The Option Investor Newsletter Sunday 08-24-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: The Music Stopped Futures Market: Doji Day Index Trader Wrap: INTEL MY BELL Editor's Plays: Will History Repeat? Market Sentiment: About-Face Ask the Analyst: Mortgage rates, refinancing and Treasury yields Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 8-22 WE 8-15 WE 8-08 WE 8-01 DOW 9348.87 + 27.18 9321.69 +130.60 9191.09 + 37.12 -130.60 Nasdaq 1765,32 + 63.31 1702.01 + 57.98 1644.03 - 71.59 - 15.08 S&P-100 497.42 - 0.88 498.30 + 4.50 493.80 + 0.16 - 9.30 S&P-500 993.06 + 2.39 990.67 + 13.08 977.59 - 2.56 - 18.53 W5000 9612.43 + 64.92 9547.51 +154.78 9392.73 - 61.43 -145.20 RUT 485.51 + 13.59 471.92 + 17.98 453.94 - 14.14 - 0.80 TRAN 2641.56 + 17.90 2623.66 + 44.63 2579.03 - 16.88 - 19.88 VIX 20.27 + 0.07 20.20 - 1.09 21.29 - 1.49 + 2.84 VXN 29.47 + 0.26 29.21 - 2.82 32.03 - 0.45 + 2.44 TRIN 1.36 1.01 0.87 1.08 Put/Call 0.91 0.53 0.81 0.91 Avg Highs 720 338 189 462 Avg Lows 58 62 86 72 ****************************************************************** The Music Stopped by Jim Brown If you read my wrap from Thursday night you know what the title means. The move to the sidelines was orderly and patient but it was persistent. The difference in sentiment between the open and the close was as different as night an day but in reality nothing changed. The Nasdaq dropped -46 points from its morning high but only ended down -12 points for the day and up +63 for the week. Yes, it was a dramatic move but all things considered it meant nothing. Economically the day was a dud. The ECRI (the who cares report) was flat again at 127.6. The only material change was in the 6mo growth rate which fell to 12.7 from last weeks 13.2. No big deal here. Cooling home sales and rising interest rates are dampening the growth in this index. The only other report was the Internet E-Commerce Sales for Q2. It came in at $12.48 billion and up from $11.93 billion in Q1. Sales were up +27.8% from Q2-2002. While dollar volume is rising the percentage of Internet sales to all sales is dropping slightly. It was 1.59% in the 4Q-2002 and fell to 1.45% in Q2. Most analysts had expected sales volume to drop instead of rise but the overall impact of the report was negligible. Nobody cared about the economics because Intel surprised everyone by raising guidance before the open. Futures rocketed from 1002 to 1012 between 8:30 and 9:30. The markets opened up at new highs with Intel in both the Dow and the Nasdaq. The Dow raced to touch 9499.97 and a level not seen since June-20th 2002. Weekly levels of resistance were blown away in a few ticks but the index fell 03 short of touching the electric fence at 9500. The Nasdaq hit 1812 and a level not seen since April-19th 2002. The sun was shining, birds were singing and everybody was praising Abby Cohen and her latest earnings upgrade for the S&P. That all happened before 10:AM. When the clock struck 10:00 the bull's tech express turned into a pumpkin and the wheels quickly fell off the rally. I say this only tongue in cheek because nothing has really changed. The drop from the highs of the day was dramatic but it occurred on low volume and it was very orderly. Decliners beat advancers 2:1 but new highs still hit 721 and new lows only 53. The VIX was not off or under the scale with a low of 19.41 but it has climbed for four days from its 19.06 low on Monday. No news there. So what derailed the tech express in light of the Intel announcement? Intel itself was the primary cause of the change in sentiment. Intel CEO Craig Barrett went on record Thursday by saying they were seeing some selective buying in PCs but he qualified it with "We're not seeing a big upgrade cycle and we're not seeing IT budgets being raised." Ok, we can all buy that and thank you for the clarification. He knew what was coming and wanted to blunt the reaction. Friday morning Intel raised revenue estimates from +6% growth to +11% growth for the quarter over last year and raised the gross margin to 56% from 54%. The new $7.55B estimate was higher than the consensus estimates of $7.24B by about $300M. The margin gains are being fueled by a move to the higher end products like chips for notebooks and servers. We have heard from Dell, HPQ and GTW that PC sales are soft with the only consumer interest in laptops. Servers are so cheap that companies are beginning to selectively upgrade but the real key was the stronger than expected back to school bounce. Consumers are taking their tax checks and refi funds and buying new computers for students. Intel said they did not see it coming because of the very low visibility in the market. Also helping them is the price war between Dell, HPQ and the white box makers. The prices are so low for the commodity PC that retail buyers are being lured into the back to school market where they would not have ventured before. The $499 computer is flooding the market and the only winner is Intel. The box makers all buy the same chips and they are cutting their throat on the sell side to keep the volume up. You can imagine Intel's delight to see the chips flowing out the door like cocaine to street dealers. There is no profit in the food chain unless you are at the top and everybody is continuing to deal just to support their habits. Intel said other chips remain soft and Andy Bryant tried to tone down the excitement with several well placed comments. He said it is unclear if the unexpected bounce in the early part of the quarter would continue in the coming weeks. He said their chip plants were running at nearly full capacity and they were experiencing some shortages. That is a problem he would love to face in light of some plant closings over the last couple years. They are leaner now and shortages would keep prices up. Part of the higher margin guidance is because they have not lowered their prices this quarter. This is a good sign that they do not feel pressured by lack of demand. So what caused the sell off? On the conference call Intel refused to give any specific guidance or answer any pointed questions. They said the bounce might only be a temporary result of the Dell price war in anticipation of back to school sales. There was some veiled rumors that it was the result of some channel stuffing and volume requirements of dealers to get decent prices. They repeated the claim that IT spending was not improving and they had limited visibility going forward. Considering they just raised guidance the conference call was anything but bullish. They raised our hopes and then popped our balloon. However it was not the first time this year for this to happen. In June Intel raised guidance with the following comment. "The company's Intel Architecture business is trending to the high end of the normal seasonal pattern while demand for communications products remains soft. All other expectations are unchanged". With that comment Intel gapped open and capped the end of a two week rally. In March Intel saw the exact same bounce into the guidance statement only they guided to the lower end of the range. The bottom line here is that it does not seem to make any difference what they say. The smart money has already bought the rumor and they sell the announcement. Note the SOX chart shows an even more drastic reaction to the Intel news. Intel Chart SOX Chart On the trading floor the thought process was more in the "so what" category. Everybody has been buying the rally for several months in anticipation of exactly what Intel failed to say. They did not want to hear a few computers were going to be doing school work. After 2-4 weeks that boom will be history. They wanted to hear that companies were dumping in mass their Y2K dinosaurs and stepping into the Star Wars generation. They wanted to hear that budgets were being raised +15-25% to add infrastructure in the form of servers and routers. The markets did not get what they wanted. They did not get what they thought they paid for over the last three months. Instead of confirming the recovery Intel went out of their way, twice, to say there was no real improvement in IT spending. There is some evidence that small businesses are starting to crack their checkbooks but they have yet to brush away the cobwebs. The market flamed out on Friday like a rocket that had run out of fuel before reaching orbit. It was spectacular but far from the beginning of a new bear market. Even with the drop the Nasdaq still finished +63 for the week. While the Dow at +27 was less exciting it still finished the week positive. Both indexes are still at the upper end of their trading ranges and even with the -150 drop off the Dow's intraday highs it still closed right on support that has been resistance for three months. This is not an ugly picture. The uptrend support is still intact. Dow Chart The Nasdaq closed -46 points off its high, oh my! So what? The Nasdaq had jumped +172 points since the 1640 low on August-8th. In only 10 