The Option Investor Newsletter Monday 06-30-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Best Quarter Since 1998. Futures Wrap: End of the month Index Trader Wrap: See Note Weekly Fund Wrap: Mutual Funds Finish Week Lower Traders Corner: Discipline Failure Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 06-30-2003 High Low Volume Advance/Decline DJIA 8985.44 - 3.61 9068.05 8970.43 2.27 bln 1678/1564 NASDAQ 1622.80 - 2.46 1643.68 1621.44 2.08 bln 1596/1659 S&P 100 490.39 - 1.22 495.62 490.16 Totals 3274/3223 S&P 500 974.50 - 1.72 983.61 973.60 RUS 2000 448.37 - 0.38 452.64 446.20 DJ TRANS 2412.86 - 4.17 2432.56 2399.04 VIX 21.62 - 0.09 22.04 20.98 VXN 31.23 + 0.30 31.64 30.88 Total Volume 7,282M Total UpVol 3,666M Total DnVol 3,616M 52wk Highs 358 52wk Lows 30 TRIN 1.12 PUT/CALL 0.93 ******************************************************************* Best Quarter Since 1998. by James Brown Three months ago the Dow Jones Industrial Average had just closed at 7992. It had just retraced one half of its rally from the March lows near 7416 to its monthly high near 8522. Some traders were concerned that the close back under 8000 might be forecasting a retest of its recent (March) lows. Oh what a difference three months can make. In the last quarter we've seen the end of the Iraqi war, the passing of a $350 billion tax cut, a revival of corporate and investor interest in dividends, another interest rate cut by the FOMC, and a loudly declared (and loudly contested) end to the bear market. Oh, and if you missed it, it was the best quarter for the markets since late 1998. As of the close today the DJIA is up 7.7 percent for the year, the S&P 500 is up nearly 11 percent and the NASDAQ Composite is up more than 20 percent (YTD). However, at their recent highs two weeks ago both the S&P 500 index and the DJIA were up more than 25% from their March lows. Passing them both was the NASDAQ Comp with a 31 percent gain from its March low. Yup, it's been a pretty good quarter for equities. What came as a surprise to many market watchers was the general lack of buying pressure today. Some suspected that the last day of the quarter would be a strong one as funds did some last minute window dressing to spruce up their portfolios before mailing out their statements soon. It looks like money managers have learned their lesson and did their buying early this year, hence the strong first two weeks of June. That's not to say there wasn't any buying today - just the opposite occurred. This morning saw the beginning of a decent rally, as well as a mid- afternoon rally attempt. Unfortunately, both were met with selling pressure that left the major averages virtually unchanged, albeit slightly negative for the day. Market watchers suspect that the temptation to sell recent winners coupled with fund managers selling stocks that are being kicked off all 21 of the Russell indices outweighed the need to buy any stocks being added to the same indices. This index reshuffling contributed to the decent (summer) volume today with 1.8 billion shares trading on the NYSE and 1.96 billion traded on the NASDAQ. However, the market's indecisiveness is evident in its advance/decline numbers. The NYSE shows 1442 advancing issues and 1418 declining. The NASDAQ reported 1499 winners for 1568 losers. Chart of the DJIA Chart of the NASDAQ Chart of the SPX The big news today was the Chicago PMI report. Today's report was for June and showed minor growth, but it was growth nonetheless. May's number was 52.2 and June's PMI reading came in at 52.5, lead by an increase in manufactured goods. Numbers over 50 represent an expanding economic climate while numbers under 50 are recessionary. The New Orders section of the report showed a minor improvement from 54.6 in May to 54.8 in June. The last few months have shown a string of economic reports that indicate a very slow but improving U.S. economy. Today's PMI report merely reinforces that belief. Tomorrow investors get a chance to react to yet another economic report, this one being the ISM index due out tomorrow. The challenge that traders must face today is how to juggle the rise in stock prices. The markets have run up on the expectation that a second half recovery will finally make an appearance this year after being stood up the last two years in a row. The domestic economy is improving but at this glacial pace, stocks may be too expensive. We obviously won't know how the third quarter will be until it gets here, but guess what the stock market is going to base its reactions on since it discounts future events, not past events? Corporate guidance. The direction for the next