The Option Investor Newsletter Monday 07-28-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: The Stage Was Set, but the Anticipated Act Failed to Materialize Futures Wrap: Squeezing the flats Index Trader Wrap: See Note Weekly Fund Wrap: Dollar Weakness Sends Gold Mutuals Higher Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 07-28-2003 High Low Volume Advance/Decline DJIA 9266.51 - 18.06 9303.83 9234.50 1.59 bln 778/ 764 NASDAQ 1735.36 + 4.66 1740.59 1726.24 1.52 bln 878/ 561 S&P 100 501.49 - 1.45 504.18 500.19 Totals 1656/1325 S&P 500 996.52 - 2.16 1000.68 993.59 RUS 2000 473.83 + 4.95 474.42 468.88 DJ TRANS 2622.80 + 7.01 2628.94 2607.75 VIX 19.93 - 0.01 20.43 19.74 VXN 30.40 + 0.36 30.93 30.04 Total Volume 3,317M Total UpVol 1,797M Total DnVol 1,403M 52wk Highs 561 52wk Lows 51 TRIN 0.82 PUT/CALL 0.68 ******************************************************************* The Stage Was Set, but the Anticipated Act Failed to Materialize Foreign bourses set the stage for a strong Monday performance on U.S. markets. Asian markets took the stage first, with the Nikkei leaping up almost 100 points on its open and then closing up 191.90 points at 9839.91. That proved to be its highest close since July 10 when the Nikkei last closed over 9900. The Nikkei built upon the strong performance of the U.S. markets Friday afternoon, but market participants also celebrated after Japanese microchip testing equipment maker Advantest reported its first profit in eight quarters. Advantest's management also mentioned expectations for rising orders, a statement that cheered investors and raised hopes for economic recovery. Europe's markets then took the stage, with Asia's warm-up act readying participants for more good news. That good news came in the form of Germany's closely watched Ifo business climate indicator, which rose to 89.2 from June's 88.8. By the time U.S. investors woke this morning, European markets were surging. Yet our S&P futures showed a surprisingly lackluster performance in their warm-up to the U.S. open. They had tested but failed to hold over 1000 in the overnight session. Something was wrong. With all these warm-up acts preparing the stage, was our rally going to be a no-show? CNBC did its part in warming up the audience. Before the markets opened, Maria noted statistics that showed U.S. markets prepped for continued gains. Those statistics included information on IPO's and M&A activity, with the notation that M&A activity has been the busiest in a year. Analysts tried to warm up the crowd. Prudential's chief investment strategist urged increasing equity allocations to 80 percent from 70 percent and also recommended reducing bond and cash allocations. This strategist believes the S&P 500 could gain another 20 percent according to one report. CIBC chimed in, too, with its chief investment strategist saying the U.S. economy was in the early-to-middle phase of a recovery that will be supported by earnings. Earnings reports before the bell included defense company Northrop Grumman (NOC), copier behemoth Xerox (XRX), Kellogg (K), health insurer Humana (HUM), and BMC Software (BMC). XRX's profit actually slipped and BMC posted a loss and forecast Q2 revenue that will be lower than the previous consensus, according to one report. Still, the crowd prompters characterized all their earnings as beating expectations. Yet S&P futures still weren't climbing over 1000. Bonds did their part, bowing out and letting equities take center stage. Yields were up significantly in premarket. Even with all that prompting and with the stage perfectly set, the SPX opened only at 999. It quickly tested 1000, rising as high as 1000.68. This act's reception proved tepid, however, and the SPX just as quickly retreated. As it turned out, the SPX had already achieved its climatic act of the day, never again touching that day's high. At the time that day's high was achieved, the SPX also tested a descending trendline off the June highs. The day's action formed a small-bodied candle that just missed being a doji. Daily Chart of the SPX: Although today's action saw the SPX turning down from the descending trendline that's been capping prices since the middle of June, we should remember that it's possible to draw another version of this trendline, one that includes the June 14 intraday high. That trendline has not yet been challenged. Still, today's action implies some hesitancy in driving the SPX above the current version of the descending trendline. That descending trendline now coincides with the resistance now offered by the blue