The Option Investor Newsletter Sunday 06-01-2003 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: Bears In Trouble Futures Market: The Air Up There Index Trader Wrap: ZIG INSTEAD OF ZAG Editor's Plays: Homework Assignment Market Sentiment: The End At Hand Ask the Analyst: Market, sector, stock, and a March 16 review 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 5-30 WE 5-23 WE 5-16 WE 5-09 DOW 8850.26 +248.88 8601.38 - 77.59 8678.97 + 74.37 + 18.92 Nasdaq 1595.91 + 85.82 1510.09 - 28.44 1538.53 + 18.38 + 17.27 S&P-100 483.20 + 13.45 469.75 - 5.97 475.72 + 3.47 + .38 S&P-500 963.59 + 30.37 933.22 - 11.08 944.30 + 10.89 + 3.33 W5000 9218.89 +302.66 8916.23 - 73.62 8989.85 +106.51 + 49.28 RUT 441.00 + 22.60 418.40 + 3.73 414.67 + 1.14 + 5.86 TRAN 2486.35 +102.99 2383.36 - 35.95 2419.31 - 42.87 + 1.38 VIX 21.70 + .32 21.38 + 0.37 21.01 - 1.03 - 1.57 VXN 31.66 + 1.93 29.73 - 1.29 31.02 - 1.07 - 0.27 TRIN 0.92 1.09 0.93 0.83 Put/Call 0.67 0.74 0.52 0.82 ****************************************************************** Bears In Trouble by Jim Brown Good news is breaking out all over. That may not be entirely true but if you were a bear on Friday you probably felt that was the case. Even the bad news was minimal and the spin-doctors were doing a great job turning it bullish. What is a bear to do now? Dow Chart - Daily Nasdaq Chart - Daily S&P Chart - Daily After a banner week the hopes for a bearish summer may have dimmed but they are a long way from extinguished. Bulls cheered the news on the economic front and analysts were jumping at the chance to predict good things for the second half of the year. While the bad news bulls have been successful in powering the market to new highs for the year will an over abundance of good news prove to be a lethal overdose of an otherwise good thing? Friday did not get off to an early start after the Personal Income report showed a marked decrease in the recent upward trend. The April report showed that income was flat compared to the consensus for a small increase. This was the first time in eight months that income did not increase. The report showed that they were not spending what they were not making with spending dropping -0.1% and down significantly from the +0.8% in March. The key was the impact of the weak labor market and drop in hours worked. With employment continuing to fall the odds are good this number will continue to shrink. One offset to the drop in spending was the drop in energy prices. We can all agree to spend less if gasoline continues to fall and I doubt the economy will suffer. The 25 million checks now being prepared as a result of this weeks tax cut plan will help boost the spending over the next several months. Despite the drop in income and spending the Michigan Sentiment held firm at 92.1 for May and only dropped -1.1 points from the initial reading two weeks ago. This was up significantly from April's 86.0 reading and did not show any deterioration from the lingering affects of the war. There was a +12.1 point increase in the expectations component which overcame a drop in the current conditions to 93.2 from 96.4. It shows the belief in the second half is still alive and well despite concerns about current unemployment. The confidence numbers could be fragile in the June report as there has been a growing concern over the last week that employment is worsening. With three separate negative employment reports last Thursday there is a strong possibility the nonfarm payrolls next Friday will also be negative. Part of the sentiment increase was the expectation of the tax cut. That is now priced into the market. The biggest positive for the day and possibly for the month was the jump in the PMI number to 52.2 in May from 47.6 in April. This was a huge spike and well over consensus at 49.0. There was a strong bounce in production to 60.5 from 51.0 and new orders to 54.6 from 44.6 in April. These are huge gains and they offset a small decrease in order backlog of -1.4 points. The production and new orders components are at their highest levels since February. This jump in the Midwest economy bodes well for the national ISM report due out on Monday. The ISM is the key economic report next week and the good news from the PMI helped to close the markets at the highs for the year. Expectations for continued good news are running very high. Not all the Friday reports contained good news. While the PMI showed bullish conditions rising in the Midwest the New York NAPM report showed continued declines in the northeast. The NAPM fell to 229.6 in May from 234.5 in April and marked the fourth consecutive monthly decline. The six-month expectations component rose from 56.3 to 61.1 but current sentiment is negative. One of the problems in the northeast is the rapid rise of local taxes as state and local governments try to offset the impact of the economic decline. Unemployment in New York is still falling but the rate of decline is slowing. The NY-NAPM was seen as problematic to New York and the excesses of the area along with lingering impact from 9/11. The Nasdaq closed at 1595.91 and the highest close since May-31st of 2002. Coincidence? This is a remarkable feat especially when you realize it has been done on the back of the chip stocks and the chip sector is not especially healthy. The semiconductor billings for April were flat compared to March at $12.14 billion and below expectations. Chip sales rose in Japan and Asia but fell in Europe and the Americas. According to an industry spokesperson the estimate miss was due to a slowdown in demand for the final products including cell phones and computers. The forecast for chip sales for the rest of 2003 is still declining despite BEA data showing a +2.6% increase in IT spending in the forecast. SIA reported that inventories are trending downward as capacity increases for new technology which will ultimately lead to more profits when the recovery does appear. In the midst of the wildly positive PMI and the mildly negative Income/Spending and the ignored NY-NAPM the markets roared off to new highs for the year. This rally is being fed by a new influx of retail cash according to US Bancorp Pipper Jaffray. They claim +$2.8 billion in new cash flowed into the markets over the last week as well as $16.8 billion coming out of money market funds. That cash powered the Dow to a +250 point gain and the Nasdaq to +85. Even more impressive to market technicians was the +22 point gain on the Russell-2000. The percentage of RUT/COMPX gains was the same at +5.5% but the Russell gain is actually more important. The small caps lead out of bear markets and they have definitely been leading. The Russell has posted a +98 point gain since March and 22% of that gain came this week. Clearly not only are funds spending some of their hoarded cash but retail investors are also stepping up to the table to place their bets. Volume has been soaring with the Nasdaq posting the highest volume day of the year on Thursday. 4.75 billion shares traded hands across all markets on Thursday and 4.5 billion on Friday. Up volume beat down by about 3:1 on Friday with a 12 month record of 831 new 52-week highs compared to only 21 new lows. The bullish factors are almost off the scale not only in the overbought indicators but in investor sentiment. The summation index below is literally off the chart and showing full bearish divergence. NYSE Summation Index Chart - Daily While this is causing the bears to toss in their sleep it is giving the bulls cause to celebrate. The overbought conditions are simply one more big brick in the current wall of worry the bulls are scaling. Deflation fears seem to have evaporated and the risk of recession is now only 9.7%, down from 35.1% in Oct according to the Economy.com report released on Friday. Those concerns are simply disappearing if you believe the PMI and the May rally. SARS, terrorism and the jobless recovery appear to be no match to the markets desire to shake off three years of a bear market and forge ahead. The Dow has been positive for three consecutive months, the Nasdaq four and that has not happened since 1999. Does all this bullishness worry anybody? The markets are priced to perfection and are currently assuming a blockbuster second half with 4%-5% growth rates. The only hurdles ahead are the ISM report on Monday and the Jobs report on Friday. If you believe the analysts those will be positive or at lease show significant improvements. Needless to say all these expectations are priced into the current rally. You will notice from the chart below, which compares the S&P with historic PE values we are actually beginning to increase the gap not close it. S&P-PE Chart The markets have priced in a roaring recovery and the Dows +250 point gain this week has accelerated that pricing. The bulls are obviously looking for more positive data and they will get that chance next week. Monday has the ISM and Construction Spending. Tuesday BTM, Wednesday Productivity, ISM Services, Thursday Jobless Claims and Factory Orders. Friday we get the Nonfarm payrolls and Consumer Credit. Easily the two most critical are the ISM and the Payroll report. If the ISM follows the PMI then the bulls have a good chance of breaking the current market top. That will give them a week to worry about profit taking before a negative jobs report. Once past that hurdle the economics will take a back seat to the coming earnings warning season which starts the second week in June. With "only" 54% of the S&P companies already warned for the 2Q that leaves plenty more to confess. The bullish view has many of those that already warned coming back with a positive upgrade due to less war impact than previously thought. The market has some technical hurdles to overcome as well. On the earlier S&P chart you can see that it closed at a very bullish 965 and exactly at the intraday high from last August. This is a very critical level but that level could be easily broken on short covering if the ISM produces a positive surprise at 10:AM on Monday. The Dow is facing the same problem at 8850. This is strong resistance from January and it failed to hold over 8850 three times last week but closed magically right at 8850.26 on Friday. So close to real confirmation and again that confirmation could come at Monday's open. The Nasdaq is the most extremely overbought with a bullish percent at 84% but it is also the most likely to continue the run. It is currently just below 1600 but once over that psychological hurdle the next real resistance is a long way off at 1750-1800. If you note the Nasdaq chart above you will see it broke through the uptrend resistance in place since February. With the BP at 84% and very extended I would be very surprised if we did not see a pullback to the support line soon. It has gone +100 points in only five days and that equals the rebound gains on the March spike. It pulled back then as well. A slight bout of profit taking next week could then set the stage for a continued run. Overall the bulls are giddy with excitement as they charge over the bears. Considering there is a major bullish factor still to come into play they may have reason to be excited. Despite the major market gains this week the bonds closed almost exactly where they closed last week. Yields are still near 45-year lows and there were only a couple of minor selling spurts during the week. The asset allocation event has yet to occur. Buckle your seatbelts. There was a news story on Thursday that the State of Illinois was waiting for the ISM on Monday to shift $4-$6 billion from bonds to stocks. Several other states were also mentioned as potential targets for asset allocation next week as well. The ISM was 45.4 in April and fell for the fourth consecutive month. The estimate for Monday is 47.2. If the ISM is positive or simply beats the 47.2 consensus estimate I think we could see that allocation event begin. If the economy is apparently back on track and recovering then the odds of a Fed rate cut on June-25th become much slimmer. The risk of being in bonds instead of stocks becomes increasingly higher. I suggested last Sunday that we follow the internals not the indexes. They were strongly positive and indicating that every dip was being bought in volume. This week accelerated that trend. The internals and the volume were much stronger despite several attempts to sell off. The nearly -200 point drop from the intraday highs on Thursday was bought strongly and we closed right back at the highs for the week. The constant stream of bearish emails has dwindled and even some diehards are starting to go long. This alone should be a sign we are near a top. My outlook for the week is very mixed and mostly dependent on Monday's ISM report. If it is bullish then we should breakout. If bearish it may be hard for the bulls to maintain the momentum at these extremely overbought levels without the support of cash coming out of the bond market. The bottom line is trade the trend and buy the dips until the trend changes. The first two days of June are historically bullish but the ISM will control that next week. After June 3rd the odds get worse on a historical basis as June is not known for gains. Could be just one more brick in that wall of worry and after the non typical May it is clear the bulls are not watching the calendar. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** The Air Up There Jonathan Levinson Equities peeked up over those huge long term resistance lines, looked around, and held on during Friday's session. The anticipated breakaway didn't come, but neither did the failure and waterfall-style sellathon for which bears have been waiting and which bulls have been fearing. The two sides stared each other down, with all committed participants heading uncertain into the weekend. ES failed at 965 and NQ at 1200, but managed to close right at those levels. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 8967 8909 8810 8751 8652 COMPX 1610 1603 1593 1586 1575 ES03M 976 970 960 955 945 YM03M 8965 8917 8819 8771 8673 NQ03M 1216 1208 1194 1185 1171 It was somehow another flagpole rally day right out of the opening gate. Volume was above 2 billion shares on the NYSE and COMPX, once again indicating either a spectacular distribution top or a consolidation base being printed. We'll only know for certain once either the bulls or bears blink, but bears were too busy covering and shaking their heads in disbelief to give a good indication of their intentions for next week. The low put to call readings indicated the same bullish consensus that gave us a +157 gain on the YM. 15 minute chart of the US Dollar Index In an awesome display of resilience, the US Dollar Index printed a double bottom on this latest low and bounced from the 92.50 level to 93.35 as of this writing, slowing at the top in what looks like the bull flag or wedge of a bullish cup and handle formation. Many have been anticipating a bounce in the oversold US Dollar Index, and this could be the setup for it. The fed drained a token 500M today, announcing a 3.5B weekend repo. Bonds sold off through the session, but only lightly, closing near their highs of the day, with the FVX up just 1.2 bps for the day. June gold dropped 8.10 today, closing at 361.50. Daily chart of June gold The June gold contract had been toppy and is leading the oscillators toward classic sell signals, with the slower MacD lagging the move. Another down day will bring that indicator to confirm the break. I've applied the horizontal support levels to watch. Below are the long term charts of the NDX and SPX cash indices. 5 year chart of the NDX cash (log scale) The NDX broke 1200 and closed above 1195, a clear break above the long term resistance line, but not far enough to rule out a throwback move back below the line. The SPX also broke its resistance line. A bullish Monday would see these lines cleared entirely or successfully retested. 5 year SPX cash (log scale) On to the futures: Daily NQ3M candles The NQ contract put in a higher high and higher low, closing near its high of the day on a 20 point gain to close at 1199. The pattern is again a bear wedge, building above the horizontal resistance breakout point that formed our previous bullish rising triangle. The long term formation is bearish, but the week's action within it looks entirely bullish to me. The MacD issued a buy signal after a very short downphase, well above the zero line, in a clear upwardly trending move. Similarly, the stochastic is turning back up, barely making it to the midpoint on its downphase. It's not perfect, but if bulls are looking for a setup to challenge the bearish ascending wedge into a bullish failure of that pattern, this could well be it. Next week will tell the tale, but a break above that rising trendline will convert a lot of bears to the other side. 30 minute 20 day chart of the NQ3M This week's action is clearer on the 30 minute candles, with the breakout over horizontal resistance and the pattern of higher lows and higher highs. Being at the top of the daily rising wedge, its no wonder that the stochastic is trying to roll over. Also, note that the stochastic is rolling from a lower high. This is a shorter cycle oscillator and more fickle than the longer cycle stochastic on the daily candles above, but it's worth noting. Daily ES3M candles The ES contract added 15.25 to close at 964.50, just off its high of the day as well. The setup is the same as for the NQ, with the oscillators trending bullishly on the daily candles. 950 will provide support on any pullback, and a bounce from that level could provide the fuel for decisive break of the upper ascending trendline, always assuming that the indices don't simply gap up at the open on Monday. 20 day 30 minute chart of the ES3M 960 ES provided support on the afternoon pullbacks today, and it's clear on the 30 minute chart. Note that the oscillators are again toppy, but within the context of the trending longer cycles, these shouldn't provide much impediment if the overall sentiment remains as bullish as it was all week. Daily YM3M candles YM closed up 146 points today, an entirely bullish close to a good week. The trend remains up. As with its peers, the YM chart is telling us a significant break lower could be expected. The bearish ascending wedge tends to break to the downside nearly 75% of the time according to Bulkowski's Encyclopedia of Chart Patterns, by now conventional wisdom. If there was ever a setup to fit into the 25% scenario, this is it. The trending oscillators show relentless buying pressure and plenty of downside support to be tested. 20 day 30 minute chart of the YM Bearish excuses abound. This was the last day of the month, a classic setup for mutual fund window dressing. A classic stop run above well-telegraphed, obvious resistance. A mountain of stranded longs overhead, waiting for a chance to unload. Historical divergence of the VIX from its 200 dma. Alltime low readings on the QQV and VXN. New-highs vs. new-lows at historical extremes. On and on it goes. And on and on goes the buying. If this is the long-awaiting assertion of a secular bullish trend, we'd expect to see sentiment readings off the charts. Who cares about the uncertain global and domestic geopolitical and economic situations, the historically overvalued equity prices, the looming credit bubble, the exhaustion of the US consumer, the jobless, profitless recovery, famine, pestilence, war, et cetera ad nauseum? The charts were incredibly bullish this week, and as always, price remains the final arbiter. Whether the bearish ascending wedges put a stop to what bears consider "the madness" will almost certainly be seen next week. ******************** INDEX TRADER SUMMARY ******************** ZIG INSTEAD OF ZAG By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE The market appeared poised to correct further coming into last week, but zigged instead of zagged. I've had a bullish bias for some time, but thought we would also see some further downside to complete a "normal" (down-up-down) correction - WRONG! The market loves to lay waste to our expectations when these shifts happen. Biggest shift currently? - I have to go back to a premise about CONTEXT here. In the context of very low interest rates, even sluggish economic growth (jobless recovery, etc.) makes for an attractive equities alternative, especially in the depressed tech area. Therefore, professional money managers keep throwing money at select stocks anticipated to have some earnings growth. We index option players "time" the market, or try to, but not so with portfolio managers. The main indices are now "confirming" emerging bull market trends as follows: the S&P 500 (SPX) with its weekly close above 960, the area of the August and December intraday highs - there was one new prior high weekly close, but it was followed by a correction week before last. I often talk about a DECISIVE upside penetration and we got that in the S&P and especially in the (Nasdaq) Composite - the COMPX cleared its December peak in the 1520 area handily. The Russell 200 (RUT) has been leading the market for some two weeks now, showing us where money has been flowing. Only the Dow is a bit behind here, as it needs to clear 9000. With Microsoft (MSFT) and some other key Industrial stocks lagging (even though 28 of 30 were up on Friday), this may take a while longer - but at some point I anticipate we'll see a weekly Dow 30 close over 9000. (Even the long-struggling DJ Transportation average is back to just under its long-term down trendline, as travel picks up.) It could happen that the current rally falls apart and that this is bull trap, but institutional money is following momentum here, a tendency that is forced on them by report card time at the end of each (performance) quarter and the next one is END of June. LAST WEEK'S TRADING ACTIVITY – There was a bunch of news events last week - the telling thing is the shift in bullish sentiment on only so-so economic news, where the market rallies anyway. We began the week with May consumer confidence at 83.8 compared to April's 81.0 reading slightly below the forecasted 84.0. But the consumer base