The Option Investor Newsletter Tuesday 07-01-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: 180 Point Rebound Futures Markets: Reversal of Fortune Index Trader Wrap: Gravedigger shows up, but bulls say ... Market Sentiment: Timeframes Weekly Fund Screen: Can You Hear Me Now? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-01-2003 High Low Volume Advance/Decline DJIA 9040.95 + 55.50 9050.82 8871.20 1.75 bln 1918/1246 NASDAQ 1640.06 + 17.30 1641.77 1598.92 1.68 bln 1656/1565 S&P 100 494.90 + 4.51 495.46 484.41 Totals 3574/2811 S&P 500 982.31 + 7.81 983.26 962.10 W5000 9409.81 + 66.90 9416.50 9227.55 RUS 2000 449.17 + 0.80 449.24 441.22 DJ TRANS 2416.30 + 3.40 2421.03 2370.58 VIX 21.29 - 0.33 23.11 21.18 VXN 30.22 - 1.01 32.46 30.02 Total Volume 3,715M Total UpVol 2,440M Total DnVol 1,216M 52wk Highs 324 52wk Lows 26 TRIN 1.15 PUT/CALL 0.96 ************************************************************ 180 Point Rebound If you just looked at the closing numbers you would get a very wrong impression of the day's activity. The Dow's closing gain of a mere +55 was decent but that was nearly +180 points off the morning lows. Bad news abounded from ISM, Construction Spending and auto sales but the bulls were not going to be deterred. Dow Chart - Daily Nasdaq Chart - Daily The day started off negative with the Chain Store sales which fell -0.5% shocking analysts. This was the largest drop in months and negated the +0.6% gains from last week. With the sun out in the north east consumers went back outside to play and avoided the stores for anything other than seasonal merchandise. Strong sales of swimwear did little for overall store sales. Most retailers are just trying to hang on until the tax cut checks begin appearing in the mail box of consumers. Those and the lower withholding will help put additional cash in store registers. Unemployment is still holding back gains in year over year sales. Good news for those consumers came from the Challenger Layoff Report today, which showed the lowest number of announced layoffs since November 2000. Only 59,715 job layoffs were announced in June and the second monthly drop. This is only slightly above the rate which employers announced during the boom years of the 1990s. Challenger was very bullish about the coming prospects for the second half and said this was the first really positive signs of a recovering economy. For the first half of 2003 there were 630,532 announced layoffs. The excitement was tempered by the ISM results. The ISM for June was a serous disappointment when it came in at 49.8 compared to the consensus of 51.0. While it did not reach the consensus it did barely eek out a gain over last months 49.4. Traders were not excited and the market tanked on the news to dip under 8900 before recovering. While the headline number was indicative of a continuing decline in the economy there were some rays of hope. New Orders, Production and Employment rose and inventories dropped. If production is increasing and inventories are dropping then it would not take much to deduce a potential pickup in demand. This is only conjecture but traders were ready to grab at any straw when trading below 8900. New export orders jumped to 54.4 from 50.8 and the highest level since February. Construction Spending came in at -1.7% compared to estimates of +0.4%. This also surprised analysts especially when April was revised down from -0.3% to -0.7% as well. That makes this month's drop -2.1% from the previously announced April numbers. This is a huge number and it is the third consecutive monthly decline. This was the largest drop in spending in over a year. Private construction dropped -1.7% and public works construction -1.8%. The public sector may have topped out with state and local governments scrambling to raise taxes and cut services just to break even. There are no funds to expand in all but the rarest of cases. Economics were not the only market movers today. JPM cut estimates on GE for 2004 to become the lowest estimate at $1.66 for the full year. The consensus is $1.74. AMAT was weak after rumors made the rounds speculating on an earnings warning. There is concern that they were scrambling to make the end of the quarter and weak chip sales in June were causing another delay in chip equipment orders. IDC also added to this overhanging gloom with comments that they would be revising their estimates of global PC sales down from the current +2% for the year. They said the lack of a tech rebound and the SARS scare was continuing to depress the tech sector. There were also several mentions of technical sell signals being generated by weak performance in several Dow components. Those components were DD, EK, XOM, IBM, IP, GE, JNJ and PG. Also, cyclicals like CAT, IP and WY, to name only a few, were weak on a decreasing outlook for a second half recovery. Copper prices, a raw component in almost every electronic component and electrical device sold, has been dropping. This indicates there is no demand for copper and projects a weak cycle for manufacturers and retailers. Even the bulletproof homebuilders started the day off in the cellar. Traders feared the vehicle sales numbers would fall off the cliff after the close after Ford announced a -7.7% drop in sales for June. When the AutoData was finally released it showed an adjusted rate of 16.4 million units, up slightly from the May numbers of 16.1 million units. Removing the seasonal adjustment and sales dropped -4.3% overall. In the brand wars GMC rose +18%, Cadillac dropped -17%, Oldsmobile fell -33%, Pontiac -8.6%, Saturn -20% and SAAB rose +6.7%. Ford -6.6%, Mercury -36%, Lincoln +5%, Jaguar -4%, Volvo rose +22% and Land Rover -16%. Jeep +2%, Dodge +6%, Chrysler +9%, Mercedes +6.7%, except that the M-class SUV dropped -33%. Nissan rose +22% and Infinity +43%. You could make a case that expensive cars were slipping but Porsche rose +27%. It is not an apples to apples comparison since Porsche only sold around 5000 cars. BMW sold nearly 25,000 vehicles for an +11% increase. While the headline numbers show gains across all the car companies there are clearly some mixed results in the details. The incentives are continuing and car makers are still holding to a hopeful outlook for the second half. The most positive news today came from the financial sector. A 96-year-old judge threw out a class action case against Merrill Lynch. Investors had sued to recover losses which they said were due to tainted advice. The judge said investors were too naove and handed the big broker a win that could impact all the other class action suits currently in progress. He also said the ruling would apply to suits against MWD, GS and CSFB. The financial sector cheered with billions in potential liability possibly lifted from their shoulders. Citigroup gained +1.01, GS +2.10, MWD +1.44, LEH +1.25 and BSC +1.28. These gains are impressive only when you realize they were rebounds from significant early morning losses. These rebounds started exactly at 12:45 and you could easily point to an intraday Dow chart and see the beginning of the afternoon rally on the announcement. When the market jumped initially the news was not attributed to the court decision and shorts tried to jump back in at a higher level but the deck was stacked against them. Not only did the financials spark the market but bonds began to sell off once again and early retirement cash was being put to work. Don't buck the bulls on the first day of July. The first day of July has been up 13 of the last 14 years including today. The influx of retirement cash and late buying by index funds, who missed the cutoff on the rebalancing, help to power the July bounce. Today historically begins a bullish ten day period despite July being the start of the worst four months of the year. If the markets are going to rally they got the best possible start on Tuesday. The Dow dropped back to support at 8900, actually slightly below stronger support at 8950 but either way the weak holders were flushed at the open. The Nasdaq dropped back to very strong support at 1600 and rebounded strongly to close at 1640 and right in the middle of its trading range. Make no mistake. The economic news was bad regardless of how you spin it. There were positive internals but it came in below expectations. There were earnings warnings and downgrades to major estimates. There were repeated references to a second half recovery being weaker than expected or even AWOL one more time. Still the market rallied and rallied strongly bouncing +180 points off its lows. It is not a rally. It is just a one-day reversal but coming at the beginning of the strongest week in July it has all the earmarks of a potential bullish move. I suggested on Sunday to buy any dip above S&P 950 and the S&P bottomed at 962 on Tuesday before rebounding to close at 982. Now we are in that confirmation stage. If we go up from here I would continue to remain long. I would use 960 as my stop loss. A drop under 960 for the rest of the week would be very negative and could break the historical July trend. Even if the market continues to rise we need to remember this is only a trading rally and not the next leg in a new bull market. Just like the first week of July is normally bullish the last two weeks of July are