regression channel. What do we know after studying this chart? We know that the SPX still trades within a consolidation or continuation pattern defined by that descending top trendline and either the horizontal support at 975-976 or the rising red trendline marked on the chart. One formation has bearish implications while the other is neutral. We know that the low ADX number shows that the previous trend--the rally--continues to lose strength. We know that MACD has flattened, as it often does during consolidation. We can see that RSI generally maintains its pattern of lower highs, although Friday had seen RSI bump slightly above its own descending trendline. We know that the 21(3)3 stochastics have maintained their series of higher lows. We know precious little. The SPX consolidates: that's what we know. Market participants wait in their seats, ready to leave the theater or cheer the performance. It's up to the markets now, and we must wait until those consolidation or continuation patterns are broken either to the upside or downside. Fortunately, the ascending supporting trendline has risen to intercept the horizontal supporting line, so that we no longer have to question which line is most important or whether the bearish or neutral formation appears more valid. A downside violation of one will now be a downside violation of the other. Any such downside violation, especially on a closing basis, would suggest another test of the 25 percent rally retracement near the 982 level that marked the July 1 low, if not a move to the 38.2 percent retracement near 928-930. An upside violation of the descending trendline is likely to push the SPX back into its ascending regression channel, suggesting a test of the previous SPX highs, if not of the rising midline resistance. Today's candle hints that we'll see a test of downside support before we witness an upside breakout, but there's nothing on the indicators that reliably confirms the potential reversal signal given by the daily candle. Since the SPX again closed above its 21-dma, we must juggle this sign of strength against the daily candle's hint of weakness. As is often true, the OEX daily chart shows many of the same formations. Daily Chart of the OEX: The OEX daily chart sports a small-bodied red candle sitting near the top of the previous day's big white candle, a potential reversal signal. The candle's upper shadow tested but could not move above resistance marked on the chart. As with the SPX, both versions of the bottom supporting red trendlines now coincide, so that a downside violation of one will be a downside violation of both. Today's candle's shape and position suggest a test of support before an upside breakout, but as with the SPX, indicators show mixed evidence. They don't reliably corroborate the potential reversal. That potential reversal signal is also undercut by its occurrence during consolidation rather than at the top of the rally. Even if tomorrow's trading results in a red candle that confirms the potential reversal signal, that reversal could hold for only a day or two. If those intersecting supporting trendlines are violated to the downside, this suggests a test of the 25 percent rally retracement at the July 1 low near 484 or perhaps even a test of the 38.2 percent retracement. As with the SPX, an upside break suggests a test of previous recent highs. Like the SPX, the OEX again closed above its 21- dma. On Friday, the Dow Jones Industrials broke out above the top of its descending trendline. Today's candle questions that breakout, however. Daily Chart of the DJX, as a proxy for DJI: Like the two S&P's, today's DJX candle was a near-doji printed at the top of the previous day's big white candle. This would be a potential reversal signal if it came after a sustained upward movement, but has less significance when it comes during consolidation. It still might portend at least a day or two's reversal, enough to push the DJX back into its consolidation pattern. It might be easier to argue, too, that the DJX has been in an uptrend since early July, forming a pattern of higher highs and higher lows, so perhaps this formation has more significance than it did for the two S&P's. As with the S&P's, nothing on the indicators signals conclusive evidence of anything but the facts we already know: this market has been consolidating. The DJX has seen a minor breakout above its descending trendline, but perhaps not a convincing breakout. It, like the other two markets already discussed, may be signaling a need for at least one more trip down toward