trading days it had climbed +10.5%. Read my print, profit taking was due. Still it only fell back to just below the uptrend resistance at 1767 from August-2002. Not a shabby performance and a perfectly logical place to stop. Nasdaq Chart The most disturbing chart for the bulls is the S&P-500. The S&P has failed to confirm the Dow or Nasdaq and failed to break or even hit the two prior highs at 1015 from June and July. This is very troubling for the bulls but for traders it has been very profitable. The "buy 960,short 1000" trading plan has been working so well that traders hate to part with it. The constant range bound market is still in place on the S&P. The failure to break to a new high formed a triple top on the S&P and the normal pattern would be for the next test of 960 to fail. I doubt it will do that next week with the bullish undertones to the market. S&P Chart The problem is not next week but next week could be a problem. Confused. Typically the week before Labor Day is worthless. The volume is so low you can go to lunch and not miss a candle. Many traders take off the week before Labor Day. Considering we are entering the holiday week on a down note it could set the tone and with low volume drift lower. Volume is a tool of the bulls and markets do not hold major up moves without it. We have had very low volume this week and you see where we ended. We had lots of volatility and lots of movement but no conviction. It was all knee jerk reactions to news events. Nobody has yet to explain to me why Chemical Ali was bad for the market and why his capture was bullish. The problem is actually the next week. When traders come back from the Labor Day holiday they typically are ready for a change. The institutions begin thinking about taking profits before the October dip and their year ends. They will lighten in September and buy the dip in October. In 1929 the market top came on the day after Labor Day. In the last 75 Septembers only 30 have finished with a gain. Portfolio managers come back from the Hamptons with a broom in one hand and a financial statement in the other. Dump the losers and take profits on the winners. The day after Labor Day is normally bullish, up 7 of the last 8 years, but the excitement ends there. The September end of quarter portfolio restructuring is the worst quarter of the year. Will that happen this year? Nobody knows but with huge gains after a three years of losses it is a sure bet the funds will want to capture some of them before they get away. A tidbit I picked up on Friday may give us a clue. Insider selling is typically a leading indicator of market health. If they are buying then the outlook for their company is strong. If they are selling the outlook is weak. According to trackers when the insider selling reaches 20:1 over buying it is bearish. Currently sellers are running 35:1 over buyers. It has been over 20:1 for four months. What do Gates and Dell call it? Diversification. Michael Dell's wife diversified by selling one million shares last week. $32 million in back to school money for the kids. Michael sold 10 million last week. $320 million will buy some real toys. With 268 million shares left they are going to need a lot of diversification. Michael if you are reading this I am available for adoption. The economic calendar begins with Existing Home sales on Monday, and Durable Goods, New Home Sales and Consumer Confidence on Tuesday. Skip Wednesday and pickup GDP, Chicago NAPM, Help Wanted and Monthly Mass Layoffs on Thursday. Friday has Personal Income, NY-NAPM, PMI and Michigan Sentiment again. The confidence and sentiment numbers should be critical as well as the Chicago and NY NAPM reports. As long as there is no critical damage in these then the rally should continue with time outs for profit taking. If anything the sell off on Friday took the pressure off the shorts. They are no longer looking for high windows and will be breathing easier over the weekend. Bulls are already deciding where they can pick up some more bargains. Which side you are on depends on whether you see the glass half full or half empty. Personally I think the irrational exuberance from last week filled it to overflowing and we need to pour a little out before we can continue the process. There is no clear answer but as long as the earnings and economic news continues to improve the profit taking may be brief. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Doji Day Jonathan Levinson INTC managed to move the world with positive guidance Friday morning. A vertical launch on low volume in the pre-cash futures markets brought the YM and NQ futures to new rally highs, while the ES lagged again. At the cash open, another pop brought equities further but it failed to hold, kicking off a sometimes sharp but otherwise orderly decline. The equity futures closed at their lows of the day. Here's how it looked on the S&P futures: 2 day 150-tick chart of the ES Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index At the same time that equities were peaking, the US Dollar Index printed a session high above 99.20 before commencing a decline for the remainder of the day. The CRB Index added to its gains, up .71 to 241.11, led by strength in corn, soybeans, cocoa, live cattle and silver futures. For the week, the US Dollar Index added large gains to the previous week's dragonfly doji, gapping above it. This is a bullish morning star, and portends higher prices for the US Dollar Index. Daily chart of December gold While INTC, equities and the dollar were ramping, December gold was getting clocked, printing an intraday low of 359.40. It rebounded as the INTC Bounce ended, adding to its gains quickly and holding them for the remainder of the session. December gold printed an intraday high of 365.50 and closed at 364.50. The previous metals indices traded lower, the HUI dropping 3.10 to close at 180.86, the XAU –1.24 to close at 86.79. For the week, the December gold contract traded in a wider range than the previous week, finishing higher but near the middle of its range. This appears to be a bullish harami cross, but it's imperfect and could also be construed bearishly. This ambivalence fits well within the context of its multi-month neutral pennant on the daily chart. I'm bullish on gold and on commodities in general, but it could go either way from here on a technical basis. Daily chart of the ten year note yield Amidst negative news from FRE, treasuries recovered to finish the day positive, with the five year note yield dropping 5.3 basis points, the ten year yield (TNX) –4.8 bps to close at 4.459%, and the thirty –6.6 bps to close at 5.242%. On the daily chart, the TNX has a secondary ascending trendline with which to contend, and I've highlighted the higher low on the 10 day stochastic. While the Macd is in a clear downphase, the more sensitive stochastic is ambivalent. Overall, it remains a confusing market at current levels, with the price below its steep daily uptrend but respecting a weaker secondary one. For the week, the TNX closed lower, but near the top of its 5 day range. The range was narrower than that of the previous week, which amounts to a bearish harami on the weekly candle chart. This is bearish for the ten year yield, bullish for ten year treasury bonds. Daily NQ candles The NQ spiked to a new high for the year at the open at 1343, and closed at its low of the day, actually dipping slightly below the ascending daily trendline. On this timeframe, no other technical damage was done, with the oscillators not even pausing along their strong upphases. It's worth remembering that the NQ only dropped 8 points on the day, but the almost 40-point range is where the action was, as we'll see in the 30 minute chart below. For the week, the NQ closed in negative territory below a big spike high, which could be a blowoff top. The weekly candlestick formation is a gravestone doji, which leaves us with a bearish outlook for next week. 30 minute 20 day chart of the NQ The opening blast took the NQ right to the top of its bear flag, and the selloff broke the lower support line on a closing basis. The oscillators, printing a non-confirmation of lower highs for the past week, completely collapsed on steep sell signals. This bearish-engulfing move projects further downside to come, but corrective bounces within this trend can be expected, particularly with the daily oscillators still within an upphase. Daily ES candles The ES gave us a bearish engulfing daily candle, and the day's 9.50 point decline was sufficient to impact the oscillators, which did not flash sell signals but appear close. The broken bull flag trendline at 982 should provide support on this move, if the oversold shorter cycles don't provide a bounce sooner. On the weekly candles (not shown), the ES finished in the red and at the bottom of its range, also showing up what appears likely to have been a blowoff top printed Friday morning. This bearish shooting star doji