The Option Investor Newsletter Monday 07-07-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Reordering the Alphabet Futures Wrap: Another Flagpole Rally Index Trader Wrap: Fsssss... BOOM! Weekly Fund Wrap: Most Equity Fund Objectives Higher Traders Corner: Trading Terminology Traders Corner: Position Adjustment – Releasing The Choke Hold on the QQQs Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 07-07-2003 High Low Volume Advance/Decline DJIA 9216.79 +146.58 9261.12 9073.92 1.79 bln 2198/1046 NASDAQ 1720.71 + 18.72 1721.25 1685.41 1.88 bln 2349/ 983 S&P 100 505.50 + 9.42 506.53 496.08 Totals 4547/2029 S&P 500 1004.42 + 18.72 1005.56 985.70 RUS 2000 465.71 + 9.36 465.71 456.35 DJ TRANS 2458.13 + 42.82 2463.03 2416.30 VIX 22.05 + 0.44 22.54 21.79 VXN 33.51 + 1.04 33.99 32.75 Total Volume 7,401M Total UpVol 5,060M Total DnVol 2,341M 52wk Highs 864 52wk Lows 23 TRIN 0.49 PUT/CALL 0.71 ******************************************************************* Reordering the Alphabet When does the letter "s" outrank the letter "r"? When markets surge and soar rather than retreat and retrace. When support sustains the markets while resistance fails to restrain them. The surging and soaring began with the Asian and European markets. The Nikkei climbed to 9795, a closing level not seen since last August. The Nikkei has already achieved the upside target promised by this spring’s inverse head-and-shoulders formation, but pushes ever closer to its magic 10,000 level. As the opening of our markets approached, the DAX had already climbed toward its next resistance at 3325 and soon shot above that, with next strong resistance at 3500. This morning’s early surge in the U.S. markets powered the SPX above 1000 resistance, the OEX above 500, the COMPX above 1700, and the DJI above 9200, and the indices closed above those levels. Although volume stood at a tepid 1.3 billion on the NYSE and 1.8 billion on the Nasdaq, advancers beat decliners by more than 2:1 on both exchanges. Up volume measured 4.4 times down volume on the NYSE and almost 5 times down volume on the Nasdaq. The surging markets make both bulls and bears nervous, with markets pundits across the globe questioning the gains. These markets desperately need a pullback. Or do they? For a little while tonight, I’m playing devil’s advocate--or rather bull’s advocate--just as I did today on the Market Monitor. While most pullbacks retrace 1/3 to 2/3 of a previous move, strong markets sometimes retrace as little as 1/4 or 25 percent. That’s already happened. The standard Fibonacci retracement tool does not include a 25 percent retracement, but Q-charts allows a customization of the retracement tool. I added the 25 percent retracement to many of tonight’s graphs. Here’s what I found on the SPX daily chart. Daily Chart of the SPX: Last Tuesday, the SPX followed a bull flag down, trading as low at 962.10, just off the 25% retracement of the March-to-June rally. After bouncing from that level, the SPX broke out of the bull flag to the upside and now trades safely back within its ascending regression channel. Today, it broke back above its 21-dma and closed above that average. Was this a stealth pullback, one we all noted at the time but didn’t consider the real pullback? Note that RSI broke above the descending trendline, tested it and headed back up again. RSI trendline breaks often prove trustworthy. They’re especially helpful because they sometimes lead price action. In this case, RSI broke through its trendline last Tuesday, just as the SPX was bouncing from that 25 percent retracement line and heading up again. Although the 5(3)3 stochastics have zoomed up to levels indicating overbought conditions, they’re still in full bull run, turned straight up. The +DI portion of ADX has kicked back up again, although the ADX hasn’t yet followed. I’m supposed to be playing bull’s advocate, but that still- declining ADX, coupled with what I know about historical trading patterns in July, makes me hesitant to believe the bullishness implied by the close above the 21-dma, the bounce from the 25 percent retracement, the upside breakout of the bull flag, the bullish oscillators, and the close above 1000. What’s it going to take to make me trust what my eyes are seeing? A whole lot, apparently. After the steep declines over the last years, I can’t stop the skepticism. Apparently I’m not alone, either, as the two volatility indices, the VIX and VXN, gained 2.04 and 3.20 percent, indicating rising fear as the markets rose. That rising fearfulness may be cheering the bulls, however, as markets need that wall of worry to climb. Even a cautious market observer has to acknowledge the tenuous signs of economic recovery, but it’s difficult to put those signs into perspective when they’re liberally mixed with more troubling signs and fears of nasty surprises just around the corner. Today’s trading showed a refreshingly rational reaction to news, however, with many stocks sometimes trading according to their outlook, slipping if they offered bad news and gaining if they offered better news. For example, before the market opened this morning, drugmaker Schering Plough (SGP) debuted the warning season, saying that Q2 and full year profit would be below expectations. Blaming competitive pressures, SGP led analysts to expect Q2 earnings of 12 cents per share, down from the previously expected 18 cents per share, and said second half earnings might not match those of the first half. BMC Software (BMC) and Web content management software company FileNet (FILE) also warned. Houston’s BMC said customers had delayed purchasing decisions. A FILE spokesperson mentioned that large transactions had been deferred or delayed. Although FILE closed up, SGP and BMC both closed down, as did PRAA, the subject of a negative article in Barron’s, and RBAK, RITA, and WGRD, all of which either warned or lowered guidance. What I found interesting about those reactions was that the spate of warnings did not scare the markets or diminish their gains. While those stocks declined, ATYT, the subject of a positive article in Barron’s, and UNTD, MWD, BEBE, and CSL, all raised by various analysts, all gained. Although I could point to exceptions such as CERN, which was cut to a sell but still gained on the day, stocks seemed to trade in a reasonable relationship to their current outlooks. I’m a little like the characters in the old movies with an angel on one shoulder and a devil on the other. I’ve got a bull on one shoulder and a bear on the other. The bear keeps whispering that any improved outlook is already built into prices. Is it? Is there even an improved outlook to be anticipated? Today, CNBC mentioned a Merrill Lynch report staying that the IT spending cycle remained depressed. Results of similar reports related to tech spending have been mixed over the last week. A Goldman Sachs study of expected IT spending showed minimal changes from the year-ago period, a better-than-expected result since expectations had been for a decline of 3.2 percent. In addition to that better-than-expected result, other results have been positive. Early last week, a CNN Money article referred to a CIO Magazine survey of chief IT officers at 311 companies. Of those that responded, 47.4 percent had either just replaced a significant number of PC’s or were currently doing so. In an intraday email update today, Jeff Bailey referenced a Needham statement mentioning expectations for positive business momentum to continue. A survey by Nikkei Market Access showed PC sales for the week ending June 22 climbing 20 percent from the year-ago level. Certainly these varied outlooks offer some potentially bullish forecasts sprinkled among the bearish ones. In this cluster of reports, the bullish reports might even outweigh the bearish ones. Those studying the markets must negotiate such conflicting outlooks