was gaining a more positive future outlook, as the "expectations" index jumped to 94.4 from 84.8. Sales of existing homes increased by 6%, the 5th strongest month in history. And, new home sales ran up to $1.028 billion, relative to March's $1.011. Lower mortgage rates continued to pull in new home-buyers accounting for a big area of the economy. Thursday saw Commerce report economic growth at an upwardly revised 1.9% Q1 rate (from 1.6%). Q1 GDP growth largely stemmed from stronger consumer spending and higher levels of exports - of course imports rose too and business investment was weak but the market is just more hopeful. FRIDAY - Commerce said personal incomes in April were unchanged, as expected. Personal consumption dropped to -0.1% in April which was equal to January's figure, but the biggest decline in spending since the fall. However, some bullish positives were taken from the numbers: adjusted for inflation, spending rose 0.1% after increasing 0.4% in March so the two months together amount to a half percent - if this growth repeated for a year, it's a 3% growth in spending. Hey, the market is tired of being bearish! The inflation adjusted figures were the key bullish interpretation - as prices for consumer products at the consumer level have fallen, you would expect total consumer spending to also fall, but when adjusted for inflation or lower prices, spending rose a bit. Despite the overall decline in personal spending, spending on durable goods, items meant to last three years or more, rose 1.2% in April, after a 2.9% rise in March. The Price Index for April was up 1.3% from a year earlier on a core basis, which excludes volatile food and energy prices. This so-called "core deflator" is one of Alan Greenspan's closely watched indicators. It's been pointed out as the lowest year- over-year gain in over 35 years. And while it does show that the inflation rate is declining, it may not yet mean that we've reached the deflation stage. Fed chairman Greenspan has raised concerns in the market about the possibility that the U.S. could face entrenched deflation, which would be a widespread and prolonged decline in prices. These concerns are why there is talk of an interest-rate reduction in June. This prospect is fueling the rise in the market also. A report on the Chicago Purchasing Managers Index (PMI) showed industrial expansion with a 52.2 reading, above the forecast of 49.0. The key is to be above 50.0 - above that figure some manufacturing expansion is happening. FOR THE WEEK and MONTH - For the week, the S&P 500 (SPX) was up 3.3%, the Dow Industrials (INDU) by 2.9% and the Nasdaq Composite (COMPX) gained close to 6% - well, 5.7%. For the month of May, SPX gained 5.1%, INDU tacked on 4.4% and COMPX jumped a whooping 8.9%. OTHER MARKETS - The 10-year T-Note fell 7/32, to yield 3.361%. The 30-year bond was down 18/32, yielding 4.372%. The dollar rebounded a bit - trading at 119.41 yen, up from 118.27 to the buck. The Euro fell to $1.1767 from $1.1884. MY INDEX OUTLOOK – S&P 100 Index (OEX) – Daily & Hourly charts: My sentiment indicator has now had a couple of daily peak readings above 2.2 (see lower left, below) in the past couple of weeks, which is the approximate line where option traders are getting overly bullish, as I measure it. However, in a rising trend that has some decent fundamentals driving the market up, these extremes are not "automatic" sell signals - but such extremes do highlight potential for good-sized reversal within 1- 5 days. Especially when there are other patterns and indicators that support the same trading idea - example: the hourly "line" of repeated tops showing resistance and selling interest prior to the sharp reversal of week before last. When the 5-day average of call to put volume also gets up toward the line, this is a "confirming" event as to potential to reverse - for example, in May. This may not be a reversal of the dominant trend of course, but it can be substantial move such in the 10-15 point range. Besides the sentiment getting a bit overdone, there is technical chart resistance coming in around 485-487 based on trendlines and prior daily price peaks. Moreover, the oscillator type indicators are not "confirming" the move to new highs. The question then becomes is this enough to keep on the put side or buy puts into resistance? The answer should come by whether OEX can pierce those prior highs. If yes, I get an objective to 492-495. If it goes to 495, there's a good chance that OEX will test 500. Anything around 500 would cause me to exit calls and look at buying puts as this is a number where selling should come in. If there's a pullback and minor reversal FIRST, look for support in the 475-479 area; then, at 470. This might then be a place to turn to the call side, but this is getting too far ahead. On balance, I look for a maximum 470-500 range in the week ahead. Dow Industrials (INDU) Daily & Hourly (DJX.X) charts: I haven't looked at the Dow index in a while and it often turns up a somewhat different pattern or picture than the broader indices. There's a mixed picture technically, just like there is fundamentally - huh, daaah! I get bearish when I see the failure of the oscillators to confirm the new highs (in price). Not an automatic sell either but it's a darn good signal usually. I anticipate resistance coming in at 89 in DJX - if the Dow breaks out above 8900, then there's a shot at 9000. If so, I would exit any calls held in this area and will look to reversing to puts. Near support looks to be 86.5 - if exceeded, then next anticipated support is 85.5 area. I like trading the DJX at times as the Dow Industrials often trades very "technically" - meaning it gets in these well-defined price channels and trends well. My maximum expected range on the Dow is 8400-8450 on the downside, 9000 on the upside. Eventually, maybe this month we could see a move to near 10,000. Nasdaq Composite Index (COMPX) – Daily & Hourly: 1620 looks like key resistance on the Nasdaq Composite. 1550 is key support - to maintain a bullish chart, COMPX needs to say above this level. However, the dominant up trend is not violated or broken unless there's a retreat to below 1520, especially on a weekly closing basis. Last weeks move through resistance at 1520-1530 is what suggested the further upside. This area is where I would have renewed buying interest in the option-able NASDAQ index options should COMPX come back down to it. The Semiconductor (SOX) index is the other key Nasdaq index to watch - if it starts LAGGING the Composite, be alert for a (downside) correction. QQQ charts - Daily & Hourly: My idea to short QQQ in the 28.5-28.75 area was shown to be wrong when the "line" of resistance at just below 29 was pierced, as can be seen on the hourly (close-only) chart below (right). A good stop for a short QQQ position was just over 29.00; e.g., at 29.15. I like to short in resistance areas, rather than on the way down, as with that strategy tight stops can be used to better control risk. Live to trade another day! Key resistance now looks to be around 30.3-30.5 a the top of the hourly trend channel. Key near support is at 29.00. Next lower support is around 28.25 on a near-term basis. More major technical support is down in the 26.30-26.50 area, judging by the daily up trendline. A likely range this week could be 28.5 - 30.5 and I would trade that range when selling and buying interest brings in repeated highs or lows in those areas, accompanied by what momentum looks like on the hourly and daily stochastics. Right now, both hourly and daily stochastic models are saying yellow, caution as they're again nearing overbought readings - in synch with the current alerts from homeland security. I don't think they are correlated however! Good Trading Success! ------------------------- Advertisement ------------------------- VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ************** Editor's Plays ************** Homework Assignment On March 2nd when the market was in the tank I took a little over $10,000 and bought a modified Powerball portfolio in an account for my four children. It was not only a high risk investment but an exercise in long term investing as opposed to constant trading in this column. Here is the original article: http://members.OptionInvestor.com/editorplays/edply_030203_1.asp That play list looked like this when initiated. Personal Powerball List - March 2nd. As of Friday's close the portfolio looked like this. Personal Powerball List - May-30th. The symbols have changed as the leaps became regular calls. The only addition was 10 contracts of the CHTR Jan-$2.50 leaps at 25 cents to use up some odd change left in the account. The "C" column is the cost of each contract. I bought 10 contracts of each strike listed except SUNW which is 20 contracts. I sold the XMSR leaps on the spike to $12 back on May 7th for $4.40 each, well more than the 55-cent cost. Too much profit to risk at the time. The portfolio has more than doubled with the potential for a real home run if the second half recovery does appear. My dilemma is what to do now. Will we have a July slump? Will a positive ISM on Monday produce a spike that will power us to Dow 9000 and then prompt a sell off to the July slump? Should I sell them all on any spike next week or close my eyes and just hope the dip buyers continue to appear? What should I buy with the $4400 from the XMSR sale? Should I buy now or wait for a potential market event. Should I buy puts with the $4400 as insurance against a summer slump? So many questions! The Nasdaq is up +44% from the October lows, +27% from the March lows. Ordinarily I would think the chances of a summer slump are very good. However, it all depends on the ISM on Monday. If the Dow can get over 8850 and the S&P 965 then the Nasdaq has a good chance to make a serious run to 1750-1800 before the July earnings slump. My thought process is going something like this. If I buy puts Monday morning and the market rallies to 1750-1800 then those puts could lose a significant portion of their value. That value is about 20% of the current portfolio. After looking at the various index puts, DJX, OEX and QQQ I decided not to go the put route. This was a lottery play to start with and the concept was to hold until Jan-2004 and tough out things like the October dips. This was not a trading play. In reality this has already done better than I expected for this early in the year. I am ahead of projections and therefore I can afford to be more complacent about portfolio protection. That leaves me with $4400 to invest on the long side. This gives me a lot of options because I do not have to rush into anything. Actually with everything so overbought at present I would like to see a small dip to let me establish another 2-3 positions at reasonable prices. Now, here is the assignment. I research stocks constantly and write about them in this column. I always get emails about why I did or did not do this or that with the stocks I pick and why did I not pick XYZ stock instead. Ok, here is the challenge. It is your turn to convince me. You pick a stock, write a few paragraphs on why and how I should play it in the portfolio. I will profile the best ones in this article next week. I will take the best plays and add them to the portfolio. If I choose your stock and play description as the best I will buy $1000 worth and give you any profits in January. If there are multiple worthy additions I will come up with similar arrangements for the runners up. Here is your chance. Dust off those research skills, break out those stock scanners and send me those write ups. You might be able to join the lottery without spending any money. Who knows? If you do a really good job I might find a place for you on the payroll! I know there are some great researchers out there. This is your opportunity to show your stuff to everyone else. Do it this weekend. It will be more fun than mowing grass and much more profitable. One word to the wise. "BUY XYZ, it is $5 and going to $100 before year end" is not a play write up. You need to be a little more explanatory that that. Send your suggestions to: lottery@OptionInvestor.com ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. Remember the official play recommendation from last week was FLAT. There was no play just screaming to be made. For those diehards I suggested a DJX put. That would have been a quick loser based on the Dow gains. The other suggestion was a put on MRVL after the rocket gains from the prior Friday. Surprise, MRVL actually trended down all week despite the +100 points on the Nasdaq. There is no rush but it is moving down. If you just had to make a trade and chose that one you may end up a winner. QCOM - Put $33.57 5/18/03 ($31.10 when recommended) The Nasdaq bullishness was simply too strong for a Nasdaq put despite the negative press on QCOM. Traders should have exited when the $32 resistance level was broken on Thursday. Chalk this one up as closed a bull market casualty. http://members.OptionInvestor.com/editorplays/edply_051803_1.asp CY - Cypress Semi Call - $11.05 3/2/03 ($6.41 when recommended) I closed this play last week for a double with CY looking weak. It chose this week to break out to a new high. Anyone not closing with me should be even happier. http://members.OptionInvestor.com/editorplays/edply_030203_1.asp EMC Call from Feb-2nd $10.81 ($7.70 when recommended) Fortunately I did not close EMC along with CY. The stock closed at a 13 month high on Friday and has a strong chart. http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball Finally profitable! After enduring the Nasdaq drop to 1253 in March the long-term outlook is finally paying off. After five months the Powerball portfolio is profitable. Sure it is only $20 but we have that roaring second half recovery in front of us. (big grin) RFMD is still the major drag but TLAB and FLEX have improved considerably. 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 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** The End At Hand - James Brown If you listen to any of the financial media this weekend you probably heard them declare the end of the bear market. After three very long and painful years they may be right. Traditionally a new bull market is born when the indices have rebounded more than 20% off its lows. This week ended didn't just close the month of May with banner results but set some significant milestones as well. The DJIA is now up 20% from its October 2002 lows of 7286. The S&P 500 is up 24% from its October lows and the NASDAQ Composite is up more than 40% from its 1114 low. What powered these substantial gains and some strong percentage moves last week? It was the usual subjects of hope and tenacity. Investors grabbed onto any glimmer they could that the economy was indeed starting to improve. It may not rebound as much as previously expected but it looks like improvement nonetheless. The jump in the PMI last week from 47.6 to 52.2 is a huge confidence booster and allowed investors to look beyond the 1.1 point drop in the Michigan sentiment number to 92.1. Bulls positively grinned at the 12-point gain in the sentiment expectations component. Investors didn't even hiccup when the personal spending numbers slipped 0.1 percent. Underpinning traders' confidence was the lowered terrorist threat level from orange to yellow. What could be a potential turning point were the positive inflows for equity funds of $2.6 billion compared to outflows of $1.4 billion the week before. Bolstering the positive moves in the markets has been its internals. The volume this last week has been some of the strongest all year. Furthermore, Friday's advance-decline ratio was 22 to 6 on the NYSE and almost 22 to 9 on the NASDAQ. Up volume was 3:1 over down volume on the NYSE and nearly that strong on the NASDAQ. We continue to see new highs (528) completely overshadow new lows (18). The bulls do have reason to celebrate but I fear that in their exuberance the bears might take another swipe at them. So many of the major market averages are overbought and extended that the wrong news event or headline could easily become a reason to take profits off the table. Based on the underlying trend in the markets I am bullish but even without a serious retracement the major indices could easily see a 3 to 5 percent dip. Such a move in the major indices could quickly be exaggerated in many of the overextended equities. Of course the major influence on market direction next week will be the Monday morning ISM report. If the ISM report confirms the increase we see in the PMI then bulls could keep the bears on the run. I'll run the risk of sounding like a broken record but the bullish percent data is NOT suggesting this is a good time to initiate new long positions. The NASDAQ-100 has reached a new 2.5-year high at 84. The last time it was this extreme was June of 2000. The S&P 500's bullish percent is reading a high of 74. The SPX hasn't produced a reading this strong since early 2002. Yes, they can keep inching higher but eventually they will reverse. This is not like a normal chart where the sky is the limit. They can only read from 0% to 100%. We would continue to trade what you see but maintain vigilance on your stops. Don't force any new trades and we'd be hesitant to take any new positions ahead of the 10:00 AM Monday morning ISM report. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9986 52-week Low : 7197 Current : 8850 Moving Averages: (Simple) 10-dma: 8651 50-dma: 8439 200-dma: 8334 S&P 500 ($SPX) 52-week High: 1070 52-week Low : 768 Current : 964 Moving Averages: (Simple) 10-dma: 939 50-dma: 906 200-dma: 886 Nasdaq-100 ($NDX) 52-week High: 1213 52-week Low : 795 Current : 1198 Moving Averages: (Simple) 10-dma: 1148 50-dma: 1099 200-dma: 1016 ----------------------------------------------------------------- No change. The volatility indices continue to churn sideways as bulls have their way with the markets. CBOE Market Volatility Index (VIX) = 21.70 -0.79 Nasdaq-100 Volatility Index (VXN) = 31.66 +0.24 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.67 636,486 425,719 Equity Only 0.49 524,490 254,975 OEX 1.11 21,628 24,003 QQQ 4.35 8,951 38,941 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 64.2 + 2 Bull Confirmed NASDAQ-100 84.0 + 6 Bull Confirmed Dow Indust. 70.0 + 0 Bull Confirmed S&P 500 74.0 + 3 Bull Confirmed S&P 100 68.0 + 2 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 1.09 10-Day Arms Index 1.25 21-Day Arms Index 1.12 55-Day Arms Index 1.14 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 2254 2185 Decliners 619 954 New Highs 308 220 New Lows 14 4 Up Volume 1515M 1641M Down Vol. 545M 606M Total Vol. 2095M 2262M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/27/03 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 The large S&P futures contract is not showing much change this week. Commercials remain slightly bullish while small traders just flipped from slightly bullish to slightly bearish. Commercials Long Short Net % Of OI 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% 05/27/03 435,195 423,474 11,721 1.4% 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 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% 05/27/03 147,687 149,344 (1,657) 0.6% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 We are seeing an increase in both long and short positions for both the small trader and the commercial trader but the overall sentiment remains unchanged. Commercials are net short and small traders are net long. Commercials Long Short Net % Of OI 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%) 05/27/03 252,655 485,962 (233,307) (31.6%) 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 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% 05/27/03 427,412 66,031 361,381 73.3% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 The dead heat between long and shorts in the commercial positions is narrowing. Small traders have turned a bit more bearish with a big increase in shorts compared to last week's abnormally low reading. Commercials Long Short Net % of OI 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% 05/27/03 40,999 41,491 492 0.6% Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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%) 05/27/03 12,194 13,339 ( 1,145) ( 4.5%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL DJIA futures traders still seem gripped by indecision. The commercials inched up their short positions by more than 1000 but remain net long. The small trader effectively maintains a net short position but not a very convincing one. Commercials Long Short Net % of OI 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% 05/27/03 18,660 15,537 3,123 9.1% 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 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%) 05/27/03 8,225 9,316 (1,091) ( 6.2%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------- Advertisement ------------------------- WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oinvest21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- *************** ASK THE ANALYST *************** Market, sector, stock, and a March 16 review Jeff: It's been awhile since you've discussed some of the sector distributions and with the major market bullish percent indicators all at overbought levels, what sectors or stocks might we be looking at from the short side of things? This is a good question, and perhaps a very timely one. I don't save all my e-mail and I'm not sure if the above e-mail is from the same trader/investor that stimulated a prior discussion on the point and figure methodology back in mid-March, but I agree, it has probably been too long since we've discussed the various sector bullish percent, that some traders have come to know and love. Wow! Does time fly and can the markets move! It was back on March 16, 2003 when we last looked at the "sector bell curve" bullish %, with the sector bullish percent from Dorsey/Wright and Associates, and perhaps just when that column was thought to be "timely," this week's question from a fellow trader/investor is perhaps a great time