normally bearish. We will begin to see a flood of earnings and there are some serious concerns that they will not be good. The concern is that the earnings gains have come from continued cost savings and job cuts and not from top line sales. This will be key this cycle. If there is no sales growth and no improved guidance then the fears of a fourth year with no second half recovery will soar. We are approaching a very critical period in the market. The next two weeks will be key to direction and many feel that even decent earnings and guidance will not be enough to justify the gains from the last four months. The July trends I have been discussing did not occur overnight. They have been created by innumerable cycles of hoping for a strong second half, even during boom years. The summer quarter is known for its tech depression cycle. That cycle comes from the earnings guidance in the July reporting. Tech companies look at the 2Q results, at orders for the 3Q and typically revise guidance for the rest of the year. They trade the first half of the year on hope and the last half on reality. That reality is about to appear, good or bad. The key this year is "will it be good enough" not just will it be good. The Nasdaq is up +48% from the October lows. That is not a good year, it is a good couple of years. How good will earnings have to be to sustain a continued rally from here? If the ISM had blown the doors off at 55 or 60 and showed a strong surge in orders then we could expect another quarter on hope. Instead it showed a continued economic decline. The rest of the week, both days, have serious economic reports. Wednesday has Factory Orders and Mortgage Applications but Thursday is the killer. Nonfarm Payrolls, ISM Services and Jobless Claims. This could make or break the July trend. If the Jobless Claims come in under 400K and the Nonfarm Payrolls show any improvement over May then we could be ok for another week. In April jobs were revised to zero loss and in May the number came in at only -17,000. This was significantly better than the -151,000 and -121,000 the prior two months. Could we be in for a positive jobs report? Could be. The official consensus is for a gain of +1,000 jobs. Nothing like hedging your bets and not going out on a limb. That sets us up for a potential surprise in either direction. The bottom line is a potentially rocky road ahead but one that is typically bullish due to retirement cash flowing into funds. Once that cash tapers off the outlook could change substantially. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Reversal of Fortune Jonathan Levinson The Fed announced an $8.75B overnight repurchase agreement this morning, refunding yesterday's expiring 4.75B overnight repo and leaving an additional 4B in the hands of its primary dealers. They either bought equities or treasuries with it, and treasuries closed in the red. 3 minute ES candles Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 997 989 975 967 953 YM03U 9149 9085 8966 8902 8783 NQ03U 1253 1238 1208 1193 1164 10 minute chart of the US Dollar Index The US Dollar Index got hammered until just after the disappointing ISM report, when it became a buy just after 10:15 EST. Nevertheless, gold and the miners were particularly strong all day, and the CRB added another .72 to close at 234.50. Daily chart of August gold August gold retook the 350 level today and held it throughout the session, finding resistance at the 50% retracement from its February high to the March low. The miners were very strong as well, with HUI gaining over 4.50 to close above 154, XAU up nearly 2.50 to close above 81. Daily chart of the ten year note yield Treasuries got off to a good start, with early buying that reversed shortly after the disappointing 10AM ISM data. The selling began just after 10:15AM EST, and drove the ten year note yield to a close just below its high of the day. The TNX is just below its March bottom, which is so far serving as strong resistance. Combined with its toppy stochastic, and we could be seeing the first signs of a return to buying in treasuries. Daily NQ candles It looked like the sky was ready to fall this morning, but at 10:15 the price began to climb, and other than some brief declines and pauses, the trend was up, as reflected in the bullish hammer printed today. By putting in a lower low and closing at a higher high by half a point, the NQ can be said to have technically put in a key reversal. 30 minute 20 day chart of the NQ The vertical blast off this afternoon left the oscillators on strong buy signals, with a possible bull wedge breakout following the head and shoulders downside fakeout. However, the descending trendline is very close, and a "return to the scene of the crime" cannot be ruled out. Daily ES candles We have the same bullish hammer on the ES, except that yesterday's high was not touched or exceeded today, and so we're left with a lower low and lower high, despite the bullish close. The successful test of the trendline will have bulls smiling tonight. 20 day 30 minute chart of the ES How quickly things change! The ES fell below the neckline, and then bounced nearly vertically from its low of 960.25. The oscillators are now on buy signals, and the bullish descending wedge interpretation is definitely in play. If so, this move projects to the rally high if the pattern fulfils. Note that the 44 point drop implied by the fulfillment of head and shoulders neckline failure did not occur. Again, the proximity to the upper descending trendline makes it impossible to rule out a reversal back down, further implied by the toppy short cycle oscillators in the chart at the top of this page. What it does on that return to the trendline will be critical. Daily YM candles Same picture on the YM as for the ES. 20 day 30 minute chart of the YM Today was a day of surprises. I won't count the ISM report, which wasn't surprising given the data we've been following during the past weeks. But the buying of dollars and selling of treasuries following the release of that report was counterintuitive to say the least. Other than treasuries selling, today was a perfect return to the trends we saw during the rally: Fed adding liquidity, dollar falling, gold rising, stocks rising. I still cannot understand why treasuries declined today, but we'll watch for clues tomorrow. Today's incredible series of launches on the equity futures was a tonic for the bulls, and those who had the courage to be buyers just below the neckline of the head and shoulders patterns on the 30 minute charts were well-rewarded, as were gold investors who bought the 344 support level. Where the market wants to go in light of the aberrant selling in treasuries today will be on my mind tonight. Perhaps it was foreigners liquidating US assets in light of the poor economic data, but then, the rise in the US Dollar Index refutes that. In the meantime, while today was a great boost for bulls, yesterday's high on ES was 982.75, NQ 1222 and YM 9043. NQ was the only contract to print a "key reversal", breaking yesterday's high by a point and a half and closing above it. For the other equity futures, with those highs holding, today was still lower high and a lower low. ******************** INDEX TRADER SUMMARY ******************** Gravedigger shows up, but bulls say ... The gravedigger may have shown up to dig his first scoop of soil in an attempt to bury the bullish rally from the March lows, but bulls fought back into the close as if to say, "don't throw dirt on me just yet!" Traders will pick a reason for the push back into positive territory by session's end despite economic data still showing that an economic recovery still remains anemic as the latest June ISM Index still showed contraction in the manufacturing sector with a reading of 49.8, while construction spending fell for a third-straight month in May by falling 1.7% from the previous month at a seasonally adjusted annual rate of $869.8 billion, which was well below economists' forecast for a 0.3% gain. Asset allocation from Treasuries into equities. A favorable ruling for the brokers when a judge dismissed an investor lawsuit against Merrill Lynch (NYSE:MER) $48.20 +3.25% that the firm's analysts mislead investors. Market history in play with the Dow Industrials finishing the first day of the third quarter up 12 of the last 13 year, make that 13 of the last 14 years the reason that the markets were destined to finish with a gain. All three could be argued. Still, if based on some work we did in the June 12th Index Trader wrap regarding "finite levels" where the indexes and QQQ tracking stock "shouldn't trade," the "gravedigger" may have indeed shown up in this morning's early trade to signal that supply may indeed be outstripping demand. Are stocks the "lesser of two evils" when considering an alternative investment in Treasuries? One has to wonder as today's economic data did find some defensive buying in Treasuries earlier in the morning, which reversed to selling as the session wore on as YIELDS finished higher in the 5, 10 and 30-year maturities. Gold stocks as depicted by the Gold/Silver Index (XAU.X) 81.07 +3.07% and AMEX Gold Bugs Index (HUI.X) 154.22 +3.19% were the morning's only sectors showing gains, and by the close were edged out by the Disk Drive