support. Throwing that conclusion into doubt, however, is the recent performance of the Dow Jones Industrial's sister index, the TRAN. The TRAN has been achieving a series of higher highs and today closed over 2600 for the first time since early July 2000. The TRAN often leads its sister index, suggesting that perhaps the DJI's upside breakout was real. If it's not, and if the DJI does not hold onto gains and then best its June highs, we may be seeing divergence between the two indices, a bearish sign. Despite the DJX's possible upside breakout above the descending trendline, the NDX's daily chart looks the most bullish of the indices depicted in this article. Daily chart of the NDX: The NDX still maintains its ascending regression channel. Instead of squiggling around between 50 and 60, the RSI pulses up and down in a normal manner. It's been pulsing upward over the last week as the NDX traveled up to test resistance. That resistance consists of the midline resistance of its regression channel as well as the resistance implied by a possible bull flag. Today's candle was a doji, indicating indecision and creating a possible reversal signal that requires completion by tomorrow's action. As with the other indices, this possible reversal signal forms within a consolidation band, and so might not be as significant as it would be if it had formed at the top of a sustained upward movement. Oscillators give mixed messages with stochastics still cycling up but with ADX easing further, indicating a further weakening of the former trend. That sometimes happens with bull flag formations, so we can't give that easing of the ADX too much weight just yet. However, in late June, at about the same time that ADX began descending, MACD broke below its pattern of higher lows, perhaps also a confirmation of impending weakness. RSI and stochastics tops have been showing bearish divergence with the price highs, too. That's been going on some time, however, without higher price highs being impacted, so we can't and shouldn't make our trading decisions on this information alone. Those divergences should, however, make us cautious. Developments during the day and after hours didn't seem to affect market participants strongly, either, giving few clues as to market direction. Citigroup (C) and JP Morgan (JPM) ended flat today after reaching a settlement with the SEC over the investigation into Enron-related charges. After-hours releases included earnings announcements from Sprint (FON) and Barrick Gold (ABX). Excluding onetime costs and gains, FON earned a better- than-expected 35 cents per share, two cents ahead of expectations and four cents ahead of year-ago levels. Sales fell 8 percent from the year-ago period. Meeting expectations, the PCS unit lost 9 cents a share, up from its 17-cent loss in the year-ago period, while adding more customers than expected. Sales rose in the PCS unit. At 11 cents per share, ABX's Q2 income matched that of last year's second quarter, beating expectations for 6 cents per year. It seems unlikely that these announcements will guide the markets one direction or the other. Nor is it likely that tomorrow's economic releases will tell us much. Tomorrow's economic release includes only July consumer confidence, due at 10 am ET, with a market consensus of 85, up from June's 83.5. As Jim noted this weekend in his Wrap, this consumer confidence number compiled by the Conference Board does not normally move the markets. Economists consider small changes in the number to be noise, with one source noting that only a change of 5 points or more would be considered significant. Two components compose this number: the expectations component and the current conditions component. The expectations component composes 60 percent and is considered a better leading indicator. It's not until later in the week that economic releases heat up again. Let's hope we're not doomed to endure another day or two of no-show market performances until then. Linda Piazza ************ FUTURES WRAP ************ Squeezing the flats Jonathan Levinson Todays session brought treasury bonds to new year lows, the HUI to a five year high, and held equities in a tight range near what is either a lower high distribution zone, or a consolidation for an assault on the year high. The session made it nearly irresistible to either go long or short at various points, squeezing the flats. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1004 999 995 990 986 YM03U 9316 9273 9240 9197 9164 NQ03U 1297 1290 1282 1275 1267 10 minute chart of the US Dollar Index The US Dollar Index spent the day chopping its way back toward overnight support at the 95 level. The Fed added a net 2.75B via overnight repo in the amount of 5.25B against 2.5B expiring. This action from the Fed should have helped support the US Dollar Index and put a bid into treasury bonds, but neither occurred, as news of the $126B expected sale of treasury bonds in Q4 (September-December) 2003 circulated the wires. The action was bullish for the CRB, gold, silver and the precious metals indices in the early session, with a pullback coming in the afternoon. Daily chart of August gold August gold took another rocket ride today, touching 367.60 before pulling back to close at 364.60. This so far correctionless move has left us with a gravestone doji on the daily candles, portending a correction of the recent huge gains. The precious metals indices started out very strong but pulled back, the HUI closing down .55 to 166.48 and the XAU –1.21 to 83.06. Daily chart of the ten year note yield No rest for the weary as the ten year note yield set new year highs today, adding 10.6 basis points to close at 4.284%. The FVX added 12.2 bps, and the thirty added 10 to close at 5.218%. The drain in bonds did not benefit equities, which treaded water throughout the session, but it didn't hurt them either as we might otherwise have expected based on the liquidity theory. Daily NQ candles Did the Nasdaq futures print a shooting star today? Or was it a consolidation of the big gains from Friday's "we got Saddam, again" rally? The market couldn't decide, and this indecision printed a nearly flat close with spikes both to the upside and down. 30 minute 20 day chart of the NQ On a closer examination, we get no closer to an answer, as the NQ drifted sideways through upside resistance on the pennant we discussed in this weekend's Futures Wrap. However, a breakout implies explosive volume, panicking shorts, an MTV-Spring-Break extravaganza at CNBC, etc., none of which occurred today. The NQ printed a higher high and higher low, but only added 3 points to Friday's close. Daily ES candles The S&P futures managed to drop half a point in today's session, higher high and higher low. The longer oscillators are close to buy signals, but the signal is often the precise point of rejection on a reversal move, and so we've learned not to anticipate. For the moment, the downphase is sputtering, but still intact. 20 day 30 minute chart of the ES The pennant breakout just moved sideways again, still no explosion to the upside, although many participants caught their breath last night and this morning as the ES cleared 1000 briefly. 150-Tick ES Zooming in on the 150-tick chart of the ES, today's range and my effort to follow it are plainly visible. There were no volume spikes exceeding 10,000 contracts, and the entire day was good for just under 7 points' range. Daily YM candles Same story for the YM contract as the ES, except that today's 22 point loss was insufficient to reverse the buy signals printing lazily on the daily oscillator and against which the short cycles (below) are current fighting. 20 day 30 minute chart of the YM Today's session just ran the clock, as existing trends continued on all but the equity futures. Gold and silver moved higher, bonds moved lower, equities went nowhere. The 150-tick ES chart above shows that the drops were on higher volume and moved more quickly than the advances back up, making the downside moves appear impulsive to me. Read that way, I think the range is going to break to the downside. The winning strategy today, either way, was to go short at upper trendline resistance and long at support, with a one point to two point stop in each case. ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_072803_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ **************** WEEKLY FUND WRAP **************** Dollar Weakness Sends Gold Mutuals Higher Continued strength in the price of gold, due to weakness in the dollar, helped international equity funds and gold mutual funds to finish the week significantly higher. According to Lipper's fund indices through July 25, the average gold fund generated a 1-week return of 11.7 percent to pace all objectives, while the average international equity fund rose 2.2 percent. U.S. stock funds gained ground too, but their weekly returns were small in comparison to international stock funds. With stocks higher Friday in response to improved U.S. economic news later in the week, the S&P 500 large-cap index gained 0.5% for the week. Most U.S. diversified stock funds kept pace