to review, assess, and make some plans. Is it true that a rising tide will lift all boats, when it comes to thinking out price action and cycles for markets, sectors and stocks? Can it be that a MARKET simply fluctuates up and down as risk is built in and taken out of a market, sector, or stock? Traders may want to go back and review the March 16, 2003 Ask the Analyst column titled "Market, sector, stock, with bullish percent distribution," as I think both of the question just posed may well be answered with a resounding YES! That was then... this is now In order to keep from having to flip back and forth between the article you're currently reading and the March 16, 2003 column, I'm going to take the exact same sector bell curve graph I showed that day, with certain remarks still intact, and we'll take a little trip to current day. As we do this, we'll follow the sector bullish % action, and then look to see if there are some sectors traders may be looking to trade, from the bullish and bearish side of things. March 16, 2003 Sector Bell Curve I'll try and recap some of the observations made March 16, 2003 from left to right. Let's start with the observations made as it relates to RISK with the Wall Street Bullish % (BPWALL) and Dow Industrials Bullish % ($BPINDU). I'm going to associate the Wall Street bullish % with the Securities Broker/Dealer Index (XBD.X) which had closed at 360.53 on Friday, March 14th. The Dow Industrials finished their Friday trading session at 7,859.71. Did bears have a high degree of risk at such "oversold" levels? The Semiconductor Bullish % (BPSEMI) had evidently just reversed back up into "bull confirmed" status. On March 14th, the Semiconductor Index (SOX.X) closed at 305.15 and the popular Semiconductor HOLDRs (AMEX:SMH) closed at $23.98. Was a "bull confirmed" status at an "oversold" level an alert that the NASDAQ-100 Index Bullish % ($BPNDX) might be expected to reverse and give confirmation to the semiconductors? Take note! A sector reversing up into the MOST bullish phase "bull confirmed" from an "oversold" level below 30%! While BULLISH traders lick their lips for such opportunities, BEARISH traders look for "bear phases" that develop from more "overbought" conditions after a bull cycle move. Now... take special note of the Internet Bullish % (BPINET) and observations of a sector's internals "holding steady" when many sectors were still falling or moving to the left of the bell curve. This was DIVERGENCE as internals held STRONG despite a MARKET that was or had been moving lower, or to the left. The CBOE Internet Index (INX.X) closed at 94.60 on March, 14th. The Internet HOLDRS (AMEX:HHH) closed $27.79, the Internet Infrastructure HOLDRS (AMEX:IIH) closed $2.33, while the Internet Architecture HOLDRS (AMEX:IAH) closed at $25.75 on March 14th. Did the DIVERGENCE pan out for bulls? The Saving and Loan Bullish % (BPSAVI) was correcting from a bear confirmed status at "bear correction" and while RISKY above 70%, was showing remarkable levels of bullishness in what had been or was a bearish market environment. There isn't a sector that I know of to trade, but a "popular name" in Washington Mutual (NYSE:WM) had closed at $33.53 on March 14. I don't know if any of the mentioned "reasons" why the sector was holding up actually came into play, but we'll look to see if any of the observations above panned out. Move forward, with a shift to the right! To better understand what has happened and how we have gotten to where we are, I think it is helpful to try and look at things step by step. Here a March 24, 2003 sector bullish % I put together along with comments as it related to a comparison against the above March 16th sector bell curve. This was posted in the OptionInvestor.com Market Monitor on March 25, 2003 at 01:18:13. The comments were "Look for leadership groups that are the FIRST to reverse up from oversold levels below 30%, or those sectors turning bull confirmed. Can see how sector bell curve begins to shift to right." Now, when you look at the sector bell curve, take notes as to the change in "colors" of some sectors and major index bullish %. BEARS! Take note! Not of what happened, but what you'll want to look for as it relates to the future! March 24 to March 14 Sector Bell Curve Comparison - Six trading days had passed between the above sector bell curve comparisons! We could see a light "shift to the right" and some removal of RED, or "bear confirmed" to either "bull alert" or "bull confirmed." Starting from the left, you bottom feeders may have traded some partial positions when the Broker/Dealer Index (XBD.X) was trading at 400.00 that day. The Semiconductor Bullish % (BPSEMI) did indeed move above the 30% level with the SOX.X trading 325. The NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com was indeed showing some "internal confirmation" as it moved to the right in the sector bull curve and status had reversed from "bear confirmed" to "bull alert". The Internet Bullish % (BPINET) still appeared stuck, but the CBOE Internet Index (INX.X) itself looked to be moving higher at 102.00. Maybe the Retail Bullish % (BPRETA) caught a bull's eye and the Retail HOLDRS (AMEX:RTH) at $72.48. I won't go through all the sectors, but you should be getting the idea of a "rising tide" and then monitoring for sector leadership, from which individual stocks, with strong relative strength can be identified. For a discussion on RELATIVE STRENGTH, we discussed one technique in a December 29, 2002 Ask the Analyst column titled "Relative strength, but with X's and O's." Onward and upward, with a slight shift to the right! Let's fast forward some more and look at a sector bell curve after the conclusion of trade on March 28, 2003. I posted the following chart in the OptionInvestor.com Market Monitor on March 29, 2003 at 01:25:30. March 28, 2003 Sector Bell Curve - Comments from that day's Market Monitor post were... "The Sector Bell Curve showed modest bullishness this week. Restaurant (BPREST) and Healthcare (BPHEAL) both reversed back up into "bull confirmed" status this week, with Protection/Safety (BPPROT) reversing up from "bear confirmed" to "bull alert." One stock I've discussed in the restaurant sector in recent weeks and had mentioned as "bullish on a break higher at $26.00, on March 28th in the OptionInvestor.com 11:00 AM EST update was Yum! Brands (NYSE:YUM). On March 28th, the stock was trading $24.77 and a trade at $26.00 would have the stock trading a "triple-top buy signal" and also have the stock breaking above its longer- term 200-day SMA. That same 11:00 Update, I made special note that I had previously profiled a "healthcare" / "drug" related stock McKesson (NYSE:MCK) and that it probably best for bears holding short/put, "move to the sidelines" and close out the position as it was my belief, based on past observation, that a rising tide in a sector and MARKET tends to lift all boats. MCK was trading at $25.36 in that March 28, 2003 11:00 Update. On April 4th, the sector's weren't fooling! Moving forward, here's what the April 4th sector bell curves were doing. This chart was posted in the OptionInvestor.com Market monitor on April 4, 2003 at 10:12:37 PM EST. April 4, 2003 Sector Bell Curve - Things were really starting to get "green" and a more pronounced shift to the right was being seen from the sector bell curve. The results of sector bullishness had the broader S&P 500 Bullish % ($BPSPX) and VERY broad NASDAQ Composite Bullish % ($BPCOMPQ) now turning "bull confirmed." The narrower NASDAQ-100 Bullish % ($BPNDX) was on the move to the right in the 52%-56% bullish. Warp speed to today! Traders/investors should now have a pretty good grasp of what was taking place. Let's go warp speed and to get the full perspective of how things have changed, let's compare how the sector bell curve looks TODAY (May 30, 2003) and when we began this exercise, with the March 16, 2003 bell curve. May 30, 2003 and March 16, 2003 sector bell curve Wow! There's a lot of "green on the screen" and a pretty good "shift to the right" has been seen. With the major indexes now at either relative highs dating back to December of 2002, it continues to amaze me how/when the MARKET suddenly, but with notice, will systematically have the sectors and indexes shifting left to right as it relates to RISK. At some point, but with notice, the higher levels of RISK will be removed, in systematic fashion. As it currently stands, I don't see any sectors/indexes at this point that are exhibiting any weakness as it relates to their internals as depicted by the bullish percent indicators. Oh... there are some sectors/indexes that will be "ripe" for a pullback, especially those that have moved from "oversold" to "overbought." It would make sense at some point that the "smart money" that bought the lower risk levels, will eventually find the "smart money" selling at the higher risk levels (from bullish perspective). But just as we've seen the sectors move from left to right, trader/investor once again see how that sector action moves the major market bullish % like ($BPCOMPQ, $BPNYA, $BPSPX, $BPOEX, $BPNDX) have moved right with the SECTORS driving the bullishness. At some point, the opposite will be true and it will be the BEAR that picks up on the weakness, will look to attack that weakness first. Just as a sector drives MARKET action, it will be a weak STOCK, in a WEAK sector that best offers a BEAR and easy meal. Still, we should understand just how a "rising tide tends to lift all boats and currently, a BEAR that finds a weak stock, must be aware that there are probably more and more bulls just showing up to the party and looking for "cheap" stocks. There's also some BEARS that have seen enough losses mount since March, to be quick to cover another potential loss as he/she can't afford another hit to their account. I ran a stock screen using Dorsey/Wright and Associates Point and Figure charting system. As a preliminary scan, I entered the following screen criteria, to try and identify bearish candidates. This stock screen was very basic, but held the MAIN indicators I look for to begin finding WEAKNESS. Price between $20 and $100 Stock trades with options Relative strength chart is sell (longer-term under performer) Relative strength chart is O (intermediate-term under performer) Trend is negative (stock traded below bearish resistance trend) All Sectors Sort by sector (Note: Price, Options and All Sectors no a bearish criteria). This basic bearish search produced 100 stocks. BPAERO (Aerospace/Defense/Airline) : (BA, DRS, GD, HON, TGI) BPAUTO (Automotive) : (AXL, GM, TM) BPBANK (Banks) : (BK, CMA, FMER, MEL, STT) BPBUIL (Building) : (MLM, TXI, YRK) BPBUSI (Bus Pdcts) : (ADP, DNY, HEW, TXT) BPCHEM (Chemical) : (AKZOY, BOX, CCMP, EMN, FMC, GLK, PPG, ROH) BPCOMP (Computers) : (BBOX, CERN, DST, EDS, MRCY, NCR, NDC, SCSC) BPDRUG (Drug) : (BMY) BPEUTI (Elec. Util) : (AEP, POM) BPFINA (Finance) : (IFIN) BPFOOD (Food/Bev/Soap) : (CPB, MOND, RJR, TR) BPFORE (Forest/Paper) : (BCC, KMB, PCH) BPGUTI (Gas Util) : (GAS) BPHEAL (Healthcare) : (BAX, HCA, LPNT, MEDQ, PDCO, TRI) BPHOUS (Househld Gds) : (MYG, SNE) BPINSU (Insurance) : (AJG, CNA, HIG, LNC, LTR, MNY, NFS, UTR) BPLEIS (Leisure) : (EK) BPMACH (Machinery) : (CR, DOV, HIT, PH, SPW) BPMEDI (Media) : (SCHL) BPOIL (Oil/Gas) : (AHC, KMG) BPOILS (Oil Serv) : (BHI, DO, NE, RIG) BPPROT (Protect) : (INVN) BPREAL (Real Est) : (AIV, RA.B) BPREST (Restaurant) : (CEC, CPKI, JBX, KKD, LNY) BPRETA (Retail) : (ABS, CVS, KSS, MAY) BPSEMI (Semicon) : (DPMI) BPSOFT (Softwre) : (INTU) BPTELE (Telephn) : (BTY, QCOM, SBC, TDS, USM) BPTRAN (Trans) : (USFC) BPWALL (Wall St.) : (AGE, LAB) (Disclaimer: The following list of stocks was generated using a general search criteria and is not meant to imply a recommendation for or against that stock.) Observations: Computers, Chemical and Insurance seem to have more stocks in the list than others right now. Even under such BULLISH market conditions. Well.... It's late Friday evening and it has been a rather "long" week for all of us. I hope you found this article helpful, in perhaps understanding how the sector and major market bullish % tend to move from "oversold" to more "overbought" levels. It never ceases to amaze me, how BULLISH a move can become and continue to be, but how helpful the sector bullish % can be, in actually seeing the market internals strengthen, and.... eventually weaken. I've also been amazed at how BEARISH a move can become and continue to be. I will continue to monitor the sector bullish %, and try and alert traders to any reversals in the various sectors listed above. If we as traders/investors think the above display of "sector bell curve" movement only takes place to the upside, then revisit the March 16, 2003 Ask the Analyst article "Market, sector, stock, with the bullish percent distribution. Better yet! Dorsey/Wright and Associates offers a FREE trial to their point and figure database. I (Jeff Bailey) nor OptionInvestor.com or premierinvestor.net receive any fee from any subscriptions Dorsey/Wright and Associates receives from our subscribers. Once you've signed up for your free trial, you should be able to make some sector bell curve comparisons of your own by clicking the "Database" tab, then in the "Database Reports" area, click the "Sector Bell Curve" link. You may note that Dorsey/Wright will change their horizontal scale from time to time for their sector bell curve ranges. When you look at their current horizontal scale, it will be different that what I've shown in the prior sector bell curves, as I am limited on the width I can display on the web sites. That's OK though! The point of all this is to understand how to use the sector bell curve to identify sector/market strength and weakness. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of June 2nd. ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ BCS Barclays Bank PLC Tue, Jun 3 Before the Bell N/A BTH Blyth Inc. Tue, Jun 3 Before the Bell 0.37 CMVT Comverse Technology Tue, Jun 3 After the Bell -0.08 PLL Pall Corp. Tue, Jun 3 After the Bell 0.30 RYAAY Ryanair Holdings Tue, Jun 3 Before the Bell 0.33 ----------------------- WEDNESDAY ----------------------------- CWP Cable & Wireless PLC Wed, Jun 4 02:00 am ET N/A MDZ MDS Inc. Wed, Jun 4 Before the Bell N/A NMGa Neiman Marcus Group Wed, Jun 4 After the Bell 0.85 SFD Smithfield Foods Wed, Jun 4 Before the Bell 0.04 COO The Cooper Companies Wed, Jun 4 After the Bell 0.48 ------------------------- THURSDAY ----------------------------- ABS Albertson's Thu, Jun 5 -----N/A----- 0.50 NSM National Semicon Thu, Jun 5 -----N/A----- 0.08 SIGY Signet Group Thu, Jun 5 Before the Bell 0.40 SZE Suez SA Thu, Jun 5 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 DF Dean Foods 3:2 Jun 9th Jun 10th RYN Fayonier Inc 3:2 Jun 12th Jun 13th -------------------------- Economic Reports This Week -------------------------- This is a crucial week for the nascent bull market. Will the economic reports on Monday, Wednesday and Friday support the hope of an improving economy? Monday's ISM report is probably the headline number to watch. ============================================================== -For- Monday, 06/02/02 ---------------- Auto Sales (NA) May Forecast: 5.4M Previous: 5.4M Truck Sales (NA) May Forecast: 7.5M Previous: 7.6M ISM Index (DM) May Forecast: 48.5 Previous: 45.4 Construction Spnding(DM)Apr Forecast: 0.2% Previous: -1.0% Tuesday, 06/03/02 ----------------- None Wednesday, 06/04/02 ------------------- Productivity-Rev. (BB) Q1 Forecast: 2.0% Previous: -1.0% ISM Index (DM) May Forecast: 51.0 Previous: 50.7 Thursday, 06/05/02 ------------------ Initial Claims (BB) 05/31 Forecast: N/A Previous: 424K Factory Orders (BB) Apr Forecast: -0.9% Previous: 2.2% Friday, 06/06/02 ---------------- Nonfarm Payrolls (BB) May Forecast: -25K Previous: -48K Unemployment Rate (BB) May Forecast: 6.1% Previous: 6.0% Hourly Earnings (BB) May Forecast: 0.2% Previous: 0.1% Average Workweek (BB) May Forecast: 34.2 Previous: 34.0 Consumer Credit(DM) Apr Forecast: $3.0B Previous: %0.9B 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. 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The Option Investor Newsletter Sunday 06-01-2003 Sunday 2 of 5 In Section Two: Watch List: More Than Enough To Watch Daily Results Put Play of the Day: BBY Dropped Calls: QLGC Dropped Puts: AIG, GM ------------------------- Advertisement ------------------------- Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oinvest24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ********** Watch List ********** More Than Enough To Watch Wachovia Corp - WB - close: 40.18 change: +0.82 WHAT TO WATCH: With financial breaking out to the upside shares of WB are doing their part to help. Friday's rally pushed WB above resistance at $40 and it looks like a great call play if you have the patience. Shares don't move much and it could take a couple of months to reach $45.00. Chart= --- United Health - UNH - close: 95.94 change: +0.89 WHAT TO WATCH: We mentioned UNH in the OHP call play update this weekend. Shares seem to be bouncing from minor support at $94 and its rising trendline of higher lows. The close back above $95 looks tempting. The stock has a split coming in two weeks and it could see a run towards the $100 mark. Chart= --- Avon Products - AVP - close: 60.94 change: +2.08 WHAT TO WATCH: Maybe it's the Friday rally, maybe it's the warmer weather (which means more AVP saleswomen out and about) but shares of AVP have been hot this last several sessions. The stock has broken out of a consolidation phases and the close over $60.00 looks tempting. Chart= --- XL Capital - XL - close: 87.05 change: +3.11 WHAT TO WATCH: Shares of XL have broken out to new highs last week. The stock had been struggling with the $85-86 level but Friday's strong close looks like a breakout. The IUX insurance index also broke out of a five-week trading range. With XL's MACD producing a bullish crossover a run to $90 looks like a good bet and probably beyond. Chart= --- C.H.Robinson Worldwide - CHRW - close: 37.26 change: +0.96 WHAT TO WATCH: Shares of CHRW appear to be following the Transports. Now that the round of profit taking is over the rebound looks like a buying opportunity for the next leg up. Chart= --- Electronic Data Systems - EDS - close: 20.15 change: +1.21 WHAT TO WATCH: Tech stocks are hot again and EDS broke out strongly on Friday. The 6.3% move put it above the $20 level and its simple 200-dma. Shares still have some resistance at $21 but this equity may be watching. Chart= --- Zions Bancorp - ZION - close: 51.05 change: +1.34 WHAT TO WATCH: Shares of ZION have been consolidating between $48 and $50 for weeks. The breakout in the BIX over 300 helped ZION breakout over the $50 mark. The stock's MACD is about to produce a bullish crossover and shares should be able to tag the $55 level if given enough time. Chart= --- Hershey Foods - HSY - close: 71.10 change: +2.16 WHAT TO WATCH: We had HSY on the watch list on Wednesday and the stock has since vaulted over resistance in the $69-70 range. The move came on very strong volume of 1.69 million shares and traders might be aiming for a fill the gap type of move. Watch out for that PnF chart, which is showing HSY right at overhead resistance. Chart= --- Whole Foods Market - WFMI - close: 54.64 change: +1.44 WHAT TO WATCH: Shares of this high-end grocer have bottomed at $52.00 and are trying to break above resistance at $55. Traders can use a move over $55 as a trigger to go long and let WFMI fill the gap to $60.00. Chart= ==================================== RADAR SCREEN - more stocks to watch ==================================== STJ $56.10 - This medical equipment & supplies maker just keeps on climbing. Aggressive traders willing to use a tight stop might use this move over $56 as an entry. We'd target $60 but it might take a few weeks. SBUX $24.67 - Shares of this coffee gourmand appear to have bottomed near $23.00 and the rebound is on the way. The close over $24 and its 50-dma look like a signal to go long. Our target would be $26.50. BBT $34.19 - This banking stock is another equity that appears to have completed a multi-month bottom phase. The breakout over $34.00 looks positive. Check out the trading range on the weekly chart. Maybe this is a covered call candidate. Our target would be $38.00. RNR $44.70 - The profit taking appears to be over. Shares of RNR have bounced from the 50-dma and the stock's MACD looks ready to curl higher from the zero line. Traders can use a stop loss at 42.50 to 43.00. ==================================== 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 64.74 0.00 1.77 1.95 -0.43 3.04 Energizer bunny BBY 38.70 0.00 1.00 0.45 -0.40 3.38 New, Go Retail! DISH 33.10 0.00 1.26 -0.08 -0.34 1.71 Slow and sure MEDI 35.41 0.00 1.87 -0.07 -0.74 1.74 Plodding along OHP 37.03 0.00 0.43 -0.22 -0.60 0.41 Very cautious QLGC 50.11 0.00 2.04 0.02 1.52 4.62 DROP, successful SPW 38.53 0.00 1.11 -0.45 0.23 2.78 Nice move VRTS 27.72 0.00 2.03 0.09 1.29 3.67 Untriggered PUTS ACS 46.34 0.00 -2.40 -2.30 0.53 -2.46 Sit back/wait AIG 57.88 0.00 1.52 -0.22 -0.47 3.23 DROP, too much FRE 59.81 0.00 0.40 0.93 -0.19 2.81 Very cautious HDI 42.16 0.00 1.24 -0.81 -0.01 1.36 Worth watching GM 35.33 0.00 1.64 -0.32 -0.12 2.07 DROP, too much IBM 88.04 0.00 3.18 -0.03 -0.21 3.53 Speculative LLL 43.35 0.00 0.39 -0.19 0.52 0.94 Very cautious ------------------------- Advertisement ------------------------- optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oinvest25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- *************** PLAY OF THE DAY *************** Call Play of the Day: ********************* Best Buy Company - BBY - close: 38.70 change: +1.30 stop: 35.75 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 ^^^^^ QLogic Corp. - QLGC - close: 50.11 change: +0.75 stop: 46.00 Seems like it is time to close out this successful play. Our initial target for QLGC was for a trade at $51 and it came really close to that this morning with a high print of $50.97, right at the top of the stock's ascending channel. While it could certainly continue higher on continued