couple of months will be dictated by what corporate America has to say regarding their earnings forecast for the next quarter (or two). As always it will make for an interesting earnings season. Speaking of earnings, second quarter announcements will begin after the fourth of July holiday but they don't really pick up speed until Monday, July 14th. This week is still prime time for an earnings warning announcement, at least for anyone who announces in the second half of the month. One earnings report a lot of tech investors will be watching is Intel Corp's (NYSE:INTC). INTC is expected to announce on Tuesday, July 15th, 2003 after the closing bell. Intel made headlines today as Clark Westmont, an analyst with Citigroup's Salomon Smith Barney, upgraded the stock from "in-line" to an "out-perform". Clark also added INTC to SSB's "recommended list" and predicted that INTC would raise their 2004 profit margins and dividends. Mr. Westmont's optimistic outlook for Intel included speculation that the company would meet or exceed Q2 estimates. He raised INTC's 2004 per-share earnings from 70 cents to 80 cents per share. Unfortunately, shares of INTC, which gapped up on the news, was unable to hold on to its gains and closed up just 24 cents or +1.16 percent at $20.81. The SOX semiconductor index added $0.23 to close at 359.69. Traders need to be careful here. Traditionally, the shortened July fourth week is a bullish one for Wall Street. However, given the extreme ramp up over the last quarter and the position of several major indices hovering anemically above support one needs to be careful when evaluating bullish plays. We would not be surprised to see funds immediately begin undressing their portfolios, especially those money managers who have profits to lose. TrimTabs, the preeminent source on fund flows and stock market liquidity, stated that they have turned "aggressively bearish" on equities. The research firm cites the deluge of new corporate debt offerings and drought of stock buybacks combined with an extreme case of bullish sentiment by investors is a contrarian recipe for market weakness. This is one time I'm apt to agree with them although my personal bias suggest the market top is either behind us or will be made in the next two to three weeks. Watch those stops! ************ FUTURES WRAP ************ End of the month Jonathan Levinson Today's session was choppy and unpredictable, with more tentative trendlines drawn on my ES chart than actual price bars, it seems. The highest volume of the day occurred after the cash close, as the fully-dressed windows began to be unwound. The ES plunged to a session low of 971 after the bell, and hovered, and then rocketed to 973.25 as I blinked at 4:15. 3 minute ES chart Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 987 979 975 967 963 YM03U 9079 9016 8980 8917 8881 NQ03U 1230 1218 1210 1197 1189 10 minute chart of the US Dollar Index The US Dollar Index spent the day selling off, beginning a gap fill below 94.80. The action was slightly bullish for gold and the CRB, very bullish for the precious metals indices. Daily chart of August gold Gold gave us a green day, fighting against its ongoing oscillator downphase. The 344 support level continues to hold, with today's low session low at 344.70. Most noteworthy, however, was the strength in the miners, with the Gold and Precious Metals Index (XAU) up 1.1 to 78.61, and the Goldbugs Index (HUI) up 2.47 to 148.97. Daily chart of the ten year note yield Treasuries found some buyers today for a change, and the bottom in the ten year note yield is beginning to look like a reverse head and shoulders bottom to me. If so, then today's countertrend dip should see the TNX reach a pattern target of 3.88%, if it fulfils. Daily NQ candles The daily candles illustrate the degree to which nothing happened today. The NQ was the only contract that printed an inside day, closing a couple of points in the green. 1202 was tested several times but barely cracked. 30 minute 20 day chart of the NQ The NQ continues to work within a potential head and shoulder- esque pattern, but the test will come at 1190. The ongoing downphases on the short and longer cycle oscillators (daily and 30 minute candle charts) suggests that we could see this test tomorrow. Daily ES candles Unlike the NQ contract, the S&P futures are much closer to a neckline test, and today's action wasn't pretty. There was a lower high, and lower low (after the cash close) and a slightly lower close. While the daily candles show no violation of the neckline, the 30 minute chart below is far less pretty. 