with the market benchmark. With tech stocks up overall for the week, growth-driven funds outperformed other equity management styles, averaging more than 1.0% for the week. Conservative stock fund objectives, such as balanced funds and equity income funds, had weekly total returns of 0.5% or less. With the U.S. dollar weaker and gold prices stronger last week, international stock funds produced weekly total returns of 2.2% on average per Lipper. However, the average foreign stock fund returned less than the MSCI EAFE index benchmark, which climbed 3.0% for the week using Vanguard's developed-markets index fund as the benchmark. Emerging-market returns were generally under 2.0% for the week. Gold funds stole the show, however, gaining 11.7% on average last week. Bond indices were lower for the week, with income investors now more worried about the negative effect of rising interest rates. Short-term bonds lost just 0.1% on the week, while intermediate- term bonds fell 1.0% on average and long-term bonds tumbled 1.9% on average, using Vanguard's bond index funds as the benchmarks. The total U.S. bond market as measured by the LB Aggregate Bond index declined 0.6% for the week, using the Vanguard Total Bond Market Index Fund as the benchmark. Bond mutual funds followed suit, with weekly declines greater as you moved out in duration and maturity. U.S. dollar weakness contributed to the strong relative returns of global/international bond funds last week. Lipper's numbers show that the average global fixed income fund returned 0.7% in the last five days, while the average international income fund finished the week higher by 1.5 percent. Equity Fund Group Week YTD Selected Lipper Equity Indices (Jul-25) +0.3% +10.1% Balanced Fund Average +0.6% +11.4% Equity Income Fund Average +2.2% +13.0% International Fund Average +0.5% +12.7% U.S. Large-Cap (Core) Fund Average +0.6% +17.4% U.S. Mid-Cap (Core) Fund Average +0.8% +18.8% U.S. Small-Cap (Core) Fund Average +0.6% +16.1% U.S. Multi-Cap (Core) Fund Average +1.2% +29.1% Science & Technology Fund Average Last week's highest performers were gold mutual funds, which on average rose 11.7 percent, per Lipper. Among funds with assets greater than $500 million, Fidelity's Select Gold Portfolio was the week's top performing fund, rising 12.2% for the week. The $571 million fund is the largest in the gold fund category, per Morningstar. Some funds in the category returned as much as 19 percent for the week, however. International stock funds produced strong absolute and relative returns last week also, with both gold and foreign stock prices the beneficiaries of dollar weakness. Among $500 million funds, T. Rowe Price's European Stock Fund had a 1-week return of 3.2%, while the JPMorgan Select International Fund returned 3.3% over the 5-day period. Delaware Pooled Trust's International Equity Portfolio produced a 3.4% weekly total return. Several more in the category returned over 2.5% for the week. Among U.S. diversified stock funds, the week's strongest return performances came from "growth" oriented funds. Among funds in excess of $500 million in net assets, Oak Associates' White Oak Growth Stock Fund returned 2.4% for the week, while TCW Galileo: Select Equity Fund had a 2.3% weekly return. Two RS (Robertson Stephens) funds performed well also: RS Diversified Growth Fund (+2.2%) and RS Emerging Growth Fund (+2.1%). Several more pro- growth style funds had 1-week returns of over 1.5 percent using Lipper's numbers. Fixed Income Fund Group Week YTD Selected Lipper Fixed Income Indices (Jul-25) -0.7% +2.6% Corporate A-Rated Debt Fund Average -0.4% +0.4% GNMA Fund Average +0.7% +7.1% Global Fixed Income Fund Average -0.3% +16.3% High Yield Fund Average +1.5% +8.3% International Fixed Income Fund Average -0.6% +3.0% Intermediate Investment-Grade Fund Average -0.1% +1.8% Short Investment-Grade Fund Average -0.7% +0.3% U.S. Government Bond Fund Average While a few short-term bond funds eked out tiny gains last week, most U.S. investment-grade and high-yield funds sustained weekly losses. According to Lipper, U.S. government and corporate bond funds lost as much as 0.7% over the 5-day period through July 25, as some analysts are calling an end to the bull market for bonds. Dollar weakness contributed to the strong performance of non-U.S. bond funds. Among funds with over $500 million in assets, SEI's International Fixed Income Fund was the week's top performer, up 1.9% for the week. T. Rowe Price International Bond Fund gained 1.6% last week, while American Century's International Bond