market strength, we're going to err on the side of caution and take our gains here. Traders opting to hold for another move higher will still want to exit in the $51-52 area and should set tight stops at $49.50, just under the afternoon low on Friday. Picked on May 22nd at $45.13 Change since picked: +4.98 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume = 6.60 mln PUTS ^^^^ American Intl Group - AIG - cls: 57.88 chg: +1.63 stop: $58.00 Call me chicken but we're throwing in the towel on AIG. Shares of this insurance giant have not yet touched our stop loss at $58.00 but the close above its simple 200-dma is unnerving for a bear on the stock. Furthermore the IUX insurance index just broke above five-week resistance at 265 on Friday and the technicals for AIG are moving against us. Look for two of AIG's top brass to be speaking at seminars and conferences this coming week. Picked on May 20th at $54.94 Change since picked: +2.94 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million Chart link: --- General Motors - GM - close: 35.33 change: +0.75 stop: 35.25 As proof that a rising tide lifts all boats, GM continued its persistent rise right into the closing bell on Friday. No amount of bad news from the company or negative analyst comments could hold back the bulls as they bought even this out of favor DOW component. Ending the day over both the 50-dma and our stop was enough to convince us that it is time to let this one go. GM still looks weak compared to the rest of the market, but there's no sense butting our heads against the near-term uptrend. Picked on May 4th at $35.80 Change since picked: -0.47 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 5.40 mln *********** 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 06-01-2003 Sunday 3 of 5 In Section Three: Current Calls: AMGN, DISH, OHP, SPW, VRTS New Calls: BBY Current Put Plays: ACS, FRE, HDI, IBM, LLL New 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 ********************************************************************* ****************** CURRENT CALL PLAYS ****************** Amgen, Inc. - AMGN - close: 64.74 change: +1.42 stop: 62.50*new* 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: Between merger rumors and profit taking in the Biotechnology index (BTK.X), our AMGN play had a volatile trading week. But in the end, the bulls prevailed, driving the stock to a new 52-week closing high on Friday and it looks like we have another confirmed breakout. Before succumbing to the temptation to chase the stock higher on Monday though, keep in mind that AMGN has a pattern of breakout out to new highs and then consolidating those gains before once again pushing higher. There's no reason to expect it to be any different this time and conservative traders may want to take advantage of the current strength to harvest gains and then wait for a pullback to support to re-enter the play. With the solid breakout over the short-term descending trendline and horizontal resistance just below $63, we're now looking for that level to become new support. A pullback and rebound from that level would make for another solid entry, but note that we aren't giving the play a lot of wiggle room, raising our stop to $62.50 this weekend. Should AMGN break below that level, it would introduce the risk of a retracement all the way back to the 50-dma (currently $60.63) and that's more heat than we ought to be prepared to take from current levels. Recall that the next significant level of resistance is at $66 and should AMGN power up to that level early next week, we would recommend harvesting gains there and looking for a new entry on the next pullback. The stock continues to look strong and with the strength in the BTK index, our eventual target of $72 is still a possibility. But AMGN is not a stock that moves in a straight line and harvesting gains along the way is the most prudent strategy. 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 continued breakout above $64 will want to look to the July 65 Call. This option is now at the money, and 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= 6019 at $5.20 SL=3.25 BUY CALL JUN-65 YAA-FM OI=19992 at $1.50 SL=0.75 BUY CALL JUL-65 YAA-GM OI=27886 at $2.45 SL=1.25 BUY CALL JUL-70 YAA-GL OI= 9836 at $0.65 SL=0.30 Annotated Chart of AMGN: Picked on May 11th at $61.24 Change since picked: +3.50 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.5 mln --- EchoStar Communications - DISH - cls: 33.10 chg: +0.88 stop: 30.90*new* 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 quiet climb higher for EchoStar continues. Shares added another 2.7% in Friday's rally on volume of 5.2 million. This was about two million more than its average volume. News for DISH is still elusive but the investors are still buying the trend. The stock's daily MACD just produced a bullish crossover and shares look ready to breakout over the $33 level that has been acting resistance since the 22nd of May. Our short-term target remains near $35.00. To reduce our risk we're raising our stop to $30.90 though if you can stand the heat leaving it under $30.00 is probably a smarter move. The 50-dma has been support for months and it is currently at 30.32. 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=5459 at $3.30 SL=1.60 BUY CALL JUN 32.50 UAB-FZ OI=2798 at $1.45 SL=0.70 BUY CALL JUL 30.00 UAB-GF OI= 661 at $3.90 SL=1.80 BUY CALL JUL 35.00 UAB-GG OI=1201 at $0.95 SL=0.40 BUY CALL SEP 35.00 UAB-IG OI=1383 at $2.00 SL=1.00 Annotated Chart for DISH: Picked on May 21st at $31.10 Change since picked: +2.00 Earnings Date 05/06/03 (confirmed) Average Daily Volume = 3.3 million Chart link: --- MedImmune - MEDI - close: 35.41 change: +0.72 stop: 32.50 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: Our longer-term play in MEDI continues to plod along. We came very close to being stopped out on the 21st of May but shares rebounded off the bottom of its rising channel as expected. The stock is really fighting for each bit of ground gained which is depressing for MEDI shareholders given the boom in biotech stocks right now. Traders are still waiting for word from the FDA on an approval for MEDI's FluMist product. The announcement is expected by the end of June. Several days ago MEDI reaffirmed its full year guidance and the news helped fuel a move back over the $35.00 level. After looking at some of the technicals we suspect that MEDI could be ready for another leg up but it would take a move back over $36.00 to 36.50 to convince us. Don't be surprised to watch it trade sideways for another week or two. We are still not suggesting any new positions at this time unless you're willing to speculate with high risk capital on a positive announcement for their FluMist product. 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: +1.10 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 3.9 million Chart link: --- Oxford Health - OHP - cls: 37.03 chg: +0.40 stop: 36.00*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: We're growing increasingly cautious on our bullish OHP play. We knew that in a broad market rally other sectors might steal the spotlight from healthcare and insurance providers like OHP. Yet we did not expect OHP and its group mates to lag behind the rally this much. The sector as whole continues to be one of growth and we feel that bullish investors would do well to follow it throughout 2003. However, the technicals on OHP are starting to look rather ominous and we're not suggesting new bullish plays at this time. If you do like the sector and are interested in a long position look at United Health (UNH). UNH has bounced from the $94 level of minor support and with its stock split coming in a couple of weeks the stock might see a run toward the $100 mark. Meanwhile to put action behind our cautious words on OHP we're going to raise our stop loss to $36.00. As we said before, OHP could easily dip back to support at $35.00 and its 200-dma but we're just not willing to take the risk that it will bounce there. Let your own risk tolerance be your guide. Suggested Options: We really don't suggest new long positions in OHP at this time. However, traders can look to the June and August options at the $35 and $37.50 strikes as their best bets. BUY CALL JUN 35.00 OHP-FG OI=2355 at $2.65 SL=1.30 BUY CALL JUN 37.50 OHP-FU OI= 947 at $1.05 SL=0.50 BUY CALL AUG 35.00 OHP-HG OI=3217 at $3.70 SL=1.80 BUY CALL AUG 37.50 OHP-HU OI=1445 at $2.15 SL=1.10 Annotated Chart of OHP: Picked on May 20th at $36.51 Change since picked: +0.52 Earnings Date 05/05/03 (confirmed) Average Daily Volume = 857 thousand Chart link: --- SPX Corp. - SPW - close: 38.53 change: +1.42 stop: 36.25*new* Company Description: SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. The company offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices and metering and mixing solutions. The company also provides specialty service tools, diagnostic systems, service equipment and technical information services. SPW services a broad array of customers in a variety of industries, including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications, financial services, transportation and power generation. Why we like it: The first couple days of SPW being on the call list had us questioning whether the stock was ever going to gain any traction, as it vacillated below $37. But Friday's action was another ball game altogether, with the stock launching higher to the tune of 4.75% on volume that was more than 40% above the ADV. The early morning move took SPW very quickly to the $38 level (successfully breaking $37.50 resistance), and after consolidating near that level for the balance of the day, the stock shot higher into the close on what looks like some late-day short-covering. Regardless of the root cause, the price action looks very healthy and it appears that a test of next resistance at $39.50 could be in the cards as early as Monday morning on any bullish follow through. With that resistance being so close, we don't recommend new entries on a break above Friday's highs. Rather, traders looking for a new entry should now look for a pullback to test either the $38 or even $37.50 level as new support. A rebound from that level would confirm today's breakout and set the stage for a renewed bullish move towards our eventual target of $41.25. Following Friday's strong breakout, we're raising our stop to $36.25, which is just below the supportive 20-dma. Suggested Options: Shorter Term: The June 35 Call or even the July 35 call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Traders looking to capitalize on a rally to test the $40 level and above will want to look to the July 40 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. More conservative traders may even want to consider the September 40 Call, as it provides plenty of time for the bullish move to unfold. BUY CALL JUN-35 SPW-FG OI=1535 at $3.90 SL=2.50 BUY CALL JUL-35 SPW-GG OI= 27 at $4.10 SL=2.50 BUY CALL JUL-40 SPW-GH OI= 82 at $1.15 SL=0.60 BUY CALL SEP-40 SPW-IH OI= 553 at $2.30 SL=1.25 Annotated Chart of SPW: Picked on May 27th at $36.86 Change since picked: +1.67 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.04 mln ---- Veritas Software -VRTS - close: 27.72 change: +0.48 stop: 24.50 Company Description: As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Why we like it: No matter how you slice it, last week was a big victory for Technology bulls with the NASDAQ Composite closing just a shade below the critical 1600 resistance level. Leading the way higher to round out the week was our new Call play on VRTS. Unfortunately, it didn't oblige on Friday to give us a buyable dip. Recall that we set a trigger on this play at $26.25, and are then looking for a rebound from the $26.00-26.25 area to provide a solid entry. That was a solid resistance level and should be tested on a pullback as new-found support before the stock continues up towards are initial target of $30. If the stock just continues to power higher, then we'll let it go, as we don't want to get caught buying a top near known resistance in the $28-29 area. If we do get the entry setup we're looking for near $26, then stops should be placed at $24.50, just below the rising 20-dma ($24.94). Suggested Options: Shorter Term: The June 25 Call will offer short-term traders the best return on an immediate move, as it is currently slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 30 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. More conservative long-term traders should utilize the July 25 call. BUY CALL JUN-25 VIV-FE OI=13835 at $3.30 SL=1.75 BUY CALL JUN-30 VIV-FF OI= 759 at $0.40 SL=0.20 BUY CALL JUL-25 VIV-GE OI= 643 at $3.90 SL=2.50 BUY CALL JUL-30 VIV-GF OI= 382 at $1.05 SL=0.50 Annotated Chart of VRTS: Picked on May 29th at $27.24 Change since picked: +0.48 Earnings Date 07/23/03 (unconfirmed) Average Daily Volume = 8.66 mln ************** NEW CALL PLAYS ************** New Bullish Plays | June 1, 2003 While current conditions have not yet seen an improvement, the latest Consumer Confidence report indicates that consumers are much more optimistic about the future. Even without heavy-weight WMT participating, the Retail Index charge to new highs for the year on Friday. NEW CALL PLAY - Confident Consumers ============= Best Buy Company - BBY - close: 38.70 change: +1.30 stop: 35.75 Company Description: Best Buy a specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. The company provides a broad selection of models within each product line in order to provide the customer with a meaningful assortment, offering more than 5800 products, not counting entertainment software titles. Growing its store count by 15% in fiscal year 2000, brought the grand total to more than 4000 in 41 states by year end. Why we like it: Shares of BBY have come a long ways in the past few months, now up more than $12 (46%) since the end of March. This 2-month rally was triggered by strong earnings on April 1st, that beat estimates by a penny. More importantly, the company posted record revenues for the quarter, and investors have been confronted by the reality that consumers are still buying all that cool technology that BBY is known for carrying. The first big wall of resistance that confronted this rally was at $38 and the first attempt earlier this month led to a pretty sharp pullback down to the $34 level. But the bulls dusted themselves off and started on the accumulation trail again. A sharp mid- week move brought the stock right back up to the $38 level, but with a different result this time. With the broad market charging to new highs for the year, and the Retail index (RLX.X) following suit, BBY scaled that level and looks to be in the clear for another leg higher. While there is some mild resistance in the $39-41 area, the more likely upside target appears to be $44. While the PnF chart projects far above that with a bullish price target of $57.50, there's no sense in getting greedy. Daily Stochastics are well on their way to overbought, but still have some room to run, and hint that a near-term push to the top of that $39-41 area may be in the cards. A pullback to confirm the $38 level as new support would be most welcome and a rebound from that level would make for an ideal entry point. That said, if the bulls decide to push higher without a pause next week, then aggressive traders may want to enter on a breakout over the $39 level. The top of Wednesday's gap at $37 should provide strong support, but we're going to give BBY a bit more room to move by setting initial stops at $35.75, which is just below the bottom of that gap, as well as the rising 10-dma ($36.11) and the 20-dma ($36.04). One final note pertains to earnings. While Briefing.com is reporting the earnings date as July 1st, Yahoo! has the date listed as June 18th. If the earlier date is correct, then this play will only last a bit more than 2 weeks. We'll clarify this issue as soon as possible and report in a future update. Suggested Options: Shorter Term: The June 37 Call will offer short-term traders the best return on an immediate move, as it is currently slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 40 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. More conservative long-term traders should utilize the July 37 call. BUY CALL JUN-37 BBY-FU OI=5466 at $2.55 SL=1.25 BUY CALL JUN-40 BBY-FH OI=5463 at $1.25 SL=0.60 BUY CALL JUL-37 BBY-GU OI= 359 at $3.40 SL=1.75 BUY CALL JUL-40 BBY-GH OI= 715 at $2.00 SL=1.00 Annotated Chart of BBY: Picked on June 1st at $38.70 Change since picked: +0.00 Earnings Date 07/01/03 (unconfirmed) Average Daily Volume = 3.91 mln ***************************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 ***************** Affiliated Computer - ACS - cls: 46.34 chg: +1.24 stop: 47.25 Company Description: ACS, a Fortune 500 company with more than 40,000 people supporting operations in nearly 100 countries, provides business process and information technology outsourcing solutions to world-class commercial and government clients. ACS makes technology work. (source: company press release) Why We Like It: As expected (and written in Thursday's newsletter) shares of ACS traded higher on Friday. The stock had broken down earlier this week on a negative article about the company's founder and chairman Darwin Deason. The breakdown took it below the 200-dma and then the follow through brought it below the $45 mark. Both declines were on strong volume. However, in our original write up we stated that the financial shennigans of Deason were very unlikely to have any affect on ACS and our play's premise resided in investor overreaction and fear of the unknown. We've now seen two brokers defend the stock stating similar beliefs that Darwin's shady dealings would have extremely limited affect, if at all, on ACS. There has still been a lot of technical damage done and we're going to wait and see if ACS can trade back above the 200-dma and the $47.00 level before closing the play. A failed rally there might work as an entry for more aggressive traders. If you're not quick on the entry or the exit then ACS is probably not the play for you, especially now that the investor reaction may be over. Our stop at $47.25 remains but it wouldn't hurt to cinch it down to $47.00. Our profit target of $42.00 remains should the stock reverse course again. Suggested Options: Given that this is a news driven story we could see a quick reaction from shareholders so our preference would be the June or July options. *Given that the investor reaction may be played out we're not suggesting new plays at this time. BUY PUT JUN 45 ACS-RI OI= 769 at $1.25 SL=0.60 BUY PUT JUN 40 ACS-RH OI= 794 at $0.30 SL=0.00 *riskier* BUY PUT JUL 45 ACS-SI OI=7868 at $2.25 SL=1.15 BUY PUT JUL 40 ACS-SH OI=5120 at $0.90 SL=0.45 Annotated Chart of ACS: Picked on May 27th at $46.50 Change since picked: -0.16 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.7 Million Chart link: --- Freddie Mac - FRE - close: 59.81 change: +0.77 stop: 60.51 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: It's tough being a bear when the market is closing at new relative highs and hitting milestones that could potentially signal the end of the bear market. We initially added FRE as a put play due to its breakdown out of its rising channel and a close under its 200-dma. This technical breakdown was caused by investor concerns that FRE was losing market share to its main rival Fannie Mae (FNM). While FRE is doing what it can to remedy the situation Wall Street has not put much faith behind its efforts. The rebound appears to be market participation only but its painful for bears just the same. The stock has not yet triggered our stop loss at 60.51 but if the ISM data is positive we would expect the markets to rally and expect FRE to rally with it. We would NOT suggest new plays at this time. Suggested Options: We are not suggesting new put positions at this time. Annotated Chart of FRE: Picked on May 25th at $57.90 Change since picked: +1.91 Earnings Date 07/00/03 (unconfirmed) Average Daily Volume = 3.4 Million Chart link: --- Harley Davidson - HDI - close: 42.16 change: +0.78 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: Things aren't looking too good for our HDI play. Despite the poorly received news about the company's introduction of aggressive financing incentives, the bulls bought that dip with abandon the day after we began coverage. Since then the stock has been trading in a tight range and up until Friday it looked like we'd get the expected rollover below the $42 resistance level. But the bulls were feeling frisky all day and pushed the stock back through that level at the close, managing to generate a close over the 50-dma ($41.89) in the process. More disconcerting is that the stock pushed back above the ascending trendline from the March lows, leaving us with the very real possibility that the bulls may attempt to push HDI higher from here. Resistance provided by the 5/23 gap is still strong, giving us the possibility of a rollover from a higher level next week. Aggressive traders can enter new positions on a failed bounce below the top of that gap ($43.28), but must be comfortable with holding a tight stop at $43.75. More conservative traders will want to wait for a break and close below Thursday's intraday low of $41.20 before playing. The $40 level is still critical support and we won't have confidence that this play is really going to go in our favor until HDI breaks that level on solid volume. 