The Option Investor Newsletter Sunday 06-15-2003 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: Let the Fed-Guessing Begin Futures Market: Friday the 13th Index Trader Wrap: It's the jobs stupid - or, you can't fool the consumer Editor's Plays: (See Note) Market Sentiment: Confidence Drops The Market Ask the Analyst: Sector/Index trading with HOLDRs and iShares 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 6-13 WE 6-06 WE 5-3 WE 5-23 DOW 9117.12 + 54.33 9062.79 +212.53 8850.26 +248.88 - 77.59 Nasdaq 1626.49 - 0.93 1627.42 + 31.51 1595.91 + 85.82 - 28.44 S&P-100 497.82 + 2.15 495.67 + 12.47 483.20 + 13.45 - 5.97 S&P-500 988.61 + 0.85 987.76 + 24.17 963.59 + 30.37 - 11.08 W5000 9454.26 + 1.72 9452.54 +233.65 9218.89 +302.66 - 73.62 RUT 449.71 - 4.23 453.94 + 12.94 441.00 + 22.60 + 3.73 TRAN 2455.56 - 25.98 2481.54 - 4.81 2486.35 +102.99 - 35.95 VIX 22.88 - 0.55 23.43 + 1.73 21.70 + .32 + 0.37 VXN 34.46 - 1.67 36.13 + 4.47 31.66 + 1.93 - 1.29 TRIN 1.23 1.06 0.92 1.09 Put/Call 0.73 0.78 0.67 0.74 WE= Week Ending ****************************************************************** Let the Fed-Guessing Begin Market participants weren't quite sure what to expect as this week began. Many indices ended the previous week with key reversal days, but the bulls weren't through yet. Although key reversal days come after a seemingly never-ending rise or plunge, and so are closely watched, they're often minor reversal signals. That's what last Friday's key reversal day turned out to be: a minor reversal signal. With most indices, the reversals stopped at the midline support of their ascending regression channels and the indices continued to find support there through the week. Neither overbought conditions nor Thursday's worrisome four-week initial claims average could drive the indices back below midline support. In fact, up until Friday, trading felt like the old momentum days of late 1999 and early 2000, complete with news of mergers and acquisitions, and IPO's. FormFactor (Nasdaq:FORM) began trading Thursday. With MSDW as the underwriter, and Lehman, Bank of America, and Thomas Weisel as secondaries, 6 million shares were priced at $14.00, up from the 5.5 million originally priced at $11-13. FORM designs, develops, and manufactures tools used in semiconductor manufacturing, specifically wafer probe cards that allow advanced tests and speed the manufacturing process. The issue opened Thursday at $19, but ended the week at 16.50, still above its $14.00 pricing. FORM's status as a semiconductor-related stock ties it to the performance of the semi industry and that industry's link to global economic recovery. This week, the price of the 256 Mb 400 MHz DDR (double data rate) chip continued recent increases, with the price surging 5.5 percent on Thursday alone. The Semiconductor Industry Association pegged the 2003 global chip sales growth rate at 10.1 percent, while forecasting 16.8 percent growth in 2004, 5.8 percent in 2005, and 7 percent in 2006. The semi news wasn't all good, however, perhaps producing the SOX's almost 30-point fall this week and an evening-star formation on the SOX's weekly, rather than daily, chart. While 2003 global sales are expected to grow, the SIA forecast 2003 Americas sales to decline 2.1 percent, with growth resuming in 2004 at a 15.7 percent rate. Deutsche Securities added further pressure to the semis with its downgrade of Intel (INTC) on valuation concerns. INTC fell 3.53 percent in Friday's trading. In addition, news surfaced late in the week that Taiwan Semiconductor (TSM) and STMicroelectronics (STM) were being added to the SOX, with Lattice Semiconductor (LSCC) being dropped. This marked the first time the index would include U.S. shares of foreign companies. Some market pundits at least partially attributed the SOX's weak performance this week to confusion as to how their inclusion would affect the index. Of the mergers or acquisitions announced globally, Oracle's (ORCL) hostile bid for PeopleSoft (PSFT) probably drew the most press. Since announcing its cash takeover bid of PSFT the previous week, ORCL fielded questions about its intentions toward PSFT. Analysts speculate that SAP might benefit if ORCL's bid succeeds and ORCL attempts to transition PSFT's customers to the ORCL products. This week, PSFT rejected the hostile bid and announced intentions to continue with its acquisition of J.D. Edwards (JDEC). ORCL moved up its earnings release, with many rightly speculating that ORCL would surprise to the upside. ORCL closed the week at 13.48, up 0.62 this week. Friday, the buoyant 1999-ish mood dipped as attention focused on a full slate of economic releases. The before-the-bell releases included May's PPI and trade gap, and the 9:45 release featured June's preliminary consumer sentiment number. The consensus forecast for the PPI number was a decline of 0.1 percent, with estimates as low as a decline of 0.3 percent. The actual number fell to the lowest of the estimates, declining 0.3 percent. Economists predicted a 0.1 percent rise in the core number, with estimates ranging all the way to a 0.3 percent drop, with the actual number meeting the expected 0.1 percent rise. April had seen a decline of 1.9 percent in the PPI number and a decline of 0.9 percent in the core number. Analysts surmised that Friday's PPI number left all options available to the Fed, as the low inflation risks allow a further easing in the rates. While the dollar's plunge should help narrow the U.S. trade gap, making our goods more attractive overseas, that effect was minimal, at least in this reporting cycle. The April trade gap did narrow to $42 billion, as expected, down slightly from March's $43.5 billion, but still remains up 26 percent from last year's rate. Exports fell 2.2 percent, but an April decline in crude oil prices also sent imports down 2.1 percent. Economists predicted a trade gap of $42 billion, but estimates ranged as high as $46 billion, with March's gap at $43.5 billion. Although this number isn't rated a market-moving number, economists do hope to see rising exports, a hope that was dashed in this reporting cycle. Although the U.S. does not depend greatly on exports, rising exports can be seen as a sign of growing demand in other countries and a sign that their economies might be strengthening. The University of Michigan's U.S. consumer sentiment number attracted the most interest, however, both in the U.S. and globally, both before and after its release. The June number disappointed, falling to 87.2. The consumer sentiment number had been predicted to rise to 93.2 from May's 92.1, although forecasts ranged from 91 to 93.7. None of the forecasts ranged into the 80's, however. As Jeff Bailey mentioned in an intraday update Friday morning, consumer sentiment usually improves when stock markets gain, as ours have been doing. However, consumers mentioned worries about job losses. The component measuring future outlook also plummeted, to an unexpected 84.2 from the previous 91.4. The low employment figures and consumer sentiment number increase speculation on the size of the rate cut that might be expected at the June FOMC meeting. Over the last weeks, Fed watchers have transitioned from asking whether there will be a cut to whether it will be 25 basis points or 50. The May retail sales, released Thursday, helped boost the case for a Fed cut. May retail sales met expectations, but the retail sales figures excluding autos were up only 0.1 percent, less than the projected 0.2 percent increase. That turned out to be the best of both worlds, however, as the small increase still allows the Fed to lower rates again while being just large enough to support hopes of a recovery in progress. Thursday's initial claims number demonstrated a continuing softness in employment, also buoying hopes for a rate cut. Don't forget that economists across the globe will be debating the Fed's likely decision next week, and their markets' reactions can impact ours. Global bourses have been building on the gains of the others as hopes have risen that economic recovery is either already underway or about to be seen. For example, the Nikkei is up 15 percent since hitting new 20-year lows day after day in April, and it's gained 7 percent just this week. The FTSE 100, CAC 40, and DAX have bounded above resistance level after resistance level, but they've based that energy on hopes of a U.S. recovery to a great degree. To demonstrate the interdependence of the global bourses, European markets began falling as our economic numbers were released Friday morning and then followed the course of our markets to a great degree. The performance of European and Asian markets Monday morning may govern the direction of our opening, too, although after U.S. trading begins, it's often our markets that guide the directions of the others, rather than the other way around. While Friday's decline felt strong and created potential reversal signals on the daily charts, it didn't do much technical damage. Many, me included, await the natural and expected retracement or consolidation of strong gains, if only for new bullish entries, but we've waited in vain so far. Many felt the retracement had begun in mid-May when the DJI fell more than 300 points in three days, but even as the DJI was plummeting, signs of renewed strength began appearing on the daily oscillators. Those signs included an upturn in the RSI, often a leading indicator, and then an RSI breakout above its trendline of descending highs. The daily chart depicts a bullish cross of the +DI and -DI lines on the ADX, and then an upturn above 20 on the ADX itself. May market behavior is old news by now, except that many of those chart characteristics remain intact as depicted in the chart below. Daily Chart of the DJX, as a proxy for the DJI: A study of the chart reveals that a potential reversal signal, an evening-star pattern, formed over the last three days' trading. It may portend a drop, but during this rally, the drops produced by the reversal signals themselves have often been the only declines seen. Today the DJI bounced from above the midline support, hinting that the support could hold even if the DJI were to decline again on Monday. The DJI could fall as far as the 8880 level, another 300-point decline, and still remain within the ascending channel and above the rising 21-dma and the 8880 horizontal support. A drop below 8800 would begin to damage investor sentiment and might predict a deeper drop, perhaps at least the 25-38.2 percent retracement we've all expected. The shallower 25 percent retracement would bring the DJI back to the next support level at 8720-8750. Currently, the ADX remains above 30, however, and it's rising, showing that the trend increases in strength for now. For those not accustomed to studying the ADX, I believe Jane Fox is writing an article about the ADX for this weekend's newsletter. The NDX daily chart demonstrates some of the same traits, although subtle differences appear. As the NDX printed its own version of an evening-star pattern, it did not bounce from the midline support of its ascending channel, but rather closed right on that support. RSI turns down more distinctly. The 21-dma (pink line) rises higher beneath the NDX, so that a move to the bottom of the ascending channel would violate that rising 21-dma. ADX still depicts a strengthening trend, as it did on the DJI. Daily Chart of the NDX: A fall as deep as 1140-1160 would maintain the integrity of that ascending channel, although it might damage investor sentiment more since a fall that deep would also carry the NDX below its 21- dma. A study of the chart shows that this index has more routinely violated that dma during the rally than has the DJI, however. The downturn in the RSI, completing yet another instance of bearish divergence with prices, perhaps predicted today's downturn, but watch for a penetration of the rising RSI trendline for a first sign of a possible continued decline. Those bearish divergences will eventually mean what they used to mean, but for now they tend to predict a pullback only as far as the bottom support of the regression channel. The OEX chart shows the same characteristics, with signs of renewed bullishness in mid-May as the OEX fell to the bottom of the regression channel and began moving up again, and with an ADX level that currently remains above 30. Daily Chart of the OEX: While not as classic as that of the DJI, the OEX chart reveals a close approach to an evening-star pattern, but it also shows the OEX springing up from that midline support, as did the DJI. Although it's not included here for space reasons, the OEX's 60- minute chart shows oscillators turning up out of levels indicating oversold conditions, too, hinting that the OEX could rise Monday morning if the performance of global bourses does not damage investor sentiment too strongly. If those hourly oscillators and that spring from midline support send the OEX up on Monday, OEX 505 and then 507-508 might be appropriate places to watch for the next pullback toward the midline support of the OEX's regression channel. OEX 507-508 marks slight weekly support and resistance. The bullish outlook will be preserved if the pullback stops short of 489. Because OEX 487-488 is such an important level, marking two interim-term tops on the OEX's weekly chart, I would give the OEX leeway to this level. The rising 21-pma currently crosses at 483.57 but might have risen to the 489-490 level by the time the OEX could decline that far. Although it's not as apparent on this chart as it is on intraday charts, the OEX's two forays toward 505 show up as potential double tops on intraday charts. A move below 489 would technically confirm that double-top formation, predicting another 15-point fall, although I would give the OEX leeway down to that 487-488 level before considering that formation confirmed. The daily SPX chart appears similar, although subtle differences show up here, too. Daily Chart of the SPX: The SPX chart may show more mixed signals than the OEX's. The evening-star formation appears closer to the classic description. RSI turned down more distinctly, although it has not yet and may not violate its rising trendline. Unlike the OEX, the SPX's two tops may have been far enough different in price to disqualify the pattern as a potential double top. However, ADX measures 39.32, showing an intact trend. The SPX sprang up ahead of its midline support level. If Monday sees the SPX rise, the 1007.69 June 5 high might be the first place to watch for a pullback. If the SPX instead falls through that midline support, the ascending channel's integrity would be preserved with a fall to a level as low as 965. Currently, the 21-pma rises underneath that channel, crossing now at 958.82 and perhaps rising to meet the SPX at the 965 level if the SPX should test the bottom of the channel. Watch for a downturn in the ADX level and an RSI violation of the rising RSI trendline for first signs that a trend change has occurred. As we've seen over the course of the last months, sentiment can undo anything shown on the charts. Serious Fed-guessing begins next week and much attention will focus on economic numbers. Looking ahead to the week's economic calendar shows a light day Monday, with only the NY Empire State Index and National Association of Homebuilders June Housing Market Index due, but the housing number might draw some interest. Tuesday and Thursday's calendars prove full. CPI and housing starts launch Tuesday's releases before the bell, with capacity utilization and industrial production released at 9:15. Both CPI and housing starts may be watched closely. Worries about a housing bubble keep percolating, and many eyes focus on the housing numbers, watching for the first weakening pinprick. Earlier this week, homebuilder Lennar showed no such weakening. Shares rallied to a new 52-week high after the company announced Q2 earnings of $2.05/share, handily beating the year-ago earnings of $1.37/share and the forecasted earnings for this year. The company also noted a favorable outlook for the homebuilding market, although the CEO did note pockets of regional weakness when he spoke on CNBC. When discussing retail sales figures this week, one economist pointed to the cold, wet weather in much of the nation as one factor impacting retail sales. The same weather conditions could impact housing starts, with the same reason giving to any disappointment in those figures. In addition, the Mortgage Bankers Association of America released figures showing that the purchase component of its index of applications fell to 418.9 from the previous week's record high of 460.5. Housing starts might just be lofted by the continued new lows in mortgage rates, however. This week, the average for a 30-year mortgage dropped to 5.21 percent. Perhaps the greatest impact in those lower mortgage rates will occur several months from now, with building permits, at least, usually increasing a few months after a drop in mortgage rates. Freddie Mac's chief economist said that Freddie Mac had raised their forecast for 2003 origination volume. Today, the Dow Jones US Homebuilders Index fell only 0.15 percent, against an $SPX decline of .99 percent and a Wilshire 5000 ($TMW.X) decline of 1.03 percent, showing relative strength as compared to the broader markets. CPI predicts inflation, or disinflation these days, and will be closely watched for that reason. Economists forecast a decline of 0.1 percent in May CPI, adding to the prior drop of 0.3 percent. Forecasts are for a 0.1 percent fall in the core number, slightly better than the prior 0.3 percent drop. That core number includes breakdowns into apparel, tobacco, airfare, new car, and other components. This week's inventory numbers showed a buildup in inventories of new cars, perhaps predicting lower numbers in that component. May industrial production forecasts range from 0.0 percent to 0.1 percent growth, better than the prior 0.5 percent decline. Manufacturing production, one component of Tuesday's industrial production number, might be important to watch. Economists expect May capacity utilization component to measure 74.4 percent, the same as the prior period. Capacity utilization numbers over 85 percent are considered inflationary, but we're not likely to see a number that high in this report. Thursday sees the Q1 current account figure and initial claims before the bell, May's leading indicators at 10:00, the Philadelphia Fed's release at noon, and the treasury budget at 2:00 ET. The continuing claims number will likely draw the most attention, as this previous week's number showed the four-week average hitting a 20-year high, rising 2,250 to 433,750. This four-week average smoothes out seasonal fluctuations and so is considered most trustworthy. This week, initial claims dropped, with the 430,000 number still higher than expected, remaining above 400,000 for more than four months. I'm tempted to propose that with markets being so overextended, any number that worsens hopes for economic recovery or else lessens hopes for a rate cut might be the impetus for that pullback we've all been awaiting. However, if Friday's Michigan sentiment numbers weren't going to be that impetus, I don't know what will, and those numbers did not produce significant technical damage to the indices. This feels as if the markets want to charge right up into the FOMC meeting week after next. On each chart, I've marked the likely levels where pullbacks might begin, and the levels to which the indices could pull back and still preserve bullish sentiment. Moves over those resistance levels might prompt a next leg up to next resistance, while a fall under the marked support levels might portend that the deeper pullbacks will begin. Don't forget that in addition to the next week being option expiration week, June marks the end of quarter and end of half, too, and some end-of-quarter-and-half positioning might be occurring as we move into the second half of this month. Fed- guessing at full alert, triple expiration, extended markets, and the approach of the end of quarter and end of the half: that sounds like a prediction of volatility to me. Trade carefully. Linda Piazza ************** FUTURES MARKET ************** Friday the 13th Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03M 1009 999 991 980 972 YM03M 9277 9190 9121 9034 8965 NQ03M 1252 1231 1217 1196 1182 10 minute chart of the US Dollar Index The US Dollar Index sold off heavily following the slight downside surprise in the 9:45 U. of Michigan consumer confidence number data. The bounce at the bottom was lackluster to say the least. Daily chart of June gold August gold had a good day, closing 30 cents off its session high at 357.40, up 3.50 for the session. The move was enough to turn the 10 day stochastic back up, though no buy signal has yet appeared. Upside trendline resistance should be at 370 by the time it's tested, assuming, that a true reversal actually commenced today. This is a very preliminary guess, given the absence of buy signals. We'll first wait to see if the 61.8% retracement line gets surpassed. Despite the strength in gold, the CRB was lower by 1.78 to 234.13, led down by weakness in grains and oil. The weakness in oil was attributed to the International Energy Agency revising its count of existing worldwide oil stocks upward this morning by an historic amount as mentioned in the Market Monitor this morning. The July crude contract closed down 86 cents at $30.65 a barrel, down 63 cents for the week. Daily chart of the ten year note yield The ten year treasury note went ballistic, breaking to a new multidecade high and driving the yield to a new low, with the TNX closing down 6.4 basis points to 3.104% with several sustained spikes below the 3.10% level. The combination of treasuries and gold rallying, equities and the US Dollar falling bodes ill for next week. 30 minute 20 day chart of the NQ September NQ futures tested the lower ascending trendline today, printing a low of 1204 and closing slightly above that level as illustrated in the 2 day 5 minute chart below. It was the weakest of the indices, perhaps suggesting that it will be leading the others to the downside as the Nasdaq so often breaks fresh ground for its peers. The lower ascending trendline has the feel of a sloppy "hunchback" head and shoulders formation. The end of day rampjob, by now predictable, was sufficient to turn the 10 period stochastics higher and give a buy signal on that timeframe, while the slower MacD appears ready to follow along. A break of the ascending neckline would imply approximately 70 points to the downside as a head and shoulders tarket. 