with care. How much weight should be given to the CIO Magazine survey? How much to the Merrill Lynch report? Is either outlook already priced into the market? With the bear on one shoulder whispering "summer doldrums just ahead" and the bull on the other shoulder whispering "bullish chart formations," I’m adopting a wait-and-see attitude until the SPX clears the June 1015.33 high. That June high now coincides with the resistance offered at the midline of the rising regression channel. A close above that level would imply a move to the top of the channel, although not necessarily without an intermittent pullback or two. That top-of-the-channel level would be marked by a move to 1045-1050 depending on how quickly the SPX rose. Interim resistance would lie at the June high near 1015, also near 1027, and then at 1050, with 1050 being the strongest of the three. If the SPX should achieve that 1050 level, the low daily ADX number hints that the SPX might settle into a trading range throughout the summer doldrums, perhaps between 937 and 1150. If the SPX instead falls below 1000, watch for support near 990, also at 986, then at 972-975, historical support and the top of the bull flag. Strongest support might lie at the 959-962 level that represents the 25 percent rally retracement. SPX 929 represents the 38.2 percent rally retracement and also is the area of the 200-ema, but there’s also light support at 935. The OEX daily chart displays similar characteristics. On July 1, the OEX dropped out of its regression channel long enough to achieve an intraday low of 484.41, approximating a 25 percent retracement of the spring rally. Daily Chart of the OEX: While retracing 25 percent of the rally, the OEX traded down in a bull flag, springing from the bottom of that bull flag at the same time that RSI broke above its formerly violated trendline. As with the SPX, MACD flattens, but the +DI line of the ADX has kicked up again. RSI and 5(3)3 stochastics remain bullish. The OEX closed well above its 21-dma. Midline regression channel resistance for the OEX would be found at 510-513, and a close above that level would hint at a move toward the top of the regression channel. The OEX would hit the top of that channel near 525, depending on how quickly it rose. The OEX might see light resistance near the June high, near 417.50, near the top of the regression channel, and again at 533 and 542. If the OEX did manage a move to the top of the regression channel, the currently low ADX hints that it might also establish a trading range throughout the summer doldrums. If the OEX should instead fall, it will fall back into the recent congestion zone with support layered underneath, perhaps strongest at 500.80-501, 497.60-498, and then between 489-491, at which point it would be testing the bull flag’s support. Other support might be found at the 25 percent rally retracement just below 485, at 478.50-480, and at the 38.2 percent rally retracement and 200- ema at 469-470. The DJI also touched its 25 percent rally retracement, doing so on July 1 when it also dipped to the bottom of its bull flag and then sprang up from that level. I haven’t included the Fibonacci lines on this chart because I wanted to show a comment I’d first written on June 13, before that dip to the 25 percent retracement value, but the 25 percent retracement lies at about 8880. On June 13, I’d speculated that the bullishness of the chart formation would be preserved with a fall to 88.80 (using the DJX chart as a proxy for the Dow’s). I’d expected that plunge to 88.80 to take place sooner so that the DJX would have remained within the regression channel while retreating to 88.80, but the violation of the ascending channel was brief, taking place as the DJX traded within its bull flag. Daily Chart of the DJX: I can add little to a discussion of this chart that hasn’t already been said about the other charts. The bull flag, the regression channel, the close above the 21-dma, and the positive RSI action all appear similar. Midline resistance would be found between 93.20-93.80, depending on how quickly the DJX rises. A close above that midline resistance and the June high might portend a move toward the top of the regression channel, near 95-95.50, depending on how quickly the DJX rose. Other resistance might be found at 9700 and 9900, but the DJX might also retreat once it hit the top of its regression channel. ADX measures less than 20, an indication of range-bound rather than trending markets. If the DJX should instead decline, participants could first watch for support at 9200, then in 50-point increments down to 8950. The 25 percent rally retracement lies at 8880, some support exists between 8710-8740, and the 38.2 percent retracement and 200-ema lie between 86.20 and 86.50. When studying the NDX chart, it quickly becomes apparent that the NDX has already moved above the midline resistance on its rising regression channel. This perhaps portends that other indices will do so, too. Although a classic bull flag might see a tighter range of lower highs and lower lows, the NDX pattern over the last several weeks could also be described as a bull flag, with the breakout having taken place. The NDX moved above its 21-dma last week, perhaps also portending that the other indices would do so today. It also tested and sprang up from its 25 percent rally retracement level and RSI broke above its trendline as that was happening. Daily Chart of the NDX: This action hints that the NDX will test the top of its regression channel, perhaps near the 1320-1350 historical resistance, although market participants might have liked a bigger closing margin above its 1280 former resistance before they started counting on testing higher resistance. Oscillators look bullish, however, with the ADX above 30 and perhaps turning up again. Support lies beneath at 1280, although that support remains questionable, between 1265-1266, near 1250, and between 1220-1223. A steeper fall might bring the NDX back to test its 25 percent rally retracement at 1184 or to 1180 support. Other support can be found between 1162.50-1165.50 and then at 1140, the site of historical support and the 38.2 percent rally retracement. Even though I’m viewing these charts with a bear sitting on one shoulder, the indices seem primed to move higher, perhaps only over the next week or so with maybe a down day or two along the way. Many 30-minute and 60-minute charts display oscillators that indicate short-term overbought markets, but the high ADX levels on those 30-minute and 60-minute charts hint that the upward trend remains strong and that oscillators can’t be trusted. I’m still inclined to listen to the bear, particularly with the summer doldrums almost upon us, so can’t quite believe the evidence I’m seeing. Not even the bear is whispering that it’s time to short the markets just yet, though. He’s just growling warnings. Tomorrow, that may all change. What would change the outlook? Nothing I can predict at this point since earnings and economic releases will be light. AA will report. As Jim mentioned this weekend, this will be the first Dow component to report. GE reports on Friday. Nasdaq biggie YHOO reports on Thursday. Tomorrow morning’s economic reports include Chain Store Sales at 7:45 ET, previously -0.5%, Redbook Retail Sales at 9:00, previously +0.9%, and the June Richmond Manufacturing Index at 10:00, previously at -5. Out of those numbers, the Richmond Manufacturing Index at 10:00 ET might be the most likely suspect to initiate a pullback on those 30-minute and 60-minute charts. May’s Consumer Credit will be released at 3:00 p.m. ET, previously $10.7 billion and with a market consensus of $5.0 billion for May, but with predictions ranging from $1.5 billion to $5.3 billion. As the wide-ranging predictions demonstrate, this number can prove volatile. Perhaps due to the warnings