displays a complete hundred-and-eighty-degree reversal at the top, and bodes ill for bulls next week. 20 day 30 minute chart of the ES The weakening uptrend on the oscillators also availed itself of a weakening secondary channel highlighted on the price candles, both of which got broken today. As well, horizontal support at 993 failed, with Fibonacci support at 992 stopping the plunge. It was either fib support or the closing bell, as the ES closed 75 off its intraday low. The stochastic is oversold, and many, myself included, were expecting a bounce at the end of the session. With the short cycle oscillators (first chart at the top of the page) trending in oversold and the 300 minute stochastic at a multiweek low level, the ES is either set up for bounce on Monday, or the beginning of a more significant downtrending move. In light of the weekly candlestick shooting star doji, I'd give either scenario equal odds, but as of Friday's close, that bounce looks like an excellent shorting opportunity from here. Daily YM candles There's nothing to add on the Dow futures, as it finished midway between the correction on the NQ and the destruction on the ES. Like the ES, the YM finished the week at the bottom of its range It failed at its high for the year on a spike move, closing near the low. This is a bearish shooting star formation on the weekly candle chart. 20 day 30 minute chart of the YM For the week just ended, we had a bullish finish on the US Dollar Index, an ambiguous finish for gold, a bearish finish for equities, and a bullish but uncertain finish for treasuries. I believe the picture was muddied this week as the result of the Fed's large repo added last Friday as a prophylactic measure following the power outages. This large addition of liquidity had to be withdrawn without overly disturbing the markets, which appears to have been accomplished. Most notable in my view is the possible disconnect between treasuries and equities, which was seen on Friday when bonds only began to advance once equities began to fall. Again, the chart of the ten year yield doesn't look clear to me because of the secondary support still in place. Meanwhile, a higher dollar translated into lower equity prices, the same trend as we saw through the spring rally, when lower dollars equaled higher equities. This tells me that the strength in the US Dollar Index is not the result of foreign investors itching to buy US stocks. If anything, that money is going or beginning to go into bonds. For next week, caution will continue to be the rule. I'll be hoping for more days like today with nice, extended moves that go beyond the stop-running chop we had for most of the week. See you there! ******************** INDEX TRADER SUMMARY ******************** INTEL MY BELL By Leigh Stevens lstevens@OptionInvestor.com Stocks dropped Friday, with the Dow falling back under some technical support, after starting the day on a high note after Intel's (INTC) mid-quarter update earlier had sharply boosted this key component to the tech heavy Nasdaq (as well as part of the Dow average). The Dow Industrials, which had led the market rally coming into the week, closed off 74.8 points - at 9348.8 - on Friday, while the Nasdaq Composite, fueled by the Semiconductor sector (SOX), resumed as market leader but did give back 12 points on Friday profit taking to finish at 1765.3; this after being up as much as 35 points during the session on the back of the Intel news. The S&P 500 500 (SPX) fell also, by 10.2 points to 993. However, for the week, all indices rose to new yearly highs with the exception of SPX. Intel closed up nearly 4% to $27.39 after the world's biggest microchip maker announced that its target for Q3 revenue was being put up substantially (to $7.3 to $7.8 billion from its prior forecast at $6.9-7.5 billion). The company credited its PC business for the boost. However, the stock was also off substantially from its early peak just over 29 bucks. INTC's announcement caught traders by surprise and those with short positions in the stock bailed by buying back shares. This short-covering prompted the market's initial sharp rally until some started thinking about the company's hefty valuation/PE ratio based on current projected earnings, which brought in substantial profit taking by those long the stock. No doubt those who exited on the rally wish they had waited until the close! THE BOTTOM LINE - While the economic recovery is not yet robust, market participants have got the bullish bit in their teeth for those tech darlings, particularly the smaller cap stocks. The tech- heavy Nasdaq is again leading the rally, after the Dow led the breakout of the Indices' consolidation of recent weeks. I would be paying more attention these days to the smaller cap Russell 2000 Index (RUT), which was an early breakout leader, watching the extent of any RUT pullback ahead. And the market is trading more "technically", as in technical analysis, not as in technology shares - although both are in the forefront here. Bottom line, the tech sector seems to be entering its next up leg but the NYSE related Indices look like they are going to continue to consolidate a while longer. Tech can go up on a wing and a prayer, investors have to see the "whites of their eyes" (earnings) for other sectors. Sideways consolidations, after an initial strong run up, most often tend to take the "form" of a rectangular or triangular pattern as you'll see on some of the charts I've marked up. Why does it matter to label a pattern as a consolidation - the short answer is that it tells you (usually) that the next big move should be in the direction of the prior TREND. If you hunger for more on this subject, go to my prior Trader's Corner article at - http://www.OptionInvestor.com/traderscorner/082202_1.asp The key to seeing that the rally was coming happened to come from the Dow industrials. Just as there is rotation among stock groups, while some go ahead, then others leapfrog them, there is rotation among the indexes. The Dow, in what often used to sometimes be called a "solitary walk of the Dow", was the tip off to the rally that was coming. I didn't quite believe that there was going to be so much upside follow through in the (typical) August doldrums, but I tend to follow "breakout" moves at least for a trade, assuming that the market knows more than me. And, I trust the charts - until proven otherwise! FRIDAY'S TRADING & ECONOMIC NEWS - The 4-week moving average for jobless claims, which helps smooth out weekly fluctuations, showed an improvement (as announced Thursday), dipping to 394,250, down from 395,500 the previous week - this was the lowest point for the four-week moving average since Feb. 15. It is considered to be important when the 4-week average is staying below, and declining from, the 400,000 level. So the question become whether those improvements will be reflected in a corresponding growth in the all-important monthly payrolls figures. As a "lagging" indicator, I don't look for improvement in the payrolls for another 1-2 months. The market has also shifted its focus from questioning whether the U.S. economy will experience a "double-dip" recession to how fast the economy can grow and how long before the Fed will need to begin raising rates. Good point. Higher interest rates have cooled the rate of mortgage refinancing and the same long rate rise should cool housing activity by year's end. So, something else has got to pick up the slack - so the thinking was in the Street of Dreams last week. Mostly, now, the market is dreaming that something will. A good dream, so I hope it happens. One item that got attention in Intel's revenue forecast increase was that the company said it had revised its gross margins for the current quarter upward to 54% from 50.9%. As OIN's Jeff Bailey noted on Friday, this upward revision indicated that the company's newest products were being well received by their marketplace. And, with the increase in margins more of a revenue increase comes to the company's bottom line - more profit is music to the ears of investors. Some other stocks in the news - Schering-Plough, which late Thursday announced a major dividend cut (nearly 70%) dropped slightly over 9% or 1.52, to close at 14.96 on the NYSE, dragging down the drug sector. The stock of Gap stores fell 43 cents to 19.22 on the Big Board, even though the apparel retailer's second-quarter earnings more than tripled. Classic buy the expectations, sell the "fact" as the retailing sector has been in an uptrend for some time. Boeing said it plans to lay off another 1,440 employees as part of continuing job reductions at the company. Boeing's stock rallied 70 cents, to 35.68. Most of the announced cuts will take place in the Seattle area, where the company makes nearly all of its commercial jets. Hey, owning a house in that neck of the woods is far worst than the rest of the West Coast, especially California, when you want to pack up for greener