2 day 5 minute NQ candles The afternoon push is clear, but accomplished nothing but a close above the low of the day, whereas in previous sessions it's left us on more bullish notes. The green volume spike at the 1204 level could be hinting at stronger support from that level. While the day had a bearish feel to it, and while I've characterized the rising support line on the 30 minute candle chart as a potential "neckline", note that it's still a rising support line. Until it gets taken out, the uptrend remains intact. That said, today's session cost the NQ's 27 points alone, and the week closed negative for the first time in several weeks, with a spinning top printed for the weekly candle. Not bullish. 20 day 30 minute chart of the ES Once again, the ES contract was stronger than the NQ, never even coming close to testing its 61.8% retracement line. On a weekly basis, the ES closed positive but also printed a spinning top, showing indecision at current levels. The sloppy head and shoulders pattern noted on the NQ chart is so sloppy that I haven't bothered to draw it on ES. A bounce from the secondary ascending trendline could easily take us to new rally highs, athough it would be within the context of a potential bearish expanding wedge or "bulloney bullhorn" formation. Yet again, the market leaves us just enough for both bulls and bears to be on shaky ground. A green open looks like a done-deal once again, with both the short cycle oscillators (below) and the 10 period cycle on the 30 minute candles (above) both in gear to the upside. 2 day 5 minute candles Despite the rosy outlook for the ES discussed above, the closeup of the 2 day 5 minute candles is not without its challenges. 990 is support-turned-resistance, just above the 38.2% short term retracement. With the short cycle oscillator in topping territory, I don't expect to see 990 fail without a fight. 20 day 30 minute chart of the YM The Dow futures have the most bullish setup, with the 78.6% fib line easily supporting the price today. We have the same setup aiming for new rally highs on Monday, but again with those failed s/r lines now providing resistance. The oscillator setup is bullish as well. 2 day 5 minute candles The story all week has been the same for equity bulls and bears, and for the second week in a row I'm writing about how the bears survived another week in potential breakout territory. Unlike last week, however, today's decline was not on large volume, and the gap and crap open did not have that violent "doji feel" that last Friday's reversal did. The real action was not in equities but in treasuries, where traders and even casual observers are left gawking at the runaway in treasuries and the breakdown in the time-value of money. While the equity charts are telling us what we already know, the US Dollar, treasuries and gold, which appears to be in the process of truncating a downphase in its early stages, should be putting bulls on full alert. We know that the percentage of bearish advisors dropped to 16% for the last week, what I believe to be at or near an alltime low. We know that the equity rally has shocked most market timers and persuaded most casual investors. This may well be a new bull market underway, but the action of the larger forex and treasury markets are not jibing with that interpretation, and the strength in gold has historically not been good news for equities. ******************** INDEX TRADER SUMMARY ******************** It's the jobs stupid - or, you can't fool the consumer By Leigh Stevens lstevens@OptionInvestor.com Consumer sentiment, according to the U of M preliminary survey for June, fell to 87 from 92 in May, well below the forecasted 93. One reason why market folks were surprised by this drop is that optimism usually has risen with a rise in the market - generally, consumer sentiment takes its cue from the markets, but Friday saw the market take its cue from consumer sentiment. Like the CEO surveys, consumers may have (again) turned more negative on the economic outlook. One reason is the continued loss of jobs or no job growth. The Labor Department indicated this past week that the number of Americans who remain on unemployment benefits rose 120,000, to 3.8 million, the highest since April 1983 or going back 20 years. As OIN's Jeff Bailey suggested on Friday, those that believe psychology plays a role in how markets trade got some confirmation for their view, as a more bearish consumer "psychology" took the indexes down on Friday. I count myself as a true believer as I've long assessed that attitude about the market plays a major role in valuations. It's what can make the S&P multiple 20 versus 15. Right now, a further sustained rise in the market is counting on both the consumer to keep spending and businesses to also at least start in opening their checkbooks. People stop spending when they get worried about future income and fear may be on the rise again. THE BOTTOM LINE - The indices got rather far extended for the first up leg of a recovering market. I anticipate further corrective action - not necessarily a very steep decline, but with downside to perhaps 960 in SPX, 480-485 in OEX, 1570 in COMPX and to 1185 or perhaps 1165 in the Nasdaq 100 (NDX). LAST WEEK and FRIDAY'S TRADING - The S & P 500 (SPX) finished the week with a gain of only 0.1%. The Dow fell nearly 80 points on Friday, to 9117.12 but was up slightly on the week, having a 6 tenths of a percent rise. The Nasdaq was lower by 0.1% (to 1626.49), breaking an eight-week winning streak. The Labor Department on Friday reported that producer prices fell 0.3% in May, which was more than the forecast for a 0.2% decline. core prices (excludes food and energy) rose 0.1%, which was also just below a forecast of +0.2%. A large decline was seen at the finished energy goods price level, which dropped 2.6%, as wholesalers continued to adjust prices lower after a run-up ahead of the Iraq war. Consumer expectations of inflation have also begun to fall off, according to the aforementioned University of Michigan study. This outlook, along with the drop in wholesale prices and other recent data, again raised concerns about the risk of deflation, something that the U.S. Federal Reserve has been increasingly concerned about in recent months. So, while a decline in prices is normally a positive for the economy, too much of this is not good for the Market as an inability to raise prices keeps a lid on corporate earnings and also then on stock prices in general. Further economic data released Friday showed the U.S. trade gap contracting 2% in April to $42 billion from March's record $42.9 billion. Despite a weaker U.S. dollar, exports fell 2.2% to $81 billion, the lowest level in a year, while imports fell 2.1% to $123 billion, largely due to a decline in crude oil prices. So far in 2003, the trade deficit is up 26% from a year-ago. While the weaker dollar has yet to result in a more noticeable impact on the U.S trade deficit, consumer price sensitivity around the world tends to be a more gradual trend and the dollar's declining purchasing power for imported goods slowly starts having greater effect. An interest-rate cut from the Fed at its policy meeting in later this month is looking to be on track. Friday's economic reports added more fuel to speculation that the Fed will cut the fed- funds rate. Futures market activity Friday suggested that most investors expect a cut of one-half percent. Virtually flat growth in May retail sales Thursday combined with only a slight drop in weekly new unemployment claims had already increased speculation that a rate cut will be forthcoming. OTHER MARKETS - Government bonds advanced in price as yields fell, as the latest round of economic news reinforced hopes for a Fed rate cut. The 10-year Treasury note climbed 15/32 to yield 3.11%, while the 30-year government bond rallied 25/32 to yield 4.175 percent. In currency trading, the dollar was slightly lower against both the yen (-0.2% to 117.44) and the euro, which gained 0.8% to $1.1857. INDEX OUTLOOKS – GOLD - If deflation is going to become a problem, we're not seeing it in gold prices, which have been quite buoyant. While much of the strength is likely due to the fall in the dollar - gold prices have to rise to keep the same value in dollar terms - it is unsettling in terms of thinking that equities have clear sailing ahead. The Philly Gold and Silver Index or XAU is near to a bullish breakout, but bullion prices in terms of the nearest futures (continuous) contract look like they're hitting resistance. What's it all mean? Many explanations, none convincing, but I would normally expect to see less gold strength if we're heading into a bull market for stocks. Low interest rates are a factor also, as the "opportunity" cost of owning gold diminishes. Also, we can't discount the fear factor in the mid-east about U.S. intentions - gold may have become more attractive than owning dollars. S&P 500 (SPX) - Hourly chart: As anticipated, resistance developed on the rallies that carried above 1000. Expect to see the same phenomena at Dow 10,000 and in the inability for the S&P 100 (OEX) to hold above 500. There is something about those big round "milestone" numbers that cause traders to pause or take a wait and see attitude on further buying. It's sort of like Joe and Moe at the door saying: "you first", no "YOU first" ad infinitum. 1020 is resistance implied by the top end of the broad hourly (uptrend) channel as shown on the hourly chart below, with 960 as potential support implied by the lower trendline boundary. The very steady and strong uptrend is especially apparent in the hourly closes going back to mid-March. The longer that we have such a strong rate of ascent, the greater the likelihood of a more prolonged correction - which is of course what oscillators like RSI, Stochastics and MACD attempt to highlight. These indicators "work" for the approximately 70% of the time that markets are not in one dominant trend. For the 30% of the time that indexes ARE in strong trends, forget about using oscillators as an automatic guide to buying puts or calls. Eventually the law of averages catches up and we get a pattern like we see above in SPX - lower rally or upswing highs. Because of this I rate it more likely that SPX will reach 960 than having a move above 1000 first. S&P 100 Index (OEX) – Daily & Hourly charts: Bullish "sentiment" is still measuring in a neutral range as far as my CBOE equities (call volume relative to daily put volume) option indicator. However, quite bullish buying interest from big investors, fund managers mostly, has carried the S&P 100 steadily higher as can be seen in the daily chart below. The hourly chart highlights better the correction that is underway. It becomes a relatively shallow pullback if OEX stays at or above 490-492. If so, there could be a further attempt for a breakout type move to above recent highs in the 503-505 area. What would be more "normal" corrective action such as in retracing half of the last upswing would be a retreat to the 480- 485 area, which is my best prediction of the unfolding pattern here. If you bought puts on the last failed rally attempt, my current trade objective would be 480, but with an exit point or stop at a new high daily close or at 505 anytime. While the RSI or stochastic can stay up near the extremes for a long time, eventually these indicators get back into the center of their range. The most bullish action is when there is only a sideways correction before the index rallies again. However, OEX is pretty overdue for a pullback. A definite wild card in terms of some volatile price swings is triple expiration in the coming week, ahead of the FOMC (Federal Open Market Committee Meeting) in the following week. Maybe they'll keep the OEX up near 500 to cause the bears some more punishment. Dow Industrials (INDU) Daily & Hourly (DJX.X) charts: 9200-9250 looks like the area where there is selling interest (or where buying tapers off) in the Dow Industrials. A daily close above this area is needed to suggest potential for another up leg ahead after only a shallow correction. Hard to figure without further price action if there will be a deeper correction than has been seen so far in the strong rally since the March upside reversal. The 90 level in DJX could be key here as an area of prior highs - if the Index holds at or above this area, the correction remains shallow and suggests a still strong outlook on a technical basis. A daily close or two below 90 would suggest otherwise - I would then focus on the potential for a possible retreat to the 88 area at the daily uptrend line or perhaps to 87, at the lower end of the hourly channel. Eventually - especially if the Industrials stay above 9000 - a longer-term objective is for Dow 10,000. As mentioned last week, 2 consecutive closes under 9000 suggest that a top has formed for the time being. Nasdaq Composite Index (COMPX) – Daily & Hourly: Will history repeat itself in the tendency for COMPX to have 3 upswings, followed by corrective action? A key to this is what happens if/when the Index retreats to its 21-day moving average, which currently intersects at 1577. If this moving average is pierced on a closing basis, it suggests that there will be another down leg, perhaps carrying the Composite to the 1500-1480 area, where there is likely to be good buying interest again. Traders and investors may have gotten too bullish relative to the current earnings picture. If this is also too bullish for the future earnings potential will depend on whether there is some pick up in business spending, which will be better gauged in the next round of earnings announcements post-June. I find the hourly chart to be insightful if you go back a 100 days and can find the broad boundaries of a trend channel. The one shown above for COMPX would suggest that the Composite could be headed back down to a test of the low end of the channel around 1570. 1550 also appears as a key area of potential technical support, as the "line" of prior hourly closing highs. A close above 1670 would re-confirm the bullish chart picture. 1600 is near technical support and if any pullback holds at or above this area, this is also bullish as it marks a relatively shallow correction. Nasdaq 100 (NDX) Index (NDX) - Hourly: The NDX looks like it is headed lower still, perhaps to around 1160 and completion of a 62% retracement. The index would look stronger if it held around 1180 on any further drop. Resistance or selling interest is anticipated in the 1220 area. I would rather buy puts on a rally than calls on a decline. However, a daily close above 1220 would suggest possible more upside and cause me to exit puts if there was follow through strength the following day. A note for affectionados of technical analysis - prior support often later "becomes" resistance and this includes trendlines. The move back up to the upper trendline had 3 moves to or above the upper trendline line, but NDX couldn't stay above it. The third time marked the start of a correction when it gapped above the line, then immediately retreated. Nasdaq 100 Tracking Stock (QQQ) - Daily & Hourly: I mentioned shorting QQQ last week in the 31-32 zone. I continue to look for a pullback to the $29 area as a minimum downside objective. If there was daily close under 29, the Q's look less bullish in its chart pattern. It looks like the 27.5 - 28 area is must hold support. 30.75 is my exit or stop out point currently for short stock or long puts. It now is looking like the recent spike up on daily trading volume, coinciding with the rally peak (so far), may have marked at least an interim top in QQQ. Nasdaq traders could be thinking more about waiting for the next round of earnings announcements before doing much more scale up buying. There is downward momentum currently as suggested by the daily and hourly stochastic models. Good Trading Success! ------------------------------------------------------------ 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=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** No Editors Plays this Week **************** MARKET SENTIMENT **************** Confidence Drops The Market By: Jonathan Levinson Today's sudden drop at 9:45AM was attributed to the University of Michigan Consumer Confidence reading of 87.2 for May vs. 92.1 for April. Evidently the market was hoping for consumers to be more resilient, presumably to run out and borrow against the Fed's anticipated rate cut at its June 24-25th meeting. It seems like a deep thought for the Teflon Market to have, but indeed, if consumers are losing confidence, then the Fed may well find itself pushing on a string with its next cut. Market breadth was distinctly bearish today, with decliners just about doubling advancers and declining volume more than tripling advancing volume for both the NYSE and the Nasdaq. Also noteworthy today was the low put to call ratio throughout the session, which opened in full-on "buy the dip" mode at .46 and crept up into the mid .70s for the remainder of the session, never touching .80. The lack of bearish put volume showed, for the first time in weeks, a solid confidence in the firmness of the uptrend. This is exactly what bears are waiting for, because it implies that the bulls are already committed and confident, and that there will be fewer "weak hand" shorts seeking to cover on the dips. If this interpretation is correct, we should see weaker support than previously encountered during the rally. While the price uptrends are well-established and far from failing, risk for the bulls remains relatively high, given the toppy levels depicted by the bullish percent indices. By the same token, bears need to be patient and wait for a downturn in those bullish percents, and for the price supports to fail decisively to avoid "catching a falling knife" in reverse. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9733 52-week Low : 7197 Current : 9117 Moving Averages: (Simple) 10-dma: 9050 50-dma: 8604 200-dma: 8342 S&P 500 ($SPX) 52-week High: 1041 52-week Low : 768 Current : 989 Moving Averages: (Simple) 10-dma: 982 50-dma: 927 200-dma: 887 Nasdaq-100 ($NDX) 52-week High: 1266 52-week Low : 795 Current : 1212 Moving Averages: (Simple) 10-dma: 1212 50-dma: 1130 200-dma: 1026 ----------------------------------------------------------------- It remains strange to see the volatility indices only inching skyward when the entire market saw red today (save for the gold index). This indicates that we have yet to see any investor fear and the pull back is just a pause in the climb higher. CBOE Market Volatility Index (VIX) = 22.88 +0.55 Nasdaq-100 Volatility Index (VXN) = 34.46 +0.45 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.73 629,281 462,071 Equity Only 0.59 505,247 297,774 OEX 1.41 24,438 34,564 QQQ 2.13$bpna 30,101 64,080 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 70.6 + 0 Bull Confirmed NASDAQ-100 87.0 - 2 Bull Confirmed Dow Indust. 80.0 + 0 Bull Confirmed S&P 500 81.4 - 1 Bull Confirmed S&P 100 79.0 + 0 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 1.39 10-Day Arms Index 1.17 21-Day Arms Index 1.19 55-Day Arms Index 1.15 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 944 1072 Decliners 1926 2039 New Highs 247 224 New Lows 16 4 Up Volume 377M 345M Down Vol. 1174M 1442M Total Vol. 1571M 1794M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/10/03 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 This week brings us an interesting change in the commercials. Both the long and short positions jumped by 18K to 20K but the amount that the commercials are net long dropped significantly. Could we be witnessing a precursor to a reversal next week? Small traders also opened their wallets this week and bought plenty of new contracts pushing both long and short positions to new four-week highs. The amount that small traders are long moved strongly ahead, which is closer to the historical norm. (small traders tend to move counter trend to the commercials, who tend to be correct when judging trends.) Commercials Long Short Net % Of OI 05/20/03 438,238 426,569 11,669 1.3% 05/27/03 435,195 423,474 11,721 1.4% 06/03/03 438,228 422,722 15,506 1.8% 06/10/03 456,967 455,024 1,943 0.2% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 15,506 - 6/3/03 Small Traders Long Short Net % of OI 05/20/03 157,034 154,980 2,054 0.7% 05/27/03 147,687 149,344 (1,657) (0.6%) 06/03/03 169,650 167,172 2,478 0.7% 06/10/03 199,356 185,403 13,953 3.6% 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 Maybe all those full S&P contracts are being hedged here with the e-minis (we doubt it) but the net short position for the commercials jumped strongly this week. Meanwhile, as if on cue, the small traders grew excessively bullish. Small trader long contracts to short contracts is virtually 10 to 1. If you're a contrarian, that smells like a top. Commercials Long Short Net % Of OI 05/20/03 232,184 468,006 (235,822) (33.7%) 05/27/03 252,655 485,962 (233,307) (31.6%) 06/03/03 267,680 512,648 (244,968) (31.4%) 06/10/03 270,359 543,221 (272,862) (33.5%) 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 05/20/03 422,555 62,580 359,975 74.2% 05/27/03 427,412 66,031 361,381 73.3% 06/03/03 470,655 58,420 412,235 77.9% 06/10/03 498,999 49,689 449,310 81.9% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Hmm....commercials bought more short contracts on the NDX this week and their net short position almost tripled. As expected the small trader is thinking exactly the opposite with a jump in longs and a decrease in shorts. This produced a big jump in their net long position. Again, if you're a contrarian, this looks like symptoms of a market top. Commercials Long Short Net % of OI 05/20/03 42,864 42,040 824 1.0% 05/27/03 40,999 41,491 (492) (0.6%) 06/03/03 42,232 43,217 (985) (1.2%) 06/10/03 42,877 45,793 (2,916) (3.3%) 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 05/20/03 11,024 9,965 1,059 5.0% 05/27/03 12,194 13,339 ( 1,145) ( 4.5%) 06/03/03 11,407 9,092 2,315 11.3% 06/10/03 14,759 7,761 6,998 31.1% 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 While we do see a drop in long positions for commercials and a drop in short positions for small traders (what a coincidence), the overall trend here is the same. Commercials Long Short Net % of OI 05/20/03 18,028 14,108 3,920 12.2% 05/27/03 18,660 15,537 3,123 9.1% 06/03/03 19,480 15,282 4,198 12.1% 06/10/03 17,368 15,263 2,105 6.5% 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 05/20/03 8,378 9,922 (1,544) ( 8.4%) 05/27/03 8,225 9,316 (1,091) ( 6.2%) 06/03/03 7,948 9,353 (1,405) ( 8.1%) 06/10/03 7,968 8,316 ( 348) ( 2.