Jonathan Levinson and others have issued about the dangers of higher consumer credit, market participants should pay more attention to this number than they usually do. Because of that volatility and because the information is considered old news, it’s not often a market mover. Earnings warnings are likely to accumulate as the week progresses. Also, as the end of the week approaches, expect attention to focus on Friday’s upcoming economic release of the PPI and core PPI. Numerous weekend articles focused on Friday’s PPI, with many articles speculating on the various forces that might impact the number. For example, producers from car manufacturers to 3M have been using incentives and discounts to prop up demand and undercut competitors. Be careful picking a top just yet. If markets are going to dive rather than consolidate, we’ll have evidence of that happening when key support levels are violated, and you may just get a better chance for a higher top. Linda Piazza ************ FUTURES WRAP ************ Another Flagpole Rally Jonathan Levinson In what is by now a well-worn script, equities climbed throughout the night before launching in a near-vertical move, printing a "flagpole" within the first 45 minutes of the cash session, and, for the remainder of the day traded in a tight horizontal range along the top. It was a very bullish day for equities, albeit on relatively light volume, bearish for treasuries and gold. 3 minute ES candle chart Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1017 1010 998 991 980 YM03U 9337 9268 9170 9101 9003 NQ03U 1317 1301 1270 1254 1222 10 minute chart of the US Dollar Index The US Dollar Index printed a huge sell candle, followed by a huge buy candle, and then stair-stepped to new highs above 95.50. It was almost as if someone hit the wrong button on that opening sell, and then corrected it one tick later. The action was bearish for gold, but surprisingly, the commodities index (CRB) was actually positive on the day, led by natural gas, copper and live cattle futures. Daily chart of August gold Gold got sold off to the middle of its recent range, dropping 3 points to 348.30. Both the XAU and HUI got sold as well, but shallowly, recovering just before the close, with XAU finishing lower by .97 to 78.84 and HUI -.69 to 153.96. Daily chart of the ten year note yield Treasuries also got sold off, chopping steadily lower throughout the session. The move was sufficiently extreme to print most of today’s closing candle on the Ten Year Yield above the upper Bollinger band, which should be good for a downside correction tomorrow, which means a move higher for treasuries. The Fed added 6.5B net in overnight repos, which should have hurt the US Dollar and helped treasuries, but if it did, it certainly wasn’t apparent from either the chart of the TNX or the US Dollar Index. Daily NQ candles That would be a Rocket Powered Bullish Engulfing Candle printed today, setting a new rally and year high on the Nasdaq futures. It closed one point below its high of the day, never dipped or pulled back, and turned the oscillators up on bullish buy signals before even approaching oversold territory. 30 minute 20 day chart of the NQ As we can see, the move exceeded the bullish descending wedge upside target, and the oscillators on the 30 minute candles are hinting at sell signals within this shorter timeframe. No kidding. After the past two sessions with barely the whiff of a pullback, some kind of correction is to be expected. Daily ES candles The S&P futures were no slouch either, but paled in comparison to the move on the NQ contract. Note how the MacD oscillator hasn’t printed its confirming upside cross yet. The rally high was missed by 11 points, but if the NQ tends to lead the way, there could be much further for the ES to go. 20 day 30 minute chart of the ES The oscillators on this shorter 30 minute timeframe are on clear sell signals, but the correction was good for all of 2.25 points as of this writing. I suggest that you look at the pivot matrix posted above for the ES futures- I’ve been watching the tape since last night, and the levels it calculated coincide exactly with my chart-based observations as posted in the intraday Market Monitor. I like to see confirmation of my work, and the pivot calculator seems to be doing so here. Daily YM candles The Dow futures are telling the same story as ES. 20 day 30 minute chart of the YM The charts really speak for themselves. Bears will be jumping up and down. Why did the Fed add so much intervention money in today’s open market operation? Why did bonds sell off with a huge move upward in the US Dollar Index? Why did the option volatility indices, the VIX, VXN and QQV, all rally today, moving higher with equities? Why was the put to call ratio not higher? Why was it not lower? What about the low volume? Bulls are buying because it’s going up. Relief rally because of the blessed absence of domestic disaster over the holiday weekend, or because of oversold oscillators from Thursday, it doesn’t matter. Whatever the reason, the charts tell us to expect a pullback within the context of a strong prevailing uptrend on the dailies. A violation of the ascending trendlines on the dailies will be cause to re-evaluate, and I personally feel that it’s not a question of "if", but rather "when". Nevertheless, dips to support should be bought with active stops until the charts tell us otherwise. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Fsssss... BOOM! Technology stocks lead today’s bullish session after a report in The Financial Times that Microsoft (NASDAQ:MSFT) $27.42 +3.47% may be ready to distribute roughly $10 billion of its $46 billion stockpile of cash to shareholders in the form of a one-time dividend provided an early morning catalyst for gains. Reports out of Asia that a lessoning of SARS cases has brought a resurgence in demand for PCs along with multiple positive comments from brokers in the semiconductor sector fueled gains into the close, with Goldman Sachs’ Laura Conigliaro saying that the firm’s latest information-technology survey showed a strong outlook for Intel-based servers. The "weakest" performing technology sector was the GSTI Software Index (GSO.X) 131.82 +3.12%, with BMC Software (NYSE:BMC) $15.09 -8.37% weighing on the groups otherwise bullish session as the company said current quarterly results were being hurt by delayed corporate spending for its software products. Technology sector strength and many four and five lettered stocks surged in the session, helping lift both the broader NASDAQ Composite (COMPX) 1,720 +3.44% and NASDAQ-100 Index (NDX.X) 1,281.89 +4.28% to new highs as bulls and bears flocked to their favorites by sending 390 stocks on the NASDAQ to 52-week highs compared to a meager 8 stocks hitting new lows. Today’s 390 new 52-week highs on the NASDAQ was the second highest total this year when compared to 439 new highs found on June 6th. NASDAQ Composite Chart - Weekly Intervals 52-week high/low breadth had been falling off in recent weeks and it was looking like the NASDAQ Composite may have "topped out" with resistance at 1,685. A resurgence in bullishness today has the NASDAQ Composite breaking above 5-week resistance and new highs of 390 gives some confirmation to the move higher. While our DAILY ratio of new highs versus new lows reads 98.0%, it has the 10-day average of new high/new lows turning up to 93.3% for the first time since "peaking out" on June 17th at 97.8% and gives the impression that bullish leadership may take hold over the next couple of weeks. NASDAQ-100 Tracking Stock (AMEX:QQQ) Chart - Daily Interval The QQQ and NASDAQ-100 Index (NDX.X) 1,281.89 +4.10% exploded to the upside with the "5 horsemen" or largest weighted stocks gaining a minimum of 3.47%. While MSFT’s 3.47% gain seems "minimal" its 10.2% weighting, which is nearly double