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=4553 at $1.55 SL=0.75 BUY PUT JUN-40 HDI-RH OI=3674 at $0.60 SL=0.25 BUY PUT JUL-40 HDI-SH OI= 76 at $1.30 SL=0.75 Annotated Chart of HDI: Picked on May 25th at $40.81 Change since picked: +0.11 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 2.64 mln --- Intl Business Machine - IBM - cls: 88.04 chg: +0.68 stop: 90.25 Company Description: Big Blue is being heralded as the world's largest technology company. Considering their massive hardware and software business across the globe it's not surprising. However, IBM's services and consulting business is growing by leaps and bounds and is a major source of revenues. Why We Like It: Ah.. while not quite controversial our put play on IBM did elicit some reader feedback. We're always happy to hear from our readers so I'll try and answer questions here, in the play update. Thursday we added IBM not because it was fundamentally weak but because the stock had been under-performing. We're actually bullish on IBM, especially if the markets can keep this bull rally alive. However, even bull rallies (and bull markets) have pull backs and with IBM's under-performance we are speculating that it might lead to the downside when the markets do correct. Our update stated that IBM is indeed trading between huge overhead resistance at $90 and current support at $85.00. While it would be safer to wait for a breakdown below $85.00 before buying puts the stock's under-performance compared to the Dow Industrials, of which it is a component, is rather significant. This appeared to offer us an early warning and we listed the play before any technical breakdown has occurred. We noticed that the Industrials had broken out to new relative highs mid-week while IBM had not. Friday offered even more confirmation as the Industrials took off to add 139 points while IBM added a mere 68 cents. One of the readers asked about an ascending triangle for IBM. We've posted an image of the triangle in IBM's chart below. It is easier to see on the weekly chart because it takes into account IBM's October lows and its failures at the $90 resistance in December, January and May. I do indeed agree that it would be safer to wait for the move under $85 before buying puts. I also agree that if IBM breaks out above $90 it would be a good spot to go long. A breakout above $90 could fill the gap to $97 and probably tag the $100 mark. Until we get a decisive move one way or the other I will continue to label this as a speculative play because we're basing it on bearish technical divergences between IBM and the Industrials (and the GHA hardware sector). Suggested Options: Typically, stocks tend to move down faster than they move up so we're going to focus on the short-term June and July options. BUY PUT JUN 90 IBM-RR OI= 9663 at $3.20 SL=1.60 BUY PUT JUN 85 IBM-RQ OI=31182 at $1.05 SL=0.50 BUY PUT JUL 85 IBM-SQ OI=32596 at $2.30 SL=1.15 BUY PUT JUL 80 IBM-SP OI=24035 at $1.10 SL=0.55 Annotated Chart #1 for IBM: Annotated Chart #2 for IBM: Picked on May 29th at $87.36 Change since picked: +0.68 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million Chart link: --- L-3 Communications -LLL - close: 43.35 change: +0.17 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: It was not a pleasant week for bearish traders in shares of LLL, as the rebound that began at the 50-dma continued its relentless, albeit slow rise. If not for the intraday reversal from the $44 level, we would have been tempted to just pull the plug this weekend. There's no question, LLL is severely lagging the broad market and the trading pattern over the past week looks an awful lot like a bearish flag pattern. The question that must be answered though is whether the stock is going to break down from that pattern (as we suspect) or defy logic and push up through resistance. We've been targeting failed rallies near the $43.50 level for new entries, and that still looks like a viable strategy. However, more conservative traders may want to wait for a confirmed break below the bottom of the flag pattern with a trade below $43 before playing. The $43.50-44.00 turned out to be solid resistance on Friday (backed up by the 20-dma at $43.88) and we're looking for that level to hold back the bulls next week. If the expected breakdown does occur, keep a sharp eye on the 50-dma ($41.87). This average provided support for the current bounce to commence and we must consider the possibility that it could do so again. Just in case resistance fails to hold back the stock, maintain stops at $45, which is just above the 200-dma at $44.70. 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= 471 at $2.40 SL=1.25 BUY PUT JUN-40 LLL-RH OI=1024 at $0.40 SL=0.20 BUY PUT JUL-40 LLL-SH OI= 636 at $0.90 SL=0.40 Annotated Chart of LLL: Picked on May 20th at $41.94 Change since picked: +1.41 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.36 mln ************* NEW PUT 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 ********************************************************************* ********** 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 06-01-2003 Sunday 4 of 5 In Section Four: Leaps: Faked Out! Traders Corner: Gettin' In -- With Minimal Begging! Traders Corner: Ooops Traders Corner: Where is the Dow Going? ------------------------- Advertisement ------------------------- We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oinvest23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ***** LEAPS ***** Faked Out! By Mark Phillips mphillips@OptionInvestor.com That's certainly the way I'm feeling this weekend, after having both of last week's two new bearish plays stopped out on Tuesday. I suspect I'm not the only eager bear that has had to endure some pain recently, as the broad market has continued its relentless rise. All of the major indices are looking quite bullish, with the S&P 500 bettering its August closing highs and the NASDAQ Composite coming very close to setting a new 52-week high. Interestingly, the COMPX ended the week right at its descending trendline connecting the May 2001 and January 2002 highs (LOG chart). In light of the recent market move, I think it would be instructive to take another look at the respective weekly charts and review where we are in pictorial form. Weekly Chart of the NASDAQ Composite (LOG) Weekly Chart of the S&P 500 (LOG) In my opinion, those two charts tell the whole story, showing both the SPX and COMPX butting up against very strong resistance, with weekly Stochastics showing extreme overbought readings. Either the bulls are going to elicit a real capitulation from the bears, or this is where the top should be put in for this cycle. What I find most interesting about the action in the broad market is that it is coming in the face of continued weakness in the US Dollar, as measured by the Dollar index (DX00Y), which is very near its 1998 lows and showing very little indication of reversing its recent slide. Not only that, but bonds have been very resistant to sell off at all, with yields once again very near their multi-decade lows. The yield on the benchmark 10-year Treasury Note ($TNX) ended the week at 3.35%, not far above its recent intraday low of 3.29%. At the same time, Gold is not showing the strength one might expect, finding consistent resistance in the mid $370s. Aside from the strong uptick in Consumer Sentiment early last week, I find very little in the economy to justify this action in the equity markets. The only reasonable explanation that comes to mind (other than end of quarter window dressing, a theory I place very little stock in) is that investors are counting on that fabled second-half recovery to materialize and break the back of the 3-year bear market. Could it happen? Sure. Is it likely to be the end of the bear? I find that likelihood to be extremely remote. No matter what contortions I go through, I cannot force myself to see the "compelling valuations" that are necessary to signal the end of the bear market. They weren't there last October and they certainly aren't there now with valuations of most stocks even higher. But there is one constant in the marketplace and that is that markets fluctuate. Exhale and then inhale and right now the market appears to be near the last stages of a big inhalation. Poke it in just the right spot and there it will be forced to begin the next exhalation process. I've got a nice sharp stick and I've been poking the market with it in the past couple weeks, all to no avail. I obviously haven't found the right spot yet. But that doesn't mean I'm going to quit poking! Two of the major factors that I monitor to give me a read on the market are bullish percents and the VIX. Despite the fact that the charts above show the markets to be very overbought, there hasn't been an indication from either of these metrics to indicate an imminent collapse. Recall that we're looking for the VIX to fall below the 21 level, preferably into the 19-20 range to indicate there is too much complacency and a downside correction is ripe for the picking. The VIX has been very resistant to falling under the 21 level, which it has been using as support now for the past 3 weeks. Turning to the bullish percent readings, we have a stark reminder that overbought can always become more overbought. I've been listing a table showing the progress of these readings for the past couple weeks and it seems worthwhile to continue doing so as long as they continue to grind higher. NASDAQ-100 - 84% (12/02 high of 82%) NASDAQ Composite - 64.62% (new all-time high) DOW - 70% (5/22/03 high = 73%, 11/02 = 73%, 4/02 = 76%) S&P 500 - 74% (3/02 high of 77%, 5/01 high of $74%) S&P 100 - 68% (12/02 high of 76%, 3/02 high of 79%) In all cases, the major indices BP is either in or very near overbought territory, but with further upside possible from a historical standpoint. The one notable exceptions is the COMPX, which is currently sporting its highest BP reading ever. One thing that stands out as we examine these readings on a weekly basis is the lagging nature of the OEX and the DOW. We've seen the DOW's price action lag the rest of the market and that is also true in the BP readings, which haven't been able to advance beyond the 70% level for the past 2 weeks. I've noted the OEX has shown less strength than the broader SPX, and I believe that can be attributed to the reality that large cap stocks (which are more dominant in the OEX) are underperforming small- and mid-cap stocks. That underperformance is confirmed by the OEX being the only one of the major Bullish Percent readings that hasn't been able to push into the normally overbought region over 70%. I mentioned this last week, but I think it is worth repeating verbatim again tonight. I invite you to go over to stockcharts and look at the SharpChart for each of these bullish percent readings. In almost every case, the bullish percent is continuing to push higher, and we have yet to see any of them break below their respective 10-dmas. As I've said before, overextended, but not yet showing anything that can be termed weakness. Here's the link I use, for your convenience. http://stockcharts.com/def/servlet/SC.web?c=$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 The bulls have pushed the bears right to the brink of capitulation, but we haven't yet seen what I would term the decisive tipping point. The market's are all very extended, but have yet to show any definitive signs of tipping over. At the same time, there hasn't been what I would call a decisive breakout either. The next couple weeks should be very interesting, and I'll be on the edge of my seat waiting for the resolution to this very interesting setup. As noted at the top of my commentary, it was a less than stellar week for the LEAPS Portfolio, as I got sucker punched on both the AMZN and GS plays. New to the Portfolio just last weekend, they both found their way to the drop list this weekend. Our other bearish plays are being threatened by bullish price action to varying degrees as well. The blow by blow is contained below. Portfolio: AIG - Despite the bearish fundamentals and new outbreaks of SARS to deal with, AIG staged an impressive rally to end the week right up against that strong $58 resistance level, and fractionally above the 200-dma (currently $57.62). A look at the weekly chart, shows the stock nearing a test of major resistance at the descending trendline (currently $58.90) that began with the highs in late 2000. Will the bulls be able to break out from here? It seems unlikely to me, with weekly Stochastics already topped out in overbought territory and weekly MACD starting to weaken as well. But that doesn't mean it can't happen. That's what stops are for. For traders still eyeing a bearish entry into this play, taking a position in the $58-59 area still feels like a good risk/reward move, with the bulls in this market carrying the overwhelming majority of the risk. Maintain stops at $61. GM - Don't fundamentals matter anymore? Even after UBS Warburg came out with bearish comments on the Big 3 Automakers last Thursday, making comments about a 'major casualty' from the group in the long-term, GM held its ground from Tuesday's sharp rise and closed over the $35 level on Friday, just fractionally above its 50-dma. While the downtrend is still intact, it looks entirely possible that we could see a test of that descending trendline from the December and January highs. That trendline is currently at $37.35, and is reinforced by the 200-dma at $37.21. My outlook for GM remains unchanged and I expect significantly lower price levels in the months ahead. Nonetheless, I am reminded of the last time we played bearish on this stock and got stopped out literally at the high back in January. I don't want a repeat of that performance, so I've done something that I am normally loathe to do -- I'm actually raising the stop back above that trendline where it was until recently. The stop is now back at $37.50 and it will remain there until we are either stopped out or the stock closes decisively back under the $33 level. I would still recommend new entries into the play on a failure of this rebound below the 200-dma. KO - The price action with which KO rounded out the week was certainly not what I expected to see. After 3 weeks of stalling below the descending trendline from the July highs as well as the 200-dma, a rollover from the $45 area seemed to be the natural course that events would follow. But the broad market strength on Friday provided just the lift the stock needed and it broke decisively through both of those measures of resistance. Not only that, but the buying volume over the past couple days has been among the strongest seen for the past few weeks. I can't say for certain whether this breakout will continue, but I continue to believe resistance is going to hold. Turning to the PnF chart for confirmation shows the bearish resistance line resting right at $46. So it should come as no great surprise to have seen KO top out on Friday at $45.95. For those looking for a better entry into the play, I believe this rally is providing it, with weekly Stochastics now topped out in overbought. Maintain stops at $47 for now. AMGN - To say I was feeling nervous about initiating this play last week would be an understatement, given what I believed to be a severely overbought market. But the persistent and predictable trend along with strength in the Biotechnology sector were just too compelling to pass up. Apparently, it was a good choice, as AMGN broke out to a new 52-week closing high on Friday. It wasn't a straight line move over the past week though, with plenty of volatility to deal with along the way. Rumors of mergers and profit taking had AMGN bouncing about quite a bit for the first 3 days of the week, but in the end, the bulls prevailed, giving us a bit of breathing room in the play. The next near-term objective will be for a move into the $66-68 area, which ought to produce at least a near-term pullback from profit taking. Hopefully, we'll be able to ride the trend higher to the PnF bullish price target of $72. With the breakout to round out the week, raising our stop to $60 (just below the 50-dma and the rising trendline) seems a prudent course of action. Keep the Dramamine close at hand, as the next couple weeks are likely to see a fair amount of volatility. But we'll hold on for the ride, as the trend looks like it has enough strength to power AMGN to our $72 target, market willing. QQQ - That didn't take long! Apparently, I was a bit too pessimistic with the entry strategy, because after entry on Tuesday, the QQQ just continued higher to end very close to a new 52-week high. This is a pivotal level and either I'll be proven right in the weeks ahead or it will be another example of the perils of trying to sell into strength. Full details below. Watch List: NEM - I'm getting as tired of maintaining this play on the Watch List as you are of reading about it. Gold futures are looking top-heavy here, especially with the Dollar index (DX00Y) acting like it wants to head higher for a bit. That should pressure gold stocks lower over the next several weeks, but only time will tell. NEM is still trading right at the top of its year-long neutral triangle, and appears it is being held back by that heavy resistance near $30. I wouldn't advocate bearish positions here due to my long-term bullish view on gold stocks. But neither is it the time to be initiating bullish positions. Just like I've reported over the past several weeks, we wait and see on this one. If NEM decisively breaks out above the $31 level without giving us an entry point, then I'll just drop the play as one where I was correct on direction, but badly flubbed the entry. DJX - A few weeks ago, it may have seemed like the DOW would never make it to our $88-89 target area, but here we are right in the middle of that zone, with the DJX ending at $88.50 on Friday. So why isn't this an entry? Primarily because there are really no signs of weakness. Bullish percents are still steaming higher and the VIX is stubbornly refusing to break below the 21 level. As much as I would like to see the DJX reverse right here at the January highs, this market has the feel of one that is bound and determined to test the August and December highs from last year between $90-91. So we adapt our strategy to that expectation. If the market falls apart from here, then it is quite possible that we'll miss the entry. But the consolation will come from the QQQ play, which transitioned to active status last Tuesday. As can be seen by the action in our other bearish plays last week, I believe patience is the appropriate strategy to employ until more of the parameters I outlined in my recent series of MOPO articles line up in our favor. Closing Thoughts: I really don't have a lot to add other than what I described above. The markets by all the measures I follow are looking very overbought, but also at critical levels of resistance. It is make or break time for the bears. At the same time, the VIX and Bullish Percents are indicating that there shouldn't be much more upside in store. All in all, the month of June should be quite instructive as to whether the pundits calling for the end of the bear market will be hailed as geniuses or hung out to dry for once again calling the end of a very young bear market. Last week, I promised to detail the process by which the 2006 LEAPS would be rolled out from now until the end of July. You know what they say about the best of intentions. I actually had a nice little description put together to add to the end of this week's column, but fate intervened on Saturday morning. An ugly system crash not only put me severely behind in terms of schedule, but managed to corrupt that file. It will have to be recreated from scratch and there just isn't enough time to get it done before I hit my publishing deadline. So with apologies to all, I'll have to postpone that description until next week. Note that I haven't added any new Portfolio candidates this week. This is partially due to running out of time, but more to the point, it is because I want to see how the current situation plays out in the broad markets first. I can find lots of bearish candidates, but then what's the point if I turn out to be wrong and the markets defy gravity and head sharply higher. On the other hand, it is very hard to find bullish candidates that I think make sense for initiating new long-term positions. In my opinion, this is a good time to just maintain current positions and look for some sort of confirmation of where the market is headed next. If we get the rollover from resistance, then there will be plenty of time to get on board the bearish train. But if they break out, then I believe it will demand a significant change in strategy. I'll be eagerly looking on with the rest of you. 