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ 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=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Sector/Index trading with HOLDRs and iShares Can you point me to some sectors and indexes that I could actually trade short/long based on the sector bell curve data you have shown in the past? I'm interested in trading sectors on more of a swing-trade or intermediate-term basis as I can't watch the markets all that closely during the day. It is rather amazing how many different products have been developed over the years that give investors and traders the opportunity to expose capital to "baskets of stocks." The more I search the internet for sectors, the more products I find that I never knew existed for sector trading. The most common sectors or indexes that traders know about are traded at either the Chicago Board Options Exchange (CBOE), NASDAQ, American Stock Exchange (AMEX), Philadelphia Stock Exchange (PHLX) in the form of index options. These indexes are easily found by visiting their respective websites. CBOE indexes http://www.cboe.com/OptProd/IndexOptions.asp NASDAQ indexes http://quotes.nasdaq.com/asp/option_info.asp AMEX http://www.amex.com PHLX Indexes http://www.phlx.com/products/sectors.html In this column, I'm going to focus on HOLding company Depositary Receipts, most commonly called HOLDRs. These are securities traded on the AMEX that represent an investor's ownership in the common stock or American Depository Receipts of specified companies in a particular industry, sector or group. Here's a picture of the HOLDRs that a trader/investor would most likely associate with some of the sector bullish % data. AMEX listed HOLDRS On the far right of the chart, I've tried to associate some of Dorsey/Wright and Associates sector bullish % symbols that I we might associate with some of the HOLDRs. I've footnoted the Broadband HOLDRS *(1) as some of this HOLDRs components have been "classified" by Dorsey's bullish % as being associated with different sectors. For example, Broadband HOLDRs component Applied Micro Circuits (AMCC) is classified by Dorsey as "electronics" (BPELEC), HODLRs component CIENA (CIEN) is classified by Dorsey as "telephone" (BPTELE), while HODRs component PMC-Sierra (PMCS) is classified by Dorsey as "semiconductor" (BPSEMI). Arguable, they all have some type of "telecom" association, but the group of stocks also have different function within the broadband industry and makes it difficult to really classify all the stocks to one particular industry. There are 21 stocks that comprise the Broadband HOLDRs. I've also footnoted the Utilities HOLDRS. There are basically two type of utilities. Gas and Electric. Dorsey/Wright differentiates the two with their "electric utilities" bullish % (BPEUTI) and "gas utilities" (BPGUTI). While the two sub sectors (gas/electric) tend to move in unison, during periods of extreme price fluctuation of the gas commodity, gas utilities may strengthen/weaken. During periods of extreme price fluctuation of the coal commodity, electric utilities may strengthen/weaken. The Wireless HOLDRS also see diverse sector association within Dorsey/Wright's sector bullish %. AT&T Wireless (AWE) is classified as "telephone" (BPTELE), while Motorola (MOT) is classified as "semiconductor" (BPSEMI) and Netro Corp. (NTRO) is classified as "electronics" (BPELEC). The bulk of Wireless HOLDRs are classified as "telephone" (BPTELE) and would most likely be the appropriate sector bullish % to use. As it relates to other bullish % data sources, besides Dorsey/Wright. Stockcharts.com does have some sector bullish % data. Their sector bullish % data, with symbols are as follows. S&P Consumer Discretionary ($BPDISC) S&P Energy Sector ($BPENER) S&P Financial Sector ($BPFINA) S&P Healthcare ($BPHEAL) S&P Industrial ($BPINDY) S&P Info Tech Sector ($BPINFO) S&P Materials Sector ($BPMATE) S&P Consumer Staples Sector ($BPSTAP) S&P Telecom Services Sector ($BPTELE) S&P Utilities Sector ($BPUTIL) Dow Jones Transportation Sector ($BPTRAN) If a sector you're looking to trade isn't available among the HOLDRs, then perhaps the iShares has a sector fund you're looking for. A good starting point for a plethora of information and symbols for various iShares can be found at www.ishares.com Options traders will note that options are traded on many of the iShare sectors. The Networking Index (NWX.X) 186.02 -3.36%, doesn't trade options anymore, and I use this index' symbol in our intra-day updates to point out how the sector in general is doing. The Networking iShares (AMEX:IGN) $19.86 -4.05% tends to track the NWX.X and would provide exposure to this sector. This sector has become so narrow anymore, that many of the components have been consolidated into Dorsey/Wright and Associates "computers" bullish % (BPCOMP). When traders/investor visit any of the sites "linked" above, they can actually view the components, or stocks, that comprise the HOLDRs and iShares. Individual stock traders that WISELY use the sector bullish % data, will use the HOLDRs and iShare data compositions, to further define bullish and bearish looking stocks to trade within a sector, in an effort to pinpoint those stocks that are stronger in a recovery mode that might then "outperform" the sector, or identify weaker stocks from higher levels of sector risk that appear to be leading a potential sector decline. Had I known that there was a iShare Networking sector (IGN), I'm just seeing it today, maybe I would have seen the "bullish triangle" unleashed at $17.50 back in May. That's a rather powerful bullish chart pattern. ishare Networking Sector (ICN) - $0.50 and $1 box www.stockcharts.com tracks the various iShares and allows for point and figure analysis that traders and investors will tie in with the major market and sector bullish %. A trader that couldn't necessarily watch the markets intra-day, or even once a day may chose a "sector" type of security like and iShare or HOLDRs to spread some bets among various stocks linked to a sector. While understanding "sector risk" as depicted by a sector bullish % isn't necessarily imperative, sector traders will use the sector bullish % to try and further define which sectors may outperform an advance or decline. Still... many traders/investors will use the NASDAQ-100 Bullish % ($BPNDX) as an indicator to get an understanding of strength/weakness and RISK. While Professor Davis's study of probabilities was focused to individual stock patterns, that study showed the "bullish triangle" profitable under bull market conditions 71.4% of the time, for an average gain of 30.9% in 5.4 months. A trader/investor that saw the NASDAQ-100 Bullish % ($BPNDX) reverse up to "bull alert" status in March from 30% to 36% and tied that in with the above chart (IGN) may have been "alert" to a bullish move. From the triggering of the "bullish triangle" at $17.50, the IGN has/had advanced 25.7%. With the NASDAQ-100 Bullish % now at 87% after having been as high as 91% earlier this week, bulls might now be looking to protect some gains. Browse around some of the site link above, you never know just what you might find. I just found the neatest "heatmap" at the NASDAQ site in their ETF section. Check this out! NASDAQ's ETF Dynamic Heatmap The EWP is the Japan iShares and the EWO is the Austria iShares and looked to have fared better than others. I see the NASDAQ- 100 Index Tracking Stock (QQQ) on the heatmap, down 2.25% today, with the Networking iShares (IGN) being one of the weaker performers in today's trade. Boy there's a lot of stuff to trade isn't there? I'd love to incorporate some of this stuff into an index trader wrap sometime. I don't know if there's enough hours in my day to do it all, but maybe we can profile a "trade of the month" or "trade of the week" for a sector in the iShares or HOLDRs? Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of June 16th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- IBOC Intl Bancshares Mon, Jun 16 -----N/A----- N/A ------------------------- TUESDAY ------------------------------ ASL ASHANTI GLDFLDS LTD Tue, Jun 17 -----N/A----- 0.05 CC Circuit City Stores Tue, Jun 17 Before the Bell -0.24 FDS FactSet Research Sys Tue, Jun 17 Before the Bell N/A SJM J. M. Smucker Co Tue, Jun 17 Before the Bell N/A PIR Pier 1 Imports, Inc. Tue, Jun 17 Before the Bell N/A RHAT Red Hat, Inc. Tue, Jun 17 After the Bell N/A V Vivendi Universal Tue, Jun 17 Before the Bell N/A ----------------------- WEDNESDAY ----------------------------- BSC Bear Stearns Wed, Jun 18 Before the Bell 1.72 BBBY Bed Bath & Beyond Wed, Jun 18 After the Bell 0.18 BBY Best Buy Co., Inc. Wed, Jun 18 Before the Bell 0.20 JBL Jabil Wed, Jun 18 After the Bell N/A JWa John Wiley & Sons Wed, Jun 18 -----N/A----- N/A MWD Morgan Stanley Wed, Jun 18 Before the Bell N/A WOR Worthington Ind Wed, Jun 18 Before the Bell N/A ------------------------- THURSDAY ----------------------------- COGN Cognos Thu, Jun 19 -----N/A----- 0.14 DRI Darden Restaurants Thu, Jun 19 -----N/A----- 0.34 GTK GTECH Holdings Corp. Thu, Jun 19 Before the Bell N/A KBH KB Home Thu, Jun 19 After the Bell N/A LEH LEHMAN BROS HLDGS INC Thu, Jun 19 Before the Bell N/A SLR Solectron Thu, Jun 19 After the Bell N/A TIBX TIBCO Software Thu, Jun 19 After the Bell N/A ------------------------- FRIDAY ------------------------------- KMX CarMax, Inc Fri, Jun 20 Before the Bell 0.34 UNEWY United Business Media Fri, Jun 20 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CCBG Capital City Bank Group 5:4 Jun 13th Jun 16th ODFL Old Dominion Freight Line 3:2 Jun 16th Jun 17th JFBC Jeffersonville 3:1 Jun 17th Jun 18th UNH UnitedHealth 2:1 Jun 18th Jun 19th SLM SLM Corp 3:1 Jun 20th Jun 23rd FLO Flowers Company 3:2 Jun 27th Jun 30th -------------------------- Economic Reports This Week -------------------------- Economic reports this week have been divided up between Tuesday and Thursday. Look for the CPI, Housing Starts, Industrial production, leading indicators initial jobless claims and more. ============================================================== -For- Monday, 06/16/02 ---------------- NY Empire St Index (BB) Jun Forecast: 8.8 Previous: 10.6 Tuesday, 06/17/02 ----------------- CPI (BB) May Forecast: -0.1% Previous: -0.3% Core CPI (BB) May Forecast: 0.1% Previous: 0.0% Housing Starts (BB) May Forecast: 1.700M Previous: 1.630M Building Permits (BB) May Forecast: 1.715M Previous: 1.724M Industrial Prod (DM) May Forecast: 0.10% Previous: -0.50% Capacity Utilization(DM)May Forecast: 74.40% Previous: 74.40% Wednesday, 06/18/02 ------------------- None Thursday, 06/19/02 ------------------ Initial Claims (BB) 06/14 Forecast: N/A Previous: 430K Current Account (BB) Q1 Forecast:-$142.0B Previous: -$136.9B Leading Indicators (DM) May Forecast: 0.60% Previous: 0.10% Philadelphia Fed (DM) Jun Forecast: 5.0 Previous: -4.8 Treasury Budget (DM) May Forecast: -$90.0B Previous: -$80.6B Friday, 06/20/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ 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=oetics22 Note: Options involve risk. 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The Option Investor Newsletter Sunday 06-15-2003 Sunday 2 of 5 In Section Two: Watch List: Mostly Three-Lettered Stocks Daily Results Put Play of the Day: WFMI Dropped Calls: None Dropped Puts: LLL ------------------------------------------------------------ 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=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** Watch List ********** Mostly Three-Lettered Stocks Stryker Corp - SYK - close: 71.52 change: -0.14 WHAT TO WATCH: Shares of SYK have been very strong. The stock remains in its short-term rising channel and a bounce from the $70.00 mark looks like a good spot to consider some swing-trading call positions. Zimmer Holdings (ZMH) is in the same industry and shares of ZMH have rebounded to the top of its gap down. Look for a move over $47 for ZMH to target a rest of $50.00. Chart= --- Intl Business Machines - IBM - close: 82.75 change: -1.20 WHAT TO WATCH: IBM has rebounded from the $80.00 level only to fail again at the 50-dma and the bottom of its gap down at $85.00. Aggressive traders might want to consider bearish plays but the stock still has support at $80 and again at the 200-dma near $78-$79, which is also P&F chart support. Don't forget about its SEC probe. Chart= --- Ball Corp - BLL - close: 48.05 change: -1.05 WHAT TO WATCH: BLL has been in a terrible down trend since mid- May. The stock then crashed under the $50.00 mark only to retest it as overhead resistance. The stock is so oversold that the oscillators are suggesting a possible bullish reversal but from the looks of it we suspect there is still more downside to go. Chart= --- Synopsys Inc. - SNPS - close: 59.59 change: -1.46 WHAT TO WATCH: One of the leaders in the software sector, shares of SNPS have been on fire after their recent earnings guidance higher. However, it looks like it ran into a wall of selling pressure right at $64.00. From there the profit taking began and Friday's move brought it below the $60 level, which should spark even more selling. Our short-term target would be $55. Chart= ==================================== RADAR SCREEN - more stocks to watch ==================================== MSTR $39.15 - We had MSTR on the watch list a few days ago. The big failure on Friday looks like a tempting spot to consider some short-term bearish plays. MACD is about to rollover. MRCY $19.00 - It's a little cheap at $19.00 to be playing options but shares are just barely holding on to support. A break under $18.75 could lead to a test of $15.00 (or worse). JNJ $52.56 - Shares of JNJ have been in a slow channel lower and Thursday and Friday's performance reflects a failed rally near the top of that channel. A move back under $52 might herald a retest of the $50.00 mark. GOLD $17.73 - Shares of Randgold Resources are not optionable but the do appear to be offering a tempting bounce for bulls to ride it back to the $20.00 mark and beyond. *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS LAST Mon Tue Wed Thu Week GENZ 43.60 0.00 1.19 1.72 -1.69 1.21 Bouncing IGT 96.93 -1.14 1.26 2.50 1.36 5.43 STRONG LXK 73.38 -0.83 -0.15 0.20 1.52 0.68 New, pennant MERQ 41.00 0.00 1.71 0.88 -0.43 0.09 Cautious PGR 73.27 -0.28 0.00 0.50 -0.01 3.25 New, Rocket PUTS GS 89.17 -0.76 0.80 1.04 0.61 0.87 New, Fire HCA 32.00 0.69 0.38 -0.36 -0.19 0.60 Weakness KSS 49.45 -0.75 -0.34 -0.85 -1.08 -2.83 New, sour LLL 44.04 -1.14 0.10 0.30 1.00 0.23 Drop, too much WFMI 49.44 0.00 1.07 0.49 0.11 0.52 New, Failure ------------------------------------------------------------ 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=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Put Play of the Day: ******************** Whole Foods Market - WFMI - cls: 49.44 chg: -1.35 stop: 52.00 *new* See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ L-3 Comms -LLL - close: 44.04 change: +0.13 stop: 44.70 We give up! LLL has had us on a real roller coaster these past couple weeks as the stock has played ping-pong between the 50-dma and the 200-dma. That battle seemed to finally shift in favor of the bulls on Friday, with LLL moving above its two previous intraday highs ($44.40 and $44.46) with an intraday high of $44.69. Not only that, but the stock breached the 200-dma for the first time in a month. While the stock did pull back to just above $44 at the close, we're willing to concede defeat and move on. As noted in the market monitor on Friday, we now view weakness in the stock as an opportunity to exit losing positions, not to initiate new ones. Picked on May 20th at $41.94 Change since picked: +2.10 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.31 mln Chart link: *********** 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. 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The Option Investor Newsletter Sunday 06-15-2003 Sunday 3 of 5 In Section Three: Current Calls: GENZ, IGT, MERQ New Calls: LXK, PGR Current Put Plays: HCA New Puts: GS, KSS, WFMI ------------------------------------------------------------ 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=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** Genzyme Corp. - GENZ - close: 46.30 change: -0.01 stop: 44.00*new* Company Description: Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. Why we like it: In a nearly picture-perfect repeat of June 2nd, GENZ surged higher with the rest of the Biotechnology index (BTK.X) on Wednesday, just kissing the $48 resistance level before abruptly reversing course on Thursday and falling back near $46. With a lack of meaningful news to explain the pullback, we can only assume that investors decided to harvest profits after the one- day ramp following Wednesday's bullish analyst comments. That sharp reversal aside, GENZ is still observing the bounds of its shorter-term ascending channel, closing back over $46 after finding support at the 20-dma (currently $45.22). The sharp reversal from resistance is precisely why we didn't want to get caught chasing the stock higher with a momentum entry approach. Buying the dips back to support near $45 provides a much more palatable risk-control setup. The one potential fly in the ointment is the action in the BTK, as it is also pressing against the bottom of its ascending channel (currently $465) and stronger support in the $458-460 area. As long as that support doesn't break down, then GENZ ought to have the necessary fuel to both lift back to the $48 area and then above, working towards our $52 target. Look for strength in the BTK to confirm a rebound in shares of GENZ before entry. Note that our stop is now set at $44, right at the site of the June 3rd intraday low. Suggested Options: Shorter Term: The July 45 Call will offer short-term traders the best return on an immediate move, as it is currently slightly in the money. Note that June contracts expire next week. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 47 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders should utilize the October 47 call. BUY CALL JUN-45 GZQ-FI OI=1373 at $2.20 SL=1.00 BUY CALL JUL-45 GZQ-GI OI=2013 at $3.60 SL=1.75 BUY CALL JUL-47 GZQ-GS OI= 984 at $2.15 SL=1.00 BUY CALL OCT-47 GZQ-JS OI=2031 at $4.30 SL=2.75 Annotated Chart of GENZ: Picked on June 8th at $46.61 Change since picked: -0.31 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 3.63 mln Chart link: --- Intl Game Technology - IGT - cls: 96.93 chg: +1.20 stop: 90.00 Company Description: IGT is a world leader in the design, development and manufacture of microprocessor-based gaming and lottery products and software systems in all jurisdictions where gaming and lotteries are legal. (source: company press release) Why We Like It: OptionInvestor.com added IGT to our play list on Tuesday because we liked the strong bounce off the $90.00 level. Well, that and we expected a potential good old-fashioned split run. Several days ago IGT announced a 4-for-1 stock split set to be payable on July 2nd, 2003. On top of a 4:1 split, they also announced a new dividend, payable for later in July. Investors are looking strongly at any stock with a decent dividend these days and we can't say the dividend-split news hasn't helped produce IGT's incredible relative strength. Shares of have produced a very strong stair step performance all week long and short-term traders have very identifiable levels to raise their stop losses. However, picking that stop loss is the hard part. The stock is up about $6.50 since Monday's low. While the rest of the market has been hit with some minor profit taking, IGT keeps climbing. Yet sooner or later, IGT is going to give some back. If we were extremely conservative and were already happy with the gains in the stock then we'd suggest a stop loss just under $96.00, where shares bounced twice on Friday. A little less conservative would be a stop under $94.00- 95.00 but if you expect a pull back and still want to stay in the play then something closer to $92.50-93.00 might work best. If you can really take the heat then just leave your stop under $90.00. We're torn between our greed to reach $100 and what we see on the chart. The daily chart is showing a nice gap up doji candlestick on Friday. This typically represents indecision but if shares gap down on Monday and paint a red candle it would be a classic "evening star" bearish reversal pattern. Honestly, if you're happy with the move in the options already it wouldn't be a bad idea to take some profits off the table now. We're going to bump our stop loss up to $92.90 and hope that any pull back is met by dip buyers at $95, $94, or $93. IGT only has two weeks left before its split so bulls might be able to defend it even if the markets turn south for a few days (but that is still being optimistic). WE WOULD NOT RECOMMEND NEW POSITIONS at this time. Look for a pull back and the beginnings of a bounce before initiating any new positions. Suggested Options: Our strategy is to play IGT for any potential split run. With the split on July 2nd, it doesn't make sense to buy options longer than July's but we're going to list an October for those who are interested. BUY CALL JUL-90 IGT-GR OI=2417 at $8.90 SL=5.00*on a dip* BUY CALL JUL-95 IGT-GS OI=2285 at $5.70 SL=3.20 BUY CALL JUL-100 IGT-GT OI=1710 at $3.10 SL=1.50 BUY CALL OCT-95 IGT-JS OI= 651 at $5.80 SL=3.50 Annotated Chart of IGT: Picked on June 10th at $91.87 Change since picked: +5.06 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.22 million Chart link: --- Mercury Int - MERQ - close: 41.00 change: -2.07 stop: 38.95*new* Company Description: As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Why we like it: A failed breakout was exactly what we were concerned with on our MERQ play and precisely why we cautioned that a momentum strategy may not be the best approach given the stock's already extended condition. Sure enough, MERQ broke out, tagged the $44 level and pulled back slightly on Thursday. But the real show unfolded on Friday after after JMP Securities downgraded the stock with a price target of $38 on their belief that the company's customer base could contract. Call us cynical, but it sounds to us like JMP just wants a better entry point and the firm didn't want to chase the breakout move higher. A look at the annotated chart below certainly may shed some light on this speculation. Note the ascending channel from the April lows, which has a lower bound just above $39. Not only that, but we have the 20-dma resting at $39.05. Could it be that this is the point where eager bulls will jump back into the stock after today's sharp 4.8% plunge? Only time will tell. Recall that our stop was initially set at $39.95. Upon noticing the strong support offered by the $39 level, we've opted to lower that stop to allow for a rebound from the bottom of the channel without stopping us out of the play. We'd prefer to see a rebound from above the $40 level as originally laid out, but are trying to cover all the bases. Conservative traders that entered on the breakout earlier in the week may want to stick with the original stop. For those still awaiting entry, a rebound from above $40 would be the preferred strategy, although a drop down to the vicinity of the bottom of that channel may turn out to be a gift of an entry. Suggested Options: Shorter Term: The July 40 Call will offer short-term traders the best return on an immediate move, as it is currently slightly in the money. Note that June contracts expire next week. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the July 42 Call. This option is currently slightly 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 aggressive long-term traders can utilize the July 45 call. BUY CALL JUN-40 RQB-FH OI=1706 at $2.00 SL=1.00 BUY CALL JUL-40 RQB-GH OI=7564 at $3.70 SL=2.00 BUY CALL JUL-42 RQB-GS OI=3983 at $2.35 SL=1.25 BUY CALL JUL-45 RQB-GI OI=4331 at $1.35 SL=0.60 Annotated Chart of MERQ: Picked on June 10th at $42.62 Change since picked: -1.62 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 4.43 mln Chart link: ************** NEW CALL PLAYS ************** Lexmark Intl - LXK - close: 73.38 change: -0.62 stop: 69.00 Company Description: Lexmark International, Inc. is a leading developer, manufacturer and supplier of printing solutions -- including laser and inkjet printers, multifunction products, associated supplies and services -- for offices and homes in more than 150 countries. Founded in 1991, Lexmark reported approximately $4.4 billion in revenue in 2002. (source: company press release) Why We Like It: Opportunity is the word we'd like to use here. The GHA hardware sector has been a leader in the market's rally to new relative highs. While we think the GHA looks ready to dip to the 205 or 200 level that doesn't mean we don't want to be ready for a dip in shares of LXK. Actually, we're not so sure that dip is going to come for the inkjet cartridge and printing solutions supplier. Everyone knows that the big companies in the ink cartridge business have huge margins. It appears that investors have rediscovered LXK and are slowly buying up shares. Sure, the company has plenty of competition from the likes of Hewlett Packard, Canon, Epson and a host of Internet-based discounters trying to steal market share but that's not affecting LXK's monthly gains in share price. Both the daily and the point-and-figure chart are showing LXK in what appears to be a pennant shaped consolidation pattern. It's easier to see on the P&F chart, which would indicate we still have a bit more consolidating to go before LXK breaks out one way or the other. Typically a pennant pattern doesn't have a bias up or down on which direction the stock will break but looking at the weekly chart of LXK we're betting the breakout will be up. OptionInvestor is going to use a hard trigger at 74.51 to leg us into the play. Until LXK trades at or above 74.51, we are NOT in the play (yes, we're being redundant here). However, more aggressive and nimble traders might want to look for a dip and bounce at the $70.00 area should such an opportunity occur. Hopefully, if the consolidation pattern holds up, LXK will not trade that low. We're going to initiate the play with a stop loss at $69.00 but traders could easily consider stops at $70 or under the 50-dma. Suggested Options: We don't have a preference over July or October strike prices as the trend on LXK looks rather strong. Still, it's a lot cheaper to play the July options. The July 75s don't look too bad. BUY CALL JUL 70 LXK-GN OI=2397 at $5.60 SL=3.25 BUY CALL JUL 75 LXK-GO OI=6110 at $2.65 SL=1.30 BUY CALL JUL 80 LXK-GP OI=1019 at $0.95 SL=0.00 *pretty risky* BUY CALL OCT 75 LXK-JO OI=1681 at $5.50 SL=3.25 BUY CALL OCT 80 LXK-JP OI=1174 at $3.50 SL=1.75 Annotated Chart of LXK: Picked on June 15th at $xx.xx Change since picked: +0.00 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 1.78 million Chart link: --- Progressive Corp. - PGR - close: 73.27 change: +2.28 stop: 69.00 Company Description: Traditionally a leader in non-standard, high-risk personal auto insurance, PGR has moved into standard-risk and preferred auto insurance, as well as other personal use vehicle coverage, such as motorcycles and recreational vehicles. The company's property-casualty insurance products protect its customers against collision and physical damage to their vehicles and liability to others for personal injury or property damage. Why we like it: If it seems like it has been weeks that the Insurance index (IUX.X) has been stuck just below major resistance, that's because it has been. Two, to be exact. The $275 resistance level effectively kept a lid on the IUX from October through January, and it has been having the same effect since the first of June. Despite the IUX being unable to crack resistance, shares of PGR are not content to just wait around. The company has been continuing to deliver on the earnings front and investors have been rewarded for holding the stock. After blasting to new all-time highs above $61 on April 1st, the stock never looked back. Setting one new high after another, it stymied every one of the bears' attempts to pick a top, and serial short-covering likely played at least a small role in the stock's persistent rise. But after stalling just below the $73 level for the past couple weeks, PGR actually looks like it is ready to run again. If the IUX can join in the party then the stock could really gain some altitude. We don't want to get overly aggressive though, as the stock has been working higher in an ascending channel for the past 6 weeks and given its already extended condition, we don't want to get caught chasing momentum. Looking at the chart below, you can see that PGR is near the top of that channel, so it would take a pretty strong push for another strong surge to hold right here. So our preferred strategy will be to look for a pullback and rebound from the vicinity of $71, which also happens to be the site of the 20-dma. The PnF chart is off the chart in bullish terms, with a bullish price target of $118! It appears unlikely that we'll see that level anytime soon, but on a more micro scale, a trade at $74 will generate another Buy signal and likely give the stock more fuel. Momentum traders can enter on a breakout over $74, but must be willing to accept the risk of a pullback to the bottom of the channel (currently $70.75) before the stock continues higher. We're initially placing our stop at $69, just below last Monday's reaction low of $69.24. Suggested Options: Shorter Term: The July 70 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Note that June contracts expire next week. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the August 75 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 70 call. BUY CALL JUL-70 PGR-GN OI=163 at $4.40 SL=2.75 BUY CALL JUL-75 PGR-GO OI= 39 at $1.40 SL=0.75 BUY CALL AUG-70 PGR-HN OI=396 at $5.10 SL=3.00 BUY CALL AUG-75 PGR-HO OI=230 at $2.15 SL=1.00 Annotated Chart of PGR: Picked on June 15th a $73.27 Change since picked: +0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 983 K Chart link: ------------------------------------------------------------ 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=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** HCA, Inc. - HCA - close: 32.00 change: +0.10 stop: 33.50*new* Company Description: HCA Inc. is a healthcare services company that, as of the end of 2002, operated 179 hospitals, comprised of 166 general, acute care hospitals, six psychiatric hospitals, one rehabilitation hospital and six hospitals included in joint ventures. In addition, the company operated 78 free-standing surgery centers. The company's facilities are located in 22 states, England and Switzerland. The general, acute care hospitals provide a full range of services to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Why we like it: Are you still awake? It's been a tough week for traders following the HCA play, primarily because of the difficulty in staying interested. After the rebound from just above $31 early in the week, the stock has been gradually losing ground again and ended right on the $32 level, posting a gain of a dime on Friday. What's encouraging about the play is that while the stock has been stalling under resistance, daily Stochastics have been rising towards overbought and appear to be starting to roll over. That would play very nicely into our hands, especially with critical resistance provided by the 10-dma ($32.29), the 20-dma ($32.61) and the 50-dma ($32.94) dropping on a daily basis. In fact it seems unlikely that HCA will be able to test the major resistance at $33.50 without a sharp shift in sentiment. Following the abrupt rejection at the top of last Thursday's gap, it seems safe to lower our stop to $33.50, thereby reducing our risk. Traders still looking for an entry into the play will likely have to content themselves with looking for a failed rally below the 50-dma. At this stage of the game, it seems like a momentum strategy is unlikely, but just in case, look for a break below $30.75 to signal an entry point. Suggested Options: Short-term traders will want to focus on the July 32 Put, as it will provide the best return for a short-term play. Those looking for a larger move down below the $30 level will want to utilize the July 30 Put or even the August 30 Put, which provides greater insulation from the spectre of time decay. Note that June contracts expire next week. BUY PUT JUL-32 HCA-SZ OI=2261 at $1.65 SL=0.75 BUY PUT JUL-30 HCA-SF OI=3293 at $0.70 SL=0.30 BUY PUT AUG-30 HCA-TF OI=3658 at $1.15 SL=0.60 Annotated Chart of HCA: Picked on June 3rd at $31.45 Change since picked: -0.55 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 5.95 mln Chart link: ************* NEW PUT PLAYS ************* Goldman Sachs - GS - close: 89.17 change: -1.18 stop: 90.76 Company Description: Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world. (source: company press release) Why We Like It: We have to admit right off the bat that we're playing with fire here. What happens to most people who play with fire? Easy, they get burned. Thus we hope to limit our burnability by using a relatively tight stop loss. We're going to classify this as a very aggressive play. So why are we so eager to suggest puts on shares of Goldman Sachs? Hmm... like many of the traders out there we're in shock at the nearly non-stop ramp up in GS since its late May breakout. Stocks, like markets, typically ebb and flow, up and down, that's just the nature of the game. Well, GS has gone nothing but up for three weeks and its high time for some down. Toss in a couple of key resistance levels, a market that's showing some minor weakness and the opportunity was just too tempting to pass up. First a couple of caveats. GS is expected to announce earnings on Wednesday, June 25th. Out of the entire brokerage group, analysts appear rather optimistic about GS. That's not good for us because we're attempting to go bearish on a whole lot of strength. The recent observations about rising trading volumes for the last couple of months may also help bolster the brokers earnings numbers and we're due to see a number of announcements in the next two weeks. Coming up quickly is MWD who announces this week on June 18th before the bell. Thankfully, MWD's earnings are expected to be significantly less than the first quarter and less than a year ago. As long as they don't surprise to the upside their report shouldn't boost shares of GS. The next report traders should be watching is LEH's earnings on June 19th. Now they're a potential hazard, as estimates are somewhat positive. It will depend on what LEH has to say in their conference call. The last (warning) but not least, we're essentially picking a top. Just like picking bottoms, it can be hazardous to your trading account. Speculation plays only, please. Now check out the GS chart. The stock went from $61 to $78 between mid-March and late April. This produced a strong point- and-figure chart buy signal with a potential target of $95.00. From late April the stock consolidated in a bullish flag pattern for about three weeks. Then in late May the stock broke out from its flag pattern near $75 and has run straight to $90.00. Most oscillators are pegged deep in overbought territory to they're little help until we see some consolidation. Thankfully, the chart below suggests that its time for some profit taking in GS but we are being optimistic. The multi-week rally in the XBD broker-dealer index from less than 350 to 550 lends credence to our stance that its time for a dip. You'll also notice that the 550 level was resistance for the XBD back in late December 2001- to-very early January 2002. We're going to initiate the play with a stop loss at $90.76. If we're wrong, we're wrong and we want to be out quick. Our short-term target $85.00. More aggressive traders could potentially target $82.50. Suggested Options: Our time frame is relatively short-term so we're looking at the July strikes but we've listed an October for the more patient trader. BUY PUT JUL-90 GS-SR OI=3404 at $3.80 SL=1.60 BUY PUT JUL-85 GS-SQ OI=5881 at $1.80 SL=0.90 BUY PUT OCT-85 GS-VQ OI=2769 at $4.30 SL=2.15 Annotated chart of GS: Picked on June 15th at $89.17 Change since picked: -0.00 Earnings Date 06/25/03 (unconfirmed) Average Daily Volume = 4.57 million Chart link: --- Kohl's Corporation - KSS - close: 49.45 change: -1.03 stop: 53.25 Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: The Retail index (RLX.X) may have been knocking on new multi- month highs as recently as a week ago, but the same certainly can't be said about KSS. The stock topped out at the 200-dma back in mid-April and aside from a brief spurt higher in early June, it has been all downhill. The decline really seemed to get rolling on May 8th, when the company reported a 4% decline in its April comps vs. Prudential's estimate of a 3% gain. After declining back near the $51 support level, KSS bounced again with the strength in the RLX, but that rebound was short-lived. After running into firm resistance at the 50-dma, the stock once again began plunging a week ago Friday. By this past Wednesday, KSS had reached a critical juncture, coming to rest just above the $51 level that had provided support through late May. The bulls weren't so fortunate this time around, as the stock has plunged sharply below that level in the past two days, coming to rest on Friday very near its low of the day. Confirming the bearish situation demonstrated by the price action, volume has been running well above average on this selloff and looks to be a harbinger of further weakness ahead. You have to look pretty hard in this market to find a bearish looking PnF chart, but KSS fits the bill with its fresh Sell signal and $41 bearish price target. We aren't going to be quite that aggressive, as the $45 level looks like a more reasonable target, nestled in between the October and March lows (incorrectly labeled on the chart). There's likely to be some support found first at $47.50 and then again near $46, so a momentum strategy isn't our first choice. Rather, we'd like to see a rebound back into the $51-52 area that gets knocked back by the imposing resistance of the 10-dma ($52.44) and 20-dma ($52.22). If we should get so fortunate as to have the RLX reverse lower, then it should act like a sledge hammer, driving KSS sharply lower in short order. Place stops at $53.25, just above the bottom of last Monday's gap. Suggested Options: Short-term traders will want to focus on the July 50 Put, as it will provide the best return for a short-term play. Conservative traders looking for a larger move down towards the $45 level or below may want to utilize the October contract, which provides greater insulation from the spectre of time decay. Note that June contracts expire next week. BUY PUT JUL-50 KSS-SJ OI=8476 at $3.10 SL=1.50 BUY PUT JUL-45 KSS-SI OI=4064 at $1.15 SL=0.60 BUY PUT OCT-45 KSS-VI OI=1761 at $2.90 SL=1.50 Annotated Chart of KSS: Picked on June 15th at $49.45 Change since picked: +0.00 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.46 mln Chart link: --- Whole Foods Market - WFMI - cls: 49.44 chg: -1.35 stop: 52.00 *new* Company Description: Founded in 1980 in Austin, Texas, Whole Foods Market is the world's largest natural and organic foods supermarket with $2.7 billion in sales in fiscal year 2002. The company currently has 143 stores and employs more than 27,000 Team Members in the United States and Canada. The motto, "Whole Foods, Whole People, Whole Planet"(TM) captures the company's mission to find success in customer satisfaction and wellness, Team Member excellence and happiness, enhanced shareholder value, community support, and environmental improvement. For six consecutive years, Whole Foods Market has ranked on Fortune's annual list as one of the "100 Best Companies to Work For." Whole Foods Market, Bread & CircusŪ and Harry's Farmers MarketŪ are all registered trademarks owned by Whole Foods Market IP, LP. (Source: company press release) Why We Like It: From a technical perspective, it doesn't get much better than this for a suggested short play. In early May, WFMI plummeted 10 points over a two-day period. WFMI then spent the ensuing month consolidating in a classic "b" distribution pattern. That pattern usually predicts a fall equal to the fall that preceded it, which gives us 42 as an eventual target for this short play. There's more. When WFMI broke out of that "b" distribution pattern on June 5 and 6, it fell below an ascending trendline that's been in place since April 2001. It also dropped beneath its 200-dma. WFMI spent this week retesting both that trendline and the 200-dma. Friday, it failed that test. Oh, and while it failed that test and moved down, it also handily fell through the nice round number of 50, likely damaging investor sentiment. WFMI is on a P&F sell signal with a target of 42, fitting nicely with the target predicted by the "b" distribution pattern. What could be better than that? How about an examination of the reasons behind WFMI's decline? The two-day ten-point decline began with a McDonald Investment analyst's downgrade on valuation concerns ahead the earnings report on May 7. The analyst thought that the company's premium valuation might subject the stock to profit taking on any bad news. That bad news arrived that afternoon when WFMI guided expectations for fiscal 2003 and same-store sales to the low end of their previously stated ranges. Q2 sales were 725.1 million, just below the expected $729.8 million, but earnings were 41 cents per share, and in line with expectations. The McDonald Investment analyst was soon joined by a U.S. Bankcorp Piper Jaffray analyst who lowered his estimates for the company. Again, the problem seemed to be that the company's stores had been performing well: so well that earnings and sales couldn't continue to grow at their previous rate. It was the old "priced to perfection" argument that used to target tech stocks. When worries about mad cow disease surfaced in mid-May, WFMI temporarily benefited as the chain sells organically raised beef from U.S. livestock, not fed antibiotics or hormones. A WFMI spokesperson said higher sales were not immediately expected as a result of the mad cow worries, however. Unfortunately for WFMI but not for new play, other grocers began reporting in early June, and the news was not good. Albertson's (ABS) missed earnings, saying full-year earnings would be $1.70- $1.75, far below the previous $2.04 consensus. Albertson's mentioned competitive pressures. Safeway (SWY) announced that it would cut more than 10 percent of its administrative personnel as it also coped with competitive pressures as well as plummeting profits. Winn Dixie (WIN) lowered guidance for its fourth quarter. Kroger (KR) announced an SEC information request related to its filings, although the company thought the request was just part of the SEC's regular activities. The sector dragged the just-recovering WFMI down with it. This week's retail sales figures did their part, too. Thursday's number showed a decline of 0.5 percent in food and beverage store sales. The ideal entry would be a rollover beneath 50 or the 200-dma at 50.78, but we may not get that entry. Traders instead might enter on a move below Friday's 49 low. Our first target is 45 and our second is 42, with a stop at 52. As great as this setup is, traders should probably expect some turbulence between 46.50 and 47.50, the site of a gap up in February. Suggested Options: We have plenty of options to choose from. WFMI has Julys, August and November options already available. We're going to suggest July 50 and 45 puts but the August 45s don't look bad either. BUY PUT JUL 50 FMQ-SJ OI= 539 at $2.70 SL=1.35 BUY PUT JUL 45 FMQ-SI OI=1052 at $0.90 SL=0.45 BUY PUT AUG 50 FMQ-TJ OI= 913 at $3.40 SL=1.70 BUY PUT AUG 45 FMQ-TI OI= 396 at $1.50 SL=0.75 Annotated Chart for WFMI: Picked on June 13 at $49.44 Change since picked: -0.00 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume: 1.6 million Chart = ------------------------------------------------------------ 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=oetics24 Note: Options involve risk. 