pastures. Shares of computer anti-virus software-maker Symantec, which is taking more and more of this important market, (symbol: SYMC), traded to a new all-time high at $54.59 (+2.5%)in the session and held most of those gains. SYMC has its hooks in me, as I ante up annual fees for anti-virus for both my laptop and PC - who is going to go without virus (and those worms!) ongoing protection in this day of cyber-terrorists! OTHER MARKETS - The 10-year Treasury note rose 1/4, or $1.25 for each $1,000 invested, to yield 4.455%. The 10-year benchmark Treasury note rose for just the 3rd time in the past 10 weeks, gaining 17/32 on the week with its yield falling back to 4.465%. Bond prices up means yields were down - or, the bond interest rate if bought at that price. Friday in New York, the dollar bought 117.57 yen, down from 118.15. The euro fell against the dollar, trading at $1.0890, down from $1.0921. With recession now tolling in France and joining Italy and Germany, with a 2nd consecutive quarter of lower GDP, the dollar has been in a recovery rally against Euroland recently as it trades down from the 1.12-1.13 area. INDEX OUTLOOKS – My mother used to hate it when her supermarket changed the aisle merchandise around and she had to slow down her rush through to find stuff. What does this have to do with my Index outlook? - nothing and everything, as I go in order of interest through the Index charts this week. TECH RULES - Nasdaq Composite (COMPX) – Hourly chart: Sometimes ya see a pattern developing beforehand, sometimes not. I didn't have this key upper trendline drawn here on Comp chart, but it sure is telling me a bunch with this chart breakout. ONE - The main correction is probably over in the Nasdaq indices given the completion of the down-up-down common correction pattern - this pattern relates to the way the markets work and "wave" concepts in particular. TWO - An important thing about the breakout of a triangle pattern is a minimum upside objective can be projected - this is as I say a "minimum" possible upside objective and not to be taken as a final objective for an advance like this and does not measure a time frame in which it "has" to occur, although that is usually within a month - weeks not months anyway. The upside objective implied for the Composite becomes to around 1880-1890 - just shy of 1900 as noted on the chart below - Another point, as with any trendline, corrections can tend to come back as far as the trendline - to around 1720 right now - but shouldn't close under it, especially on a daily closing basis. Since the trendline slopes down over the coming week, lets call it 1700 - a close under 1700 is suggesting that what we saw last week was a "false" breakout or the pattern didn't have its predictive ability it often or usually has. Any of you not having a sunny afternoon calling you outside like here, could peruse Trader's Corner articles I wrote on the subject I'll put these references at the bottom, so as to not agitate dear readers who want to move on NOW - spoken like a true trader. As far as looking to where being long options is favorable, unlike maybe the futures, buying calls or puts in the middle of a relatively narrow expected range doesn't offer the needed potential for a sizable move - unless there is breakout to resolve the trend, but this doesn't seem likely anytime soon. SOX STILL ROCKS - If you want to know why the Nasdaq, Nas 100 and QQQ rebounded, I see it as the influence of the chip stocks. To revisit the Semiconductor stock index (SOX) chart, see the chart below - The SOX is looking quite strong and is exerting influence on tech stocks in general as it is prone to do. A close back under its trendline - call it 360 to cover all of next week - would be a bearish technical development. Otherwise, look for SOX to climb higher, maybe after one more dip to the 400 area. Reinforcing the idea that the Chip index is due for a pullback is the oversold level reached on the 14-day RSI as seen above. SMALL CAP RULES TECH - Within Nasdaq, the smaller cap tech stocks are getting played in a significant way. Because of this, I suggest paying greater attention to how the Russell 2000 (RUT) acts in the coming weeks. I would anticipate, if the RUT is on a bullish track here, for any corrections to hold at and not close below the prior peak - (prior resistance, once pierced, "becomes" future support). S&P 100 Index (OEX) – Daily chart: My principal sentiment indicator, that of the daily volume ratio of the equities calls to puts, had one spike into "overbought" territory as noted below; i.e., a reading above the red line. As typical of this indicator, a correction followed. No triangle breakout similar to the Nasdaq was seen and the OEX reversed in the area of its resistance trendline. In August it takes substantial institutional buying to create upside follow through above resistance areas and these folks are not likely yet convinced that its time to throw more money at stocks without further evidence of a stronger economy and a solid upward trend in earnings. As before, would treat this Index as a trading range affair still and buy down neat 489-490. If former resistance at 500 becomes new support, then the lower level of the trading range has ratcheted up some to 500 - 510 for the time being. I suggest buying calls at the low end of whichever range, epecially if the RSI gets back to a more fully oversold reading again, such as to around 35. A sideways trend will tend to keep the oscillator type indicators into at least neutral or midrange readings. I like to go into a more substantial position when the price is right (at the low or high end of a range) and when the RSI is at an extreme. That's the ideal - not always realized, but when it is, its worth waiting for. Dow Industrials Index (DJX.X)- Hourly chart: The Dow has failed or reversed its rally after getting up the 9500 area. The true and best tip off for a reversal was when the hourly DJX RSI (21 Length setting) was heading lower as the Index was heading to a new high. Buy puts into those kind of rallies, even if there was a breakout. False breakouts happen often enough to trade against them. But, price/RSI divergences tend to have an even higher degree of trade reliability as a reversal type "signal". 93 is must hold technical support now in my estimation. The new range may be for a while, at 93 - 95 and I am trading accordingly. Nasdaq 100 Tracking Stock (QQQ) - Daily and Hourly charts: Basis the daily chart, the Q's got back into what was their broader uptrend channel - the question is whether they can hold into that channel now and start a renewed advance. Time to go to the hourly charts - I would note on the daily chart above, that the stock is into overbought stochastic readings and the daily trading volume has not picked up as much as I would expect if this rally was going to really take off just yet. Time for more backing and filling probably - stay tuned! I expect a drift lower unless the Q's immediately pop back above the prior high at the red dashed line. If 31.5-31.7 holds as support, then I suggest buying the stock again for a pop, especially if the stochastic is down to the bottom again. The stock could come back to the 30 area again and not change the overall bullish chart. I am thinking that a 31 to 34 range is shaping up for the coming 2-week period. I will feel more confident buying the stock for other than on a quite short-term basis (e.g. 1-2 day periods) when we get into September, where there is propensity to rally on a seasonal basis. Of course, we got to get past Sept. to get Q3 earnings, but a strong rally could develop on the expectation of better earnings if the economic reports continue to show a pick up in the recovery. Good Trading Success! OF POSSIBLE INTEREST: Wave analysis in price trends; part 1 http://www.OptionInvestor.com/traderscorner/tc_120502_2.asp Wave analysis in price trends; part 2 http://www.OptionInvestor.com/traderscorner/tc_121202_2.asp Wave analysis in price trends; part 3 http://www.OptionInvestor.com/traderscorner/tc_121902_2.asp ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ************** Editor's Plays ************** Will History Repeat? For more quarters than I care to show the pattern has been the same. Stocks, primarily chip stocks run up into the Intel guidance announcement and then tank. It does not seem to make any difference if the guidance is good or bad as the smart money always buys the rumor and sells the fact. Essentially they are always expecting that blowout news to signal the recovery in progress but are always disappointed by the update given. It is particularly ugly if you look at the last August bounce. The market was declining but we still got the ramp into the guidance with traders still hoping for a second half recovery. The news was not good and the sell off was steep. Fast forward to June of this year. The guidance was decent with a slight improvement. The actual wording of the release was almost exactly the same. "The company's Intel Architecture business is trending to the high end of the normal seasonal pattern while demand for communications products remains soft. All other expectations are unchanged". We got a big gap up and the SMH sold off for the next three weeks. They always want more than they get and they are always disappointed. The play for today is an October $35 Put on the SMH. It closed on Friday at $1.45x$1.55 and has an open interest of 11,000. Obviously there are some other like minded investors playing the same bounce. The stop loss is going to be $38 and the profit target is $33. The symbol is SMH-VG. SOX Chart SMH Chart SMH Chart - Aug-2002 ******************************** Play updates: QQQ Puts - August 17th. It was almost painless. The explosion out of the gate on Monday knocked the Sept-$30 puts down to 45 cents if anybody was brave enough to buy them in a rapidly rising market. The $32 stop loss was hit late Monday afternoon and they closed at 30 cents. It was a quick play and a merciful exit considering the remainder of the week. Powerball EMC and CMVT are soaring out into the lead. Even the laggards TLAB and RFMD are slowly ticking up. Bad news from ADCT this week sent them to zero but still five months to go. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** About-Face -Jonathan Levinson After week of immersion in the daily and intraday charts, we can look to the big picture and see how the story has unfolded on the weekly candlestick charts. Stocks had a negative week, with the S&P leading to the downside, followed by the Dow, with the Nasdaq finishing as the strongest of the three. The SPX closed at its weekly low, traversing a wide range to the upside but failing to hold any of it. This is known in candlestick charting terms as a shooting star doji, and projects further weakness on this timeframe. The same formation was printed by Dow. The Nasdaq closed lower as well, but did not "blow off" as much of its gains. The resulting gravestone doji candle is also bearish, but not as much as those of the SPX and INDU. The VIX printed a a bullish doji star on the weekly candle chart, while the QQV and VXN gave us bullish doji hammers. The term "doji" is coming up a lot, and this smacks of reversal, with topping / reversal candles on stocks coinciding with bottoming /reversal candles on the volatility indices. These signals on the weekly charts are indicative of the broader trend, and do not rule out bounces or even rallies from here. But, on this longer timeframe, this was a week of reversals, and next week will be crucial in confirming whether the market is entering the next bearish wave. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9499 52-week Low : 7197 Current : 9348 Moving Averages: (Simple) 10-dma: 9344 50-dma: 9185 200-dma: 8592 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 993 Moving Averages: (Simple) 10-dma: 991 50-dma: 990 200-dma: 917 Nasdaq-100 ($NDX) 52-week High: 1342 52-week Low : 795 Current : 1304 Moving Averages: (Simple) 10-dma: 1271 50-dma: 1252 200-dma: 1108 ----------------------------------------------------------------- The VIX just finished two days under the 20 level and Friday's market weakness was enough to pop it back above this pivotal area. The VXN has rebounded from all time lows near 26.00 and is about to break above the 30 mark. By all indications we could be witnessing the market top that these volatility indices have been forecasting for months now. It just took an extreme reading to signal the turning point. CBOE Market Volatility Index (VIX) = 20.27 +0.56 Nasdaq Volatility Index (VXN) = 29.47 +1.83 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.91 511,038 463,251 Equity Only 0.72 439,724 315,751 OEX 1.27 18,281 23,138 QQQ 0.75 29,991 22,467 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 70.0 + 0 Bull Confirmed NASDAQ-100 75.0 + 3 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 77.4 + 1 Bull Correction S&P 100 84.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.97 10-Day Arms Index 0.92 21-Day Arms Index 0.99 55-Day Arms Index 1.09 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 838 1022 Decliners 1996 2061 New Highs 76 115 New Lows 10 4 Up Volume 396M 673M Down Vol. 1161M 1002M Total Vol. 1566M 1685M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 08/19/03 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 There is nothing eye opening to report in the large S&P futures contracts today. Commercials remain slight more short than long and small traders are significantly long the market. Commercials Long Short Net % Of OI 07/29/03 405,429 445,114 (39,685) (4.7%) 08/05/03 395,633 450,988 (55,353) (6.5%) 08/12/03 399,414 456,767 (57,353) (6.7%) 08/19/03 404,665 455,381 (50,716) (5.9%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 07/29/03 155,216 73,030 82,186 36.0% 08/05/03 159,971 72,951 87,020 37.4% 08/12/03 158,821 71,040 87,781 38.2% 08/19/03 162,034 87,064 74,970 30.1% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Meanwhile for the e-mini contracts commercial traders are still net long. Small traders are still net short but we saw a big increase in long positions. Commercials Long Short Net % Of OI 07/29/03 272,659 216,166 56,493 11.6% 08/05/03 310,662 249,004 61,658 11.0% 08/12/03 306,014 217,233 88,781 17.0% 08/19/03 296,971 235,779 61,192 11.5% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 88,781 - 08/12/03 Small Traders Long Short Net % of OI 07/29/03 44,437 93,144 (48,707) (35.4%) 08/05/03 56,663 95,919 (39,256) (25.7%) 08/12/03 62,534 106,403 (43,869) (26.0%) 08/19/03 90,428 125,980 (35,552) (16.4%) Most bearish reading of the year: (48,707) - 07/29/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Hmm... interesting development here. Commercial traders are still net short the NDX so that's not a surprise but the extreme just brushed a new "high" so to speak. Retail traders are still net long but there was a big bump in short positions. Commercials Long Short Net % of OI 07/29/03 31,456 50,294 (18,838) (23.0%) 08/05/03 32,813 52,383 (19,570) (23.0%) 08/12/03 34,374 53,015 (18,641) (21.3%) 08/19/03 32,107 53,665 (21,558) (25.1%) Most bearish reading of the year: (21,558) - 08/19/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 07/29/03 25,691 7,810 17,881 53.4% 08/05/03 22,188 7,783 14,405 48.1% 08/12/03 23,957 7,871 16,086 50.5% 08/19/03 25,607 10,134 15,473 43.3% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Wow! We see a big change in sentiment by the commercial traders in the DJ futures. Short positions doubled indicating a growing expectation that the market could rollover. Right on cue the retail trader is picking the wrong direction and more than doubled their long positions while slashing their shorts. This sort of extreme flip-flop would indicate a market reversal in the making. Commercials Long Short Net % of OI 07/29/03 23,696 9,572 14,124 42.5% 08/05/03 23,981 9,264 14,717 44.3% 08/12/03 24,942 9,878 15,064 43.3% 08/19/03 21,088 18,984 2,104 5.3% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 07/29/03 5,744 11,601 (5,857) (33.8%) 08/05/03 5,716 10,422 (4,706) (29.2%) 08/12/03 6,933 13,248 (6,315) (31.3%) 08/19/03 15,717 9,143 6,574 26.4% Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 6,574 - 8/19/03 ----------------------------------------------------------------- ------------------------------------------------------------ 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: ------------------------------------------------------------ *************** ASK THE ANALYST *************** Mortgage rates, refinancing and Treasury yields Hi, I was recently offered a position as a loan officer for a reputable home finance company. However, I have no education in the industry. In fact, I have no knowledge about the stock market, refinancing, interest rates, or anything related to real estate. One thing I am trying to understand, and maybe you can give me some direction or a good online beginners manual website to go to, is the relationship between the stock market and interest rates, and how bond markets and the 10 year note relate to interest rates. Any information you can give me would be helpful. First of all, congratulations for being offered a position of employment in today's tough job market! It would be my initial observation that your interviewing skills were strong and you are probably viewed by those around you as a fast learner that is highly motivated and not afraid to ask a few question. Now, some investors may think... this is such an easy question to answer, but I'm going to give it a twist. The twist is going to be my, Jeff Bailey's, perception of real estate as actually being an illiquid investment, which can not only be thought of as an asset, but also a liability! And it may be this very discussion, which may give some insight as to what may actually be in play not only in the stock market, but one part of the U.S. economy. I