Index (DDX.X) 108.09 +3.35% for today's sector winner, with the bulk of equity sectors finishing today's session's with gains (Oil Service (OSX.X) 90.44 -1.25% was the only sector to fall more than 1% today). With the major equity indexes all reversing morning losses, but the early bid in gold stocks holding through their close, I'm still going to interpret this intra-day action that thoughts of "deflation" resurfaced on the still contractionary June ISM Index reading, which held into today's close. I would have thought the early DIVERGENCE between gold stocks and the major market indexes would have seen similar DIVERGENCE taking place with gold giving up gains as stocks recovered. Again... one day doesn't make a trend, but the bullish side of me begins to be outweighed by bearish thoughts as all of my "finite levels" of support were traded this morning, and have me looking for bulls to begin using rally opportunities to lighten up their exposure. For now, the "main test" will be to see that the recent relative highs hold as resistance, and violations of today's lows, be violated further in the weeks to come begin to set a pattern of lower highs and lower lows. As a quick review of our "finite levels" of support, I had the Dow Industrials (INDU) on conventional 50-point box scale having the 8,900 level as "finite," which was traded today with a session low being 8,871.20. The S&P 500 Index (SPX.X) on unconventional 6-point box scale with "finite" level being 972.00 and session low today of 962.10 and narrower S&P 100 Index (OEX.X) unconventional 3-point box scale with "finite" level being 489.00, with session low of 484.41. I had also shown the NASDAQ-100 Tracking Stock (AMEX:QQQ) with unconventional $0.35 box size establishing a "finite" level of $29.40, which was traded with a QQQ session low of $29.26. Again... these were levels simply identified where we "made the point and figure charts" look as bullish as we could, and not show a single sell signal since the March lows, and if we did see a sell signal on these charts, would give first hint that supply was beginning to outstrip demand. I'm not going to look at all of these point and figure charts tonight as I want to show the bar charts with their new WEEKLY and MONTHLY Pivot analysis retracement on them, but I will show the unconventional 6-point box chart of the S&P 500 Index (SPX.X) 982.32 +0.8%. To be truthful, I wanted to profile a bearish trade in the SPX this morning on the initial break at 972, but with yesterday's "historical" trade lower, the only reason I didn't profile a bearish trade at 972 and waited until later at 980 to profile a bearish trade in the SPX was simply on "fear" of a bullish session based on the previously mentioned Stock Trader's Almanac notes discussed last week. S&P 500 Index (SPX.X) - 6-point box size On our unconventional 6-point box chart of the SPX, it has now given its first sell signal since giving a buy signal on March 17th at 858, which was one day prior to the bullish % indicator reversing up to "bull confirmed" status. I've made some notes on the above chart as it relates to the bullish % back in December, and traders/investors can perhaps tie that trade action on the 6-point box scale with the bullish % readings found during that time. A bear should now be looking to enter bearish positions in the SPX with RISK to a stop being assessed to 1,020. This would be little different in my opinion to a bear entering a trade back in December at SPX 912 and assessing risk to a stop at 960. Today's trade saw the S&P 500 Bullish % ($BPSPX) see a net loss of 5 stocks to new point and figure sell signals. This has the bullish % slipping an additional 1% to 77.60%. S&P 500 Index Chart - Daily Interval The SPX did more than violate some correlative support between its WEEKLY (blue) 80.9% retracement and WEEKLY S1 of 968.12 earlier this morning. Program trading curbs were not in place, and I'm thinking that if computers were set for buying regardless of what hit them on the sell side, we shouldn't have seen such a violation of that 968 level. I found myself "wishing" I had taken a bearish trade earlier this morning. Sometimes the MARKET gives a trader a second chance, which I thought bears should take on the SPX rally back to 980 and just below the WEEKLY Pivot. Sometimes the MARKET gives a bull a second chance to get out of a trade he/she has been watching slowly slip lower and I'm looking for resistance back at WEEKLY R1 of 990 to provide resistance. Based on the above point and figure chart, a rebound back to 990 (if seen) might then have a more RISK AVERSE bear looking for at least a 6-poin decline back lower to then put on a bearish trade, using today's "sell signal" at 972 as an observation of weakness that leads to a lower low. S&P 100 Index (OEX.X) - Daily Interval I readjusted my upward trending regression channel (2 Std. Dev.) as I had been using an older regression channel. By now setting the regression channel from the March lows to recent June 17th highs, I'm in essence "saying" that I think the OEX high for this bull cycle is in at 511.73. One could say that tomorrow is a "pivotal" day for the OEX based on the above chart as it managed to rally back to its WEEKLY Pivot of 494.83 and lower end of regression channel. I like a partial bearish in the OEX, similar to that profiled in the SPX, and one thing I would monitor the next several days is this. A bear wouldn't be overly concerned if the OEX inches higher along the broken lower part of trend (trading either side), but I do think a bear wants to see the 502-503 zone provide the "ultimate resistance." I think this 502-503 zone will indeed be the more formidable resistance as I'm going back to the bullish OEX trade profiled from 497, where I saw the OEX make ultimate gain back to 500.76, only to then get stopped out at 491.00 with a June 28th session low trade of 490.85. As "weird" as it may seem, the OEX came back to bullish entry of 497 and has now seen a lower low of 484.41. In essence, while I'm disappointed that I took a loss at 491, I haven't really seen enough bullishness from the OEX to make me wish I was still holding long at 487. Maybe other market participants feel the same way? Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and bullish % stands at 81% for the 6th consecutive session and still just off its bull cycle high reading of 82%. These internals should still have a bear cautious. It becomes rather apparent after the seeing the OEX recent pullback from the June 17th high, that there are a lot of large cap stocks that were probably quite far from a level where a "sell signal" on their point and figure chart would have been found. This may have stock traders looking for some large-cap stocks that are showing a supply/demand pattern of lower highs, but steady lows, which would now set up a "sell signal" as good stocks to monitor for relative strength softening, where a sell signal could find the stock sharply lower if consolidation support lies "way below." NASDAQ-100 Tracking Stock (QQQ) - Daily Interval Were the QQQ a "bargain" between WEEKLY 80.9% retracement and WEEKLY S1 of $29.34 on weaker-than forecasted economic data? There isn't a "broker/dealer" in the bunch. Today's increase in volume, when compared to a building short interest, especially the 32.4% jump in short-interest from April 15th to May 15th hints to me that bears short below $28.90 took the opportunity to try and cover a mistake made in from April 15-May 15th, but I think market participants that have seen $30.64-$30.75 will be sellers after seeing today's lows. Today's action saw the NASDAQ-100 Bullish % ($BPNDX) see a net loss of 1 stock to a point and figure sell signal. This has the bullish % slipping further to 74% after a bull cycle high reading of 91%. Dow Industrials (INDU) Chart - Daily Interval 22 of the 30 Dow components finished in positive territory, but that wasn't enough to get the Dow back above its December highs of 9,043 and WEEKLY/MONTHLY pivots. From an economic point of view, it remains perplexing to me how the Dow Industrials, which holds some of the biggest US-based companies with exposure to various economic sectors trades "technically" weak (using the December highs as a benchmark) to the other indexes, where many company's in those indexes actually "rely" on Dow components for future business. The "fundamentalists" are currently saying it's not the economy that will be key to stock prices holding in, but upcoming quarterly earnings. June auto sales from the "Big 3" totaled 5.5 million autos (consensus was 5.5 million) with truck sales of 7.5 million (consensus 7.6 million) for a total of 13.0 million (consensus 12.9 million). Dow component General Motors (NYSE:GM) $35.74 -0.72% did battle back from its lows of $35.00, but closed below its still trending lower 200-day SMA ($36.07) and starting to round flat 50-day SMA ($35.99). If an old market saying of "as GM goes, so goes the market" is true, then Dow bulls and perhaps major index bulls want to see the stock get back above its 50-day SMA soon. One bullish % indicator that Dorsey/Wright and Associates tracks, is the percentage of stock that are trading above their respective 50-day SMA's (an intermediate-term moving average) This indicator recently reversed