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The Option Investor Newsletter Sunday 06-15-2003 Sunday 4 of 5 In Section Four: Leaps: This Is Not MOPO, Right? Traders Corner: It's That Time Of The Month Again Traders Corner: Elliott Wave Plays Traders Corner: Elliott Wave Play Updates Traders Corner: Where is the Dow Going? Futures Corner: ADX Article I Have Been Promising ------------------------------------------------------------ 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=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** This Is Not MOPO, Right? By Mark Phillips mphillips@OptionInvestor.com Giving credit where it is due, this week's title came from a long- time reader. He sent me an email on Friday with that subject line and the reason I highlight it is as much to comment on the state of the current market as to compliment that reader for the progress I've seen him make in his understanding of the market over the past couple years. You see, in the past, I would have expected this individual to be blindly shorting into this recent rise in the market. Not so, this time around. He's learned to listen to the language of the market and based on the past few failed LEAPS Put trades, maybe a bit better than I! This reader's question highlights his lack of belief that Friday's drop off in the broad market is not the beginning of a larger decline and I have to agree. Let's revisit the premise of the MOPO setup and see what may be setting up in favor of that long- awaited trade setup and what isn't. For those new to the MOPO discussion, here's the background information, as we certainly don't need to take our time together this weekend to rehash it. MOPO - Remember That Term? http://www.OptionInvestor.com/traderscorner/tc_042803_1.asp Setting Up For MOPO http://members.OptionInvestor.com/options101/opt_043003_1.asp Further Reflections on MOPO http://members.OptionInvestor.com/options101/opt_050703_1.asp Clearly, with all of the major indices blowing through major resistance in recent weeks, the first ingredient of the MOPO setup has been removed. The market's have broken their trend of lower highs and with all the indices more than 20% above their October lows, we have satisfied the 20% rule that says we're in a new bull market. I certainly won't argue with that -- where I differ with many of the talking heads is in whether this is a cyclical or secular bull market. By my definition, this market can't be considered to be a new secular bull unless the indices are able to take out their previous bull market highs. Needless to say, there is a LONG ways to go before that becomes even a remote possibility. But at the same time, with the March lows being higher than the October lows and the current highs having exceeded the peaks in August and December of last year, we have the beginning of a trend of higher lows and higher highs. That flies directly in the face of what we want to see for a MOPO setup. Strike one for the bears. Next up is the information delivered by the CBOE Volatility index or VIX. Historically, the VIX has signaled a near-term market top whenever it has declined to 20 or below, while at the same time the market has either stalled or continued to rise. Taking a look at a daily chart of the VIX vs. the SPX, and it becomes very clear that something is different than what we want for a MOPO setup. Daily Chart of the S&P 500 vs. the VIX This is actually bullish action, not the setup for a large bearish move in the broad market. While the actual market has been rising, the holding action in the VIX indicates that there are just enough skeptics (like me) out there to continue to fuel the market's rise. Remember that rallies need a wall of worry to climb, and it appears that market participants that don't believe in this rally have continued to provide legs for it to continue to rise. This flies in the face of the latest numbers out of the Investor's Intelligence Survey, which shows the boat listing severely into the bullish camp. The latest numbers show that 58.7% of advisors are bullish while only 16.3% are bearish. The significance of this imbalance is that this is the lowest bearish reading in 16 years! I'm sorry, but I have a hard time believing that after only 3 years of a bear market, that suddenly the crowd is right. In my never-to-be-humble opinion, there is a big correction coming. The $64,000 question is when and from what levels. I remember reading of advisors in the middle of 1999 that were forecasting a major selloff in the stock market. They were right, but I wonder how many traders went bankrupt trying to short into the rally from mid-1999 through March of 2000? In this game, timing is everything! So let's look at the third ingredient in our MOPO recipe, that of Bullish Percent (BP). Recall that BP doesn't tell us where the market is headed, it just tells us whether the bulls or the bears are carrying most of the risk. Look at our summary table below and I think you can easily surmise that the bulls are carrying the vast majority of the risk in this market. NASDAQ-100 - 87% (6/03 high of 91%, 11/99 high of 92%) NASDAQ Composite - 70.88% (new all-time high) DOW - 80% (Same level as 3/00 and 5/01 -- highs in 1998 = 92%) S&P 500 - 81.40% (6/03 high of 82.20%) S&P 100 - 79% (New cycle high, 11/98 all-time high = 84%) Except for a bit of weakness showing in the NASDAQ-100, we can see little signs of weakening in the bullish percent measures. The bulls may be carrying the bulk of the risk in this market, but that certainly hasn't stopped them from repeatedly steam-rolling the bears at each new supposed resistance point. Even the NASDAQ Composite now meets the standard definition of overbought as it crept over the 70% level last week. I hesitate to show the following chart, as I have concerns that some readers will take it as the definitive sign of weakness and start shorting the NDX based on that perception. Let me just say that based on what we see on this chart, such action would clearly be premature! I've talked at great length about the SharpCharts version of the bullish percent charts and the interaction of these lines with their respective 10-dmas. Up until recently, we really haven't had a hint of a bearish crossover on any of the major indices. Based on the minor loss of strength on the NDX BP on Friday, we're finally getting that hint. Bullish Percent SharpChart of the NASDAQ-100 As you can see, the BP line is crossing below the 10-dma here, but we still need the confirmation of the CCI dropping below the zero line. Keep in mind, the NDX BP is usually the first to show an inflection and it is currently the most extended of any of the major indices. Looking at a broader picture, the S&P 500 gives a more balanced picture. Bullish Percent SharpChart of the S&P-500 We can see the BP line tipping a bit lower, but it still hasn't even touched the 10-dma, much less crossed over it. And while the CCI line is starting to dip below 100, it is still nowhere near the zero line. Of all the major indices the SPX and NDX are the closest to giving us a bearish signal, with the other indices still looking quite strong and bullish. As I've mentioned over the past several weeks, I invite each of you to monitor these charts on your own over at StockCharts.com. 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 I owe a great debt of thanks to one of my readers who introduced me to the above method of reviewing the bullish percent readings. Unfortunately, I can't remember who that kind soul was (as I get so many great emails each and every week), but you know who you are, and I thank you! In each of the past 2 weeks, the bears have managed to turn back rally attempts from just above the 1000 level in the SPX, which has corresponded to the DOW pushing just over the 9200 level. What is so interesting and of a cautionary nature to bears is that the SPX seems to now be finding support above the 970 level, while the DOW is finding support above 8900. It wasn't so long ago that we were using these numbers to define what we thought would be solid resistance! Does this continued rally make sense? Well, yes and no. From a fundamental standpoint, there's no leg for it to stand on, as valuations across the entire market are more ridiculous now than they were in the spring of 2000. But there are two factors that I believe is floating the market higher. The first is the rising tide of liquidity being provided by the Fed, both by continuing to hold interest rates at multi-decade lows and by running the printing press, making more dollars available. Adding to this buoyant factor is the recently passed tax cut, which is expected to continue to aid the U.S. consumer in continuing to fuel the global economy. Of course, don't forget that mortgage rates are continuing to fall, and it certainly looks like we're entering into the next wave of refinancing, which will only unleash more cash to be directed into either the real economy or the equity market. With interest rates so low, investors looking for capital appreciation really have no other choice but to invest in the equity market, as money market and bond yields are so ridiculously low. The other factor driving the markets higher is future expectations. While valuations at this point do not justify current equity prices, the consensus belief seems to be that this year the second-half recovery is for real. Based on that belief, investors expect that even rising equity prices now will be justified towards the end of the year and into early 2004 as earnings catch up with expectations. Those of you that have been with me for awhile know that I have no confidence the second-half is going to be any stronger than it has been over the past 3 years. There just isn't anything coming from the corporate arena to indicate that there is anything driving better earnings other than cost-cutting. If companies aren't able to paint a rosy picture for investors in the upcoming July earnings cycle, I suspect it could make for a rough remainder of the summer. As you can see, I have an expectation of much lower equity prices ahead, but just when such a correction might get underway, the tools I follow are not telling me anything other than "Possibly soon, but not yet". Jeff Bailey did an excellent article last week in one of his market wraps and I hope all of you caught it because it dovetails nicely with our continuing search for where that elusive reversal point might be. It was done Thursday night, and for those of you that may have missed it, I highly recommend reading through it this weekend. Jeff played around with the settings on his PnF charts of the major indices, fine-tuning them to the point where they should signal when a real reversal does occur. Here's the link in case you missed it. Looking for a "finite" level http://members.OptionInvestor.com/Itrader/marketwrap/iw_061203_1.ASP As you can see by some of the bullish price targets that Jeff is working with, my speculation last week of the DOW potentially reaching 9500, the SPX 1100 and the NDX 2000 doesn't seem so far- fetched. In fact, in light of my possible upside targets for the SPX and NDX, maybe we're looking at the DOW working as high as 10,000 before all is said and done. Warranted? No way! Possible? Believe it or not, I think so. Of course, the more elevated the market becomes, the more susceptible it is to a major correction. But I don't think it makes sense to open positions in anticipation of that correction until there is some sort of technical confirmation that the correction has arrived. That leaves us with what I feel is a very extended bull market cycle within an overall bear market. Do we jump on the bandwagon and romp with the bulls? Or do we wait patiently on the sidelines, sharpening our claws for the major decline we "know" is coming? Decisions, decisions...You'll note that shorting into every rally is NOT one of the choices that I'm willing to consider. That would be the same as trying to convince the market to do what I want, and that is almost always a very painful and expensive lesson. Join me below for a discussion of where we're going with the Portfolio and Watch List Portfolio: AIG - Up, down, up, down. In the past 6 weeks, AIG has gone absolutely nowhere. The big question is whether that is good news or bad news. Looking at a chart of the Insurance index (IUX.X) over the past several weeks shows another rather flat trend, helping to explain why AIG can't seem to gain any traction in either direction. But with both the IUX and AIG underperforming the broad market, I continue to think this is one of the better plays for bears. While still underwater from our entry point, I like the way the stock has been getting rejected from the $60 level over the past couple weeks. On the other hand, I'm concerned that former resistance at $58 now seems to be providing support, with the stock holding above the 200-dma for two solid weeks now. That makes the longest period of time the stock has been over the 200-dma since late 2001. Either we've picked a solid top for AIG or we'll be stopped out with a close over $61. I still favor new entries on failed rallies below $60, but more conservative traders will want to wait for a decline back under the 200-dma before playing. GM - That was close, wasn't it? GM continues to defy all rational thought, rallying on the sea of liquidity despite the dismal fundamental situation. the company reaffirmed their Q2 outlook on Tuesday and that seems to have provided the necessary lift to challenge the descending trendline. The stock rallied through the 200-dma and descending trendline on Wednesday, and reached as high as $37.76 on Thursday before reversing to close just over $37. A bit of bright news for our play emerged on Friday morning though, with Moody's downgrading the company's debt to Baa1 from A3. That was enough to drop GM back under the $37 level, but I must say I was a bit surprised to see the damage so limited. GM remains in a downtrend, but resistance is starting to weaken. I still view this as one of the best potential bearish plays out there right now, but that doesn't mean we'll be proven right. Nervous investors may just want to take advantage of the current weakness to exit open positions near par. I'm going to stick by my guns, keeping stops set at $37.50, expecting any broad market pullback (which is long overdue) to have an outsized impact on shares of GM. AMGN - Despite the pullback in the Biotechs last week, AMGN managed to hold its ground fairly well. The stock didn't quite succeed in pushing to new highs, but holding onto the $65 level on Friday was encouraging. Dips that find support above $62 still look attractive for new entries, as our eventual target is still the $72 level. But as I've cautioned before, I don't recommend entering on a breakout to new highs. AMGN has a habit of consolidating after each push to a new high before pushing higher again. The best entry strategy is to take advantage of the lull between the highs. Of course, in such an overextended market, there is the very real possibility that AMGN (along with the rest of the market) could top out at any time, so prudent use of stops is mandatory. This week, I'm getting just a bit more aggressive and raising our stop to $61.40, which is just below the last reaction low, as well as the 50-dma. QQQ - Are we topping out yet? I hesitate to go that far, with the NDX still holding onto support at the 1200 level. But it was encouraging to see a bit of weakness in the QQQ towards the end of the week, giving us a close back under the $30 level. The bearish cross in the BP chart above is also encouraging, as is the steady rise in the VXN (NASDAQ Volatility index) over the past couple weeks. But the bearish case is still far from conclusive. For now, we just continue to look for failed rallies below $31 as potential entry points and maintain our stop at $32. We'll need to see the QQQ break and close below $29 and a further weakening on the NDX BP before we'll really have any confidence that perhaps the scales are tipping in our favor. Watch List: DJX - More and more, the virtue of patience is being revealed to me. The DOW just continues its relentless rise along with the rest of the market. With the VIX continuing to hold up and no signs of weakness in the DOW's BP, it is really difficult to make the case for a solid bearish entry point. I continue to believe it is near at hand, but it remains as elusive today as when we initiated this play over a month ago. We'll stick with the higher entry target for now, although that may be subject to revision, depending on what transpires in the week ahead. Closing Thoughts: As you might expect after that rather long commentary above, I'm pretty much talked out for the week. This continues to look like a top-heavy market to me, but I refuse to throw more bearish trade candidates out there without some indication from either the major indices or some internal weakness in the market that the bearish case holds more merit than it did 2 or 4 or 6 weeks ago. At the same time, the only decent bullish candidates seem to be those that have already had quite a run, meaning that it is too difficult to quantify downside risk. I looked through several hundred LEAP-able stocks this weekend, and I really can't find a single stock that I feel comfortable adding to the Watch List. But after not adding anything for the past couple weeks, I feel like I'm not giving you the product you deserve and want. So I'd appreciate your thoughts on what you actually would like me to do. Do you want fresh candidates every week, no matter what the market conditions? Or would you prefer that I only list candidates that I think look really strong? I'll do my best to provide what the majority wants, but I need your input to figure out just what that ought to be. As a sort of compromise this week, here is a short list of several of the stocks that I think may provide some solid bearish possibilities in the weeks ahead. These are NOT Watch List plays just yet, but some of the leading contenders that I am watching for confirmation of my own personal bias. HD - Looking for the rising channel to break down, likely on a rejection from long-term resistance in the $36 area. This goes against the strength in the Housing sector, but recall that LOW has been a much stronger performer over the past year or so, and I think that bodes ill for HD long-term. GS - This is really aggressive, but I'm looking for the stock to top out very near current levels. The flag pattern that resolved to the upside in late May (stopping us out of our bearish play) has now reached its upside objective of $90 and there is some strong resistance in the $90-92 area. I'm watching for a topping formation up here and then a decline all the way back into the upper $70s. WMT - Something is wrong with WMT. Despite the Retail index (RLX.X) continuing to look strong, this stock is definitely showing a lagging behavior. Is it telling us something about the larger Retail picture? Rally failures in the $57-58 areaare starting to look attractive for new bearish positions, but we are going to need to see some significant market weakness in order for LEAP Put plays here to yield fruit. FNM - I've been watching this one for months now, looking for a favorable point to play. The SEC investigation of FRE resulted in the big break lower before we could even consider adding it here. Now that the $71-72 support level has been broken, I'm wanting to see a failed rally back near the $70-71 area to convince me the downside here has merit. The big thing about FNM/FRE that appeals to me from the bearish side is that I think this is potentially a time bomb waiting for the right catalyst. If the debt bubble does start to implode, these two stocks are going to be ground zero. ADBE - Did we pick the perfect bullish exit point from this play or what? Since then, I've been looking for some definitive sign of weakness from the stock due to a host of very ugly fundamental factors. Apparently last Friday was it, with the stock cratering more than 12% in response to the company's gloomy forecast for Q3. That drop came on a big gap. I want to watch for that gap to fill in near the $36 level to give us a solid bearish play setup. There are several others, but I think you get the idea. It isn't locating the trade candidates that is the challenge. It is in finding the entry setup that will work best in what continues to be a bullish market environment. I'll likely start writing several of these as new Watch List plays in the weeks ahead IF they provide some favorable price action. I think it is very unlikely that I'll be adding further bullish candidates, as I just can't see the favorable risk/reward ratio without a sizable pullback first. Of course, I'm always open to new ideas and if you've got bullish candidates you think have merit (remember they have to have LEAPS available), send them along. Maybe we can share them with the group and that way everyone wins. In the meantime, I'll keep doing what I've been doing until I get a clear message from you telling me that we ought to make a change or from the market telling us that the bears are (finally) back in town. 