20 day 30 minute chart of the ES You'd be very hardpressed to find anything bullish in this chart other than the so-far unviolated neckline in the 972 area. The right section of this formation is not a bull wedge, but, if anything, a descending triangle, which tends to break south. If it does, the head and shoulders target implies a 44 point drop below the neckline, if it plays out fully. Daily YM candles The daily trendline remains intact on the YM as well. Today's candle would have constituted an inside day, except that today's low of 8944 matched Friday's low, and while it wasn't a lower low, it wasn't higher either. Nevertheless, the cyclical picture is the same as for the other equity futures- in gear to the downside, except on the shortest intraday timeframes, where the post 4PM sellathon might have been a short term bottom on the 3 minute candles. 20 day 30 minute chart of the YM The bull wedge discussed over the weekend is not as clean as a descending triangle along the 23.6% fib line. The oscillators and price action so far just don't look bullish to me, but this has been a year of surprises. It will be far easier to predict direction below the h&s necklines. There's not much to say about today's unpleasant, jerky session. With the end of month antics played by funds not the least bit interested in actually purchasing value for their unitholders, it's difficult to read the market. Even Reuters ran a story this afternoon titled "Stocks up on Quarter-End Window Dressing". For tomorrow, I'll be watching the levels profiled. Below the necklines, I will be thinking aggressively bearish thoughts, and above, I'll remain antsy and uncertain. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_063003_1.asp ------------------------------------------------------------ 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: ------------------------------------------------------------ **************** WEEKLY FUND WRAP **************** Mutual Funds Finish Week Lower Mutual fund net asset values moved lower last week along with the global equity and fixed income markets. According to Lipper, the average large-cap core U.S. equity fund lost 1.7% over the weekly period, a little less than the 1.9% weekly decline by the S&P 500 index of large-cap U.S. stocks. The average international equity fund lost 2.4% last week, lower than the 2.8% decline by the MSCI EAFE index of foreign developed markets. Meanwhile, the average government and corporate bond fund lost in the neighborhood of 0.5%-0.6% over the week, per Lipper, matching the weekly decline by the Lehman Brothers Aggregate Bond Index of investment-grade U.S. bonds. The average high-yield fixed income fund had a negative 0.3% return. Global/international bond funds lost in the range of 1.3%-1.6% over the 5-day period, the biggest decliners over the 5-day period through June 27, 2003. Equity Fund Group Week YTD Selected Lipper Equity Indices (Jun-27) -1.3% +8.9% Balanced Fund Average -1.7% +9.7% Equity Income Fund Average -2.4% +9.6% International Fund Average -1.7% +10.3% U.S. Large-Cap (Core) Fund Average -0.6% +14.3% U.S. Mid-Cap (Core) Fund Average -0.3% +14.5% U.S. Small-Cap (Core) Fund Average -1.5% +13.4% U.S. Multi-Cap (Core) Fund Average -1.5% +22.6% Science & Technology Fund Average Each of Lipper's equity fund averages lost ground last week with international equity funds sustaining the week's greatest losses, off 2.4% on average. Salomon Brothers International Equity Fund, Lazard International Equity Fund, Fremont International Growth Fund and Wells Fargo International Equity Fund declined by 4.0% or more to lead the foreign equity group lower. Among U.S. stock funds, the week's biggest loser was the Frontier Equity Fund, down 11.8% over the week. Another aggressive small- cap fund, Polynous Growth Fund, lost 5.6%. However, hefty losses weren't confined to small-cap and technology funds. For example, ProFunds Ultra Dow 30 Fund posted a 4.7% negative return over the 5-day period through June 27, 2003. So, weekly losses were broad based. Fixed Income Fund Group Week YTD Selected Lipper Fixed Income Indices (Jun-27) -0.6% +4.5% Corporate A-Rated Debt Fund Average -0.0% +1.2% GNMA Fund Average -1.3% +8.0% Global Income Fund Average -0.3% +15.7% High Yield Fund Average -1.7% +8.3% International Income Fund Average -0.5% +4.6% Intermediate Investment Grade Fund Average -0.5% +2.4% U.S. Government Bond Fund Average U.S. fixed income funds generally lost less than 1.0% over the 5- day period through June 27, while global and international income funds lost more than 1.0%. Among U.S. fixed income funds, longer duration funds were hardest hit. For example, Vanguard Long-Term