that of Intel (INTC) was HUGE for the QQQ. Today’s move above $27.00 for MSFT breaks formidable resistance for that stock and should have support building at that $27.00 level. With MACD crossing above its Signal on the QQQ, I’ve got to be looking for support at $31.43 on any type of profit taking pullback and with such a fierce move higher from short-term downward trend in today’s trade, the MONTHLY R2 of $32.40 is in play. While BMC Software (NYSE:BMC) $15.09 -8.37% is not a component of the NASDAQ-100, it is "tech" and today’s quarterly earnings warning continues to show that there are still some very soft spots in corporate IT spending, which right now, the MARKET seems willing to look past for broader technology, but I’d still use these types of warnings as a "reason" to NOT BE OVERLY LEVERAGED from the bullish side in the QQQ/NDX. At the same time, I made note in today’s Market Monitor that discount airliner Frontier Airlines (NASDAQ:FRNT) $11.48 +17% was moving above $10 resistance earlier in the morning, jumped to an 8% gain when the company guided higher on quarterly earnings and built further gains into the close. FRNT is not a NDQ/QQQ component either, but gives the impression that if there are some "upside surprises" to the bottom line on improving demand, there’s one heck of a lot of bullishness that is unfolding, especially in stocks where short interest is building! FRNT doesn’t trade near the volume the "Big 5" in the NASDAQ-100 does, but its short interest jumped to 3.4 million by June 13th, from a May 15th 2.7 million shares. It’s one thing for bears to be covering simply based on price action like I think we are seeing in the QQQ, and it would certainly appear that the slightest amount of "good news" in fueling gains. Intel (INTC) $22.90 +5.47% and Amgen (NASDAQ:AMGN) $68.91 +3.81% both traded new 52-week highs today and there appears to be a significant lack of supply for these two stocks and short interest was building in both from May 15th to June 13th. Today’s trade saw a net gain of 1 stock to a point and figure buy signal in the NASDAQ-100 Bullish % ($BPNDX). This has the bullish % still "bull correction" status, but moving up from last Wednesday’s 74% reading to 77%. I should also make note that after trading the $29.40 level last week and our "finite stopping" level for bullish on the unconventional $0.35 box scale for the QQQ, today’s trade at $31.50 was a break to new highs which should have bears VERY defensive and further trade high at $31.85 gives me the impression that buyers (short-covering or new bulls) are very aggressive. This type of action should have bearish traders in the other indexes, which haven’t broken above their June highs quickly assessing bearish risk in their accounts. S&P 500 Index (SPX.X) Chart - Daily Interval I saw nothing bearish in today’s trade for the SPX and must say that I’m not a "full of conviction bear" even at partial bearish position. After the first hour of trading, the SPX traded between 1,002 and 1,005 the remainder of the session. The only "negative" I do see was at the end of today’s trade when the S&P 500 Bullish % ($BPSPX) showed a net loss of 4 stocks to point and figure sell signals as the bullish % slipped 0.8% to 77.2%. This is considered "bearish divergence." I’m thinking these sell signals were likely to have come from the energy sector and perhaps Oil Service (OSX.X) 88.72 -2.84% which was today’s weakest sector. The narrower S&P 100 Bullish % ($BPOEX) saw a net gain of 1%, with the bullish % rising to a bullish cycle high reading of 82%, which on a comparison basis has me thinking it was some energy stocks giving reversing sell signals. I’ll try and check what stocks may have shown weakness when Dorsey/Wright and Associates updates their charts. I can sort for stocks that gave sell signals in today’s trade. S&P 100 Index (OEX.X) Chart - Daily Interval If not for the slippage in the S&P 500 Bullish % ($BPSPX) on a broader scale, I’d be much more bullish the narrower S&P 100 Index (OEX.X) by today’s close as the narrower bullish % is once again matching its bullish cycle high reading of 82% and looks to have its WEEKLY S2 of 510.63 and June 17th closing high of 512.67 in reach. Other than potential resistance at WEEKLY R1, the main technical resistance I would be cognizant of is the mid-point of our regression channel, which when broken to the downside on June 23rd, saw a test/violation of lower regression, with now looks to have a bounce higher in full swing. My thinking that the OEX may have resistance near 514 is that the mid-point of this regression channel has at times served support, which after being broken to the downside might come back into play on a further spike higher at 513. While brokers got an upside surge to their June highs on comments that "make sense" regarding stronger trade levels from retail investors and a pickup in merger/acquisition activity, the banks are lagging the brokers somewhat, and my best guess is that the higher YIELDS in Treasuries may indeed have some sector bulls being cautious on thoughts that the next move by the Fed is going to be raising rates, not cutting them further, which can be viewed as a negative for the sector. Still, I’m keeping an eye on Bank of American (NYSE:BAC) $80.90 +1.11% as it trades a new 52-week high, which is a component of both the S&P Bank Index (BIX.X) 309.85 +1.43% and KBW Bank Index (BKX.X) 884.41 +1.92%. The trade action in BAC certainly has to hint that the BIX.X and BKX.X should follow this type of leadership. Dow Industrials (INDU) Chart - Daily Interval Alcoa (NYSE:AA) $25.71 +1.62% is first Dow component to report earnings and they are due to announce tomorrow morning. While AA has gained nearly 35% from its March lows of $19.00 and there’s obviously been some type of "expectations" built into tomorrow’s earnings report, earnings along with forward outlook and any "dividend policy changes" could be the needed catalyst for a Dow move higher. (Consensus is of AA to earn $0.25 per share) I can’t say for certain that "everyone" is going to be listening to what a Dow component has to say about how things are "shaping up" but with the indexes above or nearing their June highs, any type of bullish comments for a deep cyclical rooted in the economy should have some type of impact and could influence trade. I’m also keeping an eye on General Motors (NYSE:GM) $35.90 +0.33%, which remains pegged near the $36 level, with its intermediate-term 50-day SMA ($35.91) still unable to get a "bullish crossover" above the longer-term 200-day SMA ($35.95) with today’s trade. The "fundamental" side of me continues to struggle with the gains found in many technology stocks, that are "dependent" on some of these bigger cyclical stocks to buy technology from, which so far, we haven’t seen them spend with plenty of production capacity still unused. While quarterly bottom line earnings will be closely listened to, I’d also be listening for forward guidance, but also dividend policy going forward. I don’t think many Dow components will be cutting dividends, and if anything, would be raising dividends. Microsoft (NASDAQ:MSFT) $27.42 +3.47% when questioned about their potentially raising their dividend did say late today that they would not comment at this time. Microsoft is scheduled to release quarterly earnings on July 17th. Today’s trade saw a net gain of 1 stock to a point and figure buy signal in the very narrow Dow Industrials Bullish % ($BPINDU) and has this bullish % rising 3.33% to a bull cycle high reading of 86.67%! International Business Machines (NYSE:IBM) $86.09 +2.54% was the stock to reverse a prior sell signal given at $84.00 on June 3rd, which came on news of an SEC investigation into its accounting. Today’s trade at $86.00 was the reversing point and figure buy signal level. Here’s a quick look at the Pivot Analysis