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 $ 9.80 +40.00% $61.50 '05 $ 60 ZAM-AL $10.90 $14.20 +30.28% $61.50 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 4.00 -28.57% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 7.00 -17.65% $61.00 GM 05/13/03 '04 $ 35 LGM-MG $ 4.10 $ 3.80 - 7.31% $37.50 '05 $ 30 ZGM-MF $ 4.60 $ 4.40 - 4.30% $37.50 QQQ 05/27/03 '04 $ 27 KLF-MA $ 1.70 $ 1.50 -11.76% $32.25 '05 $ 27 ZWQ-MA $ 3.10 $ 2.75 -11.29% $32.25 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: DJX 05/04/03 $94-95 DEC-2003 $ 92 DJV-XN DEC-2004 $ 92 YDK-XN New Portfolio Plays None New Watchlist Plays None Drops KO - $47.45 It's time to concede defeat on this failed Put play. After more than 2 weeks of holding just under the 200-dma after we initiated the Portfolio position, KO finally broke above that important measure and in hindsight, that should have been the signal to cut our losses and move on. But stubbornness and disbelief kept me adhering to the original stop of $47, all the while expecting the fledgling rally to fail. Alas, it never happened, as the stock has mirrored the relentless rise in the broad market, triggering our stop on Thursday. Weekly Stochastics are the deepest into overbought they've been for the past 14 months, but there's no point fighting the rally right here. Fundamentally, I still think KO should see significantly lower levels, but now we need to look for the technicals to confirm that bias before playing again. Look for the $50 level to be the next major point of conflict between the bulls and bears. ------------------------------------------------------------ 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=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** It's That Time Of The Month Again By Mike Parnos, Investing With Attitude Yes, it's that time of the month again. No, put away the Motrin. If it was THAT time of the month, we wouldn't be able to do our "Quickies." Let's face it. This month has been less than exhilarating. We still have a week left to expiration. Maybe we can make some good things happen with our "pre-expiration" short term trades. Remember, these "quickie" trades don't necessarily have to be held to expiration. If you're in a position to lock in a reasonable profit – grab it. _____________________________________________________________ Quickie #1 – SMH Baby Iron Condor – Closed at $28.50 With only a week left, and the market poised to consolidate, let's see if we can entice the semiconductor holders (SMH) to stay in the $27.50 to $30 range. Maximum profit is $1.15. At risk is $1.35. Adjust the number of contracts to your level of comfort. Sell 10 contracts of the SMH June $27.50 puts @ $1.10 Buy 10 contracts of the SMH June $25.00 puts @ $.50 Net credit of $.60 Sell 10 contracts of the SMH June $30.00 calls @ $.90 Buy 10 contracts of the SMH June $32.50 calls @ $.35 Net credit of $.55 Total net credit of $1.15 _____________________________________________________________ Quickie #2 – QQQ Strangle – Closed at $29.96 Let's take a flyer. Don't worry, this one is affordable. We're going to play for a big move in one direction or the other – it doesn't matter. Buy 10 contracts of the QQQ June $32 puts @ $2.05 Buy 10 contracts of the QQQ June $28 calls @ $2.05 We're actually only risking $.10. There is an intrinsic value of $4.00 in this position that is never at risk. We could have bought the $32 calls and $28 puts for a nickel each and risked the same dime. However, by buying in-the-money options, we take advantage of a little extra delta. We're only looking for a small profit, so don't get greedy! If the QQQs move $1.50, take your profits because it may not be there for long. If you can't be home to baby-sit the position, you might want to put in sell orders at $.35 or $.45 – whatever you're comfortable with. The other difference is in the commissions. If you just buy the out of the money options for a nickel each, you'll only have to deal with one commission to take your profits. However, if you put on the position with in the money options, you'll need to close out both the puts and calls to make sure you get your intrinsic value. ______________________________________________________________ Quickie #3 – LLTC Condor Sell Straddle – Closed at $32.05 Here is a relatively low risk trade on a stock (Linear Technology) that has moved down recently, but has support close by. Sell 10 contracts of LLTC June $32.50 puts @ $1.05 Buy 10 contracts of LLTC June $30.00 puts @ $.25 Net credit of $.80 Sell 10 contracts of LLTC June $32.50 calls @ $.60 Buy 10 contracts of LLTC June $35.00 calls @ $.15 Net credit of $.45 Total credit: $1.25. Total risk: $1.25 For one week, there's a pretty good chance that LLTC is going to hang around the $32.50 level. We have a profit range of $31.25 to $33.75. The closer LLTC finishes to $32.50, the more we'll make. Maximum profit is $1,250. Again, as always, adjust the number of contracts to your comfort level. ______________________________________________________________ CPTI JUNE POSITION UPDATE June Position #1 – SPX Iron Condor – Closed at 988.61 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 gave 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. We're right up at the top of the range. Last week, when the SPX traded down to about 975, the timid had a chance to bail out. _____________________________________________________________ June Position #2 – BBH Iron Condor – Aborted _____________________________________________________________ June Position #3 – TOL – Bear Call Spread Plus – Currently at $31.02 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. The market has gone against us. We have two weeks for TOL to move back down to $25 or up to $35. Maximum potential profit is $1,100. Yesterday morning (Thursday), when TOL popped up to $31.68, I used the opportunity to sell our extra 10 $30 calls for $1.80. With the market trending up, I may live to regret that move. However, by taking in the $1.80, if TOL finishes above $30, I have reduced my worst-case scenario loss to only $2.10 – a figure I can live with. Hopefully, it won't come to that, but I have further defined, and limited, the maximum loss. ______________________________________________________________ June Position #4 – COF Iron Condor – Currently at $52.93. 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 gave 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 $1.50 ($2.50 less our $1.00 credit). If it works, it's an 80% return on risk. COF has gotten a bit carried away. We have another week for it to come to its senses. Our max loss could be only $1.50, but a lot can happen in a week. ______________________________________________________________ June Position #5 – QQQ ITM Baby Strangle – Currently at $29.96 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. Last week, an opportunity. When the QQQs traded at $31.47, we could have sold our long $28 calls for $3.70. Then, when the market retreated, the $30 puts could have been sold for $1.35 – resulting in a profit of $1.20. ____________________________________________________________ Unofficial CPTI Replacement Position—QQQ Strangle - $29.96 We bought 10 contracts of the QQQ June $31 calls @ $.10 and 10 contracts of the QQQ June $25 calls @ $.10. Total debit: $200. We're playing for a big move in the QQQs. If the QQQs move $3-4, our long put or call could easily be worth $.75 - $1.25. We're only risking $.20. Greater risk takers (speculators) could have bought closer strikes. The $26 put and the $30 call would cost $.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. Last week there were opportunities. The QQQs traded up to $31.47. Our $200 bet was worth $1,000. A $400 bet was worth $1,700. Hopefully, traders took advantage of these opportunities to take their profits. ________________________________________________________________ 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 ************** TRADERS CORNER ************** Elliott Wave Plays By Steve Gould Company Profile The NASDAQ-100 Index is a modified capitalization-weighted index, which is designed to limit domination of the Index by a few large stocks while generally retaining the capitalization ranking of companies. Representing 100 of the largest non-financial U.S. and non-U.S. companies listed on the National Market tier of The NASDAQ Stock Market, the NASDAQ-100 Index reflects NASDAQ's largest companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. Through an investment in the NASDAQ-100 Index Tracking Stock, QQQ, investors can participate in the collective performance of many of the NASDAQ stocks. Chart Analysis Based on the analysis in "Where is the Dow Going?" for 6/13/2003 we want to play a put but hedge our bets. The NASDAQ mirrors the Dow, although sometimes it is a little out of sync. The NASDAQ (as well as the Dow) appears to be at a crucial junction where it is going to make a move either up or down (versus remain flat). We need some type of play that will make money whether the NASDAQ moves up or moves down. Trade Setup This is going to be a non-directional play in the sense that we do not care (really) which way the QQQs move, just as long as they move. It is slanted more toward a move down, but the spread will protect us should we be totally wrong and the QQQs move up instead. Even though we have a July expiration date, this is not a 5 week play. We have until December for the QQQs to make their move, a very likely event. We are only selling the July put as protection against being wrong. Although we will need a larger move to make a profit, we will risk substantially less should our direction be wrong. (This is going to be my new favorite play and I will be writing an article on it in the near future.) Option Pos Num Sym Strike Type Bid Ask Delta Vol OI Buy 2 KLFME Jan 04 31 Put 3.00 3.20 -0.51 500 777 Sell 1 QQQSK Jul 03 37 Put 6.90 7.10 -1.00 21 57 Credit: .50 Pos Num Sym Strike Type Bid Ask Delta Vol OI Buy 2 QAVXD Dec 03 30 Put 2.44 2.55 -0.45 2093 8154 Sell 1 QQQSJ Jul 03 36 Put 5.90 6.10 -1.00 0 57 Credit: .80 Calculations are based on the first set of options. I find that I can split the difference quite a bit on this stock, so if you can enter this as a spread order, you might be able to receive more than a $50 credit What If We Are Right Chart: Position Analysis For The First Target Any move of the QQQs below 27.85 becomes profitable. Since the maximum risk of this trade at this point is $69 (see What If We Are Wrong section), a move of the QQQs below 25 offers a 1-2 risk/reward level. Below 24 offers a 1-3 risk/reward level. The above calculations do not take into consideration that as the QQQs decline in value, the implied volatility will increase shifting the risk/reward plot up. Chart: Position Analysis For The Second Target Should the implied volatility increase to just 35, we hit the 1-3 risk/reward level at 24.75. Higher volatility means higher profits. What If We Are Wrong Scenario 1 Chart: Wrong Scenario 1 If by the Wednesday before July expiration the QQQs do not move at all or very little and close at 30, the July 37 put will be worth 7.00. Buy it back and sell the August 37 put. The value of the options should be the same and the only cost will be the commissions. Scenario 2 Chart: Wrong Scenario 2 If the volatility of the QQQs decreases, the value of the OTM puts will also decrease. Looking at a chart of QQQ volatility for the last 2 years show that the lowest volatility was within the last month and it was about 27. This will not affect the long term aspect of the play at all. Typically the volatility will decrease when the stock is rising in value. In this case, the QQQ will have to close above 33.60 to make a profit. If the QQQs close at 37.00 then we will make the maximum profit of $160 as the July option will expire worthless and the January options will still have some value. This would be a good time to close out this play and initiate a new one. ************** TRADERS CORNER ************** Elliott Wave Play Updates By Steve Gould DJX Chart: DJX 6-13-2003 change from last week The Dow has had a net movement up of about 54 points but nothing significant enough to alter the value of the play. The original option values were Option Sym Strike Type Bid Ask Vol OI DJVIN SEP 92 Call 2.8 3.0 37 14836 DJVUJ SEP 88 Put 2.7 2.9 348 5070 ---- --- 5.5 5.9 Current values are Sym Strike Type Bid Ask Vol OI DJVIN SEP 92 Call 2.95 3.20 254 16584 DJVUJ SEP 88 Put 2.30 2.55 45 5374 ---- --- 5.25 5.75 There is no change and no action is necessary. Note: On 5/19/2003, I initiated another DJX put play with a stop loss at 8870. I did not write a play update to close out the position when the Dow hit 8870. You should have followed the plan and exited the play at that point. ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould Last week I had a conversation with a colleague of mine and he commented that his company has lost subscribers because they are one of the 16% of the newsletters who are still crying bear. I can relate that it is difficult to retain a following in the face of the market behaving in exactly the opposite manner that you are declaring. It takes a certain amount of courage to stick with your convictions despite public opinion against you. I certainly hope that I have not lost too many readers thinking that I will go to my grave crying bear. I have said it once before and I will say it again. We are in a bear market rally that is going to catch a lot of people off guard. Although the top may not yet be in place, more evidence this week suggests that the Dow may have indeed hit a top, although I am still in the "hedge your bets" mode. It would be very easy for me to effect a top. All I would have to do is sell all my puts and purchase calls. The moment I do that, I know the market will come crashing down. I just may be doing everyone a favor by remaining stubborn. Chart: Dow 6/13/2003 Here is a daily chart of the Dow from January 2000 to the present. If you look at last weeks chart and this one, not a lot has happened. The general trend is still down and the Dow is currently undergoing an A-B-C correction. Just how high will the C wave go is the question I would like to put to rest. Let's examine this 2 wave in a bit more detail. Chart: Dow 6/13/2003 wave 2 The Dow inched one more step closer to the 62% retracement level. The Dow is already at a level where wave A equals wave C creating a flat type correction. This creates a double resistance area. Should the Dow break through this level, the next level will be the 78.6% retracement level of 9935. Chart: Dow 6/13/2003 wave A vs. Wave C Right now, the Dow is only a few points away from where wave A would equal wave C (9264). The Dow is close enough now to satisfy the requirement of a flat correction (see last week's article or Corrections Part I) and could start heading down any moment. Or, the Dow could morph into an expanded flat and head toward 9968. Since this level is also close to the 78.6% retracement level, the range of 9935 – 9968 would be the next level of resistance. Chart: Dow 6/13/2003 Wave C Here is a close up view of the C wave. In general, C waves subdivide into a 5 wave basic pattern. So far, this C wave has completed waves (i) – (iv). The final (v) wave does not look to be complete as of yet. It looks like it will have one final thrust up and then be complete. If this is the case, then the flat will be complete and the Dow will start heading down next week. If the Dow does continue higher into an expanded flat, then the wave count will need to be relabeled. This will not invalidate the longer term wave count. It will just delay the inevitable. Bottom line, I still remain bearish the long term. The Dow is currently at a resistance level. If it breaks through, the Dow will head toward 10,000 before hitting resistance again. ************** FUTURES CORNER ************** ADX Article I Have Been Promising Jane Fox The ADX is a trend following method developed by Welles Wilder and explained in his book, New Concepts in Technical Trading Systems. It identifies trends and shows when a trend is moving fast enough to make it worth following. There are five parts to the calculation of the strength of the trend. (I will be using daily bars because it is easier to explain the concept with today, yesterday, etc.) 1. Identify the Directional Movement (DM). DM is defined as the largest portion of today’s range that is outside the previous day’s range. It is always a positive number, the “+” or “-“ refers to the movement above or below. There are three types of DM: A. Today’s range is above yesterday’s range. DM = + B. Today’s range is below yesterday’s range. DM = - C. Today’s range is inside yesterday’s range or extends above and below by equal D. amounts. DM = 0 When I tried to figure this one out I got wrapped around an axle so I captured some data on the QQQs and drew the picture below. First of all here are the data I captured: Date High Low Range 06/06 31.47 30.02 1.45 06/09 30.22 29.53 0.69 06/10 30.20 29.68 0.52 And here is the picture I drew for myself. The ranges of 06/06 and 06/09 overlap by .20. Since .49 of the 06/09 range is below the range of 06/06 the DM=0.49 and is “-“ because it is below the 06/06 range (30.02-29.53). So are you wrapped around an axle yet? If not, you will be. 1. Identify the True Range (TR). This is also an absolute number (has no + or -) and is the largest of the following three calculations: A. Today’s high minus today’s low B. Today’s high minus yesterday’s close C. Today’s low minus yesterday’s close Let’s take the above data, add the close and calculate the TR: Date High Low Close A. B. C. TR 06/05 30.68 29.97 30.42 06/06 31.47 30.02 30.13 1.45 1.05 -.40 1.45 06/09 30.22 29.53 29.73 0.69 0.09 -.06 0.69 06/10 30.20 29.68 30.12 0.52 0.47 -.05 0.52 1. Calculate the Directional Indicators (DI) The DI is simply an absolute value found by the quotient of DM divided by the TR. The “+” or “-” of the DM will determine the “+” or “-“ of the DI. The formula is: DI = DM TR The DI for 06/09 would be: DI = 0.49 = 0.710 and is “-” because the DM is “-”. 0.69 2. Smooth the DI with a moving average and you have DMI. You can pick any period for smoothing and, as with any moving average, the shorter the time frame the more movement you will get and the longer the time frame the less movement. The relationship between the positive and negative smoothed DI lines identifies the trend. If the DMI+ line is above the DMI–, the trend is up; if the DMI– line is above the DMI+, the trend is down. 5. Calculate the Average Directional Index (ADX). This unique component of the system will tell you the strength of the trend identified by the DMI- and DMI+ lines. The ADX measures the spread between the positive and negative directional lines, sort of like the histogram of the MACD. It is calculated in two steps: A. Calculate the DX: DX = (DMI+)-(DMI-) * 100 (DMI+) +( DMI-) B. Smooth the DX with a moving average As a trend proceeds and becomes stronger, the spread between the DMI+ and DMI-grows and the ADX rises. Please note here that the ADX is ALWAYS a positive number. It only measures the STRENGTH of the trend not if the trend is up or down. If you cannot determine from the price formation if the trend is up or down you can look at the DMI lines. If the DMI+ is above the DMI- then the trend is up and vice versa. As Alexander Elder says in his book Trading for a Living, “The ADX tracks changes in mass bullishness and bearishness by measuring the capacity of the bulls and bears to move prices outside of the previous day’s range. If today’s high is above yesterday’s high, it shows that the market crowd is becoming more bullish. If today’s low is below yesterday’s low, it shows the market crowd is becoming more bearish.” If you have slogged through all of this so far, I say you are a diehard technical trader and are to be commended for sticking with me. Let’s move on to how to use it, how we can become better traders with the ADX. How to Use the ADX 1. Trade only from the long side when the +DMI is above the –DMI and the ADX is rising. Trade only from the short side when the +DMI is below the -DMI and the ADX is rising. 2. When the ADX is below the +DMI and –DMI you have a consolidation no trend. But get ready because it is from these flat consolidations that large moves can be made. 3. If the ADX rallies from below the two DMI lines, it istelling us that a trend is starting and it is time to pay attention. 4. When the ADX is above both DMI lines and turns down it means the trend is weakening and its time to take profits. 5. When the ADX is declining the market is becoming less directional and it is better not to use a trend-following method like the ADX. The ADX has been popularized by Linda Raschke and Larry O’Connor in their joint venture, Street Smarts. They call it the “holy grail” (tongue-in-cheek, of course, since there is no real holy grail) system. It’s quite simple, really – as many good systems are: 1. Find a market (stock, index, futures) that is trending 2. Wait for it to pull back to support 3. Buy it when the trend resumes. The system I am profiling in the Market Monitor is based on the ADX and I use an ADX of 30 or above to identify a trending market, then a pullback identified by the 5 min bar in relation to the 4 period moving average and finally a resumption of that trend. Hopefully this article did not get too heavy and was helpful Remember plan your trade and trade your plan Jane ------------------------------------------------------------ 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=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Sunday 06-15-2003 Sunday 5 of 5 In Section Five: Covered Calls: Success With Covered Calls Naked Puts: A Unique Approach Spreads/Straddles/Combos: A Pause In The Rally! Updated In The Site Tonight: Market Posture: Market Catches Its Breath ------------------------------------------------------------ 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=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: Success With Covered Calls By Mark Wnetrzak This week, we continue our strategy introduction for new readers of the Option Investor Newsletter. If you are relatively inexperienced with options, you probably think they are very risky. However, you also know that people regularly make money with options. What makes these traders successful while others fail? As a group, profitable traders have a number of things in common, the most important of which is a sound and sensible method for managing the positions in their portfolio. The great thing about trading "covered" calls is almost anyone can become an expert with this strategy, even with very limited experience in options. On a relative basis, it doesn't require much time because once the position has been initiated, you can place closing orders at key technical points in the price range of the underlying issue, or you can watch the stock for changes in trend or character, using a mental stop to signal exit trades. Of course, losses will occur, despite the fact that the strategy is conservative, and a painful lesson will transpire the first time you delay your exit from a losing trade. After you have been around the options market for awhile, you will soon learn that it doesn't matter what method you favor, losses are simply part of the game. One problem that new traders must overcome is learning to close losing plays early, while the capital drawdown is still relatively small. The simple fact is, there is no good reason to stay in a losing position when there are so many other viable plays that deserve your time and money. The best (and most profitable) solution is to accept your losses, learn from your mistakes and evaluate each one critically, then move on! Success will not come immediately so you must have patience and continue to work hard, learning the fundamentals of the options market and gaining skills that other profitable traders exhibit on a daily basis. Indeed, too many new investors give up after a few losing plays, long before they have time to learn (and absorb) the various methods required for profitable trading. Once you understand that losses are simply part of doing business, you can move on to the "nuts and bolts" of position management. With covered-calls, the key to success is keeping losses to a minimum because there are never any big winners to offset the big losers. That is also why correctly managing your positions is one of the crucial requirements for achieving consistent profits with this strategy. As I mentioned earlier, successful traders have a number of common traits and by the same token, there is a reason why the majority of people lose money with options. Most of them have yet to learn the #1 secret of profitable trading: The market will always prevent the uneducated masses from making money while consistently rewarding the astute professional minority. If this is the case (and I assure you it is), the first prerequisite for long-term success is knowledge. Buying and selling stocks may be a simple technique but when you add options to the mix, the game becomes much more complex. A trader must completely understand any strategy being used, including its advantages and weaknesses. Obviously, you can't make good decisions without knowledge of the mechanics of a specific technique and the best traders are those who are acutely aware of how best to overcome the shortcomings of their particular approach. Since limiting losses is a major goal for covered-call writers, it stands to reason that every position should have a predetermined exit point. The majority of market professionals use protective stop-orders with their positions but the retail trader is far less proficient in this practice. Using stop-orders eliminates the risk of emotional or reaction-based judgments in difficult situations and removes fear, hope and greed from the entire equation. The consistent use of stop-orders also provides a mechanical and disciplined method for achieving profits. As you might expect, allowing the market to make the exit decision is much more precise than relying on our complex human intuition. Just as setting stops on each individual position is an absolute must, a maximum allowable loss must be considered when managing portfolio positions. The rule is simple: Never trade with more money than you can reasonably afford to lose and always maintain a reasonable cash reserve. When establishing position size and collateral requirements, ensure that funds for active trades are not co-mingled with capital for other functions. It is also very important to set a "loss limit" at the beginning of each month or option expiration period. When this level is breached, trading should be halted for the duration of that period. Of course if your losses are consistently more than your gains, stop trading! Step back and take some time off. When you are ready to try again, evaluate your current approach and review the steps that will be taken to avoid losses. When you begin to make money, put some of the profits in a reserve account, just in case there are any unexpected developments in the future. Next week, we'll continue our discussion of position management and the most common adjustment techniques for covered-calls. 