Bond Index Fund, Vanguard Long-Term Corporate Bond, and Vanguard Long-Term Treasury Fund each lost around 1.5% over the past week. Among global/international bond funds, the week's biggest decline was sustained by Prudential Global Total Return Fund, which ended the week down 3.2% (Class A shares). Numerous other funds within the group lost 2.0% or more for the week. Money Market Fund Group Yield Selected iMoneyNet Money Market Indices 0.64% All Taxable MMF Average 0.55% All Tax-Free MMF Average Current yields on money market funds will be coming down further following the Fed's decision last week to lower short-term rates by a quarter percent (0.25%). The iMoneyNet.com All Taxable MMF Average slid 0.03% last week, to 0.67%. The nation's largest retail money market fund, the Fidelity Cash Reserves Fund, sports a current 7-day simple yield of 0.92%, and a weighted-average maturity of 78 days. Low-cost Vanguard Prime Money Market Fund has a 7-day yield of 0.87%. They are two good money market funds. At 1.15%, PayPal Money Market Fund (402-935-7733) is one of four prime retail money market funds to still have a yield of at least 1.00%. Bunker Hill Money Market, Invesco Treasurers: MM Reserves and McMorgan Principal Preservation Fund are the three other MMF. Fund News, Etc. In Morningstar.com fund news, Morgan Stanley announced last week that the firm has hired Bill Ennis, who was CEO of the Evergreen Funds, as president of global services. He will oversee sales, distribution, and operations. Morgan Stanley also said it will merge two institutional small-cap growth fund products. Meanwhile, Franklin Templeton is re-opening its Micro-Cap Value Fund (FRMCX) as of June 30, 2003. It had been closed since Feb. 2002. According to Morningstar, it was one of the fund funds to post gains throughout the bear market of 2000-2002. According to the Investment Company Institute, stock funds had a net inflow of $12.1 billion in May 2003, following a $16 billion inflow in April 2003. Fixed income funds had an inflow of about $9 billion in May, following a $10.5 billion inflow in the month of April. Hybrid fund assets are also higher. Steve Wagner Editor, Mutual Investor email@example.com ------------------------------------------------------------ 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: ------------------------------------------------------------ ************** TRADERS CORNER ************** Discipline Failure by Mark Phillips mphillips@OptionInvestor.com I started this process of describing a futures trading plan with a clear picture of the steps I needed to go through and the proper order for doing so. I knew that it would be imperative to stick with a disciplined approach in order to clearly convey the strategy that I have adopted for my own futures trading. The first four installments went very well, as we covered much of the necessary background before heading pell-mell into the fun part, which is talking about charts and the actual trading strategy. But last week, that discipline broke down in a big way. We started out by describing the layout of my charting application, but then I got sidetracked into talking about several of the nuances of a specific day's trading signals. I think the discussion was actually fairly clear, except that I leaped past several important points, the most critical of which was actually describing the framework of the strategy I employ. OOPS! Well, tonight, I'll step back a bit and try to fill in some of the gaps left open in last week's article. The deeper we get into this discussion, the more necessary it becomes for those just joining us to catch up with the portion of the discourse that has already taken place. If you're one of those newcomers, please take the time to catch up using the links below. The Case For Futures http://www.OptionInvestor.com/traderscorner/tc_050503_1.asp Planning For The Future(s) http://www.OptionInvestor.com/traderscorner/tc_051203_1.asp Back To The Future(s) http://www.OptionInvestor.com/traderscorner/tc_060203_1.asp Getting Ready To Launch http://www.OptionInvestor.com/traderscorner/tc_060903_1.asp Painting A Picture http://www.OptionInvestor.com/traderscorner/tc_061603_1.asp This article was supposed to appear last week, but due to technical difficulties and my being on a short vacation, it didn't make it. So that puts us a week further behind in tying the various pieces together, but we're still making progress. So enjoy last week's article this week and I promise to have this week's installment ready for next week. Is that confusing enough? GRIN First off, let's finish describing how my charting application is set