don't know of any good beginners manual or website that you can go to in order to get a quick explanation to help build an initial background for your new career, but I've been in this subscriber's shoes when I first went to work for Mobil Oil years ago. At the time (mid-1980's) I was probably considered highly computer literate, but knew very little about the exploration and production of oil and natural gas. But that didn't stop me from applying my computer skills and spending 7, rather enjoyable years with the company. That's where I also began learning about investing, and where I learned a lot about what it is to be a homeowner when a real estate bubble burst here in Denver, Colorado when most of the major oil companies pulled out of the Rocky Mountain region! The basics I think any investor or trader of any asset needs to understand is the simple concept that PRICE is determines by supply and demand. An example might be, if you live in a small town like Liberal, Kansas, say 25,000 people and there are 10 nearly identical houses for sale, and Mobil Oil announces it is going to be transferring 75 employees to Liberal, Kansas from its Denver and Oklahoma City, Oklahoma offices, what do you think the value of those houses might do? Rise 20% overnight? That's about right. Guess what happens about a month later? New listings (supply) increase by about 10% as the neighbor or close friend of one of the owners finds out that his or her buddy is about to strike it rich. Once all the Mobil Employees have done their house hunting and have paid top dollar, the demand declines and housing prices in the town settle back to where they were 6-months prior. As it relates to Treasuries and stocks, the MARKET (you and I) also plays a role in determining price. The basics of a Treasury bond is really rather simple. Just think of a teeter totter. On one end, place PRICE and on the other end place YIELD. Should price rise (more buyers than sellers) then YIELD will fall. Should price decline, then YIELD will rise. It should also be understood that the MARKET (you and I) establish what a Treasury bond like the 10-year Treasury will be worth. As such, the MARKET will also establish a YIELD for that bond, which can change rather dramatically. While the price of any security is established by the MARKET, there are various market forces that will influence supply and demand. Two of the GREATEST forces are GREED and FEAR! As a soon to become mortgage lender and perhaps investor/trader of securities, REMEMBER the emotions, GREED and FEAR, as these two emotions are most likely THE MOST IMPORTANT TOOL that you will use, along with the education of your client (that you're going to provide), to have your prospect doing business with YOU, and not the mortgage lender next door! Don't get me wrong! I'm not saying mortgage lenders are "ambulance chasers," or higher pressure sales people. You will be tactful in how you explain to your potential customer why they need to do business with you. It is my view that a single family home should be considered an illiquid asset. Yes, there are or have been housing markets where the listing time as been as short as two weeks, but there are times when a new listing sits on the market for several months as there simply aren't any buyers. Is a house an asset or liability? This depends on current market conditions and supply/demand for housing at that time. If we incorporate RISK MANAGEMENT into our thinking of a home, I consider a home or piece of property, which is rather illiquid compared to other securities an individual could buy, as being a liability. Some investors in real estate may disagree with me on this point, but if I buy a house for $250,000.00 and have at $200,000.00 mortgage liability, I consider this example as being a rather illiquid liability. If I were employed at the time I bought the house, say two years ago, but lost my job last year, I would then, to a greater degree, consider my home an illiquid liability. Furthermore, if I have a $200,000.00 mortgage that I'm paying monthly payments to the bank on, who actually owns this piece of property? THE BANK! I don't own a home until the mortgage is paid off. If I miss a couple of monthly mortgage payments, I'm rather certain the bank is going to come looking to get THEIR property. If need be, they'll foreclose on me, and even though the house next door has a "For Sale" sign in front of it with an asking price of $250,000.00, the bank doesn't care, all they want is their $200,000.00. They don't necessarily care if I recovery my $250,000.00 of original purchase. Sales technique: When talking with a potential client about refinancing his/her mortgage, suggest to them that when they refinance their mortgage, to think of it as shifting RISK of an illiquid asset/liability to the bank. It's smart of them, while they are currently employed, to think about diversifying their wealth, especially if they are younger and bulk of their net worth is concentrated in their home. Should your potential customer lose his/her job, it would most likely be difficult to secure any financing without a source of income. By refinancing NOW, they're pulling liquidity from their illiquid home, diversifying their asset base, and perhaps gathering further tax deductibility from the mortgage interest payment. Also explain that while it is very difficult to predict future housing price trends, real estate values will cycle. Wouldn't it be terrible to not only lose your job and source of income, but at the same time see housing prices in your area decline? By refinancing your mortgage, not only are you diversifying your investments, but your also shifting RISK onto the bank! Individuals (you and I) should perhaps be listening and understanding the concept of how our house (or the banks house) fits into our asset allocation and RISK management. Do you know anyone personally that is suffering from stress due to the inability to make their monthly mortgage payment due to loss of employment, yet sits on equity in the property, but is no longer able to refinance the dwelling as they have income, which the lender requires in order to have the bank assuming the RISK? Buy low, sell high! We've all heard this phrase. What am I doing when I refinance my house, which hopefully has appreciated in value? When I'm sucking some liquidity from the home, I'm actually re-selling the house to the bank at a HIGHER price. How wonderful it would be if I did this when mortgage interest rates were at 40-year lows! One of the hardest decisions an investor has to make when considering a new home purchase or refinancing an existing dwelling is the direction of mortgage rates. But this really shouldn't be a hard decision, if put in the perspective of RISK management. Do I, or should I really care what the rate of interest is on the mortgage today? If I'm a willing buyer of a piece of property for $250,000.00, my "interest rate RISK" is that the mortgage rate is going to RISE, not fall. However, it is GREED that will have a potential buyer waiting to lock in a mortgage at a lower rate than current rate. How silly is that? Lock it in, and if rates fall, then refinance it at the lower rate! The main RISK to an investor in real estate is that the price/value of the dwelling declines, and the bulk of your financial net worth is held in that illiquid investment! Now wait a minute! What if the property I'm looking at, which is listed at $250,000.00 is affordable for me when a 30-year fixed rate mortgage is 5.00%, but suddenly rates rise to 5.23%, then 5.72% and now I can't qualify for that $250,000.00 mortgage loan? What has to happen? Either I have to wait for mortgage rates to fall back where I can afford the $250,000.00 mortgage, or.... the SELLER has to come DOWN in PRICE if he/she wants to sell it to me. It would have been so much simpler if I had just locked it in when I had the chance. And it this very rising in Treasury YIELDs in recent months, which in turn has caused mortgage rates to rise, which in turn has had mortgage applications and refinancing applications falling. In last weekend's Ask the Analyst column, "Betting on or against Treasuries with options" I posted a spreadsheet that I'm trying to populate with data gathered from the Mortgage Bankers Association. While I stay pretty busy during the week, I've updated for this week's MBA report, which is released each Wednesday for the prior week's data (Monday-Friday). While I'm monitoring this data, and still trying to better understand the impact that higher YIELDS have had on the mortgage application and refinancing trends, which may give insight to fundamental strength/weakness among the publicly traded homebuilders that comprise the Dow Jones Home Construction Index (DJUSHB) 441.97 -1.96%, I'm also aware that while the U.S. economy continues to show improvement, the rate of improvement, or growth, has been largely driven by the consumer. Perhaps a consumer that may have lost a