into "Bear Confirmed" status at 80% recently after reaching bull cycle high readings of 90% twice (March lows were 26%). As it relates to the bar charts of the indexes, traders might assess downside near-term to the 50-day SMA's. Stock traders may look for stocks breaking below their 50-day SMA's to identify stocks that are "leaders" to the downside as they are among just 20% of stocks slipping below their 50-day SMAs. Pivot Analysis Matrix Q-charts and several other data sources show the SPY having traded as high as $98.85 in today's trade. However, I looked at the intra-day chart of the SPY and can only find a high trade of $98.66, which I'm using for tomorrow's DAILY levels. "Early support" from matrix correlations looks to be in the NDX/QQQ at DAILY Pivot and WEEKLY pivot, while QQQ does show correlative resistance at $31.18 from MONTHLY R1 and DAILY R2. There's no economic data due out tomorrow, but several economic reports are due out on Thursday. Jeff Bailey ************************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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Timeframes - Jon Levinson Those of you who follow the live action in the Market Monitor and Futures Monitor and trade the market intraday are aware of the flightiness of the shorter period charts and indicators. My primary trading window is based on 3 minute candles, though I often switch to a 50-tick view as well to change perspective. This focus has evolved to fit my own trading style, which has evolved to fit my personality and its numerous psychoses and idiosyncrasies. Under most circumstances, the oscillators indicators I follow on that timeframe allow me to see and react to the trade setups that serve me best. Other times, they do not, such as today. As I type, my useless 26-3-18 stochastics are flatlined above the 80 level on this 3 minute chart, as the longer cycles within which it is nested push higher. Like your kids' face smushed against the side window as you drive along a highway rotary, pulling maximum G's, my little 2.6 hour cycle oscillator is smushed against the bottom of the longer cycles which bottomed just after 10AM. 2 lessons: watch the oscillators on longer timeframes to contextualize the timeframe that you're trading, and always use stops. I was sloppy with the one but not with the other today. In reviewing the data below, keep in mind that it's end-of-day data, and will fit best with your daily candle charts. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9410 52-week Low : 7197 Current : 9041 Moving Averages: (Simple) 10-dma: 9096 50-dma: 8808 200-dma: 8381 S&P 500 ($SPX) 52-week High: 993 52-week Low : 768 Current : 982 Moving Averages: (Simple) 10-dma: 986 50-dma: 956 200-dma: 893 Nasdaq-100 ($NDX) 52-week High: 1266 52-week Low : 795 Current : 1217 Moving Averages: (Simple) 10-dma: 1212 50-dma: 1170 200-dma: 1043 ----------------------------------------------------------------- The rebound in the broader markets today reinforces the feeling that bulls are still in control for now. This had the VXN falling another 3.2% just above the 30 level and fast approaching its all time lows. The VIX remains pegged near the bottom of its sideways channel between 21 and 24. CBOE Market Volatility Index (VIX) = 21.29 -0.33 Nasdaq-100 Volatility Index (VXN) = 30.22 -1.01 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.96 474,338 456,893 Equity Only 0.90 340,986 307,233 OEX 0.85 26,004 22,128 QQQ 3.13 21,594 67,647 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 70.9 + 0 Bull Confirmed NASDAQ-100 74.0 - 2 Bull Correction Dow Indust. 83.3 + 0 Bull Confirmed S&P 500 77.6 - 1 Bull Confirmed S&P 100 81.0 + 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 1.33 10-Day Arms Index 1.33 21-Day Arms Index 1.21 55-Day Arms Index 1.13 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 1708 1636 Decliners 1113 1417 New Highs 116 132 New Lows 6 14 Up Volume 1047M 1136M Down Vol. 659M 505M Total Vol. 1728M 1671M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/24/03 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 After last week's quadruple witching Friday rolled around, we witnessed a HUGE collapse in outstanding positions in both longs and shorts almost across the board. For the full S&P 500 contacts, the commercial long positions dropped 114 thousand to 405K and the shorts dropped 52 thousand to 447 K. This produced the first bearish net negative (more shorts than longs) in quite a while. Small traders saw significant drops of 42K in longs to just 159 thousand and 98K short positions evaporated to leave 85K. This produced a very strong net long position. Which is exactly how these COT reports are traditionally read. The Small Traders always tend to do the opposite of the "smart money" or Commercials. Unfortunately, it is the commercials who tend to be correct most of the time, and they're newly bearish on the S&P. Commercials Long Short Net % Of OI 06/03/03 438,228 422,722 15,506 1.8% 06/10/03 456,967 455,024 1,943 0.2% 06/17/03 519,887 501,401 18,486 1.8% 06/24/03 405,382 447,526 (42,144) (4.9%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 06/03/03 169,650 167,172 2,478 0.7% 06/10/03 199,356 185,403 13,953 3.6% 06/17/03 202,040 184,028 18,012 4.6% 06/24/03 159,405 85,182 74,223 30.3% 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 The same scenario took place in the S&P 500 e-mini contracts. There were massive drops in outstanding positions. Commercial traders dropped 156 thousand long positions and 459 thousand short positions. This drastic reduction has produced the most bullish reading of the year for the e-minis. As expected, the small traders took the opposite role and produced the most bearish reading. This was due to a massive reduction in outstanding long positions of 382K versus a drop of just 26K in small traders' aggregate shorts. Commercials Long Short Net % Of OI 06/03/03 267,680 512,648 (244,968) (31.4%) 06/10/03 270,359 543,221 (272,862) (33.5%) 06/17/03 306,279 661,114 (354,835) (36.6%) 06/24/03 150,208 201,724 (51,516) (14.6%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 06/03/03 470,655 58,420 412,235 77.9% 06/10/03 498,999 49,689 449,310 81.9% 06/17/03 466,837 70,609 396,228 73.7% 06/24/03 84,081 44,347 39,734 30.9% Most bearish reading of the year: 39,734 - 06/24/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 The same disappearing act of outstanding positions occurred in the NDX 100 futures as well. Commercials dropped some 32K in long positions and 18K in short positions but this left them with their most bearish position in quite some time. Small traders, reacting in lock step mirror image, produced their most bullish net long position with a major drop in outstanding shorts. Commercials Long Short Net % of OI 06/03/03 42,232 43,217 (985) (1.2%) 06/10/03 42,877 45,793 (2,916) (3.3%) 06/17/03 60,964 65,561 (4,597) (3.6%) 06/24/03 28,780 47,425 (18,645) (24.4%) Most bearish reading of the year: (18,645) - 6/24/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 06/03/03 11,407 9,092 2,315 11.3% 06/10/03 14,759 7,761 6,998 31.1% 06/17/03 29,400 23,232 6,168 11.7% 06/24/03 24,519 7,064 17,455 55.2% 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 Small traders of the DJIA futures didn't do much other than reduce a good number of outstanding positions but it was the commercials who cut a number of shorts that produced a new relative high in outstanding longs. Commercials Long Short Net % of OI 06/03/03 19,480 15,282 4,198 12.1% 06/10/03 17,368 15,263 2,105 6.5% 06/17/03 20,625 18,593 2,032 5.1% 06/24/03 19,373 11,565 7,808 25.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 06/03/03 7,948 9,353 (1,405) ( 8.1%) 06/10/03 7,968 8,316 ( 348) ( 2.1%) 06/17/03 9,092 9,398 ( 306) ( 1.6%) 06/24/03 5,950 7,442 (1.492) (11.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** WEEKLY FUND SCREEN ****************** Can You Hear Me Now? These mutual funds outperformed their communications sector fund peers in the second quarter 2003, no small feat considering that specialty-communications funds returned 21.4% on average to lead all Morningstar domestic stock fund categories. This week we'll explore these funds and tell you which ones we like now based on return, risk, expense and other factors such as investment style and strategy. Specialty-communications funds seek to provide long-term capital appreciation by investing primarily in common stock of companies in the communications sector. The 11 communications funds shown below each outperformed the 21.4% category average in the second quarter 2003. Note that some of these funds have multiple share classes. In those cases, we will use each fund's class A shares, which have a front-end load (sales charge), but beyond that tend to have to lowest operation expenses (hence, better performance). +31.5% ProFunds Ultra Wireless Inv (WCPIX) +26.9% ProFunds Ultra Telecommunications Inv (TCPIX) +26.6% Fidelity Select Multimedia (FBMPX) +25.8% Fidelity Select Wireless (FWRLX) +24.7% T. Rowe Price Media & Telecom (PRMTX) +24.6% Gabelli Global Telecommunications (GABTX) +24.4% Scudder Flag Communications A (TISHX) +23.9% Hartford Global Communications A (HGCAX) +23.7% Gabelli Global Growth (GICPX) +23.5% Lindner Communications Inv (LDUTX) +21.9% Fidelity Advisor