Fund finished the week 1.5% higher. Money Market Fund Group Yield Selected iMoneyNet Money Market Indices 0.53% All Taxable MMF Average 0.34% All Tax-Free MMF Average The iMoneyNet.com all-taxable money market fund average slid one basis point, to 0.53%, last week. PayPal Money Market Fund (402- 935-7733) remains the nation's top prime-retail money fund, with a current 7-day simple yield of 1.04%. No other retail fund has a current yield over 1.00%. The country's largest prime-retail fund, Fidelity Cash Reserves has a current 7-day simple yield of 0.82%, while Vanguard Prime Money Market Fund, another large, popular fund, stands at 0.81%. Lower expenses/costs help these two funds to remain competitive. Fund News, Etc. Last week, Lehman Brothers Holdings (LEH) announced that it has entered into a definitive agreement to acquire Neuberger Berman (NEU) in a transaction valued at around $2.6 billion. Lehman's acquisition would bring total client assets under management to over $100 billion, including Neuberger & Berman's $63.7 million in assets under management at June 30. Dalbar, a leading mutual fund consulting firm, says you can expect more consolidation and mergers in the financial services and asset management industries as investors become more optimistic about the market and economy. Chairman and CEO of Oak Value Capital Management Inc., investment advisor for the Oak Value Fund (OAKVX), George W. Brumley died in a plane crash in Kenya the weekend of July 19-20, with all three members of his immediate family and eight members of his extended family, including his parents, two sisters and their spouses and oldest children. To read the company statement released July 21, go to (www.oakvaluefund.com). George Brumley co-managed the $273 million Oak Value Fund since its January 1993 inception, building a solid long-term track record. The fund's 10-year rating is "4" stars from Morningstar, based on above-average return and average risk relative to category peers (i.e. mid-blend funds). Fund co- manager, David Carr, becomes the fund's "sole" portfolio manager. Brumley and his partner Carr founded Oak Value in 1986 in Durham, North Carolina, sticking to the value investment philosophies of Benjamin Graham, one of the fathers of "value" investing. 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The Option Investor Newsletter Monday 07-28-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: AZO, GENZ Dropped Calls: None Dropped Puts: None Play of the Day: Call - AZO Watch List: Individual Stocks Rally Updated on the site tonight: Market Posture: After Friday's Rally, Traders Sat on the Sidelines ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** AZO - call Adjust from $77.00 up to $78.50 GENZ - call Adjust from $46.49 up to $48.00 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** AutoZone, Inc. - AZO - close: 82.95 change: +2.78 stop: 78.50 Company Description: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why we like it: You certainly haven't heard much on the topic from Stock TV lately, but automotive related-stocks look like they might actually be a beneficiary of the recent rise in interest rates. If it cuts into consumers' willingness to take on the payment for a new car, that means they'll need parts and service for their existing vehicles, right? That seems to be what investors are thinking, as shares of AZO have been gradually working their way higher over the past few weeks. There was a fair amount of indecision around the 200-dma in late June and early July, but the bulls eventually prevailed, leading to the trend we're seeing on the daily chart tonight. The stock has been tracing out a nice bullish triangle, with higher lows and horizontal resistance in the $79.50-80.00 area (see chart below). The bulls were so eager for a positive conclusion to that pattern that they broke above the top of that pattern on Friday at the close. It wasn't just horizontal resistance that was eliminated either, as the close over $80 was also a breakout over the 50-dma. It gets better too, as the PnF chart is on a Buy signal, in a column of X and has a vertical count of $90. Can AZO break out to new highs ahead of its earnings report at the end of August? Stranger things have certainly happened in the past, but we aren't going to set our sights quite that high. Our initial target will be for a rally to the $85 resistance level and if it really gets moving, then we may target a trade in the $88 area (very strong resistance) as our profit exit. But first we need to get into the play. Aggressive traders