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 $ 9.30 +32.86% $60.00 '05 $ 60 ZAM-AL $10.90 $13.80 +26.61% $60.00 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 4.10 -26.79% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 7.20 -15.29% $61.00 GM 05/13/03 '04 $ 35 LGM-MG $ 4.10 $ 4.10 + 0.00% $37.50 '05 $ 30 ZGM-MF $ 4.60 $ 4.60 + 0.00% $37.50 KO 05/15/03 '04 $ 40 LKO-MH $ 1.70 $ 1.40 -17.65% $47.00 '05 $ 40 ZKO-MH $ 3.85 $ 3.40 -11.69% $47.00 QQQ 05/27/03 '04 $ 27 KLF-MA $ 1.70 $ 1.50 -11.76% $32.25 '05 $ 27 ZWQ-MA $ 3.10 $ 2.85 - 8.06% $32.25 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 PUTS: DJX 05/04/03 $90-91 DEC-2003 $ 88 DJX-XJ DEC-2004 $ 88 YDJ-XJ New Portfolio Plays QQQ - NASDAQ-100 Trust $29.10 **Put Play** Suffice to say, this is not how I expected this play to be initiated. I was hoping for a push up to the $29 level and then an exhausted roll over. Instead, those crazy bulls launched the NASDAQ higher on Tuesday, with the QQQ ending at $29.10. Because of the way I set up the entry strategy on this play, we're in the play as of Tuesday's close, for better or for worse. Instead of weakening after that entry, the QQQ just powered higher into the end of the week, as the NASDAQ-100 pressed up against the 1200 resistance level and the NASDAQ Composite ended just below the 1600 resistance level on strong volume. These are critical resistance levels and eager bears (myself included) just may be in for some pain over the near term. A breakout there could really send the short covering and we could even see a substantial move higher into the $31-32 area. With the NASDAQ- 100 bullish percent hitting 84% on Friday and the NASDAQ Composite hitting a new all-time high of 64%, there's no question this market is very extended at this altitude. But that doesn't mean it can't go higher. I believe this trade is correct, but the timing is obviously a bit early. For that reason, I'm starting out with a wider stop than I would normally, setting it way up at $32.25. For traders that took the entry early last week that are uncomfortable with that much risk, I would recommend sticking with the initial stop I had mentioned at $31. As mentioned last weekend, this is an aggressive play, where we are attempting to pick a top in what has lately been a strong market. Both weekly and daily Stochastics are buried in overbought territory, but weekly MACD is still looking strong and has now moved to its highest level since September of 2000 when the QQQ turned down from the $100 level! If the NASDAQ does continue higher over the next week, then I would say that I still favor new positions in the $30-31 area on any sign of weakness. In fact, if this play is stopped out, there is a very strong likelihood that I would consider a new entry at higher levels. Risk is very high for the bulls up here, but it remains to be seen whether price action is willing to obey the law of gravity. Remember my comments from earlier in the year, where I stated my belief that the NASDAQ would prove to be the stronger area of the market this year? Well that is certainly proving out to be true right now, isn't it! My primary rationale for listing this play in the face of that relative strength is based on the expectation that a significant retracement of the gains from the March lows is long overdue. Bears that would prefer to play in a weaker sector of the market should focus their efforts on our DJX play, as the DOW is the clear weakling in this rally so far. BUY LEAP JAN-2004 $27 KLF-MA $1.70 BUY LEAP JAN-2005 $27 ZWQ-MA $3.10 New Watchlist Plays None Drops AMZN - $34.85 That was just unpleasant! In retrospect, when AMZN pushed through the top of its channel after the company's latest earnings report, I should have just pulled the plug on this play due to the strong buying interest in the Internet sector. I still feel this sector is horrendously overvalued and AMZN is the worst of the bunch, with a P/E ratio (based on phony EBITDA earnings) of 118! The company doesn't have a real P/E ratio because in terms of actual cash flow, the company is still losing money. But I'm sure there were more than a few bears chewed up by similar thinking in 1999-2000 as the stock rocketed above the century mark (split-adjusted) on little more than hype. In fact, the action in the Internet space is starting to feel "bubblish" to me again. Weekly Stochastics are pegged at their highest level EVER, but weekly MACD is looking very strong. This is not the place to continue fighting the tape and that's what stops are for. We were triggered into this play on the dip below $31.50, which turned out to be a clear bear trap. Last Tuesday's strong rally through the $34.50 level (the site of our stop) was more than enough to convince me of the error of my ways, and we closed the play for a painful loss. Sometimes we need a stark reminder of the risks of fighting the tape. That's what stop-losses are for! We'll be back for another bearish attempt on AMZN, but not until there are some definite signs of weakness. GS - $78.48 Bear traps were a common occurrence over the past couple weeks, and sadly I took the bait. GS' breakdown below the $74 level on May 20th looked like the real deal, with the Brokerage index (XBD.X) having shown some real weakness itself. Wrong! That end of day rebound should have been my clue, but I really didn't see it having the ability to follow through. Over the past week, the bulls really went nuts, not only pushing the XBD index back above the $465 resistance level, but through its April and May highs from last year. I saw the handwriting on the wall with our GS play last Tuesday, with the stock surging strongly higher to end at $78.48. Sure that is a couple pennies below our $78.50 stop, but the stock's ability to trade fractionally above that level and end near the high of the day did not bode well for bearish positions. I'm glad I dropped it there, as the rest of the week saw incredible strength in the XBD sector and GS, with the stock closing out the week at $81.50, a new high for the year, and interestingly, right at the August 2002 closing high. Will it continue higher or reverse from here? I wish I knew, but based on what I see on the charts, I would expect further upside over the near term. No question, I'll come back to dip my toes in the water on a future bearish trade on GS. But the time for tilting at that windmill is not right now. ------------------------- Advertisement ------------------------- VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ************** TRADERS CORNER ************** Gettin' In -- With Minimal Begging! By Mike Parnos, Investing With Attitude "Help! Help!" That's the familiar sound of a CPTI student who has strayed from the path and finds himself up the creek without a paddle. He's losing money, confused, and doing a Linda Blair - - spewing out Latin phrases backwards while his head does a 360. Your "trading exorcist" is here. A Bad Entry Can Lead To A Bad Exit Often the problem is a result of how he entered the trade. So, today, we're going to examine the process. There are a number of ways to enter a trade – ranging from conservative to aggressive. Most of our trades involve spreads. Because we sell premium, we often use indexes. The SPX, OEX, XAU, RUT are indexes that trade only on one specific exchange. ______________________________________________________________ Hooray! We Found a Trade! After diligent research, hours of chart interpretation, two calls to the Psychic Friends Hotline, three kamikazes, and the all- important coin-flip, we've decided to put on a bull put spread on the SPX. We (and our other influences) decided that there is significant support at the 920-925 level. The Order We're going to take advantage of the fact that the SPX is only traded on the CBOE. Some of those bid/ask spreads are outrageous. The size of the bid/ask spread depends on how close the SPX is trading to the option, and the liquidity of the option. The Bid / Ask Spread Who pays those large spreads? Not CPTI students! Experienced traders will try to shave off a nickel, dime or more from each of these huge spreads. As long as we don't get greedy, there's a good chance we'll get filled at the prices we want. Here are some typical bid/ask spreads on current SPX options. SPX June 925 puts $5.00 x $5.70 SPX June 920 puts $4.30 x $4.90 SPX June 915 puts $3.70 x $4.20 SPX June 910 puts $3.20 x $3.60 If you want to sell the 925 put as part of the bull put spread, you need to recognize that there is a $.70 spread. How much should we ask for? We can try for a $.15-.20 concession on the 925s. Let's assume the other option, to complete the bull put spread, would be the purchase of the June 910 puts. The bid/ask spread is $.40. We can expect to shave off $.10 from the spread and have a reasonable chance of getting filled. Placing The Order If you place the order as a spread order with a specific limit, you will also increase your chances of getting filled. Per the above figures, if you were to place the order at posted prices, the sale of the 925s and the purchase of the 910s would yield $1.40. If we add the additional amount ($.30) we have shaved from the two bid/ask spreads, we now can place the spread order at the CBOE with a credit limit of $1.70. Our chances of being filled are quite good. Why? Because we didn't get greedy. We offer the marketmaker a substantially larger chunk of the spread, so they're willing to compromise a little. They probably won't fill you immediately. When you're trying to take a small slice of their pie, it's often near the end of the day before you're notified of the fill. If they don't get their piece, they can't afford their limo payments. They may find themselves out of work and selling urinal cakes door to door. Now, that's motivation!! Other Submitting Alternatives For the more aggressive trader who has the time to devote attention to the market, there's a way to possibly gather a more premium. Notice that I said "possibly." Here's the scenario. Your support level has already been established. The market opens and it appears the SPX is going to go down significantly today. Instead of entering the trade as a spread, you might consider just buying the long option (SPX June 910 put) early. Then you can wait for the SPX to move lower before you fill the second part of or the bull put spread (SPX 925 call). The Best: If the SPX moves down significantly, you could conceivably pick up an additional few dollars in time premium. Another choice you would have is to sell a different strike price. Instead of the June 925, you could conceivably sell the June 920 put without sacrificing premium credit. That would lower your exposure (and maintenance requirement). If you have the 920/910 bull-put spread, you're only exposed for 10 points as opposed to a 15 point exposure for the 925/910. The Worst: The market gods have a strange sense of humor. Your risk is that the SPX picks that very moment to reverse and go in the opposite direction. You sit there, cursing in the language of your choice, watching as your potential premium credit seemingly disappears before your very eyes. Keep in mind that this reversal "may" be temporary. There's no rule that says you have to complete your spread that same day. Perhaps it will reverse again and move back down the following day. But, when you roll the dice, you take your chances. That's why they call is "craps." _____________________________________________________________ Routing Your Order To A Specific Exchange – A Review Most stock options are traded on multiple exchanges. And the prices on these exchanges are often different. The ability to see real time prices and to route your order allows you to get your order filled at the best price available. If you can save a nickel or dime on every option trade you make, you wouldn't have to make any profit. These nickels and dimes add up to a nice profit all by themselves. There are actually five exchanges – Chicago (CBOE), American (AMEX), Philadelphia (PHX), Pacific (PCX), and the Electronic (ISE). Not all stocks are traded on all of the above exchanges, but most are traded on at least two or three. Does your broker give you the ability to route your orders – online or otherwise? I sure hope so. If not, you may be losing potential profits. _____________________________________________________________ CPTI JUNE POSITION UPDATE June Position #1 – SPX Iron Condor – Currently at 963.59. 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 – Aborted _____________________________________________________________ June Position #3 – TOL – Bear Call Spread Plus – Currently at $29.03 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 $48.17 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 $29.79 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. _____________________________________________________________ Unofficial CPTI Replacement PositionQQQ Strangle - $29.79 We bought 10 contracts of the QQQ June $31 calls @ $.10 and 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 could easily be worth $.75 - $1.25. That would be a nice return – IF it happens. If not, que sera, sera – whatever will be will be. We're only risking a total of $.20. Greater risk takers (speculators) 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. With the continued move up, our $200 bet is now worth $250. If you bet $400, it's now worth $650. _____________________________________________________________ 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 click on "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 ************** Ooops By Steve Gould Ooops. I made a mistake. Not a terrible one, but one that needs to be rectified. This will also give me the opportunity to start using some standards I should be using anyway. Dale Carnegie in his excellent book, How to Win Friends and Influence People, devotes an entire chapter to admitting your mistakes. This is a tough lesson for many people to learn as it is just not in our nature to even conceive that we could possibly imagine the improbable likelihood that we may even remotely be maybe wrong. The boss, the kids, the wife (he says under his breath) just will not ever admit a mistake. If you don't believe me, the next time you get into a "disagreement" with your spouse, try using this line. Say, "Honey, I would agree with you, but then we would both be wrong." This is a sure fire way to prove that you are right and they are wrong. Your spouse will undoubtedly instantly realize how wrong he/she is and readily admit it. Please report back on how successful this useful technique is. You will have plenty of time to email me, because no one is going to be talking to you anyway. Here is what I did wrong. In my 5/4/2003 article, "Where is the Dow Going?", I provided a monthly chart of the Dow from 1915 to the present. I did not label the chart correctly and I would like to take this opportunity to set the record straight. The relabeling changes the analysis a bit, but the effect from the January 2000 peak is essentially the same. Here is the chart as I labeled it. Chart: Dow Monthly since 1915 Since I only had data going back to 1915, I labeled it the way that seemed reasonable at the time based on the available data. I incorrectly reasoned that for the first 130 years of the US stock market we were in a wave I and the stock market crash of 1929 was a wave II. I subsequently did a little bit more research and found a chart going all the back to 1789. The chart fudges a little bit as it used a constant dollar basis, whatever that is. Also, I know that Charles Dow did not start charting stocks until the late 1800s so I would imagine that the data was interpolated based on comparable stocks that Dow would have used. The graph did look reasonable, based on the above assumptions. Using that particular graph, the I wave started at the birth of the country (1789 for all you non-history buffs) and extended to about 1835. Wave II went until about 1860 and wave III extended through the roaring 20s. The stock market crash of 1929 was actually the IV wave. From the 1930s until the year 2000 was the V wave. Based on this available data, the chart should have been labeled this way. Chart: Dow Monthly since 1915 relabeled You will notice two things different with this relabeled chart. First, the major trend is now labeled correctly. Second, the symbols used for the labels have been updated to be more consistent with standard nomenclature. Which brings me to the topic of proper wave nomenclature. Every profession develops a unique language so that one person can communicate with another person effectively. Doctors have their own language, lawyers have their own language. Even stock market analysts have their own language. Elliott developed a nomenclature to categorize his various degrees of subdivisions. Each subdivision has a notation that an Elliottician can instantly recognize and know exactly what degree of subdivision the wave count is in. I use Robert Prechter's notation as it is probably the best out there. Elliott recognized that there is one large trend and everything else is a subdivision of that larger trend. He named this large trend the Grand Supercycle and subdivided subsequent wave degrees in the following way: Grand Supercycle Supercycle Cycle Primary Intermediate Minor Minute Minuette Subminuette Figure 1: Wave degrees Note the consistent pattern in the labeling. Symbols start out with a circle, progress to a parenthesis (a balding circle) and then to a stand alone symbol (a completely bald circle). The degree labeling uses outline format starting with Roman Numerals and progresses to Arabic numerals. What this chart ultimately says is that the Grand Supercycle will consist of a 5 wave basic pattern labeled with circled Roman numerals. After the 5 wave, the A-B-C correction will be labeled with a circled a, b and c. Within the 1, 3 and 5 wave of the Grand Supercycle will be a Supercycle 5 wave basic pattern labeled with Roman numerals in parentheses. The Grand Supercycle 2 and 4 waves will be labeled (a), (b), (c) as they are the A-B-C corrective pattern of the Supercycle. This logic repeats recursively to the smallest degree. To illustrate this, let me relabel the Dow chart. Since I do not have the correct fonts for Grand Supercycle, I will start at the Primary. Figure 2: Wave Degree Progression Assuming that we are at a Primary degree (circled), the 5 wave basic pattern of the 5 circle wave will subdivide using the Intermediate labels. The (3) wave will subdivide into a 5 wave basic pattern using the Minor labels. Looking at the wave degree figure, following a Minor labeling of 1, 2, 3, 4, 5 for a 5 wave basic pattern, we use A, B, C for the A-B-C correction. This takes a little getting used to as the first inclination is to use the (A), (B), (C) labeling of the Intermediate degree. We don't use these labels until the (5) wave is complete. My computer does not have the fonts necessary to label Grand Supercycle, Primary and Minute degrees. I searched through a CD with 2000 fonts and nothing even came close. I am going to have to find some type of solution so that I can be consistent with this labeling schema. (If anyone has a font that I could use, I would appreciate it if you could send it to me.) The charting program I use does not use this system either. The program starts all waves as a Primary with the next subdivision as a Minor and then to Subminuette. This works for the short term snapshots that we look at but keep in mind that it is not "official" or consistent with smaller subdivision labeling. When labeling the Dow, I will strive to use the official, standardized notation. When labeling a stock, I will use a modified version of this notation as consistent as I can be. Since all the stocks would not participate in the Grand Supercycle degree, I would most likely adopt my charting program's schema and start at the Primary degree. This works as long as I do not try to compare a weekly chart to a daily chart to an hourly chart. It is important to use correct nomenclature and notation so that we can communicate without confusion with other Elliotticians our analysis of a stock. ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould Many years ago, the US government published a study on the bumble bee. The conclusion of this multi-million dollar research project stated that because of the bumble bee's size, weight, shape, wingspan, drag/lift ratios and metabolism, it can not fly. The bumble bee, not having read the government's study, just keeps going from flower to flower to flower to flower. Because of the Dow's Elliott Wave count, Fibonacci time relationships, overbought technical indicators and bullish sentiment the Dow cannot continue to go up. Yet, the Dow, not having read the white papers on technical analysis continues to inch higher and higher and higher and higher. Will the Dow continue to go up, or is it just about to crash? Every technical indicator I see says the Dow is about to crash, yet the Dow does not seem to be paying much attention to the technical indicators. I fear though that a time will come very soon when the technical indicators are going to catch up with the Dow's rebellious behavior and a Dow crash is going to catch a lot of people off their guard. Well, with the bullish sentiment higher than it has ever been, that won't be very hard to do. Last week I was convinced that the Dow was headed lower. Nothing like a 300 point rally to quash your convictions. The question remains, where will the Dow go from here? Chart: Dow Daily 6/1/2003 Here is a chart of the Dow since January 2000. I have relabeled it slightly to correspond more accurately with the correct labeling terminology. (See Trading Corner article "Ooops" written by me.) The 2 wave is still intact but not by much. It will remain intact until it reaches 9043 which is the peak of the (2) wave. Should it breach 9043, then the Dow would be relabeled as follows. Chart: Dow Daily Relabeled 6/1/2003 So what would change should the Dow breach 9043? Should the Dow reach 9044, the wave (2) correction will morph into a flat and will be spaced out a bit more. The Dow will then take one of two paths. It could continue to trend higher, conceivably up to 10500, thus forming a zigzag or it could remain a flat and start the (3) wave. Being at the crossroads, it would be best to step back and wait for the trend to reveal itself. (An alternate strategy would be to buy a straddle. Up or down, you win. Just not as much.) In either case the long term trend is still bearish. It is just a matter of time. But the Dow has not yet breached 9043. What would transpire if it doesn't? If the Dow is going to peak, it must do so soon. In less than 200 points, it will breach the 9043 level and the wave count will have to be relabeled. Chart: Dow Daily Since August I am looking at this daily chart and trying to get a rational labeling for the 2 wave. This is not an easy wave to label and all the alternatives lack reasonableness. It is still a valid wave count but I am going to defer and see how the Dow plays out before trying to anticipate the labeling. Chart: Dow Hourly 6/1/2003 Looking at an hourly chart, a case could be made for the peaking of the C wave. The last run traces out an impulse pattern with a slight throw over. A throw over is where the v (five) wave extends past the blue trend line and then returns backs. Sort of like a false break out. In this case, the v wave may not yet be complete. It may print out a few more points and then head down. Technically speaking, Elliott Wave- wise, the Dow should not print out more than a few more points and then start heading down. From an hourly chart perspective, it just doesn't make sense for the Dow to head higher. Should this be the case, we would expect to see a new 5 wave basic pattern trace out heading down. Bottom line is that the Dow can only trace higher about 150 more points before the wave count must be relabeled. Should it breach the 9043 level, it would be best to step aside and wait for the direction to reveal itself. Otherwise, it will head up for about 50 or so points and then head down and with a pent up vengeance that will make the bulls head spin. ***************************Advertisement*************************** Thinking of retiring to Hawaii? Or a second home in Paradise? Here's a rare Real Estate offering, not yet listed. 