Developing Communications A (FDMAX) It's no surprise to see these fund families represented. T. Rowe Price, Fidelity and Gabelli are well-recognized names in the fund industry, with good long-term track records of performance versus the competition. So, this group of 11 funds makes an appropriate starting place (short list). We will look at quarterly and year- to-date performance to help us judge short-term relative returns, but we'll also look at each fund's long-term performance relative to category peers to give us a sense of whether the recent return performance is a fluke. In the end, we'll tell you which one or two funds we believe have the potential to continue to lead the communications group, based on their historical performance. Screening/Evaluation Process As we often do here, we entered the fund symbols for these funds in Morningstar's Fund Compare tool online at www.morningstar.com. The fund compare tool allows you to compare a set of funds based on returns, risk, expense, manager tenure and other factors, and to "score" the funds based on your own specific criteria and the importance you assign to each one. Once we got our comparison results, we reviewed each fund's star rating from Morningstar, YTD total return, and operating expense ratio using the Snapshot View provided. One of the funds on the list, Fidelity Select Multimedia (FBMPX), has a 5-star (highest) overall rating based on risk-adjusted performance in relation to category peers. Both Gabelli Global Growth (GICPX) and Gabelli Global Technology (GABTX) are 4-star rated by Morningstar (above average overall), as is T. Rowe Price Media & Telecommunications (PRMTX). Lindner Communications Inv (LDUTX) and Scudder Flag Communications (TISHX) have 3-star ratings (average). The rest of the funds on the list are not rated. The group's largest fund based on total assets is T. Rowe Price Media & Telecom ($501 million). All of the 4-star/5-star rated funds have at least $100 million in assets. The top YTD return belongs to ProFunds Ultra Wireless Inv (WCPIX), up 31.5% in the second quarter and up 34.5% on a YTD basis through June 30, 2003. It's snapping back from a disastrous 2002 that saw the fund post a negative 80.4% return. That followed a 41.7% loss in calendar 2001. We feel a better alternative to this fund may be Fidelity Select Wireless (FWRLX). It lost less in 2001 and 2002, and has a YTD total return of 28.4%, not too far below the ProFunds fund this year. Fidelity Select Multimedia (FBMPX), which sports a 5-star rating, also sports the lowest fund expense ratio (1.10%). T. Rowe Price Media & Telecom (PRMTX) has an annual expense ratio of 1.15%, not bad either. Gabelli Global Telecommunications Fund has an annual expense ratio of 1.66% while its sibling, Gabelli Growth Fund has a 1.75% expense ratio, reasonable for a sector fund. Next, we went to the Nuts & Bolts View, and looked at each fund's manager tenure. Bruce Behrens, a vice president with Alex. Brown Investment Management, has been involved in the management of the Scudder Flag Communications Fund for 19 years and has 31 years of investment experience. Marc J. Gabelli, a managing director with Gabelli Funds, has served as manager or co-manager of the Gabelli Global Telecommunications Fund and Gabelli Growth Fund for 10 and 7 years, respectively. Robert Gensler has spent three years with the T. Rowe Price Media & Telecom Fund. In the Portfolio View, we saw that ProFunds Ultra Telecom (TCPIX) sports the highest average market capitalization ($81 billion) of the funds on the list, times the category average. It invests in companies comprising the Dow Jones U.S. Telecommunications Sector Index, including Verizon Communications (33.7% of the index), SBC Communications (23.3% of the index) and Bellsouth Corp. (14.1% of the index), per the ProFunds website. In relation to the average fund in the category, TCPIX has a large-cap "value" equity style. The other funds on the list all have average market caps that are below the $20.4 billion category average per Morningstar, so they dip down in market cap more than the average communications fund. That provides more octane (higher long-term growth potential) for investors, but normally higher returns are associated with higher risks. These funds are leading to the upside in part because mid and small capitalization stocks have generally done better in the second quarter rebound than large-cap stocks. In the next section, we tell you which funds we like now based on past and recent performance, taking into consideration risk, cost and expense, as well as manager tenure and style. Our Favorite Funds Among large-cap funds, we like T. Rowe Price Media & Telecom Fund (PRMTX), which seeks long-term capital appreciation by investing at least 80% of assets in the common stocks of companies engaged in any facet of media and telecommunications (publishing, movies, cable TV, telephones, cellular services, technology, and telecom equipment). Typically, the fund invests a portion of its assets in the mid-capitalization range, but focuses mostly on the large- cap and mega-cap sectors. Recently, the fund had 26.9% of stock assets invested in the mega-cap range, 46% in the large-cap range and 22.2% in the mid-cap range. With its growth style, the fund has the makings of a fine multi-cap growth offering specializing in media and telecommunications. In addition to providing exposure to three capitalization ranges, the fund also provides foreign exposure. Recently, the fund had nearly a third of assets invested in foreign securities; so, the fund seeks higher long-term growth potential through investments in the mid-cap range and investments abroad. This fund may have above average risk relative to the average communications sector fund, according to Morningstar, but overall it has produced high relative returns for investors. The fund's 5-year average total return through June 30, 2003 of 5.4% ranks in the category's top 4 percent. Much of the credit goes to portfolio manager, Robert Gensler, who has guided T. Rowe Price Media & Telecommunications Fund since January 14, 2000. In the mid-cap range, we like Fidelity Select Multimedia (FBMPX) the only Morningstar 5-star rated fund in our comparison results. Brian Kennedy took over the reins on March 1, 2002, and over the past year has produced a 37.4% return for investors, ranking the fund in the category's top 6 percent. That includes a 26.6% net return for the second quarter 2003. Since 2000, relative return performance has been top quintile (top 20%). The fund's mid-cap growth style has produced high returns overall relative to other communications funds, but it has kept risk to average within the category. The result, a Morningstar 5-star (highest) rating for risk-adjusted return performance versus peers. Conclusion The two mid-cap offerings from Gabelli Funds also look like they warrant consideration. Between the two, we favor Gabelli Global Telecommunications Fund because it is a purer bet on the telecom sector, and the Gabelli Growth Fund may have moved on, investing heavily as of May 31 in healthcare and consumer goods securities. It's more of a go-anywhere growth fund than a pure sector bet on telecom stocks. Go to www.troweprice.com for further information on T. Rowe Price Media & Telecommunications Fund. Go to www.fidelity.com for more information on Fidelity Select Multimedia. Go to www.gabelli.com for more information on the Gabelli asset management firm and its mutual fund products. Investors seeking specific exposure to the telecommunications sector may want to start with these three fund families. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 07-01-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: IGT, LH Dropped Puts: None Call Play Updates: ABC, AGN, AMGN, EBAY, MRK, PGR, STJ New Calls Plays: GS, PHM Put Play Updates: COF, ICOS, KSS, RYL, SIVB, WFMI New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Intl Game Technology - IGT - cls: 102.42 chg: +0.09 stop: 99.99 It appears that IGT can do no wrong. The company announced a $130 million acquisition of Acres Gaming (AGAM) on Monday and shares traded higher! The stock (IGT) is set to split 4-for-1 tomorrow, which should mean its opening price will be near $25.60. Normally stocks that have a strong ramp up into their split are prone to some post-split depressions (a.k.a. weakness) as momentum traders move out of the stock and into their next play. We suspect that IGT might be one of the few stocks that does not suffer from the traditional post-split selling but we're closing the play at $102.42 for a move of more than $10. Keep in mind that the company is set to announce earnings on July 17th and that the shareholder record date for the July 28th cash dividend payment is July 14th. If you still hold options, odds are your option symbol may change tomorrow just as the number of contracts and value of each contract reflects the 4:1 split. Please check with your broker. Picked on June 10th at $91.87 Change since picked: +10.55 Earnings Date 07/17/03 (confirmed) Average Daily Volume = 1.22 million Chart link: --- Laboratory Corp - LH - close: 29.67 change: -0.48 stop: 29.00 That's it! We're cutting LH from the call list for lack of performance. Shares have been hovering on either side of $30.00 