Matrix. Pivot Analysis Matrix - Stocks and Treasury YIELDS as depicted by the 10-year YIELD ($TNX.X) have started to show more correlation in the past week, with selling in Treasuries seemingly freeing up cash that may indeed be finding its way toward stocks. (see monthly and WEEKLY matrix today). However, the U.S. Dollar Index (dx00y) 95.53 +0.31%, which measures the strength of the dollar against a basket of 7 foreign currencies has also been showing strength and matching stock price action in recent weeks, so I’m not entirely comfortable at this point in saying that higher YIELD results in higher equity price, or vise versa. Combined, the Dollar strength depicts that of cash coming back to the U.S., while selling in Treasuries against the dollar has the look that the money is staying here in the U.S. From what I’ve read, foreign government bonds are seeing selling with their equity markets seeing gains. I’ve "dashed green" some correlative near-term support levels for tomorrow, as these support levels were traded through to the upside today. The QQQ ticked higher from its 04:00 PM EST mark, when the NASDAQ-100 Index (NDX.X) itself closed, but here, in the NDX we see correlative resistance first near 1,292 and then higher still at 1,302. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** WEEKLY FUND WRAP **************** Most Equity Fund Objectives Higher According to Lipper, most equity fund objectives were higher over the 5-day period through July 3, 2003, but weak unemployment news took stocks down in Thursday’s holiday-shortened session. A jump in the U.S. employment rate from 6.1% to 6.4% in June spurred the round of selling. Vanguard Total Market Index Fund, which tracks the total return of the Wilshire 5000 index, the broadest measure of the U.S. stock market, produced a weekly return of 1.1%. Most diversified U.S. stock funds fell short of that. In terms of market capitalization, small-cap funds outpaced their large-cap peers, which produced minimal returns. Growth-oriented funds, meanwhile, outperformed value-driven funds overall. Tech- sector funds were the best performing U.S. equity fund group, up 2.1% on average over the 5-day period through July 3, per Lipper. Small-cap growth funds averaged 2.0% for the week, while mid-cap growth funds picked up 1.2% on average, per Lipper. Weekly total returns were stronger for international equity funds also. Vanguard Total International Stock Index Fund, which seeks to match the total return of the total international stock market (MSCI EAFE plus MSCI Select EMF index), generated a weekly return of 1.6%. Most international and emerging-market equity funds did better than that, particularly those overweighted to Japan. Gold mutual funds shot up 4.7% on average in the last five days, using Lipper’s numbers through July 3, 2003. Vanguard Total Bond Market Index Fund, which replicates the total return performance of the Lehman Brothers Aggregate Bond Index, a broad measure of investment-grade U.S. bonds, was 0.1% lower over the 5-day period. Weekly declines increased as you moved further out on the yield curve. Vanguard’s Intermediate-Term Bond Index Fund was down 0.4% for the week, while Vanguard’s Long-Term Bond Index Fund was 0.8% in the red. According to Lipper, most fixed income objectives contained their average weekly losses to below 0.3%. Equity Fund Group Week YTD Selected Lipper Equity Indices (Jul-03) +0.0% +9.5% Balanced Fund Average -0.1% +10.5% Equity Income Fund Average +2.1% +11.5% International Fund Average +0.1% +11.3% U.S. Large-Cap (Core) Fund Average +0.9% +15.6% U.S. Mid-Cap (Core) Fund Average +1.5% +16.3% U.S. Small-Cap (Core) Fund Average +0.2% +14.4% U.S. Multi-Cap (Core) Fund Average +2.2% +26.0% Science & Technology Fund Average Among funds with over $500 million in assets, the highest weekly total return belonged to Vanguard Pacific Stock Index Fund, 5.1%. T. Rowe Price New Asia Fund was second with a 4.5% weekly return. So, so strong relative returns from Japan and the Pacific region. Fidelity Select Gold rose 4.2% for the week to lead the gold fund group higher. RS Diversified Growth Fund, a small-cap growth fund, gained 3.4% for the week, highest among "growth" funds with assets over $500 million. Oppenheimer Discovery, another small-growth style fund, generated a 1-week return of 2.6%. International funds with pro- growth styles also performed relatively well. The William Blair International Growth Fund, for example, had a weekly total return of 3.7%. Hennessy Cornerstone Growth Fund, a core growth fund, gained 2.6% last week, highest among "core" stock funds with assets more than $500 million. Heartland Value Fund’s 3.6% weekly return was tops among popular "value" funds. Wasatch Small-Cap Value Fund picked up 3.2% for the 5-day period through July 3, 2003. So, small-cap fund returns were broad-based across investment styles. Fixed Income Fund Group Week YTD Selected Lipper Fixed Income Indices (Jul-03) -0.3% +4.3% Corporate A-Rated Debt Fund Average +0.1% +1.3% GNMA Fund Average -0.2% +8.2% Global Income Fund Average -0.1% +15.7% High Yield Fund Average +0.1% +8.8% International Income Fund Average -0.3% +4.5% Intermediate Investment Grade Fund Average -0.3% +2.2% U.S. Government Bond Fund Average Among U.S. government debt funds with over $500 million in total assets, the week’s top performance belonged to Montgomery Short- Duration Government Bond Fund, up 0.2% over the week. Vanguard Long-Term Treasury Bond Index Fund, on the other hand, lost 0.6% over the 5-day period through July 3, 2003. FPA New Income Fund, a high-yield fund, produced a 1-week total return of 0.5%, highest among U.S. fixed income funds over $500 million. T. Rowe Price International Bond Fund gained 0.3% for the week, while PIMCO Global Bond Fund was 0.2% higher over the most recent weekly period. Money Market Fund Group Yield Selected iMoneyNet Money Market Indices 0.58% All Taxable MMF Average 0.54% All Tax-Free MMF Average The iMoneyNet.com All Taxable MMF Average slid by 6 basis points (0.06%) to 0.58% last week following the Fed’s decision a couple weeks ago to lower short-term interest rates. Among prime retail money market funds, PayPal Money Market Fund is now the only fund with a current 7-day simple yield of 1.00% or more. It currently sports a 1.10% yield. Fidelity Cash Reserves, the country’s largest retail money market fund, has a 0.88% yield. Vanguard Prime Money Market Fund sports a 0.85% current yield. With money market yields at all time lows some experts are suggesting money market investors check out some of the "higher" yields being offered by Internet banks. Fund News, Etc. In Brill.com news (www.brill.com), there was an interesting story last week on socially responsible investing, originally published by the Fort Worth Star Telegram. It speaks about the competitive returns of SRI funds and growth in fund assets. Today, about one dollar out of every eight is invested in "professionally-managed" SRI funds. Further, combined assets in SRI funds increased about 36 percent between 1991 and 2001, outpacing the overall growth in the mutual fund industry. Last week, we profiled the co-managers of the Women’s Equity Fund, a SRI funds that invests in companies that promote women in the workforce. Morningstar analyst Christopher Davis says the recent Morningstar conference in Chicago was more optimistic than two years ago. On the other hand, many attendees have since become more pessimistic over the outlook for bonds, with rates historically low and maybe moving higher in the second half of 2003 along with U.S. economic growth. Steve Wagner Editor, Mutual Investor email@example.com ************************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 ************************************************************** ************** TRADERS CORNER ************** Trading Terminology Now that we have developed a system with the five components of system development we are ready to move on to the next stage. But first let’s do a quick recap of the components. 