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The Option Investor Newsletter Sunday 06-01-2003 Sunday 5 of 5 In Section Five: Covered Calls: Choosing The Best Option -- Part II Naked Puts: Option Pricing Fundamentals Spreads/Straddles/Combos: Rally In Progress! Updated In The Site Tonight: Market Posture: Still Going Strong ------------------------- Advertisement ------------------------- WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oinvest21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ************* COVERED CALLS ************* Trading Basics: Choosing The Best Option -- Part II By Mark Wnetrzak Last week's narrative on position selection with covered-writes generated an interesting E-mail from one of our new readers. Attn: Covered-Calls Editor Subject: OTM Versus ITM Calls Hello Mark, I have used covered-calls in the past but only with some success as the market has not treated my portfolio well over the past few years. I read your thoughts on selling in the money calls and I like the fact that we have lots of downside with this method, but it appear that there is little profit made when the stock is in a bullish trend. In a market like we have right now, it seems like out of the money calls would be the best course of action and if I am betting on the stock to go much higher, I might as well just buy the stock and use a stop on the downside. Also, I do not see how you can do much with an in the money call if the stock rises a lot. You just lose all the upside potential. Thanks for some great picks even if I don't always sell the calls! KP Greetings KP, The in-the-money approach to covered-writing is a relatively low risk strategy for investors who want to earn income through stock ownership. The goal of this technique is to achieve acceptable returns while still receiving an above-average amount of downside protection for the underlying stock. A profitable outcome is not dependent so much on selecting a "bullish" stock but rather on identifying situations where there is a high probability that the issue will remain above the (position) cost basis until option expiration. Of course, the strategy isn't foolproof -- there is risk in all trading -- but it does have less risk than outright stock ownership. At OptionInvestor.com, we favor a very conservative, in-the-money approach and in my opinion, it has been the only viable method to selling calls against portfolio stock in the recent "volatile" market. But, even in a bullish environment, we usually recommend writing in-the-money covered-calls as we are not interested in long-term stock ownership or share value appreciation, but rather in a high probability of making a low yet reasonable return. The fact that we really can't predict stock movement reinforces our reasoning for choosing to hedge stock ownership with ITM covered writes. If you find that you are lucky enough to own a rallying stock after writing in-the-money calls, there are alternatives. You can: 1) Allow the stock to be "called" and accept the original profit you established when you sold the options. 2) Close the position early -- if the call is near parity -- for a profit. However, be sure to evaluate the extra commissions versus an increased annualized return. 3) Roll the calls forward, or forward and up to establish a new (higher) cost basis and maximum profit in the overall position. In all cases, evaluate the risk-reward in each scenario and choose the alternative that fits your outlook for the underlying issue. Rolling up may seem like a good idea at first, but the catch (and there is always a catch) is that you give up downside protection. When a trader rolls-up a covered-call position, a debit is usually incurred and this is often considered undesirable because you are putting more money at risk in a previously profitable position. Despite the "conservative" label on this strategy, it is possible to lose money. Prudent money management suggests you should have mechanical (or mental) stop-loss order on the underlying issue to limit draw-downs. In addition, we recommend that you never invest more than 10%-20% of your overall portfolio in one stock. This is a very important concept of money management because no one knows what is going to happen in the future. Diversity is paramount to success with smaller portfolios and in simple terms, you do not want to have "one ship that sinks the whole fleet." Of course, you will almost always endure one or two unanticipated, catastrophic events in a year, but we have found that a diversified portfolio of ITM covered-calls, when implemented in a disciplined manner and managed diligently, historically will generate a 15-30% yearly return. With this background in mind, the ITM covered-write strategy seems appropriate for conservative investors who prefer to focus on a high probability of obtaining an acceptable return, in a stock-based portfolio that has relatively low tolerance for risk. 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 2.68 JUN 2.50 0.40 0.23* 8.8% IPXL 7.86 8.50 JUN 7.50 0.80 0.44* 7.0% ABGX 11.18 10.64 JUN 10.00 1.90 0.72* 6.7% PLUG 5.08 5.43 JUN 5.00 0.35 0.27* 6.4% MOSY 7.50 8.26 JUN 7.50 0.60 0.60* 6.3% ALKS 12.84 12.89 JUN 12.50 0.95 0.61* 5.8% IDNX 5.60 6.33 JUN 5.00 0.90 0.30* 5.5% TER 13.06 17.15 JUN 12.50 1.40 0.84* 5.2% FCS 12.55 13.98 JUN 12.50 0.60 0.55* 5.2% OVER 14.55 17.80 JUN 12.50 2.75 0.70* 5.2% MDR 5.08 6.07 JUN 5.00 0.40 0.32* 5.0% AWE 7.64 7.77 JUN 7.50 0.45 0.31* 4.9% PLUG 5.39 5.43 JUN 5.00 0.65 0.26* 4.8% FEIC 17.65 20.25 JUN 17.50 0.85 0.70* 4.7% FFIV 15.45 17.32 JUN 15.00 1.30 0.85* 4.4% GNTA 8.78 11.62 JUN 7.50 1.70 0.42* 4.3% MRVL 26.72 31.67 JUN 25.00 3.10 1.38* 4.2% CELG 31.48 31.48 JUN 30.00 2.80 1.32* 4.0% BRCM 21.40 24.51 JUN 20.00 2.25 0.85* 3.9% PEGS 13.00 14.19 JUN 12.50 0.85 0.35* 3.2% GP 17.99 17.30 JUN 17.50 1.40 0.71 3.1% * Stock price is above the sold striking price. Comments: The Bulls continue to power the market higher as the Bears look on in disbelief. Will the bullishness continue unabated? Only time will tell, but next week should offer some clues. The covered-call portfolio remains in fine shape with only a few issues causing a bit of "sellers remorse" such as Marvell Technology (NASDAQ:MRVL) - up $5.00, or Teradyne (NYSE:TER) - up $4.00. As for the early-exit watch list, Abgenix (NASDAQ:ABGX) continues to act a bit suspicious "technically" ahead of this week's American Society of Clinical Oncology's annual convention. Georgia-Pacific's (NYSE:GP) current consolidation could make a move towards support at its 50- and 150- day MAs near $16.30. Alkermes (NASDAQ:ALKS) is selling off a bit after the firm reported a wider loss on lower R&D revenues and a pull-back towards its 30-day MA around $11.00 could be forthcoming. Celgene (NASDAQ:CELG) dove somewhat drastically on Thursday after announcing that it had sold $325 million of convertible notes due in 2008, however some "good" news on Friday offered a small rebound. A test towards the 30-day MA around $29.00 seems likely. 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 SUPG 5.04 JUN 5.00 UQG FA 0.65 1297 4.39 21 20.1% ARIA 3.37 JUN 2.50 UAQ FZ 1.05 8 2.32 21 11.2% LGTO 7.60 JUN 7.50 EQN FA 0.45 2186 7.15 21 7.1% FMKT 7.51 JUN 7.50 FAQ FU 0.35 451 7.16 21 6.9% CBST 10.79 JUN 10.00 UTU FB 1.15 179 9.64 21 5.4% OVER 17.80 JUN 15.00 GUO FC 3.30 5930 14.50 21 5.0% MLNM 15.55 JUN 12.50 QMN FV 3.40 3130 12.15 21 4.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** SUPG - SuperGen $5.04 *** Drug Stock Speculation *** SuperGen (NASDAQ:SUPG) is a pharmaceutical company dedicated to the acquisition, development and commercialization of oncology therapies for solid tumors, hematological malignancies and blood disorders. The company has 3 key compounds: Nipent, Orathecin and decitabine. Nipent is approved by the United States FDA and marketed by SuperGen for the treatment of hairy cell leukemia. Orathecin, its lead drug candidate, is close to completing three randomized Phase III studies and has been submitted for two New Drug Applications. Decitabine is also in Phase III clinical studies. SuperGen's portfolio of products also includes generic daunorubicin (leukemias), Mitozytrex (mitomycin for injection), cancer vaccine Avicine, Partaject-delivered busulfan and inhaled versions of Orathecin and paclitaxel. SuperGen appears to have broken through a resistance area near $4.50 on increasing volume. Investors who have researched the company's drug-pipeline and retain a bullish outlook can use this position to obtain a favorable cost basis in the issue. JUN-5.00 UQG FA LB=0.65 OI=1297 CB=4.39 DE=21 TY=20.1% ***** ARIA - Ariad $3.37 *** Cheap Speculation *** Ariad Pharmaceuticals (NASDAQ:ARIA) is engaged in the discovery and development of breakthrough medicines that regulate cell signaling with small molecules. The company is developing a comprehensive approach to the treatment of cancer. It is mainly focused on a series of product candidates for targeted indications: AP23573 (in Phase I development) to treat solid tumors and other malignancies; AP23464, to block the spread of cancer and to treat certain forms of leukemia, and AP23841, to treat cancer that has spread to bone, as well as to treat primary bone cancers, such as osteogenic sarcomas. Ariad's stock jumped Friday after the company released promising preclinical data on its lead cancer product candidate, AP23573. Speculators can use the inflated premiums to establish a bullish, low-risk position in the issue. Trying to target-shoot a lower "net-debit" will reduce the cost basis and raise the potential yield in the position. JUN-2.50 UAQ FZ LB=1.05 OI=8 CB=2.32 DE=21 TY=11.2% ***** LGTO - Legato $7.60 *** On The Move! *** Legato Systems (NASDAQ:LGTO) develops, markets and supports storage software products and services worldwide. The Company has three product categories: Information Protection solutions, Application Availability solutions and Content and Messaging solutions. LGTO's solutions protect and manage information, assure the availability of applications and provide immediate access to business-critical information in distributed open systems environments. Its solutions provide enterprise level customers the business continuity and operational efficiency to maintain a constant state of access to, and availability of, business-critical information. The company's products are mostly found in UNIX, Windows NT, Windows 2000 and Linux server and storage computer systems. Legato recently said it is still comfortable with a 2003 revenue growth expectation of 20% as the company continues to reduce its work force. We simply favor the bullish breakout above resistance near $6.50 on heavy volume. Traders who believe the rally will continue can profit from that outcome with this position at the risk of owning Legato with a cost basis near $7.00. JUN-7.50 EQN FA LB=0.45 OI=2186 CB=7.15 DE=21 TY=7.1% ***** FMKT - FreeMarkets $7.51 *** Bottom Fishing *** FreeMarkets (NASDAQ:FMKT) offers software, services and information to help companies improve their sourcing and supply management processes and enhance the capabilities of their supply management organization. The company's customers are buyers of industrial parts, raw materials, commodities and services. FreeMarkets' solutions combine software, services and information to address the global supply management market. The company serves its customers from 18 locations in 14 countries on five continents. FMKT has been forging a Stage I base since last summer and the stock's share price has recently moved above its 150-day MA. The stock appears poised to move higher in the coming sessions and traders who believe the issue is destined for a future rally can profit from upside movement with this position. JUN-7.50 FAQ FU LB=0.35 OI=451 CB=7.16 DE=21 TY=6.9% ***** CBST - Cubist $10.79 *** New Trading Range? *** Cubist Pharmaceuticals (NASDAQ:CBST) is a pharmaceutical company focused on the research, development and commercialization of novel anti-microbial drugs to combat serious and life-threatening bacterial and fungal infections. Cubist is conducting multiple Phase III trials for Cidecin, its lead product candidate in a new class of anti-microbial drug candidates called lipopeptides. The company is also conducting trials for oral formulations of ceftriaxone and daptomycin, and initiated a lipopeptide program aimed at discovering other clinically useful products. Shares of Cubist have rallied since February when US pharmaceutical regulators said they would give priority to approving Cidecin, Cubist's new antibiotic. WR Hambrecht recently began coverage of Cubist with a "buy" rating and a $14 stock price target. The technical outlook continues to improve and our position offers excellent reward potential at the risk of owning the issue at a reasonable cost basis -- just above an old trading range. JUN-10.00 UTU FB LB=1.15 OI=179 CB=9.64 DE=21 TY=5.4% ***** OVER - Overture Services $17.80 *** Buyout Potential? *** Overture (NASDAQ:OVER) is engaged in the Pay-For-Performance search on the Internet. The company's search service is comprised of advertiser's listings, which are screened for relevance and accessed by consumers and businesses through Overture's affiliates, a network of Web properties that have integrated its search service into their sites or that direct user traffic to Overture's own site. In some cases, consumers and businesses access the company's search listings directly at its site. The search listings are ranked by the advertisers' bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertisers' search listing, click-through or a paid click. As of December 31, 2002, Overture and its wholly owned subsidiaries operated the search service in the United States, United Kingdom, Germany, France and Japan. Overture continues to rally higher as the online search companies gain further attention amid potential buyout or merger speculation. Overture is an ongoing candidate for an acquisition by larger companies trying to compete with Google. We simply favor the abrupt technical change and traders can speculate on the outcome of the rumors with this conservative position. JUN-15.00 GUO FC LB=3.30 OI=5930 CB=14.50 DE=21 TY=5.0% ***** MLNM - Millennium $15.55 *** New Drug Approval *** Millennium Pharmaceuticals (NASDAQ:MLNM) is a biopharmaceutical company focused on developing and commercializing products in several disease areas. The company has a cardiovascular disease product already on the market and a cancer product under review for marketing approval. Millennium also has potential products in earlier stages of development in each of those areas and in its inflammatory disease and metabolic disease areas. Their cardiovascular product, Integrilin (eptifibatide) Injection, is approved for marketing in the U.S. for the treatment of patients with acute coronary syndromes, which include unstable angina and heart attack, and for use at the time of a percutaneous coronary intervention. Velcade is a novel drug candidate that may have broad applications in the treatment of cancer. MLNM jumped in early May after the FDA granted approval for the therapy, Velcade, to be used in multiple myeloma patients who've not responded to other drugs. Velcade is the first treatment in more than a decade to be approved for patients with multiple myeloma -- a cancer of the blood that afflicts about 15,000 people every year. The sharp rally continued this week and the move above the August high bodes well for further upside potential. Investors who agree with the bullish outlook for Millennium can establish a reasonable cost basis in the issue with this position. JUN-12.50 QMN FV LB=3.40 OI=3130 CB=12.15 DE=21 TY=4.2% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield AMCC 5.03 JUN 5.00 AEX FA 0.30 11837 4.73 21 8.3% ONXX 10.10 JUN 10.00 OIQ FB 0.60 586 9.50 21 7.6% NANX 5.36 JUN 5.00 NSY FA 0.60 70 4.76 21 7.2% ISIS 6.39 JUN 5.00 QIS FA 1.60 693 4.79 21 6.4% TSM 10.14 JUN 10.00 TSM FB 0.55 2738 9.59 21 6.2% OIIM 15.38 JUN 15.00 XQQ FC 1.00 96 14.38 21 6.2% UTEK 17.63 JUN 17.50 UQT FW 0.85 410 16.78 21 6.2% SBSA 7.55 JUN 7.50 DFU FU 0.35 42 7.20 21 6.0% CMVT 15.27 JUN 15.00 CQV FC 0.85 1452 14.42 21 5.8% ICST 26.05 JUN 25.00 IUY FE 1.95 224 24.10 21 5.4% RNA 5.08 JUN 5.00 RNA FA 0.25 1169 4.83 21 5.1% ANT 25.07 JUN 25.00 ANT FE 0.85 31 24.22 21 4.7% TLAB 7.92 JUN 7.50 TEQ FU 0.65 6087 7.27 21 4.6% FEIC 20.25 JUN 20.00 FQE FD 0.85 89 19.40 21 4.5% MBG 30.15 JUN 30.00 MBG FF 1.00 991 29.15 21 4.2% UTHR 20.00 JUN 20.00 FUH FD 0.55 20 19.45 21 4.1% SEPR 22.82 JUN 20.00 ERQ FD 3.30 2723 19.52 21 3.6% ***************** NAKED PUT SECTION ***************** Options 101: Option Pricing Fundamentals By Ray Cummins A successful trader will always seek to improve the risk-reward characteristics of his position by looking for the trade with the greatest possible margin for error. In order to achieve this goal, a trader must be able to accurately assess an option's value and one of the most important components of option pricing is the mathematical concept of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand and this knowledge is a prerequisite for premium-selling strategies such as writing "naked" puts. The time value of an option can be simply stated as everything but the intrinsic value. Intrinsic value in options is the "in-the-money" portion of the option's premium. For put options, it is simply the difference between the strike price of the option and the current stock price. One feature that quickly becomes obvious to option traders is: Time costs money and more time equals more money. The reason is, the amount of time value in an option's price declines each day it is in existence. Too make things worse, the closer it gets to expiration, the faster the time value in the option decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as Theta. Time is a commodity and there is one very important concept that merchants of time (option sellers) must understand; the laws of option pricing dictate that time value (or premium) is highest in the at-the-money option. Time value decreases as the strike prices move in and/or out of the money and strike prices that are deep in- and/or out-of-the-money have the lowest time value of all options. Does this fact suggest that you shouldn't sell out-of-the-money put options, where the probability of a profitable outcome is very high? Of course not! It simply means that option sellers (as well as buyers) need to have a firm grasp of pricing theory before they enter a position. Remember, the main attraction of options to most traders is they provide the buyer with leverage. In fact, a trader can realize a large percentage gain with only a modest change in the stock price. The concept of delta tells us that buying out-of-the- money options offers greater reward potential if the stock moves substantially while in-the-money options will perform better if the stock only moves moderately, in a given period. By the same logic, the sale of out-of-the-money options offers more leverage, and a much higher success rate when the stock trades in a relatively small range. Choosing the correct time frame of a position also requires careful analysis because options with more time until expiration have higher "premium" and yet the more time value remaining in the option, the greater the potential for adverse movement. The actual amount of time premium in an option is based in part on historical volatility (past price movement of the underlying) and implied volatility, which approximates how much the marketplace thinks prices will move in the future. As you might expect, the implied volatility of an option is more important as it is the component that can help you identify over-priced and under-priced options, and improve market timing in entering/exiting positions. It is a crucial element in determining an option's fair value because it reflects the amount by which an underlying asset is expected to fluctuate in a given period of time. Since implied volatility is a computed value, it is best calculated with the aid of software that can easily match theoretical option prices with the current market prices of the option. The formulas for pricing options offer an acceptable estimate of the value of an option but because they are highly leveraged instruments, options can exaggerate the emotional optimism or pessimism of the market, causing prices to vary widely from their true worth. Examining the difference between a stock's historical volatility and its implied volatility can help you recognize when an option is favorably priced. In short, if the option's implied volatility is higher than its historical volatility, the option is theoretically overpriced and traders should look for those types of opportunities to initiate "premium selling" strategies. All of these variables must be clearly understood for a trader to profit on a consistent basis and for more information, consult the bibles of option trading: "Option Volatility & Pricing: Advanced Trading Strategies and Techniques" by Sheldon Natenberg, and also, "Options As A Strategic Investment" by Lawrence G. McMillan. 