for more than two weeks. While the stock has not yet broken the lower border of its rising channel we're not going to wait for it to occur. Last week we raised the stop loss to $29.00. Those traders who are not yet ready to call it quits but might want to reduce their risk can look at raising their stop to just under $29.50, a level of support that hasn't been broken since we picked the stock as a play. Picked on June 17th at $30.10 Change since picked: -0.43 Earnings Date 07/28/03 (unconfirmed) Average Daily Volume = 1.49 million Chart link: PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** AmerisourceBergen - ABC - cls: 70.13 chng:+0.78 stop: 67.50*new* While the broad market seemed to get the week started in bearish fashion, ABC really showed its relative strength by holding tough above support. This morning's dip below $69 was eagerly bought by the bulls, as they propelled the stock right back to strong resistance just above $70. Traders that have taken advantage of the recent dips near $69 appear to be well positioned for the breakout over $70 when it comes, possibly as early as Wednesday. The pattern of higher lows that caught our attention last week is still intact, and the spring is continuing to coil tighter and tighter. When the stock finally does break above $70.25 with conviction, it could unleash a wave of buying that takes the stock quickly to the $74-75 area. We're using $70.25 as the trigger for new momentum entries, as that is just one penny above Tuesday's intraday high. With the tight consolidation pattern near the recent highs, it seems safe to raise our stop to $67.50, which is below both the 20-dma ($68.20) and the intraday lows for the past 2 weeks. Picked on June 26th at $70.00 Change since picked: +0.13 Earnings Date 07/24/03 (unconfirmed) Average Daily Volume = 1.48 mln -- Allergan, Inc. - AGN - close: 77.53 change: +0.43 stop: 75.25 If it walks like a duck and quacks like a duck, then it must be a duck. Well, AGN is certainly giving all appearances that today's dip to the $76 level (actually $76.01) was the entry point we've been waiting for. After hitting that level shortly after the open, the stock found eager buyers to propel it more than $1.50 above that intraday low and it closed just barely below its high of the day. After pulling back from its foray over $80 a couple weeks ago, AGN has been building a gently-descending bull flag formation, the bottom of which was tested again this morning before the rebound. Confirmation of this bullish formation will come on a break above the top of the pattern, which is currently at $78.30. For those that didn't take the plunge on the rebound from $76, a break above the top of that flag looks like a solid entry ahead of a surge back to the recent highs near $81-82. Picked on June 26th at $78.74 Change since picked: -1.21 Earnings Date 07/28/03 (unconfirmed) Average Daily Volume = 1.16 mln --- Amgen, Inc. - AMGN - close: 65.85 change: -0.09 stop: 63.25*new* Continuing in its resilient bullish pattern, AMGN keeps finding support at the rising 30-dma, and Monday's early dip was just the latest proof of that. The stock fell with the rest of the Biotechnology index (BTK.X) early in the day and when the BTK held support near $430, AMGN launched higher in the afternoon, ending near its intraday high. The BTK index broke support this morning, but AMGN refused to go along with the group, and closed just below $66 after finding intraday support near the $64.75 area. As we've been noting for some time now, AMGN seems to be the steadiest bullish play in the group, as it continues its trend of higher lows, using the 30-dma ($64.32) as support. We continue to favor new entries on dips near that support level, as breakouts tend to be short-lived, requiring another rebound from higher support for continuation. At this point, the $64.00-64.50 area seems to be the best location to target new entries ahead of an expected push to new highs over the next couple weeks. Recall that the 50-dma (currently $63.38) is our last line of defense on the downside, so stops rise again tonight to $63.25. Picked on June 24th at $65.05 Change since picked: +0.80 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.4 mln --- eBay Inc - EBAY - close: 106.60 change: +2.60 stop: 102.00*new* One of the big winners today was EBAY. Shares added 2.5 percent on strong volume of 8.5 million shares. Propelling it higher were positive comments from Prudential and First Albany. Monday, Prudential raised their price target on EBAY from $108 to $120. The financial firm believes that EBAY continues to represent an alluring growth model. This news comes directly after EBAY wraps up its weekend PowerSeller's meeting. OptionInvestor.com suggested EBAY might be able to run to the $120 level, which represents the next significant level of historical overhead resistance from the April 1999 highs near 117 and the March 2000 highs above $120. Our short-term target remains $110 and at this rate it won't take long to get there. The comments from First Albany hit the newswires today as one of their analysts speculated that EBAY will exceed current Q2 estimates of 35 cents a share and potentially do better than First Albany estimates of 37 cents a share. The best place to consider new bullish entry points would probably be on a pull back to $104 or $105 but its entirely possible EBAY won't pull back. We're going to raise our stop loss to $102.00 but more conservative traders could use a stop under $104. Picked on June 27th at $104.05 Change since picked: +2.55 Earnings Date 07/18/03 (unconfirmed) Average Daily Volume = 6.76 million Chart link: ---- Merck & Company - MRK - close: 61.47 change: +0.92 stop: 59.50 On a pure price basis, MRK hasn't exactly been a stellar performer for us, as the stock has been consistently drifting lower over the past couple weeks. But stepping back a bit and looking at the bigger picture shows the stock has been moving lower in what looks like a solid bull flag consolidation pattern. That pattern appears to have hit its low point today, trading an intraday low of $59.71 (just above our $59.50 stop) and bouncing strongly into the close. Not only did the afternoon rebound produce an bullish engulfing candle (totally encompassing Monday's candle), but the close above $61.25 yielded a breakout above the top of the flag pattern. Traders that took advantage of the rebound from Tuesday's lows got a great entry point into the play and with daily Stochastics starting to turn bullish, we can now turn our attention to the upside. If you missed today's entry point, look for a secondary entry setup on a dip and rebound from the vicinity of $61, which is now the top of the flag. If your preference is to enter on strength, then look for a rally through the 10-dma ($61.90) or even intraday resistance at $62.25 before playing. Next major resistance comes in around $63.50 (the mid-June highs), then $64.40. A breakout over that level will have our upside target of $68 looking quite achievable. Picked on June 17th at $62.37 Change since picked: -0.90 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 6.22 mln --- Progressive Corp. - PGR - cls: 73.76 chng: +0.66 stop: 72.40*new* The corrective move in the broad markets over the past couple weeks has produced a preponderance of bull flag consolidation patterns. Our PGR play appears to be delivering just that, while remaining in its overall ascending channel that began in mid- March. The bottom of that channel at $73 got a solid test over the past couple days, but the bulls successfully defended that level and PGR rebounded into the close of trading on Tuesday. While that looks good, the stock hasn't yet been able to break free from the gently descending flag pattern that has been building over the past couple weeks. In order to accomplish that bullish feat (and provide a solid bullish entry point), PGR needs to rally through the $74 level, which interestingly enough is just a nickel above Tuesday's intraday high. While more aggressive traders can still look at rebounds from the $72.50- 73.00 area as viable bullish entry points, we'd prefer to wait for the breakout above that flag before committing fresh cash to the play. Once again, we're raising our stop tonight, this time to $72.40, which is just below both today's intraday lows and the supportive 30-dma ($72.44). Picked on June 15th a $73.27 Change since picked: +0.49 Earnings Date 07/16/03 (confirmed) Average Daily Volume = 943 K --- St. Jude Medical - STJ - close: 57.03 change: -0.47 stop: 54.95 Believe it or not, we're suddenly a little concerned about our bullish play on STJ. The up trend remains in effect but shares lost 47 cents on very strong volume of 3.8 million shares (more than double the norm). Late last night STJ announced that it had received both regulatory and reimbursement approval from Japan's Ministry of Health, Labor, and Welfare for STJ's Integrity(r) Micro family of pacemakers. This should have been very good news for STJ. It's possible that traders are just "selling the news" and if so bulls might be encouraged that the "sell-off" was less than 50 cents. Cautious investors might want to wait for a move back over $58 before evaluating new positions. Actually, per our previous suggestions for cautious traders, waiting