1. Market Action - I chose the S&P or NASDAQ e-minis because of liquidity. 2. Timeframe - I chose 5 minute because it fits my style of trading but realize that after testing may have to adjust this, however i will not use a timeframe out of my comfort zone. 3. Entering a position -: Setup 5 -minute bar trading under or over the 4MA Filter ADX(10) >= 30 DMI(14) (+) > (-) for longs DMI(14) (-) > (+) for shorts Trigger Next bar trades 1 tick above or below the setup bar. 4. Exiting a position - 1/2 the position is taken at a P1 level and 1/2 is taken at P2. Stop at 1 tick above or below the setup bar Always exit at the close of the day. 5. Money Management - according to my money management plan. Now is the time to put our feet to the fire and put the system to the test with Tradestation’s Strategy Testing. Tradestation describes Strategy Testing as, "a process of designing a set of trading rules to systematically enter and exit the market. A trading strategy is a complete set of Long and/or Short entry and exit rules based on technical analysis. The Strategy Performance Report is used to analyze the performance of a strategy as well as to gain a better understanding of its characteristics." Once you apply a strategy to a chart, the Strategy Performance Report enables you to view strategy information such as total net profit, total number of trades, largest losing trade, and more. I will go over some of the some important pieces of data from the Strategy Performance Report so we have a basis from which we can compare one test to another. The most important section of the Strategy Performance Report is the Performance Summary. The Performance Summary is divided into three sections, All Trades, Long Trades, and Short Trades. This report gives all sorts of very good information about your system but these are the most important points. Gross Profit - All the money you made Gross Loss - All the money you lost Total Net Profit - Gross Profit - Gross Loss ie. The money you walked away with. Profit Factor - The dollar amount the strategy made for every dollar it lost Number of Trades - Number of trades generated by the strategy for the defined time frame Winning Trades - Profitable trades Losing Trades - Unprofitable trades Even Trades - Breakeven trades Percent Profitable - Winning Trades/# of Trades Average Net Profit - Average amount you made on each trade Net Profit/# of trades Average Winning Trade - Average amount you made on each winning trade Average Winning Trades/# of winning trades Average Losing Trade - Average amount you lost on each losing trade Average Losing Trades/# of losing trades Largest Wining Trade - The most made on 1 trade Largest Losing Trade - The most lost on 1 trade Maximum Consecutive Winning Trades - The most winning trades in a row. Maximum Consecutive Losing Trades - The most losing trades in a row. Maximum Drawdown (intraday peak to valley) - is the greatest unrealized loss experienced intraday. This number is important to determine the minimum account size. Maximum Trade Drawdown - is the greatest realized loss experienced from closed trades There is a lot more information on these reports but we have enough here to do a fairly good job of evaluation. So what to look for? First of all the most important number is your Profit Factor, if you lose more than you make then you don’t have to go any further an this number. Second look at the Percent Profitable. You can make a positive Profit Factor and still have the % Profitable less than 50. However, this means you have more losers than winners but your winners have a larger Average/Winning trade than the Average/Losing Trade. This would be a very difficult strategy for me from the psychological point of view. I don’t know if I could stick with a strategy where I lost more than I won, no matter how much my winners made. Once you have gotten past these two numbers the next piece of information to look at is the Average Net Profit or the average money made per trade. This number can "normalize’ the first two and give you a little clearer picture. And of course you have to look at the drawdown because this fits with your money management plan. I have my ADX system coded into Tradestation and I would like to show you the results for the last 7 months on the S&P e-minis and then start an optimization process to see if we can improve a system with which we are already comfortable trading. Where does one start? Here is how I would like to approach this. Group the variables into two, one with the money management parameters only and one with the technical analysis parameters only. The money management group includes; P1, P2 and number of ticks away from the setup bar for entry and stop loss The technical analysis parameters group includes; ADX length and minimum, DMI length, MA length. I did not test the system without EXITONCLOSE because I am not comfortable with holding overnight. I have created a spreadsheet with these criteria and will use the Profit Factor and Win/Loss Ratio for comparison. Here is the spreadsheet I created. The first line is the results of the system as is and at first glance looks like it is not all that profitable. It will only return $0.69 for every dollar lost and has only a 40% win/loss ratio. My impression was that I had a pretty good system that, although it didn’t trade all that often, was profitable. So much for my impressions. Let’s dig a little deeper and examine this data. 1. Tests 1 through 9 are done with P1 and P2 set at 2 and 4 respectively. I only changed the Entry and Exit ticks. 2. Line 8 shows the "best" combination of Enter 3 ticks above or below the setup bar and set your stop loss 2 ticks above or below the setup bar. 3. Then for tests 10 through 17 I used the best combination from the previous set of tests - Entry ticks = 3 and Exit ticks = 2 and only made changes to the P1 and P2 points. Here I found that P1 = 3 and P2 = 4 seemed to garner the best results. 4. I then went back and retested the Entry and Exit points with the new P1 and P2 in tests 18 to 25. The highest Profit Factor and Win/Loss Ratio was $0.89 and 52% so I will use P1=3, P2=4, Entry ticks=3 and Exit ticks=2 for the second group of tests on the technical indicators. To test the Technical indicators I will use the Optimize function built into Tradestation. The number in magenta shows the number the optimization tests returned. Test 1 - Optimize the MA from 2 - 15. This means test all MAs from 2 to 15 while the other parameters stay even. Test 2 - Optimize the ADX Length from 5-15. This means test all ADX Lengths from 5 to 15 while the other parameters stay even. Test 3 - Optimize the ADX Minimum from 15-45. This means test all ADX Minimums from 15 to 45 while the other parameters stay even. Test 4 - Optimize the DMI Length from 7 - 21. This means test all DMI lengths from 7 to 21 while the other parameters stay even. For the rest of the re-optimization the MA will be set at 11 because it gave us the best results. Start the optimization process over again beginning with ADX Length. Test 5 - Re-optimize ADX Length. Test 6 - Re-optimize ADX Minimum. Test 7 - Re-optimize DMI Length. For the rest of the re-optimization the ADX minimum will be set at 33 because it gave us the best results. Start the optimization process over again beginning with ADX Length. Test 8 - Re-optimize ADX Length. Test 9 - Re-optimize DMI Length. For the rest of the re-optimization the ADX Length will be set at 14 because it gave us the best results. Start the optimization process over again beginning with DMI Length. Test 10 - Re-optimize DMI Length. So the final result is: MA Length = 11 ADX Minimum = 33 ADX Length = 14 DMI Length = 21 P1 profits = 