can use a further breakout over $80.30 (Friday's intraday high) to enter the play, while more patient dip-buyers can look to enter on a pullback and rebound from either the 10-dma ($78.82) or the ascending trendline and 20-dma which are overlapped near $77.75-77.80. Set stops initially at $77, as that is just below the low print of last Tuesday's dip. Why This is our Play of the Day Whether you gravitate to price or volume action, you've got to love the start our AZO play got itself off to on Monday. Despite bifurcated, directionless chop in the rest of the market, the stock continued with Friday's technical breakout over the $80 resistance level, surging through $81 shortly after the open and with only a couple of midday pauses, ran up to end right at the high of the day, just below $83. A quick look at the volume action shows a very healthy pattern with solid volume early in the day building to a crescendo by the end of the day, leaving the closing volume number above the ADV and the best showing since July 10th. Apparently Friday's breakout over the 50-dma was the real deal and another day like today will have the stock challenging the $85-86 resistance area. Unless you were quick to jump on the momentum move right out of the gate this morning, you're still waiting for a viable entry into the play and after today's sharp rise, that means waiting for a pullback. There's plenty of time until earnings at the end of August, so prudent investors will want to wait for a pullback to the $80-81 area, providing confirmation that the site of the recent breakout is now support. The primary reason for not suggesting new momentum entries after today's run is that the stock is now trading well above its upper Bollinger band and we'd prefer to wait for the likely pullback before entry, making risk more palatable to manage. Note that we're raising our stop to $78.50, just below Friday's intraday low. Suggested Options: Shorter Term: The August 80 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 September 85 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 can use the September 80 Call. BUY CALL AUG-80 AZO-HP OI=2432 at $3.80 SL=2.25 BUY CALL AUG-85 AZO-HQ OI= 818 at $0.90 SL=0.40 BUY CALL SEP-80 AZO-IP OI=1355 at $5.30 SL=3.25 BUY CALL SEP-85 AZO-IQ OI= 730 at $2.50 SL=1.25 Annotated Chart of AZO: Picked on July 27th at $80.17 Change since picked: +2.78 Earnings Date 08/26/03 (unconfirmed) Average Daily Volume = 1.29 mln ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********** Watch List ********** Individual Stocks Rally United Technologies - UTX - close: 76.66 change: +1.02 WHAT TO WATCH: Dow component UTX continues to demonstrate strength above the $74.00 level and the bounce today looks tempting for new bullish entries. Could a run to $80.00 be just around the corner? Chart= --- Netease.com - NTES - close: 44.41 change: +2.34 WHAT TO WATCH: The rally for NTES continues. The company reported earnings after the bell today. The company beat by 4 cents with strong revenue growth. We noticed that shares had broken out of what appeared to be a bull flag pattern. A pull back to $40-41 might be an intriguing entry point but given the strength we may not see such a pull back. Chart= --- Johnson and Johnson - JNJ - close: $51.46 change: +0.77 WHAT TO WATCH: Weakness continues for drug giant JNJ. The trend of lower highs could be leading to a breakdown through support of $51.00. While there looks like there "should" be support at $50.00 it may not hold. Chart= --- Northrop Gruman - NOC - close: 92.36 change: +5.26 WHAT TO WATCH: NOC announced its earnings this morning before the bell. The company beat estimates by a wide margin and guided higher. Shares gapped higher above resistance of $90 and its simple 200-dma on strong volume. We would look for some follow through on a move to the $100 level. Chart= =================================== RADAR SCREEN - more stocks to watch =================================== USTR $38.31 - Shares of United Stationer are looking strong after bouncing along previous resistance of $36.00 last week. It could see $40.00 soon. PTEN $27.70 - Shares of this oil services company continue to sink. Today marks the lowest close since January. The stock does have stronger support at $27.00 but from the looks of it, it may not hold. ************** MARKET POSTURE ************** After Friday's Rally, Traders Sat on the Sidelines To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_072803.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. 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