up. As I said last week, I run my charting application (I use Qcharts for those that are interested) on two 21" monitors. I've already described the setup on the two primary screens, the first of which gives me the micro view with 10, 5 and 2 minute charts of the ES contract, using various indicators detailed in the chart in last week's article. The second screen is devoted to monitoring breadth in the market, looking at 3 minute charts of the futures contract, ADVDECV and TICK for both the ES and NQ contracts. Even though I only trade the ES contract, monitoring both allows me to get a feel for whether the ES or NQ is the stronger or weaker index for the day. Divergence between the two can provide important clues as to whether strength or weakness may be transitory or persistent during the day. While I mentioned in passing that there was another "screen" to my workspace, I neglected to detail what is displayed there and how I use it. I have to scroll down to access this screen, but that isn't really a problem as this is the "big picture" portion of my workspace. It is very simple, with just 3 charts displayed. A daily, hourly and 30-minute chart of the ES, along with the same indicators shown on the shorter-term charts -- CCI (20), Stochastics (10,5,3), and MACD (8,18,6). Additionally, I show a faster Stochastics (5,3,3) on the daily chart, as I've found the added responsiveness gives me a heads up to a potential trend change earlier than the (10,5,3) setting. More important than what is displayed on this screen is how I use it. In an intraday trading environment, there clearly won't be much change in the daily chart between the open and close, but a quick look at this view gives me a good feel for the dominant near-term (3-5 day) trend. I know, when was the last time we saw a trend that lasted that long? PAINFUL GRIN! While it isn't an absolute, especially in the rather choppy trading environment of the past several weeks, when the daily oscillators are looking bullish, I'm looking predominantly for bullish trades. When it looks bearish, I lean towards bearish trades. Can a bearish trade be taken when the daily oscillators are looking bullish? Absolutely, but only if we can get a bearish oscillator setup on the hourly and 30-minute charts. The best trend trades come from the daily, hourly, 30-minute, etc. charts all being aligned in either overbought or oversold and then beginning to reverse from the shorter term up towards the 30-minute and hourly charts. This is the sweetheart trade setup, and when it occurs in conjunction with the ADVDECV chart agreeing with the direction of the trade, a large directional trade can unfold rather quickly and profitably. The problem with this scenario is the current market. Go back through the past few weeks and look at the alignments just of the hourly and 30-minute charts with Stochastics aligned in either overbought or oversold. Look at the reversals out of that extreme region. The first point I'll make is that there have been an inordinately high number of aligned reversals between these two charts that have either produced little or no movement, or the Sell/Buy signal has been quickly (prior to any significant favorable price action) turned and given a short-cycle reversal, resulting in a failed trade. Keep in mind that my basic strategy is to go long on a reversal from an oversold alignment, looking for an 8-10 point gain on an initial stop of 3-4 points. Similarly, on bearish trades, I want to enter on a reversal from an overbought alignment across multiple time frames, looking for a comparable 8-10 point gain to the downside, risking 3-4 points to the initial stop. Should be simple, right? Well it was in the past, but not for the past several weeks. Take a look at the chart below and I think you'll see the problem. Hourly Chart of the ES I really simplified this chart, taking all my indicators off except for the Stochastics. That way we can focus on just that one indicator as it relates to price. As you can see, over the past 3 weeks, there have only been 7 trade signals generated on the hourly chart and 4 of them would have resulted in a break-even or small loss. Clearly that is not a recipe for long-term success, so we need other filters and tools to help weed out the bad trade signals. Sadly, just dropping down to a shorter time frame (say the 30-minute chart) doesn't solve this problem. Pull up that chart and look at the Stochastics over the same 3-week span of time and you can see that it is just as choppy and prone to false signals. I think it is plain to see that this game requires more tools if we're going to consistently capture