3 P2 Profits = 4 Enter ticks = 3 Exit ticks = 2 And here is the Performance Summary for these settings; With the definitions earlier in the article, you should be able to come up with a pretty good idea if this system is for you. However, I will be delving into this strategy report in greater detail but not here. This is enough for one day. We still have to retest the money management data with the new indicator settings and we have to go through this all over again for NQ. I would like to make one last point here about strategy testing. A strategy should be robust to be used in different markets but I have decided that this strategy will be used for only the S&P or the NASDAQ so, although I agree with a robustness, I don’t feel it applies here. Hope this is all helping. Jane ************** TRADERS CORNER ************** Position Adjustment – Releasing The Choke Hold on the QQQs By Mike Parnos, Investing With Attitude Today we’re going to publish our first CPTI "position adjustment." Since my column normally appears on Thursdays and Sundays, we often miss opportunities to inform our readers of adjustments made to positions in our published CPTI portfolio. Today’s adjustment is to our QQQ Baby Strangle. Here’s a description of the original trade. July Position #4 – Ongoing QQQ ITM Baby Strangle – Currently at $31.87 In May we bought 10 contracts of the July QQQ $30 puts @ $2.05 and bought 10 contracts of the July QQQ $28 calls @ $1.80 Total debit of $3.85. Our thinking: The QQQs had made a big move up. It was either going to break through resistance or bounce off and head back down. Our objective is for a $3-4 move in the next month. One of our long options will hopefully pay for almost the entire position. That will leave our other long option, which is now practically free, poised for the bounce back as the QQQs reverse. Our exposure is only $1.85 because we have $2.00 of intrinsic value. Our Adjustment Today we got the move we were looking for. The QQQs, along with the rest of the market, took off and never looked back (but it will, hopefully). We sold the July $28 call at $3.80. That means we still own the July $30 put at a cost of only $.05. Now, we still have seven trading days for it to reverse and head back down. Wouldn’t it be nice to see the market give back three points? Since the market is going up for no apparent reason, it makes sense that it will come back down for the same lack of reason. It’s that "random walk" or "chaos" thing playing itself out. Basically, we have a free trade and seven days to enjoy, and hopefully profit from, it. An Alternative Today (Monday), the July $28 call closed at $3.80. You can play the described strategy, or you can hold onto the $28 call. If the QQQs continue up, you should make out very well. A reverse would benefit those who follow the strategy as designed. The July $30 put finished with a value of $.15. If you sold it, along with the $28 call, you would have a profit of $.10. But that’s no fun. You could just sell the July $30 put and have a small cushion should the QQQs pull back a little before a continued climb up. Decisions, Decisions . . . What will YOU do? As they say in the Far East – Rotsa’ Ruck! ________________________________________________________________ P.S. It looks like, as of about 4:30 p.m., the QQQs are bidding up a little. There may be a little pop at the open tomorrow – if bad news doesn’t come up to damper the buying. ________________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we’ve been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and click on "Traders Corner." They’re waiting for you 24/7 ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************************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". 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The Option Investor Newsletter Monday 07-07-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: ABC, AGN, AMGN, DGX, GS, HAR, PHM, EBAY Dropped Calls: STJ Dropped Puts: COF Play of the Day: Call - AMGN Watch List: Would you believe more breakouts? Updated on the site tonight: Market Posture: Bears Roast in the Hot July Sun ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** ABC - call Adjust from $68.50 up to $69.95 AGN - call Adjust from $76.00 up to $77.50 AMGN - call Adjust from $63.50 up to $64.75 EBAY - call DGX - call Adjust from $63.50 up to $64.00 GS - call Adjust from $81.95 up to $83.25 HAR - call Adjust from $76.50 up to $77.25 PHM - call Adjust from $59.99 up to $60.50 eBay Inc - EBAY - close: 113.91 change: +3.89 stop: 109.00*new* Shares of EBAY have continued to rally strongly and given the 3.44 percent jump in the NASDAQ composite we're not surprised. Shorts could be on the run after EBAY failed to stall at the $110 level. Our secondary target of $120 doesn't seem too far away but we caution against initiating new bullish positions as the stock is short-term overbought from its $104 breakout. Traders with profitable positions should re-evaluate their stop losses to ensure a profit if the stock reverses. They're also highly encouraged to consider taking some money off the table now. It never hurts to take a profit and pocket some cash. We're upping our stop loss to $109.00 on the stock but traders are strongly encouraged to make their stops tighter to protect gains. Currently, we plan on riding EBAY into its earnings report (and dumping it just before hand) unless shares hit $120 or stop us out in profit taking. Picked on June 27th at $104.05 Change since picked: +9.86 Earnings Date 07/18/03 (unconfirmed) Average Daily Volume = 6.76 million ************* DROPPED CALLS ************* St. Jude Medical - STJ - close: 55.64 change: -0.86 stop: 54.95 Well, it certainly appears the rising tide isn't lifting all boats, as the stock underperformed most of its peers again on Monday, as well as the broad baskets of healthcare-related stocks. Traders looking for the reason are going to be led to the SG Cowen downgrade to Outperform this morning. That took the bloom off this rose and a possible rebound from the $56 area turned into a breakdown instead. STJ has now broken below the bottom of its ascending channel and the 50-dma ($56.00) and our stop. While the stock did manage to recover significantly off its lows, this rebound looks like an opportunity to get out, not to consider new positions. Picked on June 24th at $57.62 Change since picked: -1.98 Earnings Date 07/16/03 (confirmed) Average Daily Volume = 1.60 mln ************ DROPPED PUTS ************ Capital One Fin. - COF - close: 51.13 change: +1.88 stop: 50.51 The 2-week stalemate finally broke on Monday, with shares of COF getting enough of a bid from the overall Financial sector to break out over $50 resistance, our $50.51 stop and then the 20-dma ($51.13). While the stock is still significantly underperforming its peers, this bullish tide is indeed lifting all boats and it is time to bid a bon voyage to COF. Given its relative underperformance recently, odds are good that it will provide further bearish opportunities once this rally fades. But fighting the bullish trend right now is not a prudent use of resources. For traders that didn't exit today, we'd recommend using any dip early on Tuesday as a gift of an exit point. Picked on June 15th at $49.64 Change since picked: +1.49 Earnings Date 07/16/03 (confirmed) Average Daily Volume = 4.18 mln ************************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 OF THE DAY - CALL ********************** Amgen, Inc. - AMGN - close: 68.91 change: +2.53 stop: 64.75*new* Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: While it would have been nice to see our AMGN play end the week at a new high, we certainly won't complain about the stock's consistency. Each dip near the 30-dma (currently $64.56), which is also near both the long-term ascending trendline and the bottom of the 