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 SUPG 5.04 6.50 JUN 5.00 0.65 0.61* 20.1% ARIA 3.37 4.40 JUN 2.50 1.05 0.18* 11.2% LGTO 7.60 8.08 JUN 7.50 0.45 0.35* 7.1% IPXL 7.86 11.21 JUN 7.50 0.80 0.44* 7.0% PLUG 5.08 5.11 JUN 5.00 0.35 0.27* 6.4% MOSY 7.50 8.12 JUN 7.50 0.60 0.60* 6.3% IDNX 5.60 6.22 JUN 5.00 0.90 0.30* 5.5% CBST 10.79 12.95 JUN 10.00 1.15 0.36* 5.4% TER 13.06 16.53 JUN 12.50 1.40 0.84* 5.2% FCS 12.55 12.55 JUN 12.50 0.60 0.55* 5.2% OVER 14.55 16.68 JUN 12.50 2.75 0.70* 5.2% OVER 17.80 16.68 JUN 15.00 3.30 0.50* 5.0% MDR 5.08 6.00 JUN 5.00 0.40 0.32* 5.0% AWE 7.64 7.51 JUN 7.50 0.45 0.31* 4.9% PLUG 5.39 5.11 JUN 5.00 0.65 0.26* 4.8% FEIC 17.65 18.55 JUN 17.50 0.85 0.70* 4.7% FFIV 15.45 16.79 JUN 15.00 1.30 0.85* 4.4% GNTA 8.78 14.21 JUN 7.50 1.70 0.42* 4.3% MRVL 26.72 30.57 JUN 25.00 3.10 1.38* 4.2% MLNM 15.55 16.82 JUN 12.50 3.40 0.35* 4.2% CELG 31.48 33.83 JUN 30.00 2.80 1.32* 4.0% GP 17.99 17.75 JUN 17.50 1.40 0.91* 4.0% BRCM 21.40 24.65 JUN 20.00 2.25 0.85* 3.9% ALKS 12.84 12.25 JUN 12.50 0.95 0.36 3.4% PEGS 13.00 14.89 JUN 12.50 0.85 0.35* 3.2% NOR 2.67 2.25 JUN 2.50 0.40 -0.02 0.0% SEBL 10.98 10.85 JUL 10.00 1.65 0.67* 5.2% MTON 5.60 5.34 JUL 5.00 0.90 0.30* 4.6% RHAT 8.27 8.21 JUL 7.50 1.20 0.43* 4.4% EDS 21.99 22.32 JUL 20.00 3.00 1.01* 3.9% IMMU 6.91 7.59 JUL 5.00 2.15 0.24* 3.7% ASIA 5.97 5.75 JUL 5.00 1.15 0.18* 2.7% QSFT 12.58 11.99 JUL 12.50 1.00 0.41 2.6% * Stock price is above the sold striking price. Comments: Is it profit-taking or is the recent wild-bull move nearing its end? Maybe both? As always, the next few days should offer some clues. With one week until expiration, the June issues in the model covered-call portfolio continue to benefit from the bullish environment. However, always monitor closely any issues that are acting weaker than expected (especially if you do NOT want to own the stock). Our early-exit watch list includes: NorthWestern (NYSE:NOR), Alkermes (NASDAQ:ALKS), FEI Company (NASDAQ:FEIC), and Fairchild Semiconductor (NYSE:FCS). FreeMarkets (NASDAQ:FMKT) is shown closed as the mid-week rally offered a reasonable chance to exit the position painlessly. As for the July positions, Quest Software (NASDAQ:QSFT) continues to find resistance near $13.00 problematic and could test near-term support around $11.50. Positions Previously Closed: FreeMarkets (NASDAQ:FMKT) and Abgenix (NASDAQ:ABGX) -- a Murphy's Law contender as it remains profitable. 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 MIR 2.78 JUL 2.50 MIR GZ 0.65 6238 2.13 35 15.1% DNDN 7.66 JUL 7.50 UKO GU 1.05 285 6.61 35 11.7% BEAV 2.69 JUL 2.50 BQV GZ 0.35 309 2.34 35 5.9% WEBX 13.90 JUL 12.50 UWB GV 2.10 649 11.80 35 5.2% SEBL 10.85 JUL 10.00 SGQ GB 1.40 6828 9.45 35 5.1% ASIA 5.75 JUL 5.00 EUJ GA 1.00 410 4.75 35 4.6% MHR 8.11 JUL 7.50 MHR GU 0.95 75 7.16 35 4.1% 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). ***** MIR - Mirant $2.78 *** Cheap Speculation: Part I *** Mirant (NYSE:MIR) is a global competitive energy company. The company delivers value by integrating an extensive portfolio of power and natural gas assets with risk management and marketing expertise. Mirant has facilities in North America, the Caribbean, Europe and Asia. As of December 31, 2001, the company owned or controlled more than 22,000 MW of electric generating capacity, with approximately 6,800 MW under development. On January 19, 2001, the company announced, as part of its separation from Southern Company, that it was changing its name from Southern Energy to Mirant Corporation. Mirant is trying to complete a debt exchange offer and a bank credit refinancing in an effort to stave off bankruptcy amidst some resistance from bondholders and creditors. The stock continues to forge a Stage I base and this position allows traders a reasonable way to speculate on the company's future with a cost basis near technical support. JUL-2.50 MIR GZ LB=0.65 OI=6238 CB=2.13 DE=35 TY=15.1% ***** DNDN - Dendreon $7.66 *** Hot Sector! *** Dendreon (NASDAQ:DNDN) is devoted to the discovery as well as development of novel products for the treatment of diseases through its manipulation of the immune system. Dendreon's product pipeline is focused on cancer, and includes therapeutic vaccines, monoclonal antibodies and a pathway to small molecules. Their most advanced potential products are therapeutic vaccines that stimulate a patient's immunity for the treatment of cancer. Provenge is a therapeutic vaccine for the treatment of prostate cancer and is in Phase III clinical trials, the final stage of product development. The company is conducting Phase II clinical trials for Mylovenge, its therapeutic vaccine for the treatment of multiple myeloma, and Phase I clinical trials for APC8024, its therapeutic vaccine for the treatment of breast, ovarian and colon cancers. Shares of DNDN surged this week after the company said U.S. regulators have agreed that a redesigned trial of its experimental prostate cancer drug Provenge will serve as the basis for a new drug application. The company also raised $26.7 million in a stock sale, part of which will be used to develop the company's investigational cancer vaccine, Provenge. We simply favor the break-out (on heavy volume) above resistance near $6.50, which suggests further upside potential. JUL-7.50 UKO GU LB=1.05 OI=285 CB=6.61 DE=35 TY=11.7% ***** BEAV - $2.69 BE Aerospace *** Cheap Speculation: Part II *** BE Aerospace (NASDAQ:BEAV) manufactures cabin interior products for commercial aircraft and business jets and distributes aftermarket fasteners. The company sells its manufactured products directly to most of the world's major airlines and airframe manufacturers, and a variety of general aviation customers. The company's major product categories include commercial aircraft seats; aircraft food and beverage preparation and storage equipment; both chemical and gaseous aircraft oxygen delivery systems; business jet and general aviation interior products. The current technical outlook for BE is "recovering" and our position offers speculators excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. Target-shooting a lower "net debit" will raise the potential yield and lower the cost basis in the position. JUL-2.50 BQV GZ LB=0.35 OI=309 CB=2.34 DE=35 TY=5.9% ***** WEBX - WebEx Communications $13.90 *** On The Mend? *** WebEx (NASDAQ:WEBX) develops and markets services that allow users to conduct meetings and share software applications, documents, presentations and other content on the Internet using a standard Web browser. Integrated telephony and Web-based audio and video services are also available using telephones, computer Web-cameras and microphones. The company's activities have been focused on continuing to enhance and market its WebEx Interactive Services and its WebEx Multimedia Switching Platform, developing and deploying new services, expanding its sales and marketing organizations and deploying its global WebEx Media Tone Network. The company sells WebEx Meeting Center, WebEx Meeting Center Pro, WebEx Training Center, WebEx Support Center, WebEx OnStage and WebEx Enterprise Edition. It also provides a service called WebEx Business Exchange to existing customers. The company recently announced a new deal with Yahoo (NASDAQ:YHOO) to integrate instant messaging into business applications and allow them to be shared. WebEx continues to forge a Stage I base and the recent move back above its 150-day MA bodes well for the future. Investors can speculate on the company's share value with this conservative position. JUL-12.50 UWB GV LB=2.10 OI=649 CB=11.80 DE=35 TY=5.2% ***** SEBL - Siebel Systems $10.85 *** Merger-Mania! *** Siebel (NASDAQ:SEBL) is a provider of e-business applications software and is principally engaged in the design, development, marketing and support of Siebel eBusiness Applications. This family of enterprise applications software enables a company to better manage its customer, partner and employee relationships. Siebel eBusiness Applications are designed to meet the information system requirements needed to manage these relationships for organizations of all sizes, from small businesses to the largest multinational organizations and government agencies. With the attempted buyouts by PeopleSoft (buying J.D. Edwards) and Oracle (a hostile attempt for Peoplesoft -- who is buying J.D. Edwards), speculators are betting on who is next. This position simply offers a way to profit from current bullish trend with a cost basis near technical support. JUL-10.00 SGQ GB LB=1.40 OI=6828 CB=9.45 DE=35 TY=5.1% ***** ASIA - AsiaInfo $5.75 *** Bottom-Fishing *** AsiaInfo Holdings (NASDAQ:ASIA) is a provider of telecommunications network integration services and software solutions in China. The company's operations are organized as two strategic business units, Communications Solutions and Operation Support System Solutions (OSS). The Communications Solutions business unit offers network, service application, security and monitoring solutions. The OSS Solutions unit includes the AsiaInfo's highly scalable software, which can automate a telecom carrier's key business processes such as customer care and billing, order fulfillment and customer relationship management. ASIA conducts most of its operations through two wholly owned subsidiaries, AsiaInfo Technologies (China) and AsiaInfo Management Software. AsiaInfo has rallied strongly on no news and moved significantly above a resistance area near $5.00 (and now a support area). This position offers a method to conservatively speculate on the reason for the huge move with a cost basis near support. Targeting a lower price in the stock or a higher price in the option (legging-in) could offer a favorable cost basis -- much better than the one listed below. JUL-5.00 EUJ GA LB=1.00 OI=410 CB=4.75 DE=35 TY=4.6% ***** MHR - Magnum Hunter $8.11 *** A Natural Gas Hedge *** Magnum Hunter Resources (MHR:NYSE) is an independent energy company engaged in the exploration, exploitation and development, acquisition and operation of oil and gas properties with a geographic focus in the mid-continent region, Permian Basin Region, Gulf Coast Region and the Gulf of Mexico. Hunter Gas Gathering, a wholly owned subsidiary of the company, owns three gas gathering systems located in Oklahoma, Texas and Arkansas, none of which are subject to regulation by the Federal Energy Regulatory Commission (FERC) and ownership interests in four gas processing plants. With three new field discoveries and all the hype on the rising price of natural gas, this position offers investors a method to hedge against the broader market while obtaining a favorable cost basis in a bullish stock. JUL-7.50 MHR GU LB=0.95 OI=75 CB=7.16 DE=35 TY=4.1% ***** ***************** 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 IMMU 7.59 JUL 7.50 QUI GU 1.00 1390 6.59 35 12.0% COB 8.40 JUL 7.50 COB GU 1.80 1570 6.60 35 11.9% IPXL 11.21 JUL 10.00 UPR GB 2.00 339 9.21 35 7.5% AZPN 5.01 JUL 5.00 ZQP GA 0.40 0 4.61 35 7.3% ONXX 12.96 JUL 12.50 OIQ GV 1.35 1041 11.61 35 6.7% HOFF 5.44 JUL 5.00 UHH GA 0.80 418 4.64 35 6.7% MU 13.08 JUL 12.50 MU GO 1.40 24495 11.68 35 6.1% NWAC 10.71 JUL 10.00 NAQ GB 1.35 525 9.36 35 5.9% ULTE 13.00 JUL 12.50 QTQ GV 1.25 354 11.75 35 5.5% MCDT 13.19 JUL 12.50 DXZ GV 1.40 2007 11.79 35 5.2% CAL 14.54 JUL 12.50 CAL GV 2.75 587 11.79 35 5.2% VANS 7.85 JUL 7.50 VQG GU 0.75 186 7.10 35 4.9% SUNW 5.34 JUL 5.00 SUQ GA 0.60 65186 4.74 35 4.8% ***************** NAKED PUT SECTION ***************** Options 101: A Unique Approach By Ray Cummins One of our readers offered an interesting twist on the strategy of writing "naked" puts. Ray, You talk a lot about portfolio management and ways to exit naked puts but one thing I rarely see is a discussion on entering new positions. Since this strategy is all about keeping gains and limiting losses, I thought you might want to hear about a method I use for selling puts. The first thing you should realize is this technique is always predicated on the fact that you might own the stock. With naked puts, I like to think I am an insurance salesman and I am paid money for the possibility of buying the stock. People might say that is risky but it's no different than buying a stock outright because it can go to zero whether you buy it with a limit order or sell a put that is exercised. The approach I take is sorta like dollar cost averaging but with options instead of stocks. First I pick the candidates for naked puts, then I place an order to sell half as many contracts as I want for the entire position; usually 5 contracts to start. After the order is filled, I wait. If these options expire, I move on to other stocks with cash in my pocket. On the other hand, if I get assigned I immediately sell 5 more puts -- usually just out of the money. I also sell 5 calls at the same time, also slightly out of the money. The puts are covered with collateral and the calls are covered with the stock I just bought with the assigned options. From there, the outcome is fairly simple because the stock goes up or down. If it goes up, my calls are assigned and my puts expire. When it goes down, at least I have some extra money to put against the basis of the stock -- which I was willing to own anyway -- and I will continue to write calls against it until I recover my loss. This method has worked pretty well through the bear market, but I will admit I still have some losers in my portfolio. I also think there comes a point when you have to cut your losses, no matter what you think about the future of a particular company. I just need to learn to do that more often with my own plays. A combination of good money management, which you always stress in your articles, and a consistent entry and exit system seems to be the best way for people to be make money trading options. I think this approach qualifies on both counts and it certainly has helped improve my success rate with selling puts. Let me know what you think -- I value your comments. PE Hello PE, Thanks very much for a wonderful explanation of systematic put writing. While not one of the most well-known techniques, the strategy is a great way to sell puts with less risk, especially on volatile issues that have high premiums. There is also some versatility to this method in that a trader can use different time frames or strike prices to achieve a specific risk-reward outlook. Keep up the good work and I look forward to hearing about any changes or variations that improve your results with this unique approach to selling naked puts. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield IMCLE 28.50 34.92 JUN 22.50 0.50 0.50* 3.3% 11.7% USG 11.85 11.50 JUN 7.50 0.35 0.35* 4.3% 11.2% CTIC 11.96 13.02 JUN 10.00 0.30 0.30* 3.5% 10.8% ANPI 28.27 41.00 JUN 22.50 0.80 0.80* 3.2% 10.8% IMCLE 38.39 34.92 JUN 30.00 0.40 0.40* 2.9% 10.8% CTIC 10.21 13.02 JUN 7.50 0.25 0.25* 3.0% 9.5% ANPI 25.20 41.00 JUN 17.50 0.75 0.75* 3.2% 9.4% FLEX 10.50 10.26 JUN 10.00 0.25 0.25* 3.7% 9.2% IMCLE 21.20 34.92 JUN 15.00 0.50 0.50* 3.0% 9.2% CELG 34.76 33.83 JUN 30.00 0.40 0.40* 2.9% 9.1% BRCM 26.01 24.65 JUN 22.50 0.30 0.30* 2.9% 9.1% OVTI 28.64 29.15 JUN 22.50 0.80 0.80* 2.7% 8.9% APPX 27.77 37.11 JUN 22.50 0.65 0.65* 2.6% 8.7% SOHU 28.04 32.45 JUN 22.50 0.35 0.35* 2.3% 8.4% CYMI 34.51 30.17 JUN 30.00 0.35 0.35* 2.6% 7.9% NVDA 21.37 23.47 JUN 17.50 0.55 0.55* 2.3% 7.6% CELG 27.42 33.83 JUN 22.50 0.70 0.70* 2.3% 7.5% BSX 56.06 61.75 JUN 45.00 0.40 0.40* 1.9% 7.4% OVTI 30.92 29.15 JUN 25.00 0.45 0.45* 2.1% 7.3% ICOS 40.25 43.12 JUN 30.00 0.25 0.25* 1.8% 6.5% OSIP 26.08 34.52 JUN 22.50 0.40 0.40* 2.0% 6.2% SOHU 22.83 32.45 JUN 17.50 0.35 0.35* 1.8% 6.2% ICST 26.05 27.68 JUN 22.50 0.30 0.30* 2.0% 6.1% NVLS 34.67 35.29 JUN 30.00 0.40 0.40* 2.0% 6.0% CELG 31.10 33.83 JUN 25.00 0.35 0.35* 1.6% 5.9% ANPI 28.45 41.00 JUN 22.50 0.30 0.30* 1.5% 5.6% SFA 20.29 23.60 JUN 17.50 0.35 0.35* 1.8% 5.4% MERQ 42.26 41.00 JUN 37.50 0.30 0.30* 1.8% 5.2% NVDA 21.26 23.47 JUN 17.50 0.30 0.30* 1.5% 5.2% APPX 23.40 37.11 JUN 15.00 0.35 0.35* 1.7% 5.0% APPX 32.20 37.11 JUN 25.00 0.30 0.30* 1.4% 5.0% OVTI 35.89 29.15 JUN 30.00 0.70 -0.15 0.0% 0.0% ITMN 23.89 16.93 JUN 20.00 0.60 -2.47 0.0% 0.0% ITMN 25.76 16.93 JUN 22.50 0.60 -4.97 0.0% 0.0% * Stock price is above the sold striking price. Comments: There was no "Joy in Mudville" Friday as the portfolio endured it largest loss in many months. The source of grief was none other than Intermune (NASDAQ:ITMN), a biotechnology stock that cratered on unfavorable news, losing a third of its value after the company cut its 2003 sales forecast for their flagship drug, Actimmune. There was little indication of "bad" news prior to the announcement and the sell-off was swift and severe. Adept traders were able to limit losses somewhat but the portfolio summary reflects the potential outcome when you write "naked" puts -- you may eventually own the stock, and at a price that is far less than what you paid for it. This is also a good example of why it's important to have a diverse, well-balanced portfolio, where one losing position loss does not offset all your previous gains. Candidates for early exit include Cymer (NASDAQ:CYMI) and Omnivision (NASDAQ:OVTI). Previously Closed Positions: Artisan (NASDAQ:ARTI) and Cyberonics (NASDAQ:CYBX), both of which are profitable, and Genesis Microchip (NASDAQ:GNSS). 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 GNTA 14.21 JUL 10.00 GJU SB 0.50 593 9.50 35 4.6% 13.0% CBST 12.95 JUL 10.00 UTU SB 0.40 132 9.60 35 3.6% 11.6% AMLN 25.45 JUL 20.00 AQM SD 0.45 405 19.55 35 2.0% 7.1% MEDI 37.71 JUL 30.00 MEQ SF 0.60 2152 29.40 35 1.8% 6.4% SOHU 32.45 JUL 22.50 UZK SX 0.50 5674 22.00 35 2.0% 6.2% CTSH 24.25 JUL 20.00 UPU SD 0.40 3681 19.60 35 1.8% 5.9% NTES 33.70 JUL 25.00 NQG SE 0.45 342 24.55 35 1.6% 5.4% CVTX 34.43 JUL 25.00 UXC SE 0.45 74 24.55 35 1.6% 5.3% 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). ***** GNTA - Genta Incorporated $14.21 *** Biotech Buying Spree! *** Genta Incorporated (NASDAQ:GNTA) is a biopharmaceutical company with a diversified product portfolio that is focused on delivering innovative products for the treatment of patients with cancer. The company's research platform is anchored by two major programs that center on oligonucleotides (RNA/DNA-based medicines) and small molecules. Genasense (oblimersen sodium), the firm's lead compound from its oligonucleotide program, is being developed with Aventis and is currently undergoing late-stage, Phase 3 clinical testing. The leading drug product in Genta's small molecule program is Ganite(gallium nitrate injection), which the company intends to launch this year for treatment of cancer-related hypercalcemia that is resistant to hydration. GNTA shares have been "on the move" in recent weeks, doubling in value since April. Traders who want to participate in the rally in a conservative manner can use this position to establish a cost basis near $10 in the volatile issue. JUL-10.00 GJU SB LB=0.50 OI=593 CB=9.50 DE=35 TY=4.6% MY=13.0% ***** CBST - Cubist Pharmaceuticals $12.95 *** 52-Week High! *** Cubist Pharmaceuticals (NASDAQ:CBST) is focused on becoming a global leader in the research, development and commercialization of novel pharmaceuticals to combat serious and life-threatening infections. Cubist has submitted a New Drug Application with the FDA for Cidecin (daptomycin for injection) for the treatment of complicated skin and skin structure infections (cSSSI) and is conducting additional Phase 3 studies under the FDA's priority review status. Cubist's pipeline includes multiple pre-clinical candidates, including CAB-175, a next generation cephalosporin antibiotic that has demonstrated unique in-vitro activity against methicillin-resistant Staphylococcus aureus (MRSA), and an oral version of ceftriaxone (OCTX), a broad-spectrum cephalosporin antibiotic. Cubist is another biotechnology stock with excellent upside potential and traders can speculate on its future share value with this position. JUL-10.00 UTU SB LB=0.40 OI=132 CB=9.60 DE=35 TY=3.6% MY=11.6% ***** AMLN - Amylin Pharmaceuticals $25.45 *** More Biotech *** Amylin Pharmaceuticals (NASDAQ:AMLN) is a biopharmaceutical firm engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes and other metabolic diseases. The company has two lead drug candidates in late-stage development for the treatment of diabetes, SYMLIN (pramlintide acetate) and exenatide, formerly referred to as AC2993 (synthetic exendin-4). Amylin has received a letter from the FDA indicating that SYMLIN is approvable for marketing in the United States as an adjunctive therapy with insulin, subject to satisfactory results from additional clinical trials. The company's second candidate, exenatide, is in pivotal Phase III clinical trials. AMLN shares have rallied over the past two weeks and part for the reason may be the firm's upcoming investor conference in conjunction with the 63rd Scientific Sessions of the American Diabetes Association. Traders who like the outlook for the issue should consider this position. JUL-20.00 AQM SD LB=0.45 OI=405 CB=19.55 DE=35 TY=2.0% MY=7.1% ***** MEDI - MedImmune $37.71 *** FluMist Speculation! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with a range of unique products on the market and a diverse product pipeline. The firm is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease, immune regulation and cancer. MedImmune actively markets three products, Synagis, Ethyol and CytoGam and MEDI's Chief Executive David Mott expects the FDA to approve its inhaled influenza vaccine FluMist sometime this quarter. MedImmune will co-market the vaccine with Wyeth and the companies expect to provide the vaccine initially to healthy people between 5 and 49 years old, which will mean a potential market of 160 million people a year in the U.S. FluMist could be the second blockbuster product for MEDI and traders can speculate on its potential approval with this position. JUL-30.00 MEQ SF LB=0.60 OI=2152 CB=29.40 DE=35 TY=1.8% MY=6.4% ***** SOHU - Sohu.com $32.45 *** 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. JUL-22.50 UZK SX LB=0.50 OI=5674 CB=22.00 DE=35 TY=2.0% MY=6.2% ***** CTSH - Cognizant Tech. $24.25 *** Solid Outlook! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. Cognizant recently published data suggesting is enjoying a strong quarter and the firm also revised its guidance upwards for the next 3 months. The company says it is also optimistic about growth prospects for the rest of 2003 and 2004 and anticipates that operating margins will remain stable. Investors with a similar outlook can establish a low risk cost basis in the issue with this position. JUL-20.00 UPU SD LB=0.40 OI=3681 CB=19.60 DE=35 TY=1.8% MY=5.9% ***** NTES - NetEase.com $33.70 *** China Internet Revolution *** NetEase.com (NASDAQ:NTES) is a China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. The NetEase Web sites, operated by a company affiliate, organize and provide access to 18 content channels through distribution arrangements with more than one hundred international and domestic content providers. In addition, the NetEase Internet sites offer a variety of products and services, including Instant Messaging (Popo), Dating, Love, Alumni and Personal Home Page. These products and services enable users to communicate about interests and areas of expertise. At the end of March 2003, the number of registered users of the NetEase Web sites reached 114 million with the average number of daily page views over 370 million. Profits and revenue have been expanding rapidly for NetEase.com due to the popularity of online games and activities in China. Net profit for the first three months of 2003 totaled $8.3 million, compared with a loss of $2.1 million a year earlier, while revenue rose almost five-fold to $14.2 million. Investors who like the fundamental outlook for this company can speculate on its future share value with this position. JUL-25.00 NQG SE LB=0.45 OI=342 CB=24.55 DE=35 TY=1.6% MY=5.4% ***** CVTX - CV Therapeutics $34.43 *** Rally Mode! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's New Drug Application (NDA) for Ranexa (ranolazine) for the treatment of chronic angina has been filed at the U.S. FDA. Tecadenoson (CVT-510), an A1-adenosine receptor agonist, is being developed for the potential reduction of rapid heart rate during atrial arrhythmias. CVT-3146, an A2A-adenosine receptor agonist, is being developed for the potential use as a pharmacologic agent in cardiac perfusion imaging studies. Adentri, an A1-adenosine receptor antagonist, is being developed by the company's partner, Biogen, for the potential treatment of acute and chronic congestive heart failure. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into human clinical testing. Shares of CVTX slumped Friday after the company announced it will sell $100 million of 2.00% Senior Subordinated Convertible Debentures due 2023 through a private placement. However, the issue is still in a strong upward trend and traders who think the rally will continue should consider this position. JUL-25.00 UXC SE LB=0.45 OI=74 CB=24.55 DE=35 TY=1.6% MY=5.3% ***** ***************** 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 ENZ 27.43 JUL 22.50 ENZ SX 0.75 195 21.75 35 3.0% 9.6% PDLI 17.58 JUL 15.00 PQI SC 0.50 198 14.50 35 3.0% 8.8% ICOS 43.12 JUL 35.00 IIQ SG 1.00 1680 34.00 35 2.6% 8.6% BONZ 12.99 JUL 10.00 QBN SB 0.25 30 9.75 35 2.2% 7.6% PSTI 11.01 JUL 10.00 MQA SB 0.30 0 9.70 35 2.7% 7.1% IMCLE 34.92 JUL 25.00 QCI SE 0.60 4901 24.40 35 2.1% 6.9% AGEN 15.45 JUL 12.50 QHL SV 0.25 15 12.25 35 1.8% 6.2% TYC 19.30 JUL 17.50 TYC ST 0.45 20831 17.05 35 2.3% 6.1% NPSP 26.62 JUL 22.50 QKK SX 0.45 25 22.05 35 1.8% 5.6% TELK 17.28 JUL 15.00 ZUL SC 0.30 322 14.70 35 1.8% 5.3% MSTR 39.15 JUL 30.00 EOU SF 0.45 399 29.55 35 1.3% 4.7% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Pause In The Rally! By Ray Cummins A slump in consumer sentiment derailed the summer rally Friday, with traders taking profits on news that Americans are guarding their wallets until the U.S. economy shows tangible signs of a recovery. The Dow Jones industrial average retreated 79 points to 9,117 on weakness in AT&T (NYSE:T), SBC Communications (NYSE:SBC), General Motors (NYSE:GM) and International Paper (NYSE:IP). The NASDAQ Composite ended down 27 points at 1,626 with computer hardware and wireless shares among the worst performers. The broader S&P 500-stock index slid 9 points to 988 as sellers emerged in auto manufacturers, retail apparel, oil & gas services, tobacco, paper, and aluminum shares. Volume was active, with 1.26 billion shares changing hands on the New York Stock Exchange while 1.82 billion shares traded on the NASDAQ. Declining issues outpaced advancing issues by more than 2 to 1 in both markets. U.S. Treasuries edged higher as investors bet that the Fed would not only lower interest rates further but keep them down for some time in the future. The pressure for a rate cut was most evident in the 2-year note where yields slipped to 1.07%, a new all-time low. The 30-year bond was also higher at 119-23/32, taking its yield to 4.17% after hitting another record low of 4.16%. ***************** 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 91.07 JUN 60 65 0.55 64.45 $0.55 Open CECO 60.52 60.49 JUN 50 55 0.50 54.50 $0.50 Open FDC 40.22 42.65 JUN 35 37 0.30 37.20 $0.30 Open RCII 65.35 72.72 JUN 55 60 0.50 59.50 $0.50 Open ADTN 45.05 53.56 JUN 35 40 0.45 39.55 $0.45 Open KLAC 42.49 45.57 JUN 35 37 0.30 37.20 $0.30 Open LLTC 36.34 32.05 JUN 30 32 0.30 32.20 ($0.15) Open? ROST 40.09 41.16 JUN 35 37 0.40 37.10 $0.40 Open BSX 48.70 61.75 JUN 37 40 0.25 39.75 $0.25 Open UNH 95.41 100.90 JUN 85 90 0.55 89.45 $0.55 Open WLP 81.05 86.87 JUN 70 75 0.40 74.60 $0.40 Open BSX 50.51 61.75 JUN 40 42 0.25 42.25 $0.25 Open PHM 63.71 69.05 JUN 55 60 0.40 59.60 $0.40 Open BSX 50.51 61.75 JUN 40 42 0.25 42.25 $0.25 Open CYMI 33.31 30.17 JUN 25 30 0.50 29.50 $0.50 Open? GILD 52.50 53.81 JUN 45 47 0.25 47.25 $0.25 Open KLAC 46.23 45.57 JUN 40 42 0.30 42.20 $0.30 Open PIXR 56.55 59.10 JUN 45 50 0.25 49.75 $0.25 No Play MEDI 39.04 37.71 JUN 32 35 0.35 34.65 $0.35 Open AGN 77.24 79.04 JUL 65 70 0.50 69.50 $0.50 Open ERTS 72.35 72.53 JUL 60 65 0.55 64.45 $0.55 Open MEDI 39.04 37.71 JUN 32 35 0.35 34.65 $0.35 Open UNH 97.86 100.90 JUL 85 90 0.60 89.40 $0.60 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Linear Technologies (NASDAQ:LLTC) and Cymer (NASDAQ:CYMI) should be closed on further downside activity. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status PG 90.15 91.17 JUN 100 95 0.40 95.40 $0.40 Open MMM 122.81 127.80 JUN 135 130 0.50 130.50 $0.50 Open ANF 27.25 26.60 JUN 32 30 0.20 30.20 $0.20 Open GM 34.41 36.20 JUN 40 37 0.25 37.75 $0.25 Open JCI 81.61 85.49 JUN 90 85 0.55 85.55 $0.06 Open? KSS 51.22 49.45 JUN 60 55 0.55 55.55 $0.55 Open LLL 43.35 44.04 JUN 50 45 0.55 45.55 $0.55 Open? APC 44.46 45.72 JUL 50 47 0.40 47.90 $0.40 Open IBM 80.05 82.75 JUN 90 85 0.40 85.40 $0.40 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Positions in Nabors Industries (NYSE:NBR), which is positive, Barr Laboratories (NYSE:BRL), Cabot Micro (NASDAQ:CCMP), and Goldman Sachs (NYSE:GS) have previously been closed to limit losses. L-3 Communications (NYSE:LLL) and Johnson Controls (NYSE:JCI) remain on the "watch" list. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AXP 38.46 43.43 JUN 32 35 2.20 34.70 0.30 Open GENZ 41.47 46.30 JUN 35 37 2.20 37.20 0.30 Open BSX 46.91 61.75 JUN 37 40 2.25 39.75 0.25 Open MERQ 35.75 41.00 JUN 30 32 2.25 32.25 0.25 Open PNC 49.25 48.90 JUN 45 47 2.25 47.25 0.25 Open NBIX 56.84 55.06 JUL 45 50 4.25 49.25 0.75 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 54.08 JUN 60 55 4.50 55.50 0.50 Open HDI 40.81 43.72 JUN 45 42 2.10 42.90 (0.82) Closed LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Harley Davidson (NYSE:HDI) was previously on the "watch" list and the position should have been closed (or adjusted) when the issue moved above the sold strike at $42.50. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SMH 26.43 28.50 AUG 30 22 0.10 3.10 Open? MRVL 26.72 30.57 JUN 30 22 (0.20) 3.60 Open? ICOS 29.85 40.25 JUL 35 25 (0.40) 12.00+ Open? QCOM 33.55 32.99 JUL 37 30 0.10 0.40 Open? The position in Icos Corporation (NASDAQ:ICOS) did not offer the target entry price, but the play was incredibly profitable for traders who paid a small debit to open the speculative synthetic position. Qualcomm (NASDAQ:QCOM) has offered a favorable profit for short-term traders. The Silicon Laboratories (NASDAQ:SLAB) position, although profitable, 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 30.17 JUL-30C JUN-30C (0.70) 0.45 Open ESI 29.11 26.90 OCT-30C JUN-30C 1.35 1.60 Open CHKP 18.05 18.84 OCT-20C JUN-20C 0.70 1.60 Open GDT 39.98 39.95 OCT-45C JUN-45C 1.45 1.70 Open NSM 21.80 21.51 JAN-25C JUN-25C 2.10 2.50 Open BRCM 21.40 24.65 JAN-25C JUN-25C 2.15 3.25 Open SRNA 19.71 20.76 AUG-22C JUN-22C 0.70 0.90 Open VRTY 18.85 19.20 SEP-20C JUN-20C 1.00 1.25 Open VIA 44.95 45.88 AUG-47C JUN-47C 1.10 1.40 Open SEAC 11.26 10.56 OCT-12C JUN-12C 0.85 0.65 Open MCDT 13.47 13.19 OCT-15C JUN-15C 0.95 0.80 Open EDS 21.99 22.32 SEP-25C JUN-25C 1.00 1.00 Open BEAS 11.08 11.31 SEP-12C JUN-12C 0.95 0.90 Open A very profitable calendar spread in Intl. Business Machines (NYSE:IBM), as well as the Filenet (NASDAQ:FILE) position, have previously been closed. CREDIT STRANGLES **************** Symbol Pick Last Month SC SP Credit C/V G/L Status NXTL 13.60 14.47 JUN 15 12 0.75 0.30 0.45 Open? MGAM 24.53 23.90 JUN 25 22 1.90 0.90 1.00 Open? SC = Short Call SP = Short Put C/V = Current value G/L = Gain/Loss Traders should consider taking profits in these volatility plays. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status TYC 17.27 19.30 JUL 17.5 17.5 1.80 2.70 Open RJR 36.19 35.17 AUG 37.5 35.0 3.15 3.25 Open Questions & comments on spreads/combos to Contact Support ************* NEWS & EVENTS ************* We are happy to announce that Andrew Aronson and Alan Knuckman are rejoining the OIN team with a wonderful service for option traders. Andrew and Alan are experienced option principles, as well as long-time OIN associates, and they recently started a specialty brokerage for derivatives traders: OneStopOption. Their personal service will enable traders to be more confident, comfortable and successful with options. They will also help novice market players learn the "right" way to trade options with education and coaching for maximum portfolio performance. Alan and Andrew's expertise is a resource that will easily pay for itself thorough timely executions and the piece of mind that comes from someone watching your trades throughout the day. The commission rates are comparable to discount brokers but you get to speak directly with option professionals, not customer service clerks. Clients can call them directly to review positions and update orders and they also offer "auto-trading" for many of the plays in the newsletter. OneStopOption Strengths: * Dedicated option brokerage with "live" option principals/brokers * Order routing to "best-priced" exchange and timely executions * All types of orders (stop/limit/OCO) to encourage disciplined trading and proper money management * Advanced option trading level approval for inexperienced traders * Foreign accounts including Canada -- Futures trading available * Direct electronic trading and personalized customer services * Ability to filter recommendations and provide strategy advice * Free OIN subscription for those who qualify (based on account size and portfolio activity) Get Execution, Education, and Option Experience at OneStopOption Visit their new site -- www.onestopoption.com OneStopOption 141 W. Jackson Blvd Ste 1800-A Chicago, IL 60604 (888) 281-9569 (312) 528-3334 ************* 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. ***** BGEN - Biogen $46.25 *** Bullish Biotech! *** Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human healthcare. The firm derives revenues from sales of its Avonex (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis (MS) and from royalties on worldwide sales by its licensees of a number of products covered under patents it controls. In addition, Biogen has a number of ongoing research programs and a pipeline of development-stage products, the furthest along of which, Amevive (alefacept), is being considered for approval by the United States Food and Drug Administration and regulatory authorities in the European Union and Canada for the treatment of moderate to severe psoriasis. BGEN - Biogen $46.25 PLAY (conservative - bullish/credit spread): BUY PUT JUL-37.50 BGQ-SU OI=1197 ASK=$0.65 SELL PUT JUL-40.00 BGQ-SH OI=1077 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$39.75 ***** PRX - Pharmaceutical Resources $49.16 *** Rally Mode! *** Pharmaceutical Resources (NYSE:PRX), a holding company, develops, manufactures, and distributes generic pharmaceuticals through its wholly owned subsidiary, Par Pharmaceutical. Through its FineTech unit, PRX also develops and utilizes synthetic chemical processes to design and develop intermediate ingredients used throughout the production of finished products for the pharmaceutical industry. Pharmaceutical Resources currently manufactures and distributes over 163 products representing various dosages of 61 drugs. PRX - Pharmaceutical Resources $49.16 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-40.00 PRX-SH OI=36 ASK=$0.45 SELL PUT JUL-45.00 PRX-SI OI=21 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$44.40 ***** WLP - WellPoint Health Networks $86.87 *** Safe-haven Sector? *** WellPoint Health Networks (NYSE:WLP) serves the health care needs of more than 13 million medical members and over 49 million specialty members nationwide through Blue Cross of California, Blue Cross Blue Shield of Georgia, Blue Cross Blue Shield of Missouri, HealthLink and UNICARE. WellPoint offers a broad spectrum of quality network-based health products, including open access PPO, POS and hybrid products, HMO and specialty products. Specialty products include pharmacy benefit management, dental, medical management, vision, behavioral health, life and disability insurance, long term care insurance, flexible spending accounts, COBRA administration and Medicare supplements. WLP - WellPoint Health Networks $86.87 PLAY (conservative - bullish/credit spread): BUY PUT JUL-75.00 WLP-SO OI=1178 ASK=$0.50 SELL PUT JUL-80.00 WLP-SP OI=1476 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$79.45 ***** FNM - Fannie Mae $68.55 *** Trouble For Brother Freddie! *** Federal National Mortgage Association (NYSE:FNM), commonly known as Fannie Mae, is a company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to ensure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. Fannie Mae then purchases the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. FNM - Fannie Mae $68.55 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-80.00 FNM-GP OI=2732 ASK=$0.15 SELL CALL JUL-75.00 FNM-GO OI=4264 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$75.50 ***** GDT - Guidant $39.95 *** Legal Worries? *** Guidant Corporation (NASDAQ:GDT) pioneers lifesaving technology for cardiac and vascular patients. The company develops, makes and markets a broad array of products and services that enable less-invasive care for a number of the most threatening medical conditions. Guidant offers stent systems, as well as implantable defibrillator systems, implantable pacemaker systems, implantable cardiac resynchronization therapy, products for less-invasive endovascular procedures, including the treatment of abdominal aortic aneurysms, products to perform cardiac surgery procedures such as Off-Pump Coronary Revascularization with EndoScopic vessel harvesting and intravascular radiotherapy systems for artery disease. GDT - Guidant $39.95 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-50.00 GDT-GJ OI=0 ASK=$0.20 SELL CALL JUL-45.00 GDT-GI OI=1656 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$45.60 Editor's note: Guidant has a conference call scheduled for Monday morning to provide an update on recent developments. The firm may introduce new information during the meeting, thus traders should evaluate the character of the issue before entering the position. ***** KSS - Kohl's Corporation $49.45 *** Next Leg Down? *** Kohl's (NYSE:KSS) operates family-oriented, specialty department stores. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than traditional, full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Since 1992, the company has increased square footage an average of 22% per year, expanding from 79 stores located in the Midwest to a total of over 400 stores with a presence in six regions. New markets include Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. KSS - Kohl's Corporation $49.45 PLAY (conservative - bearish/credit spread): BUY CALL JUL-60.00 KSS-GL OI=6744 ASK=$0.25 SELL CALL JUL-55.00 KSS-GK OI=4745 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$55.55 ***** LOW - Lowe's Companies $44.15 *** Trading Range? *** With fiscal year 2002 sales of over $26 billion, Lowe's Companies (NYSE:LOW) is a FORTUNE 100 company that serves approximately nine million customers a week at more than 875 home improvement stores in 45 states. In 2003, FORTUNE named Lowe's America's Most Admired Specialty Retailer. Based in Wilkesboro, N.C., the 57-year old firm is the second-largest home improvement retailer in the world. A typical Lowe's home improvement warehouse stocks more than 40,000 items, with hundreds of thousands of items available through its special order system, and each store carries a large selection of brand-name merchandise. LOW - Lowe's Companies $44.15 PLAY (conservative - bearish/credit spread): BUY CALL JUL-50.00 LOW-GJ OI=2093 ASK=$0.15 SELL CALL JUL-47.50 LOW-GT OI=3120 BID=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$47.75 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** GILD - Gilead Sciences $53.81 *** AIDS Fighter! *** 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 $53.81 PLAY (conservative - bullish/debit spread): BUY CALL JUL-45.00 GDQ-GI OI=145 A=$9.70 SELL CALL JUL-47.50 GDQ-GT OI=115 B=$7.50 INITIAL NET-DEBIT TARGET=$2.15-$2.20 POTENTIAL PROFIT(max)=14% B/E=$47.20 *********************** 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. ***** DG - Dollar General $18.64 *** Cheap Speculation! *** Dollar General (NYSE:DG) is a Fortune 500 discount retailer with stores in 27 states. The firm is headquartered in Goodlettsville, Tennessee, with distribution centers in Kentucky, Oklahoma, Ohio, Virginia, Mississippi, Missouri, and Florida. Through its stores, Dollar General offers a focused assortment of consumable basic merchandise, including health and beauty aids, packaged food, home cleaning supplies, housewares, stationery, seasonal goods, basic clothing and domestics. Dollar General serves primarily low-, middle- and fixed-income families. DG - Dollar General $18.64 PLAY (very speculative - neutral/debit strangle): BUY CALL AUG-20.00 DG-HD OI=801 ASK=$0.60 BUY PUT AUG-17.50 DG-TW OI=582 ASK=$0.70 INITIAL NET-DEBIT TARGET=$1.15-$1.25 INITIAL TARGET PROFIT=$0.45-$0.70 Editor's note: We received some positive comments on last week's speculative strangle, so today we have another position with a favorable risk/reward outlook for aggressive volatility traders. ***** EXPE - Expedia $70.63 *** Expiration-Week Straddles! *** Expedia (NASDAQ:EXPE) offers travel planning services in the United States, the United Kingdom, Germany, Canada, France, Italy and the Netherlands. The firm offers airplane, hotel and car reservations, trip cancellation waivers and numerous smaller vacation and business travel services, such as Broadway shows and 24-hour business travel support that make the company a one-stop travel shop for leisure and business travelers. Expedia offers travel planning tools that let consumers compare the travel offerings of multiple suppliers and make an informed decision as to which offering best suits their individual needs. In addition, it offers consumers access to a wide range of published and negotiated rate offerings. It sells travel services of more than 450 airlines and 59,000 lodging properties, major car rental companies, numerous vacation packages and cruise lines and many destination-service merchants, such as restaurants, attractions and local transportation and tour providers. EXPE - Expedia $70.63 PLAY (very speculative - neutral/debit straddle): BUY CALL JUN-70.00 UED-FN OI=1461 ASK=$1.85 BUY PUT JUN-70.00 UED-RN OI=1761 ASK=$1.30 INITIAL NET-DEBIT TARGET=$3.00-$3.10 INITIAL TARGET PROFIT=$0.75-$1.25 ***** ------------------------------------------------------------ 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=oetics24 Note: Options involve risk. 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