for a move over current resistance at $60 is not a bad idea either. Obviously for more aggressive traders, this pull back is a potential entry point. In our Sunday update we outlined a possible bounce at $57 or $58 would be a decent entry. Now all we need is to witness the "bounce" part of that equation. Picked on June 24th at $57.62 Change since picked: -0.59 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 1.56 million Chart link: ************** NEW CALL PLAYS ************** Goldman Sachs Grp. - GS - close: 85.85 change: +2.10 stop: 81.95 Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: If you look through a smattering of recently strong stock charts, one observation that is sure to surface is that there is an uncommonly high number of bullish consolidation patterns to be found. Among the most common is the bullish flag pattern, closely followed by the bullish wedge or pennant formation. We were astounded throughout the recent rally in the Brokerage sector (XBD.X) at just how powerful the rally was from late May to the middle of June. With hardly a pause, the XBD launched higher to the tune of 22% in 3 short weeks before topping out and undergoing some much needed profit taking. News this morning that a shareholder lawsuit against Merrill Lynch was thrown out by the presiding judge seemed to inject new life into the sector, as it rebounded from a morning low of $508, to end at $523, a nearly 3% rise from the lows. Of course, it doesn't hurt that reports have been surfacing recently that the strong performance in the equity market has led to improved trading levels, which is bound to help in the revenue and earnings department. One of the strongest Brokerage stocks during the May-June rally was GS and the stock didn't disappoint today, delivering a 2.50% gain on the day on robust volume. More importantly, today's rebound delivered a very bullish resolution to the bullish descending wedge pattern that has been building for the past couple weeks. Another bullish factor was last week's earnings report, where the company beat estimates by 17 cents and doubled the quarterly dividend. Now that the profit taking is out of the way, the bulls may just be ready for another romp. We're looking for a fairly quick return to the recent highs near $92 as funds put new cash to work at the beginning of the second half. What is really encouraging about this rebound is that it began near the $82 level, prior resistance that now appears to be solid support. Bullish price action that takes GS through the $86 level early tomorrow can be used for aggressive momentum entries, although traders looking for a bit more confirmation may want to wait for the stock to clear mild resistance at $87 before chasing the stock higher. A better entry may be available near $84 if the stock drops back to confirm support before continuing its breakout move. We're initially placing our stop at $81.95, as a close below that level would be a clear indication that today's rally was a one-day wonder. We're playing GS for a quick return to its recent highs, so we'll be quite happy to take our gains and run if GS can get back to the $91.50-92.00 area. Suggested Options: Shorter Term: The July 85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the August 90 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 August 85 call. BUY CALL JUL-85 GS-GQ OI=15889 at $2.40 SL=1.25 BUY CALL JUL-90 GS-GR OI=21479 at $0.65 SL=0.30 BUY CALL AUG-85 GS-HQ OI= 1260 at $3.80 SL=2.25 BUY CALL AUG-90 GS-HR OI= 785 at $1.50 SL=0.75 Annotated Chart of GS: Picked on July 1st at $85.85 Change since picked: +0.00 Earnings Date 09/24/03 (unconfirmed) Average Daily Volume = 4.50 mln --- Pulte Homes - PHM - close: 63.52 change: +1.86 stop: 59.99 Company Description: Pulte Homes, Inc., (www.pulte.com) based in Bloomfield Hills, Michigan, has operations in 44 markets across the United States. Under its Del Webb brand, the Company is also the nation's leading builder of active adult communities for people age 55 and older. Over its history, the Company has constructed more than 330,000 homes and has been named Builder of the Year for 2002 by Professional Builder magazine. Pulte Mortgage LLC is a nationwide lender committed to meeting the financing needs of Pulte Homes' customers by offering a wide variety of loan products and superior customer service. (source: company press release) Why We Like It: We're hedging our bets again and this time it's on the home builders. Currently we have a short play on Ryland Homes (RYL). As many of the stocks in the homebuilding sector have more than doubled from their early 2003 lows, the temptation to take profits is a big one. Of course the reason many investors do not take more money off the table is that mortgage rates remain near 45 year lows and the FOMC isn't against additional interest rate cuts should the economy need it. Now the FOMC doesn't set mortgage rates but the Fed's interest rate policies do affect the bond market, which affect the rates home lenders can offer. There is growing skepticism and concerns that the homebuilders may not be able to keep up the torrid pace they've been setting the last year or so. Plus, there are plenty of stories going around about all the deals that builders are offering to buyers just to move inventory. Hence our put play on RYL. However, if investors keep the perception that the sector will be able to deliver on these strong earnings expectations then shares do have a reason to rally. Furthermore, if there is going to be a second half recovery it's going to need to include some job growth. Stronger job growth should be a benefit for the homebuilders as consumers regain their confidence. There are plenty of economists, analysts and more importantly, investors that believe the home builders can keep their sales growth inline. That means there is still room for share price appreciation. You may have read that historically the sector trades around 10 to 12 times future earnings. Currently, they're closer to 8 to 10 times future earnings. A few sector analysts believe that in an expanding economy the builders might trade between a range of 12 to 15 times earnings, allowing for a prolonged period of price appreciation. Just a few weeks ago, Lehman Brothers raised their (12-month) price target on PHM from $73 to $83. Of course at the time shares were trading near $66. We noticed that the profit taking in PHM, which has been strong, just might have hit its bottom. We're a little aggressive on this entry point but yesterday's close and today's rebound represents a nice bounce from PHM's 38.2 percent retracement of the March-June rally (see chart). We're going to suggest call plays on PHM at current levels but more conservative traders can wait for shares to clear the $64.00 or $65.00 levels before evaluating entry points. Our target is current highs near $72.00 but should PHM stall near $70 we may take an early exit. We're initiating the play with a stop just under $60.00. Suggested Options: Our broad market view is not very bullish through the second half of July and into August through September. This bias has us looking more favorably at the July call options but August options will certainly work. Note: the July 70s are cheap for a reason! BUY CALL JUL 60 PHM-GL OI= 951 at $4.60 SL=2.30 BUY CALL JUL 65 PHM-GM OI=1143 at $1.65 SL=0.85 BUY CALL JUL 70 PHM-GN OI=1117 at $0.30 SL= -- *riskier* BUY CALL AUG 60 PHM-HL OI= 81 at $5.90 SL=4.00 BUY CALL AUG 65 PHM-HM OI= 883 at $3.20 SL=1.60 BUY CALL AUG 70 PHM-HN OI= 65 at $1.30 SL=0.65 BUY CALL OCT 65 PHM-JM OI= 776 at $4.80 SL=2.40 Annotated Chart: Picked on July 01 at $63.52 Change since picked: +0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 767 thousand ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Capital One Financial - COF - cls: 48.97 chg: -0.21 stop: 50.51*new* Our bearish play for COF can be summed up in one word: caution. The intraday bullish reversal in the broader markets was not lost on the financial sector. The BKX bank index bounced nicely from its support near 850 and the BIX S&P banks index followed suit with its own bounce from its rising simple 50-dma. Shares of COF under-performed them both but it certainly produced its own intraday bounce just above its 50-dma and the 47.35 level. We would NOT suggest new bearish positions on COF at this time. We suspect the stock will once again retest overhead resistance at $50.00. Now a failed rally there is a low risk entry point for new positions but this time it might pierce it. Because we're trying to swing trade this stock, we're lowering our stop loss to 50.51. Worse case scenario is that shares of COF trade up and through our stop before rolling over and eventually fulfilling our expectations for a test of the $45.00 level. However, we'd rather be stopped out at $50.51 than wait for COF to rally back to $54-55 before pulling the trigger on a late exit. If anyone's watching, the lower low today did further reinforce the COF sell signal on its P&F chart but it's not doing anything to relieve our apprehension of a multi-day bullish reversal just around the corner. Picked on June 22 at $49.64 Change since picked: -0.67 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume: 4.3 million ---- ICOS Corp - ICOS - close: 37.67 change: +0.80 stop: 40.01 Sure enough, both ICOS and the BTK biotech index followed through on the failed rally witnessed in Friday's session. Monday were declines for both and Tuesday morning saw additional weakness before the broader market rebound lifted the BTK from its lows near 415 and lifting ICOS from current support near $35.00. Thus far the trend of lower highs for ICOS remains intact but traders may want to look for another failed rally near $39.00 or a move under $35.00 to evaluate new entries. Currently, shares of ICOS were trading higher in after hours ($38.10) on news that the FDA has accepted the ICOS-Ely Lilly filing for the impotence drug "Cialis" without requesting further information. Last year the two companies tried to submit Cialis to the FDA but the government agency had asked for additional info. Today's announcement further supports the expectation that the FDA will finally approve this new impotence drug by the end of 2003. Picked on June 29th at $37.62 Change since picked: +0.05 Earnings Date 08/05/03 (unconfirmed) Average Daily Volume = 2.63 million Chart link: --- Kohl's Corp. - KSS - close: 51.46 change: +0.08 stop: 51.75 After more than 2 weeks on the playlist, KSS has yet to deliver the breakdown we've been expecting. It hasn't been able to break out of its bearish multi-month trend yet, but the relative weakness that first attracted us to the play appears to be fading. Rather than continue southward regardless of sector action, KSS has been gradually drifting higher over the past several days in tandem with the Retail index (RLX.X), which has gradually clawed its way back from the $320 support level. After dropping back near that level this morning, the RLX rallied hard in the afternoon, getting very near the $328-329 resistance that has been holding over the past week. Going along for the ride today, KSS bounced back from its early dip to close just below $51.50. While this is still below our $51.75 stop (just barely), today was the second consecutive close over the 20-dma ($51.03), the first time KSS has managed that feat in nearly a month. So until we see some more concerted weakness from both KSS and the RLX, we want to be very careful with new entries. For those traders still on the sidelines, look for KSS to fall back under $50.20 (just below the past two days' intraday lows and the bottom of the 2-week bear flag pattern. For traders already in the play, keep a sharp rein on those positions, keeping stops in place at $51.75. Picked on June 15th at $49.45 Change since picked: +2.01 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.44 mln --- The Ryland Grp - RYL - close: 70.02 change: +0.62 stop: 73.00*new* The one constant in the Housing sector over the past couple weeks is that volatility is still very much intact. Each rally attempt in RYL is being met by willing sellers, while each attempt at a breakdown appears to be met by willing buyers. The net result is that the stock remains in its relatively roughly $4.50 trading range (excluding today's early dip). Even this morning's apparent breakdown below $68.50 was a fakeout move, as the buyers stepped in at $67 support and drove RYL higher by more than $3 from its intraday low by the closing bell. Despite that rebound, we got a nice bearish confirmation on the PnF chart, as the trade at $68 generated another Sell signal. Recall that the Sell signal generated last month gave us a bearish price target of $59. The stock has been looking weak lately, but the bears won't be able to breathe easy until the bears can manage a close under $68. Failed rallies in the $71-72 still look attractive for new entries, but we're getting a bit stingier with our stop. With the recent changes on the PnF chart, a trade at $73 would generate a new Buy signal and we would want to pull the plug there. So our stop drops fractionally to $73 tonight. Picked on June 22nd at $69.95 Change since picked: +0.07 Earnings Date 07/22/03 (confirmed) Average Daily Volume = 914 K --- Silicon Valley Bancshares - SIVB - close: 23.81 change: +0.00 stop: 25.25 We've certainly had our nerves tested in our bearish SIVB play, especially with Monday's early surge to just below $25. But as strong as that rally attempt looked at the time, some serious selling volume came in near the end of the day, pushing the stock back under $24 by the closing bell. That price action left behind a pretty convincing bearish reversal candle pattern, with the 50-dma ($24.77) providing firm resistance as we expected (hoped) it would. Traders with courage should have been able to get a favorable entry on yesterday's sharp rollover and break, back under $24.50, and now we have an idea of just how much bounce SIVB had in it. Successive rally failures near $24.50 look good for new entries, although more cautious traders may want to wait for a break under $23.45 (just below today's intraday low) before taking a position. Maintain stops at $25.25 for now. Picked on June 24th at $22.82 Change since picked: +0.99 Earnings Date 07/17/03 (unconfirmed) Average Daily Volume = 717 K --- Whole Foods Market - WFMI - cls: 47.75 chg: +0.22 stop: 50.00 Slowly but surely shares of WFMI continue to slip lower. Well, maybe not lower but the trend of lower highs is still there. The next entry point looks like a move under $47.00 although that doesn't leave a lot of room between entry and our short-term profit target of $45.00. The last several weeks have seen the stock under-performing its competitor Wild Oats (OATS) as well as larger chains like KR and SWY. Picked on June 13 at $49.44 Change since picked: -1.69 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume: 1.6 million ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: advertising@OptionInvestor.com
The Option Investor Newsletter Tuesday 07-01-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Call - GS ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ********************** PLAY OF THE DAY - CALL ********************** Goldman Sachs Grp. - GS - close: 85.85 change: +2.10 stop: 81.95 Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: If you look through a smattering of recently strong stock charts, one observation that is sure to surface is that there is an uncommonly high number of bullish consolidation patterns to be found. Among the most common is the bullish flag pattern, closely followed by the bullish wedge or pennant formation. We were astounded throughout the recent rally in the Brokerage sector (XBD.X) at just how powerful the rally was from late May to the middle of June. With hardly a pause, the XBD launched higher to the tune of 22% in 3 short weeks before topping out and undergoing some much needed profit taking. News this morning that a shareholder lawsuit against Merrill Lynch was thrown out by the presiding judge seemed to inject new life into the sector, as it rebounded from a morning low of $508, to end at $523, a nearly 3% rise from the lows. Of course, it doesn't hurt that reports have been surfacing recently that the strong performance in the equity market has led to improved trading levels, which is bound to help in the revenue and earnings department. One of the strongest Brokerage stocks during the May-June rally was GS and the stock didn't disappoint today, delivering a 2.50% gain on the day on robust volume. More importantly, today's rebound delivered a very bullish resolution to the bullish descending wedge pattern that has been building for the past couple weeks. Another bullish factor was last week's earnings report, where the company beat estimates by 17 cents and doubled the quarterly dividend. Now that the profit taking is out of the way, the bulls may just be ready for another romp. We're looking for a fairly quick return to the recent highs near $92 as funds put new cash to work at the beginning of the second half. What is really encouraging about this rebound is that it began near the $82 level, prior resistance that now appears to be solid support. Bullish price action that takes GS through the $86 level early tomorrow can be used for aggressive momentum entries, although traders looking for a bit more confirmation may want to wait for the stock to clear mild resistance at $87 before chasing the stock higher. A better entry may be available near $84 if the stock drops back to confirm support before continuing its breakout move. We're initially placing our stop at $81.95, as a close below that level would be a clear indication that today's rally was a one-day wonder. We're playing GS for a quick return to its recent highs, so we'll be quite happy to take our gains and run if GS can get back to the $91.50-92.00 area. Suggested Options: Shorter Term: The July 85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the August 90 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 August 85 call. BUY CALL JUL-85 GS-GQ OI=15889 at $2.40 SL=1.25 BUY CALL JUL-90 GS-GR OI=21479 at $0.65 SL=0.30 BUY CALL AUG-85 GS-HQ OI= 1260 at $3.80 SL=2.25 BUY CALL AUG-90 GS-HR OI= 785 at $1.50 SL=0.75 Annotated Chart of GS: Picked on July 1st at $85.85 Change since picked: +0.00 Earnings Date 09/24/03 (unconfirmed) Average Daily Volume = 4.50 mln ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: advertising@OptionInvestor.com
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