moves that meet the criteria of 8-10 points that I set forth in my initial trading plan. Quite honestly, I've found those types of gains rather elusive in recent weeks. But I also have not-so-distant memories of routinely capturing moves of that magnitude using the exact same strategy that I'm trying to describe here. Is my system broken? Or is the market behaving in a more irrational manner than usual? I believe the answer to be the latter, but that leaves me with a choice. I can either modify my methods to adapt to the current market, or I can choose to remain on the sidelines for much of the time, while still watching the action all day, every day. Hey, if I'm going to have to watch the action anyways, I'd rather adapt my trading style to take advantage of what the market has to offer. The trading picture I highlighted in last week's article was my attempt to show how I've integrated several different tools to trade effectively in the current market. I think now I've filled in some blanks from that article, including the rest of the trading screen setup that I use, along with how the longer-term charts integrate with the shorter-term view that I use for making most of my intraday decisions. Next week we're really going to start having some fun, as I'm going to profile "a day in the life" looking at the decision-making process throughout a typical day. It will be rather chart-intensive, as it will require lots of pictures to show you what I see throughout the day, but it should integrate many of the tools I rely on. In addition to the standard oscillators we've covered in passing here today, we'll link in the picture offered by the ADVDECV indicators, the Pivot and S/R values and any pertinent support/resistance and trendlines. If things hold true to form, that discussion may actually get involved enough to require two separate articles, but I think it will be worth the effort. After all, isn't that why we've been spending all this time together -- to see how all the tools come together into a coherent, actionable trading plan for the day? I'll try to make it as timely as possible and ideally will be able to feature a day that shows both winning AND losing trades. Balance is the key and this exercise certainly wouldn't be of any great benefit to you if all I showed you was the winning trade setups, now would it. I can hardly wait to get started. Look forward to really having some fun next week! Mark ------------------------------------------------------------ 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. 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The Option Investor Newsletter Monday 06-30-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: RYL Dropped Calls: None Dropped Puts: None Play of the Day: Put - RYL Watch List: A Quick List for Monday Updated on the site tonight: Market Posture: Minimal ------------------------------------------------------------ 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. Risk disclosure: ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** RYL - put Adjust from $74.50 down to $73.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********************* PLAY OF THE DAY - PUT ********************* The Ryland Grp - RYL - close: 69.40 change: -1.28 stop: 73.50*new* Company Description: The Ryland Group is a homebuilder and mortgage-finance company that has built more than 175,000 homes. Additionally, the Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 155,000 homebuyers. Currently, Ryland homes are available in more than 260 communities in 21 markets across the United States. Why we like it: It certainly hasn't been an easy road for traders trying to establish a winning short trade on the Homebuilders. Last week's FOMC meeting just adding more volatility to the mix as investors had to contend with the issue of where interest rates are headed in addition to the issue of whether the stocks are actually overextended. Based on the price action in the Dow Jones Home Construction index ($DJUSHB) over the past few days, we're left with the distinct impression that investors were really expecting a 50 basis point cut, rather than the 25 that was delivered. The resultant rise in bond yields raises the specter of rising mortgage rates and that isn't going to be a bullish factor. RYL has been all over the map over the past week, plunging below $70 on two separate occasions, only to pop right back up to resistance in the $72.00-72.50 area. Fortunately, each of these rebounds has met fresh selling and RYL ended the week right in the middle of its range. That leaves us in between potential entry points. Failed rallies below the $73 level look good for aggressive entries, while those traders looking for confirmation before playing will want to wait for a break below $68.50 along with the $DJUSHB cracking its own support near $436. Maintain stops at $74.50. Why This is our Play of the Day It finally looks like the bullish tone in the Housing sector is starting to fade, as the Dow Jones Home Construction index ($DJUSHB) managed to take the top sector loser slot on Monday, sliding lower by 2.07%. While our RYL play didn't actually break down, it looks very close to doing so, ending at its worst closing level since June 9th. If the $DJUSHB loses the $430 support, then RYL ought to break below $68.50 and provide a solid momentum entry for a quick decline down to next support near $65. The rebound in the daily Stochastics looks like it is fading and a short-cycle bearish reversal will be the likely result if that $68.50 support gives way. Note that the $65 level is likely to provide mild support for at least a short-term bounce, as that is also the site of the lower Bollinger band. Traders who entered the play at a higher level last week may want to consider harvesting partial gains on a rebound from that level. Additionally, the 10-dma (currently $71.75) is exerting downward pressure or the past few days and failed rallies below that level can be used for more conservative entry points. The intraday highs of last week's attempted rebound fell just shy of $73, so we feel fairly comfortable lowering our stop to $73.50. If RYL closes above that level now, it would be a strong signal that there's less weakness in the stock than we currently perceive and we would want to be out of the play anyways. Suggested Options: Short-term traders will want to focus on the July 70 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $65 level will want to utilize the July 65 contract or even the August strike, the latter of which provides greater insulation from the spectre of time decay. BUY PUT JUL-70 RYL-SN OI= 898 at $3.10 SL=1.50 BUY PUT JUL-65 RYL-SM OI=1566 at $1.25 SL=0.60 BUY PUT AUG-65 RYL-TM OI= 61 at $2.85 SL=1.50 Annotated Chart of RYL: Picked on June 22nd at $69.95 Change since picked: -0.55 Earnings Date 07/23/03 (unconfirmed) Average Daily Volume = 905 K ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** Watch List ********** A Quick List for Monday Sina Corp - SINA - close: 20.31 change: +2.81 WHAT TO WATCH: Shares rose more than 16 percent today when the company raised its 2nd quarter outlook. This Chinese online media company has been rising strongly with all the Chinese- Internet related equities over the last four months. The break out today represents new three-year highs. Shares are optionable. A pull back to $19.00 might make for a tempting bullish entry for an aggressive high-risk play but given the volume today the stock may not pull back that far. Use caution! Chart= --- J.P. Morgan Chase Co - JPM - close: 34.23 change: +0.33 WHAT TO WATCH: JPM has lead the financial sectors higher with a huge rally of its own. The stock is currently up 75 percent from its March lows making it one of the best performing Dow Jones Industrial components. What are the odds that this equity could see some significant profit taking when the BIX and BKX break support? If not when the banking sectors pull back, then how about after JPM's earnings release on July 16th. Chart= --- Intl Business Machines - IBM - close: 82.75 change: -0.67 WHAT TO WATCH: Speculation that IBM might double its dividend has done nothing to shake it out of this sideways pattern between $82 and $86. The 50-dma overhead remains resistance while the 200- dma below remains support. We suspect that IBM may be heading lower but there is risk that any corporate spin into its July 16th earnings report could put bears in jeopardy until after the release. We're going to watch for a break under $80. Chart= --- =================================== RADAR SCREEN - more stocks to watch: =================================== IDPH $33.96 - We highlighted shares of IDPH in the weekend watch list and suggested a move under $35.00 looked like a decent trigger point to go short. Shares did just that on strong volume. A test of $30 may not be far off. KRON $50.85 - KRON was also on our weekend watchlist. We suggested a move over $50 as a possible entry point for new long plays. Looks like it's time to do a little due diligence for interested bulls. ************** MARKET POSTURE ************** Minimal To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_063003.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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