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 11.64 JUN 7.50 0.35 0.35* 4.3% 11.2% CTIC 11.96 12.50 JUN 10.00 0.30 0.30* 3.5% 10.8% ANPI 28.27 29.79 JUN 22.50 0.80 0.80* 3.2% 10.8% CTIC 10.21 12.50 JUN 7.50 0.25 0.25* 3.0% 9.5% ANPI 25.20 29.79 JUN 17.50 0.75 0.75* 3.2% 9.4% IMCLE 21.20 28.50 JUN 15.00 0.50 0.50* 3.0% 9.2% OVTI 28.64 35.89 JUN 22.50 0.80 0.80* 2.7% 8.9% APPX 27.77 29.24 JUN 22.50 0.65 0.65* 2.6% 8.7% NVDA 21.37 26.17 JUN 17.50 0.55 0.55* 2.3% 7.6% CELG 27.42 31.48 JUN 22.50 0.70 0.70* 2.3% 7.5% OVTI 30.92 35.89 JUN 25.00 0.45 0.45* 2.1% 7.3% ITMN 23.89 25.29 JUN 20.00 0.60 0.60* 2.2% 6.9% ITMN 25.76 25.29 JUN 22.50 0.60 0.60* 2.4% 6.8% OSIP 26.08 26.36 JUN 22.50 0.40 0.40* 2.0% 6.2% SOHU 22.83 28.04 JUN 17.50 0.35 0.35* 1.8% 6.2% CELG 31.10 31.48 JUN 25.00 0.35 0.35* 1.6% 5.9% ANPI 28.45 29.79 JUN 22.50 0.30 0.30* 1.5% 5.6% SFA 20.29 19.69 JUN 17.50 0.35 0.35* 1.8% 5.4% NVDA 21.26 26.17 JUN 17.50 0.30 0.30* 1.5% 5.2% APPX 23.40 29.24 JUN 15.00 0.35 0.35* 1.7% 5.0% APPX 32.20 29.24 JUN 25.00 0.30 0.30* 1.4% 5.0% CYBX 23.31 18.94 JUN 20.00 0.30 -0.76 0.0% 0.0% * Stock price is above the sold striking price. Comments: Friday's blockbuster rally pushed the major equity averages to the verge of a technical "break-out." Is it too good to be true? Is the bear market of 2000 really over? Of course, I'm as hopeful as anyone, but I prefer to remain cautious with a conservative approach to portfolio management and a guarded outlook for all new positions. One portfolio stock that made the headlines this week is Cyberonics (NASDAQ:CYBX) and the activity deserves mention. Shares of CYBX, which makes a surgically implantable pacemaker-like device to treat severe epilepsy, fell over 15% on Wednesday after the company said earnings for the first quarter and the year 2004 would be at the low end of analysts' estimates. The news came in conjunction with the firm's quarterly report, which showed that Cyberonics posted a profit in the latest quarter versus a loss a year earlier, as strong sales of its products helped propel the medical device company to its first profitable year. After the gap down, the issue showed no real signs of resiliency, but the current range near $19 seems to be developing into a new "comfort zone" and it will be interesting to see where the stock goes from here. For the record, our current (closed) position is approximately $0.70 in the red and that's with a $5 drop in the price of the underlying. 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 IMCLE 28.50 JUN 22.50 QCI RX 0.50 1005 22.00 21 3.3% 11.7% OVTI 35.89 JUN 30.00 UCM RF 0.70 872 29.30 21 3.5% 11.1% FLEX 10.50 JUN 10.00 QFL RB 0.25 1227 9.75 21 3.7% 9.2% GNSS 19.02 JUN 17.50 QFE RW 0.40 367 17.10 21 3.4% 8.9% SOHU 28.04 JUN 22.50 UZK RX 0.35 920 22.15 21 2.3% 8.4% ICST 26.05 JUN 22.50 IUY RX 0.30 270 22.20 21 2.0% 6.1% NVLS 34.67 JUN 30.00 NLQ RF 0.40 7663 29.60 21 2.0% 6.0% 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). ***** IMCLE - ImClone $28.50 *** Drug Stock Speculation! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL's shares rallied in early March amid optimism that new data about the firm's experimental cancer drug Erbitux will be released shortly and prove positive. The rally continued after the biotech firm received a $60 million cash payment from Bristol-Myers Squibb under the companies' amended March 2002 agreement to develop Erbitux. Thus week, IMCL shares soared amid reports of the drug's effectiveness in treating cancer patients. Investors appear to be optimistic about the rumors and traders wouldn't mind owning IMCLE at a cost basis near $22 should consider this position. JUN-22.50 QCI RX LB=0.50 OI=1005 CB=22.00 DE=21 TY=3.3% MY=11.7% ***** OVTI - OmniVision $35.89 *** 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 $30. JUN-30.00 UCM RF LB=0.70 OI=872 CB=29.30 DE=21 TY=3.5% MY=11.1% ***** FLEX - Flextronics $10.50 *** Earnings Speculation! *** Flextronics International (NASDAQ:FLEX) is a provider of advanced electronics manufacturing services to OEMs (original equipment manufacturers), primarily in the hand-held electronics devices, information technologies (IT) infrastructure, communications infrastructure, computer and office automation and other consumer devices industries. The company provides a network of design, engineering and manufacturing operations in 28 countries across four continents. The company's strategy is to provide customers with end-to-end operational solutions where it takes responsibility for engineering, new product introduction and implementation, supply chain management, manufacturing and logistics management, with the goal of delivering a complete packaged product. Flextronics is due to announce earnings next week and traders who think the bullish chart pattern is an indication of the character of the upcoming report should consider this position. JUN-10.00 QFL RB LB=0.25 OI=1227 CB=9.75 DE=21 TY=3.7% MY=9.2% ***** GNSS - Genesis Microchip $19.02 *** Rally Mode! *** Genesis Microchip (NASDAQ:GNSS) designs, develops and markets integrated circuits that receive and process digital video and graphic images. The company's ICs are typically located inside a display device and process incoming images for viewing on that display. Genesis is targeting the flat-panel computer monitor, flat-panel television and progressive scan cathode ray tube TV markets and other potential mass markets. The firm's products solve input, resolution, format and frame refresh rate conversion problems, while maintaining critical image information and also improving perceived image quality. Its products utilize patented algorithms and IC architectures, as well as advanced IC design and system design expertise. Genesis operates through various subsidiaries and offices in the United States, Canada, China, India, Japan, South Korea and Taiwan. Shares of GNSS have been in "rally mode" this week and investors are optimistic about the company's mid-quarter conference call, which will be broadcast on Tuesday. Traders who believe the recent upside momentum will continue can profit from that outcome with this position. JUN-17.50 QFE RW LB=0.40 OI=367 CB=17.10 DE=21 TY=3.4% MY=8.9% ***** SOHU - Sohu.com $28.04 *** Another All-Time High! *** Sohu.com (NASDAQ:SOHU) is an Internet portal in China. The firm's portal consists of sophisticated Chinese language Web navigational and search capabilities, 15 main content channels, Internet-based communications and community services, and a unique platform for e-commerce and short messaging services. Each of the company's interest-specific main channels contains multi-level sub-channels that cover a range of topics; news, business, entertainment, sports and careers. The firm also offers free Web-based e-mail. Sohu.com offers a universal registration system, and the company's portal attracts consumers and merchants alike. One of the key features is a proprietary Web navigational and search capabilities that reflects the cultural characteristics and thinking and viewing habits of the People's Republic of China Internet users. Internet use is growing exponentially among foreign countries and China enjoys the largest population in the world. Investors who want to participate in the country's Internet explosion should consider this position. JUN-22.50 UZK RX LB=0.35 OI=920 CB=22.15 DE=21 TY=2.3% MY=8.4% ***** ICST - Integrated Circuit Systems $26.05 *** Break-Out! *** Integrated Circuit Systems (NASDAQ:ICST) supplies a broad line of timing products for use in personal computer motherboards and peripheral applications. These silicon timing devices control multiple processes by providing and synchronizing the timing of the computer system, including signals from the video screen, graphics controller, memory, keyboard, microprocessor, drives and communication ports. The company also designs, develops and sells silicon-timing devices for non-PC motherboard applications, such as digital videodisk players, digital set-top boxes, digital cameras, laser printers, flat panel displays and digital TVs. In addition, it offers surface acoustic wave technology to develop high-performance products for optical networking and wireless infrastructure markets. This week, shares of ICST used the rally in technology issues to break-out of a multi-month trading range near $23. Traders who believe the upside momentum will continue can profit from that outcome with this position. JUN-22.50 IUY RX LB=0.30 OI=270 CB=22.20 DE=21 TY=2.0% MY=6.1% ***** NVLS - Novellus Systems $34.67 *** Semiconductors Soar! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. Novellus has always been a popular issue in the chip sector and now that the stock is in a bullish trend, traders can profit from any future upside activity with this position. JUN-30.00 NLQ RF LB=0.40 OI=7663 CB=29.60 DE=21 TY=2.0% MY=6.0% ***** ***************** 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 SEPR 22.82 JUN 20.00 ERQ RD 0.65 6191 19.35 21 4.9% 13.5% MSCC 13.26 JUN 12.50 QMS RV 0.40 78 12.10 21 4.8% 11.7% ENZ 25.42 JUN 22.50 ENZ RX 0.60 209 21.90 21 4.0% 11.1% ULTE 10.66 JUN 10.00 QTQ RB 0.30 12 9.70 21 4.5% 11.1% PCTI 13.30 JUN 12.50 UKC RV 0.35 57 12.15 21 4.2% 10.4% SEAC 11.26 JUN 10.00 UEG RB 0.25 86 9.75 21 3.7% 10.4% BRCM 24.51 JUN 22.50 RCQ RX 0.55 4191 21.95 21 3.6% 9.5% INVX 10.68 JUN 10.00 IVQ RB 0.25 6 9.75 21 3.7% 9.4% ADIC 10.53 JUN 10.00 QXG RB 0.25 42 9.75 21 3.7% 9.2% NSM 24.96 JUN 22.50 NSM RX 0.50 1059 22.00 21 3.3% 9.0% CVTX 32.39 JUN 30.00 UXC RF 0.70 0 29.30 21 3.5% 9.0% TALX 18.03 JUN 17.50 TUB RW 0.40 0 17.10 21 3.4% 8.2% PRGS 20.39 JUN 20.00 RGQ RD 0.45 0 19.55 21 3.3% 7.9% MCDT 13.46 JUN 12.50 DXZ RV 0.25 95 12.25 21 3.0% 7.7% NVDA 26.17 JUN 22.50 UVA RX 0.35 2495 22.15 21 2.3% 7.1% SNDK 36.34 JUN 30.00 SWQ RF 0.35 1911 29.65 21 1.7% 5.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Rally In Progress! By Ray Cummins The major equity averages soared Friday with technology issues leading the way as the first signs of an economic recovery gave investors a good reason to buy stocks. The tech-laden NASDAQ composite added 20 points to finish the day at 1,595, its highest level in 12 months. The blue-chip Dow Jones industrial average jumped 139 points to 8,850, its best close of 2003. The Standard & Poor's 500 climbed 13 points to 963 in a third straight month of gains. Winners tripled losers on the New York Stock Exchange while advancers doubled decliners on the NASDAQ. Trading was very active with almost 1.7 billion shares changing hands on the Big Board and over 2 billion shares swapped on the technology exchange. The rally in stocks erased demand for safe-haven debt, sending 10-year Treasury notes down 6/32, with a closing yield of 3.36%. ***************** 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 84.80 JUN 60 65 0.55 64.45 $0.55 Open CECO 60.52 61.39 JUN 50 55 0.50 54.50 $0.50 Open FDC 40.22 41.42 JUN 35 37 0.30 37.20 $0.30 Open RCII 65.35 66.29 JUN 55 60 0.50 59.50 $0.50 Open ADTN 45.05 48.30 JUN 35 40 0.45 39.55 $0.45 Open KLAC 42.49 46.23 JUN 35 37 0.30 37.20 $0.30 Open LLTC 36.34 36.43 JUN 30 32 0.30 32.20 $0.30 Open ROST 40.09 42.22 JUN 35 37 0.40 37.10 $0.40 Open BSX 48.70 52.10 JUN 38 40 0.25 39.75 $0.25 Open UNH 95.41 95.94 JUN 85 90 0.55 89.45 $0.55 Open WLP 81.05 85.34 JUN 70 75 0.40 74.60 $0.40 Open BSX 50.51 52.10 JUN 40 42 0.25 42.25 $0.25 Open PHM 63.71 65.59 JUN 55 60 0.40 59.60 $0.40 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status PG 90.15 91.82 JUN 100 95 0.40 95.40 $0.40 Open GS 75.00 81.50 JUN 85 80 0.60 80.60 ($0.90) Closed MMM 122.81 126.47 JUN 135 130 0.50 130.50 $0.50 Open ANF 27.25 28.55 JUN 32 30 0.20 30.20 $0.20 Open GM 34.41 35.33 JUN 40 37 0.25 37.75 $0.25 Open JCI 81.61 83.25 JUN 90 85 0.55 85.55 $0.55 Open BRL 52.56 52.75 JUN 60 55 0.70 55.70 $0.70 Open CCMP 41.55 46.27 JUN 50 45 0.50 45.50 ($0.77) Closed KSS 51.22 52.35 JUN 60 55 0.55 55.55 $0.55 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Conservative traders should consider closing positions in Cabot Micro (NASDAQ:CCMP) and Goldman Sachs (NYSE:GS). Virtually all other bearish plays are "watch-list" members. The position in Nabors Industries (NYSE:NBR) 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 41.66 JUN 32 35 2.20 34.70 0.30 Open GENZ 41.47 47.39 JUN 35 37 2.20 37.20 0.30 Open BSX 46.91 52.10 JUN 37 40 2.25 39.75 0.25 Open MERQ 35.75 39.31 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 52.61 JUN 60 55 4.50 55.50 0.50 Open HDI 40.81 42.16 JUN 45 42 2.10 42.90 0.40 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Harley Davidson (NYSE:HDI) is now on the early-exit "watch" list. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SMH 26.43 29.95 AUG 30 22 0.10 1.90 Open MRVL 26.72 31.67 JUN 30 22 (0.20) 2.50 Open ICOS 29.85 31.65 JUL 35 25 (0.40) 2.00 Open The position in Icos Corporation (NASDAQ:ICOS) did not offer the target entry price, but the play was very profitable for traders who paid a small debit to open the speculative synthetic position. The Semiconductor Holdrs (AMEX:SMH) play has achieved a favorable profit. The position in Silicon Laboratories (NASDAQ:SLAB) has previously been closed. 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 27.51 JUL-30C JUN-30C (0.70) 0.40 Open ESI 29.11 28.21 OCT-30C JUN-30C 1.35 1.60 Open FILE 13.75 16.69 JUL-15C JUN-15C 0.10 0.25 Open? IBM 87.57 88.04 JUL-90C JUN-90C 0.25 1.30 Open CHKP 18.05 18.78 OCT-20C JUN-20C 0.70 1.10 Open GDT 39.98 42.28 OCT-45C JUN-45C 1.45 1.55 Open NSM 21.80 24.96 JAN-25C JUN-25C 2.10 2.50 Open BRCM 21.40 24.51 JAN-25C JUN-25C 2.15 3.15 Open SRNA 19.71 19.78 AUG-22C JUN-22C 0.70 0.85 Open VRTY 18.85 20.80 SEP-20C JUN-20C 1.00 1.25 Open VIA 44.95 45.65 AUG-47C JUN-47C 1.10 1.10 Open Filenet (NASDAQ:FILE) should have been closed (or adjusted) when the issue rallied above the sold strike on Monday. CREDIT STRANGLES **************** Symbol Pick Last Month SC SP Credit C/V G/L Status NXTL 13.60 14.99 JUN 15 12 0.75 $0.70 0.05 Open SC = Short Call SP = Short Put C/V = Current value G/L = Gain/Loss DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status TYC 17.27 17.70 JUL 17.5 17.5 1.80 1.75 Open 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 $52.10 *** Premium Selling! *** 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 $52.10 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-40.00 BSX-RH OI=28101 ASK=$0.80 SELL PUT JUN-42.50 BSX-RV OI=9554 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$42.10 ***** CYMI - Cymer $33.31 *** On The Rebound! *** Cymer (NASADQ:CYMI) is a supplier of excimer light sources, the essential light source for deep ultraviolet photolithography systems. DUV lithography is a key technology that has allowed the semiconductor industry to meet the exact specifications and manufacturing requirements for volume production of advanced semiconductor chips. The firm's light sources are incorporated into step-and-repeat (steppers) and step-and-scan (scanners) photolithography systems for use in the manufacture of various semiconductors with critical feature sizes below 0.35 microns. Cymer's products consist of photolithography light sources, replacement parts and service. The firm maintains a worldwide service organization that supports its installed base of light sources. CYMI - Cymer $33.31 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-25.00 CQG-RE OI=2058 ASK=$0.30 SELL PUT JUN-30.00 CQG-RF OI=4752 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$29.45 ***** GILD - Gilead Sciences $52.50 *** Another All-Time High! *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. GILD - Gilead Sciences $52.50 PLAY (conservative - bullish/credit spread): BUY PUT JUN-45.00 GDQ-RI OI=6589 ASK=$0.35 SELL PUT JUN-47.50 GDQ-RT OI=1338 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$47.25 ***** KLAC - KLA Tencor $46.23 *** Chip-Equipment Sector *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $46.23 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-40.00 KCQ-RH OI=16077 ASK=$0.40 SELL PUT JUN-42.50 KCQ-RV OI=7153 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$42.20 ***** PIXR - Pixar $56.55 *** "Finding Nemo" Premier! *** Pixar is a digital animation studio with the creative, technical and production capabilities to create a new generation of animated feature films and related products. The firm focuses on creating, developing and producing computer-animated movies that appeal to audiences of all ages. The company has created and produced four full-length animated feature films, Toy Story, A Bug's Life, Toy Story 2 and Monsters, Inc., that were marketed and distributed by The Walt Disney Company. Pixary's fifth animated feature film, Finding Nemo, is scheduled for domestic theatrical release May 30, 2003. PIXR - Pixar $56.55 PLAY (less conservative - bullish/credit spread): BUY PUT JUN-45.00 PQJ-RI OI=420 ASK=$0.30 SELL PUT JUN-50.00 PQJ-RJ OI=5563 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$49.45 ***** BRL - Barr Laboratories $52.75 *** Same Play - Different Week *** 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 $52.75 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-60.00 BRL-FL OI=876 ASK=$0.15 SELL CALL JUN-55.00 BRL-FK OI=900 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$55.55 ***** LLL - L-3 Communications $43.35 *** Trading Range? *** L-3 Communications Holdings (NYSE:LLL) is a merchant supplier of sophisticated secure communication systems and other specialized products. The firm produces secure, high-data-rate communication systems, training and simulation systems, engineering development and integration support, avionics, ocean and fuzing products, telemetry, instrumentation, space & guidance products and various microwave components. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's systems and specialized products are used to connect a variety of airborne, space, ground- and sea-based communication systems, and are used in the many transmission, processing, monitoring and dissemination functions of these communication systems. LLL - L-3 Communications $43.35 PLAY (less conservative - bearish/credit spread): BUY CALL JUN-50.00 LLL-FJ OI=671 ASK=$0.10 SELL CALL JUN-45.00 LLL-FI OI=3626 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$45.55 ************* 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. ***** PNC - PNC Financial Services $49.25 *** Bullish Banker! *** PNC Financial Services Group (NYSE:PNC) is a bank holding company and its operating businesses engage in regional community banking; wholesale banking, including corporate banking, real estate finance and asset-based lending; wealth management; asset management and global fund processing services. The company provides financial products and services nationally and in its primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. It also provides certain banking, asset management and global fund processing services internationally. PNC Financial's corporate legal structure consists of two subsidiary banks, with their subsidiaries and over 70 active non-bank subsidiaries. PNC Bank, National Association (PNC Bank), headquartered in Pittsburgh, Pennsylvania, is PNC Financial's principal bank subsidiary. PNC - PNC Financial Services $49.25 PLAY (conservative - bullish/debit spread): BUY CALL JUN-45.00 PNC-FI OI=4051 A=$4.40 SELL CALL JUN-47.50 PNC-FW OI=4125 B=$2.10 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$47.25 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** SEAC - SeaChange $11.26 *** Recovery In Progress! *** SeaChange International (NASDAQ:SEAC) is a designer, manufacturer and marketer video storage servers that automate the management and distribution of long-form video streams, such as movies or other feature presentations, and short-form video streams, such as advertisements. The company sells its products and services to cable system operators, telecommunications companies and broadcast television companies. Using its systems, the company customers can increase their revenues by offering additional services, such as video-on-demand movies and subscription video-on-demand programming, both of which allow subscribers to watch content at any time with pause, rewind and fast forward features. SEAC - SeaChange $11.26 PLAY (speculative - bullish/calendar spread): BUY CALL OCT-12.50 UEG-JV OI=124 ASK=$1.15 SELL CALL JUN-12.50 UEG-FV OI=93 BID=$0.20 INITIAL NET DEBIT TARGET=$0.85-$0.90 INITIAL TARGET PROFIT=$0.40-$0.65 ***** MCDT - McData $13.47 *** Solid Quarterly Results! *** McData Corporation (NASDAQ:MCDT) is a provider of open-storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. The company's core-to-edge enterprise solutions consist of hardware products, software products and professional services. Its SAN solutions improve the reliability and availability of data, simplify the management of SANs and reduce the total cost of ownership. MCDT - McData $13.47 PLAY (speculative - bullish/calendar spread): BUY CALL OCT-15.00 DXZ-JC OI=30 ASK=$1.15 SELL CALL JUN-15.00 DXZ-FC OI=120 BID=$0.25 INITIAL NET DEBIT TARGET=$0.80-$0.85 INITIAL TARGET PROFIT=$0.35-$0.60 ******************* 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. ***** QCOM - QualComm $33.55 *** Reader's Request! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $33.55 PLAY (speculative - bullish/synthetic position): BUY CALL JUL-37.50 AAW-GU OI=10022 ASK=$0.55 SELL PUT JUL-30.00 AAW-SF OI=21706 BID=$0.50 INITIAL NET CREDIT TARGET=$0.10-$0.20 INITIAL TARGET PROFIT=$0.60-$0.90 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $1,050 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($30). *********************** 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. ***** MGAM - Multimedia Games $24.53 *** Premium-Sellers Only! *** Multimedia Games (NASDAQ:MGAM) is a supplier of both interactive electronic games and the electronic player stations on which the company's games are played. The Native American gaming market is the firm's primary customer and the company delivers games to its customers through a telecommunications network, which links EPS located among gaming facilities, enabling all players to compete against one another in the same game to win pooled prizes. The Multimedia Games group designs and develops software, content, networks and systems that provide its customers with comprehensive gaming systems. MGAM has focused its development and marketing efforts on Class II gaming systems and Class III video lottery systems for use by Native American tribes throughout the United States. MGAM - Multimedia Games $24.53 PLAY (very speculative - neutral/credit strangle): SELL CALL JUN-25.00 QMG-FE OI=2322 BID=$1.20 SELL PUT JUN-22.50 QMG-RX OI=299 BID=$0.60 INITIAL NET-CREDIT TARGET=$1.90-$2.00 POTENTIAL PROFIT(max)=25% UPSIDE B/E=26.90 DOWNSIDE B/E=$20.60 ***** ***************************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. 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