2-month channel. Seems like pretty strong support, don't you think? Unfortunately, resistance was just as strong last week, as AMGN challenged the $67.50 resistance level (6/16 high) on 3 out of 4 days and each time the bears turned the stock back. A successful breakout over $67.50 next week may make for a decent momentum entry enroute to the $70 level, but remember this is a very aggressive strategy with AMGN. The stock doesn't tend to have good follow-through on the breakouts, with the better entries coming on the pullback to support following the breakout. While it was disappointing to see AMGN fall back near the $66.50 level at the close (note the closing price of $66.06 took place after hours), this just looks like more of the back and forth tango that we've become familiar with when trading AMGN. It doesn't tend to trend very well on a day-to-day basis, but over the longer-term it continues to build a consistent pattern of higher lows and higher highs. Posting a lower high last week could be a precursor of more weakness in the week ahead, as we could be setting up for a repeat of the bearish pattern that developed in late April and early May. In that time period, the stock traded two significant lower highs and lower lows before once again finding strong support at the 50-dma. So while we're looking for new entries near the $64.50-64.75 area, we need to keep in mind that it is possible for AMGN to trade down to the area of the 50-dma ($63.52) and still retain its longer-term uptrend. Aggressive traders looking for a bargain and willing to try to catch the bottom of the next sharp selloff may do well to target a rebound from the $63.75-64.00 area. We'll continue to follow the 50-dma higher with our trailing stop, which now moves to $63.50. Why This is our Play of the Day With the broad market steaming full-bull ahead right from the open on Monday and the Biotechs surging higher to the tune of 3.44% by the close, it comes as no surprise that our AMGN play managed to break out over its mid-June high of $67.54. We didn't really expect to see that breakout extend to within less than a dollar of our initial $70 target on the same day, but it does fit with the pattern. Look at the past few breakouts in AMGN, most notably 4/23 and 6/16, although there were several less noticeable breakouts in between. How many of those breakouts led to immediate bullish follow-through? NONE! Should we be buying this breakout? Not unless you want to buck several months of a price trend. No, this is the point to harvest gains and then go looking for another entry into the play AFTER a pullback and rebound from support. Another push up near $70 on Tuesday would make the perfect opportunity to harvest gains and then wait for another entry point near the 20-dma, currently $65.42. While we're willing to tighten our stop somewhat this evening to $64.75 (just under the 30-dma), we don't want to get too aggressive, as we still have our eye on a $72 price target. A trade at that level should be used as a hard exit, regardless of entry. More conservative traders may want to be more aggressive with their stops at this point -- just under Thursday's $65.94 low is one alternative. Suggested Options: Shorter Term: The July 65 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the August 70 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 65 call. BUY CALL JUL-65 YAA-GM OI=31309 at $4.20 SL=2.50 BUY CALL JUL-70 YAA-GN OI=17309 at $0.80 SL=0.40 BUY CALL AUG-65 YAA-HM OI= 4657 at $5.20 SL=3.25 BUY CALL AUG-70 YAA-HN OI=10389 at $1.95 SL=1.00 Annotated Chart of AMGN: Picked on June 24th at $65.05 Change since picked: +3.86 Earnings Date 07/22/03 (confirmed) Average Daily Volume = 10.2 mln ************************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 ************************************************************** ********** Watch List ********** Would you believe more breakouts? Microsoft - MSFT - close: 27.42 change: +0.92 WHAT TO WATCH: A story from a French paper cited unnamed sources and the potential for MSFT to grant a one-time $10 billion dividend. The stock added 3.47% while hitting the top of the NASDAQ's most active list. The stock has broken above recent resistance at $27.00 and could see a run to the $30 level ahead of its July 17th earnings announcement. Chart= --- Cabot Microelectronics - CCMP - close: 55.64 change: +3.45 WHAT TO WATCH: Shares of CCMP have broken out of their recent consolidation pattern and the close today is just below its old highs from January 2003. Many suspect the extreme bullishness in the markets and the high-volume breakout in CCMP today has shorts in a squeeze. This stock has a very high short interest and a move above $56.00 could exacerbate it. Should the breakout occur, we'd target a move to $62.50. Chart= --- Agilent Technologies - A - close: 21.29 change: +1.30 WHAT TO WATCH: The rally in tech produced a strong day for Agilent. Shares added 6.5% on strong volume of 4.2 million shares. This is almost a new 52-week high and marks a strong close over overhead resistance. Shorts could be on the run and trying to cover. Chart= --- Merrill Lynch - MER - close: 50.70 change: +1.45 WHAT TO WATCH: Some positive comments about MWD and some investor follow through on the positive court decisions in favor of MER last week have the stock hitting new highs today. Shares broke over the key $50 level (daily and weekly resistance) on strong volume of 9.49 million shares. We wouldn't be surprised to see the bullish momentum carry into its July 16th earnings report. Chart= --- Sun Microsystems - SUNW - close: 5.09 change: +0.34 WHAT TO WATCH: SUNW is still a little cheap to play options on but its recent action is worth mentioning. The daily chart is showing a nice bounce from its rising 50-dma a few days ago, which coincided with price support at the $4.50 level. MACD is about to turn bullish again while daily stochastics, RSI and Momentum are already doing so. The move over $5.00 looks tempting for an aggressive player. Next resistance is $5.50-5.60 but given the trend one might consider targeting the $6.00 area. Chart= =================================== RADAR SCREEN - more stocks to watch: =================================== PIXR $63.40 - Today's 3.1% move produced a fresh triple-top breakout on PIXR's point-and-figure chart while also setting new one-year highs. The stock is quickly approaching all-time highs set in 1998. VRSN $13.88 - The 4% gain today has broken VRSN's recent bull flag pattern but left shares directly below price resistance at $15.00. Bullish traders could use a move over $15 to trigger them into a play. While there is current resistance at $16.00, we could target a move to $17.50. VRSN's MACD is about to produce a bullish buy signal from oversold. DELL $33.08 - Another big tech heavyweight, DELL broke out to new 52-week highs today before slipping back into the close. The longer-term trend from February is nice and bullish but the stock moves rather slowly for directional option traders. IACI $42.74 - Previously known as USAI, the stock has been very strong after bouncing at the $35 level last week. One to watch. SMG $54.00 - Oh the horror! We came so close to adding SMG to the play list as a long this weekend. The Thursday close over resistance at $50 and its 200-dma looked very inviting. Looks like we weren't the only ones who thought so. VARI $36.50 - Breakout to new highs on strong volume could have traders looking for $40.00 soon. KRON $56.58 - This is a software stock that has seen a ton of strong volume on its recent breakout over $50.00. We're still waiting for a decent pull back. ************** MARKET POSTURE ************** Bears Roast in the Hot July Sun To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_070703.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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