job, but has been able to continue spending after previously refinancing an existing mortgage. While I haven't gotten a lot of work done on this data, I've added a couple of new observations. One set of data added is the 5-day average of the 10-year Treasury YIELD ($TNX.X), where I've simply placed a 5-day simple moving average on the 10-year Treasury YIELD's chart, and noted its reading each Friday of recent weeks. I added this data so that I wouldn't have to wait until Wednesday of a following week to get a feel for what the this week's average mortgage rate might be. If I were in the business of trying to sell a mortgage to a potential customer, one of my value added services would be to try and help a customer understand mortgage rate trends. Depending on the potential customers window where they were looking to lock in a rate, I could explain to them the 5-day average increase/decrease or even a 30-day average increase/decrease if that was their window of opportunity. A second set of data added, actually it is calculated, is the rate of change, or % change in the weekly mortgage applications data. This is what I think investors may want to be following, particularly those investors or traders in the homebuilders. It is a general assumption that if mortgage applications are falling then demand is drying up. If demand continues to dry up, at some point a real estate developer, homebuilder, homeowner would eventually expect prices to fall. Sometimes it is easier, if not important to observe the rate of change in an advance or decline to truly sense what is taking place. For further explanation of the following table, please read last weekend's Ask the Analyst column. Weekly Mortgage Bankers Association Survey Statistics Again... the 5-day average 10-year column is simply taken from the average YIELD for the 10-year Treasury Bond ($TNX.X). This week, the average YIELD was 4.45%, so I wouldn't expect this Wednesday's average 30-year fixed rate mortgage to change all that much. The last two weeks have seen a 16% decline and 10% decline in the Mortgage Application's Index. While I have never seen an economist weekly forecast for mortgage applications, and I'm not an economists, I would forecast a slight decline if not relatively unchanged reading for the Mortgage Applications Index. An investor/trader may make a different forecast, which is a great thing for investors/traders to do. This can keep a trader/investor honest, and if they are wrong on their forecast, then some adjustments to the forecasting model may need to be made. By no means is the above table a forecasting model, but hopefully we can see how various pieces of the puzzle, or data and moving averages can be used. On the far right of the spreadsheet, to feed my curiosity, I wanted to calculate what the actual basis point spread has been on a week-to-week observation between my 5-day average 10-year YIELD and what the Mortgage Bankers Association was reporting as the average weekly 30-year mortgage YIELD. I averaged the April 23 to August 20 basis point spread and it is averaging about 173 basis points. For the subscriber that asked this weekend's question, the term basis point is bond yield terminology. For instance, it is much easier to say "Right now, there's about 174 basis points spread between a 30-year fixed rate mortgage and the 10-year Treasury YIELD," than it is to say "Right now, there's about zero-point- zero-one-seven-four spread between the ......" While there is no way I could ever attempt to write an Ask the Analyst column on the basics of the mortgage loan business and its ties to Treasury yields and further impact on the market, I have covered many of these items in past Index Trader Wraps at OptionInvestor.com, and various articles in the Bailey's Basics and in these Ask the Analyst columns. Right now, Treasury YIELDS are quite perplexing as it would relate to their action and what impact the bond market's trade is having on the stock market. It is my view that the U.S. economic recovery is improving. It is encouraging, in my opinion, to see the MARKET finally willing to sell Treasuries on a rather meaningful basis the past two months. Why? Because the last two years, the MARKET has been buying Treasuries due to their low RISK, when compared to stocks. However, at this stage of an economic upturn, the recent SHARP and RAPID rise in Treasury YIELDS (from selling in the bond) could threaten the home construction sector, which has been one part of the economy that has been able to keep its workers employed on a more steady basis. As we can see, the mortgage applications index has been falling in recent weeks, about as quick as Treasury YIELDs have risen. For an economy to be STRONG, does it need a STRONG housing market? The answer is no. The United States has been VERY fortunate the past two years, when the economy went into a recession, that the housing market and prices of homes had risen during the stronger economic period prior to the recession. That strong housing market enabled many Americans to refinance their mortgages, free up some capital from their homes, and for some, may have allowed for a still comfortable standard of living after they may have lost their job. As the economy has shown signs of improvement, the last and final ingredient to a more robust or stronger economy is new job growth. It has been noted over multiple up and down economy cycles that job growth is usually the final economic indicator to show improvement when an economy attempts to recover from the weaker economic cycle. One book I would strongly recommend the subscriber read is Point and Figure Charting, by Thomas Dorsey. I'm not necessarily trying to push you toward point and figure charting, but I would think many of Tom's words regarding supply and demand charting will drive home how prices, in a free market economy, are derived. I'm not here to sell books, but browse through our bookstore http://www.OptionInvestor.com/bookstore/index.asp of investment-related books. The first book I read on the subject of investing was Stan Weinstein's "Secrets for Profiting in Bull and Bear Markets." I thought it was an easy read and helped me understand some of the basics of investing and after reading I understood that stocks go up and stocks go down. Economies grow and economies contract. Real estate values go up and real estate values go down. Job markets will be strong and job markets will be weak. Hey... who knows? Maybe this weekend's subscriber e-mail, from a newly employed mortgage loan officer is further sign the economy is on the mend? It has been said that a wealthy person's most important advisor is his accountant, lawyer and investment broker. There may be some people out there that would add their mortgage broker to that list. I think any individual that has bought a home, doesn't understand that they are not simply making monthly payments for a roof over their head. In a way, they are making monthly payments on an illiquid liability, which can be an ASSET with good sound guidance and advice from their mortgage broker. If I can share one story with you on this subject. During my career as an investment advisor, selling/buying stocks, bonds, mutual funds and options for clients, one of my clients called me and wanted to take $100,000.00 out of his account, which was just sitting in cash as we waited for the bullish % indicators, which were declining from overbought levels to oversold levels. I made it my business to find out why? We had just made some very good profits in recent months and I was really looking forward to doing it again. He had been to a party at his neighbor's house, and his neighbor was boasting how at age 45, he had just paid his house off and things couldn't be better. My client, never one to be outdone by the Jones', wanted to do the same. What? I asked. Every time I advise you to take a profit on an investment, all you do is complain about the capital gains taxes and impact on you income tax return. Please understand, this client and I had become very good friends. What it actually came down to, was that indeed he just wanted the sense of security of paying off his house, without regard to risk management or asset diversification. I new how much his house's market value was and what he owed on it. I needed that information as his investment advisor. What I didn't know was that he had a 10% mortgage rate on roughly $160,000 remaining balance. Long story short, I told him that his house along with other real estate holding represented a rather large amount of his wealth, and if anything, his higher levels of earned income from his self employed business could actually be somewhat relieved if he were to actually mortgage his home "to the hilt" at a lower mortgage rate of interest 7% at that time, then we would take some of that cash from the refinancing and set up some tax-sheltered trusts for his kids, but also take a portion of that capital, invest it in a good double-tax free municipal bond fund and I'd send him a tax-free check every month for his trouble. He was shocked! Called his accountant and three days later he couldn't wait to refinance his mortgage and see various tax benefits and diversification strategies put into play. He's still doing very well in his business. While I'm not as intimate with his personal financial doings as I once was, I would also feel comfortable in saying if something happened to his business tomorrow, he'd be well positioned and have access to more liquid assets to take care of his family for at least several years, which may not necessarily have been the case if he had simply paid off his house for no other reason than a sense of security. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ACF AmeriCredit Corp. Mon, Aug 25 After the Bell 0.16 MCDTA McDATA Corporation Mon, Aug 25 After the Bell 0.07 ------------------------- TUESDAY ------------------------------ BMO Bank Of Montreal Tue, Aug 26 -----N/A----- N/A BNS Bank of Nova Scotia Tue, Aug 26 -----N/A----- N/A BNL BUNZL PLC Tue, Aug 26 Before the Bell N/A DLTR Dollar Tree Stores Tue, Aug 26 After the Bell 0.24 HRB H&R Block, Inc. Tue, Aug 26 After the Bell 0.01 HAR Harman Intl Ind Tue, Aug 26 -----N/A----- 1.02 MRX Medicis Tue, Aug 26 After the Bell 0.59 MBT Mobile Telesystems Tue, Aug 26 -----N/A----- N/A RGS Regis Corporation Tue, Aug 26 Before the Bell 0.50 RY ROYAL BK CDA MONTREAL Tue, Aug 26 -----N/A----- N/A SMTC Semtech Tue, Aug 26 After the Bell 0.09 TKA Telekom Austria AG Tue, Aug 26 Before the Bell N/A TOL Toll Brothers Tue, Aug 26 Before the Bell 0.81 TTC Toro Tue, Aug 26 Before the Bell 0.97 ----------------------- WEDNESDAY ----------------------------- BTH Blyth Inc. Wed, Aug 27 Before the Bell 0.22 BFb Brown-Forman Corp Wed, Aug 27 Before the Bell 0.66 CHS Chico's FAS Wed, Aug 27 After the Bell 0.26 COCO Corinthian Colleges Wed, Aug 27 Before the Bell 0.37 DCI Donaldson Wed, Aug 27 After the Bell 0.59 MIK Michaels Stores Wed, Aug 27 After the Bell 0.33 TECD Tech Data Corporation Wed, Aug 27 -----N/A----- 0.36 ------------------------- THURSDAY ----------------------------- ACDO Accredo Health Thu, Aug 28 -----N/A----- 0.32 APOL Apollo Group Thu, Aug 28 Before the Bell 0.34 BHP BHP Billiton Ltd Thu, Aug 28 Before the Bell 0.13 DG Dollar General Corp. Thu, Aug 28 Before the Bell 0.14 OTE Hellenic Telecom Thu, Aug 28 Before the Bell N/A AHO Koninklijke Ahold NV Thu, Aug 28 -----N/A----- N/A PETM PetsMart Thu, Aug 28 Before the Bell 0.17 REXMY REXAM PLC Thu, Aug 28 Before the Bell N/A TD Toronto Dominion Bank Thu, Aug 28 -----N/A----- N/A VIP Vimpel Communications Thu, Aug 28 -----N/A----- N/A ZLC Zale Corporation Thu, Aug 28 Before the Bell 0.20 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CECO Career Education Corp 2:1 Aug 22nd Aug 25th FOBB First Oak Brook Bancshares3:2 Aug 25th Aug 26th CELL Brightpoint Inc 3:2 Aug 25th Aug 26th CBK Christopher & Banks Corp 3:2 Aug 27th Aug 28th BER W. R. Berkley Corp 3:2 Aug 27th Aug 28th EBAY eBay 2:1 Aug 28th Aug 29th JBHT J.B. Hunt Transport Serv 2:1 Aug 29th Sep 1st RCII Rent A Center 5:2 Aug 29th Sep 1st AFP United Capital Corp 2:1 Aug 29th Sep 1st JCOM J2 Global Communication 2:1 Aug 29th Sep 1st CHDX Chindex International Inc 2:1 Sep 2nd Sep 3rd HOTT Hot Topic Inc 3:2 Sep 2nd Sep 3rd PFB PFF Bancorp Inc 7:5 Sep 5th Sep 8th RBKV Resource Bankshares Corp 3:2 Sep 5th Sep 8th PSUN Pacific Sunwear of CA Inc 3:2 Sep 5th Sep 8th -------------------------- Economic Reports This Week -------------------------- Wall Street still has a few straggling earnings report but any traders not on vacation will be watching a full week of economic reports. Home sales, consumer confidence, GDP, personal income and spending, etc. ============================================================== -For- ---------------- Monday, 08/25/03 ---------------- Existing Home Sales(DM) Jul Forecast: 5.90M Previous: 5.83M ---------------- Tuesday, 08/26/03 ---------------- Durable Orders (BB) Jul Forecast: 0.9% Previous: 2.3% Consumer Confidence(DM) Aug Forecast: 79.7 Previous: 76.6 New Home Sales (DM) Jul Forecast: 1140K Previous: 1160K ------------------- Wednesday, 08/27/03 ------------------- None ------------------ Thursday, 08/28/03 ------------------ Initial Claims (BB) 08/23 Forecast: 391K Previous: 386K GDP-Prel. (BB) Q2 Forecast: 2.9% Previous: 2.4% Chain Deflator Prel.(BB) Q2 Forecast: 1.0% Previous: 1.0% Help Wanted Index (DM) Jul Forecast: 39 Previous: 38 ---------------- Friday, 08/29/03 ---------------- Personal Income (BB) Jul Forecast: 0.3% Previous: 0.3% Personal Spending (BB) Jul Forecast: 0.8% Previous: 0.3% Mich Sentiment-Rev.(DM) Aug Forecast: 90.2 Previous: 90.2 Chicago PMI (DM) Aug Forecast: 55.8 Previous: 55.9 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ 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: ------------------------------------------------------------ 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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The Option Investor Newsletter Sunday 08-24-2003 Sunday 2 of 5 In Section Two: Watch List: Chips, Loans & Retail Put Play of the Day: ESRX Dropped Calls: PCAR Dropped Puts: None ------------------------------------------------------------ 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 ********** Chips, Loans & Retail Maxim Integrated Products - MXIM - close: 43.78 change: +0.13 WHAT TO WATCH: Intel's news on Thursday night sent the markets and the SOX soaring Friday morning. Unfortunately, the rally faded and it looks like the SOX has run out of steam. Bears can easily see the failed rally and are eager to push the group back down to retest 400. We're seeing a similar blow off in shares of MXIM and we would not be surprised to witness MXIM retesting $41- 40.00. Chart= --- KLA-Tencor - KLAC - close: 57.05 change: +1.00 WHAT TO WATCH: One of the strongest chip stocks in the bunch, shares of KLAC are still portraying a foreboding performance from Friday. Super aggressive bears could try and short this recent rally in KLAC and target a pull back to its 50-dma near the $50 mark. It looks like Friday's top in KLAC was near its upper boundary in its rising channel. Chart= --- Kohls - KSS - close: 61.10 change: -1.85 WHAT TO WATCH: The retail index (RLX) appears to be making a top. We're calling it a bit early but should we see some follow through then KSS might lead the way down. A drop under the $60 mark could be a decent trigger for a move back towards its 200- dma near $56. Chart= --- Fannie Mae - FNM - close: 60.40 change: -0.85 WHAT TO WATCH: The financial sector seems to be deteriorating and leading the way is FNM. Actually both FRE and FNM have seen better days. FNM could be a bearish play candidate and we're watching for a move under the $60 level of support. Shares have bounced twice in the last year or so near $59.00 so conservative traders may want to see this lower level violated. Chart= =================================== RADAR SCREEN - more stocks to watch: =================================== DKS $35.69 - Another retailer but this one has dropped strongly on very big volume in the last few sessions. We'd consider a trigger under Friday's low and target a move to $30. BAC $78.38 - BAC has been on and off the watch list for a while. The move on Friday was a big technical breakdown of its 50-dma and support at $80.00. Next stop looks like $75.00. XLNX $29.23 - Another chip stock, the failed rally on Friday occurred right near overhead resistance at $30-31. Bears could target a move back to its 50-dma near $26.00. ASML $14.89 - Not a put play but stock traders might want to watch ASML. This chip stock might pull back to the $12.50 area. ------------------------------------------------------------ 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: ------------------------------------------------------------ ******************* THE PLAY OF THE DAY ******************* Put Play of the Day: ******************** Express Scripts - ESRX - close: 63.48 change: -1.45 stop: 65.75 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ PACCAR - PCAR - close: 85.69 change: -1.31 stop: 85.00 Calling it in. Shares of PCAR have held up extremely well but with the ominous performances on the Industrials and Nasdaq this Friday we're going to take the money and run. If the broader indices start to pull back then we could see strong profit taking in PCAR. We'd rather close the play now and look for a bounce at $80 again. Picked on July 31 at $77.24 Change since picked: +8.45 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.15 million Chart = PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ------------------------------------------------------------ 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: ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 08-24-2003 Sunday 3 of 5 In Section Three: Current Calls: BSX, EBAY, GILD, HIG, LLL, OMC, SPW New Calls: None Current Put Plays: XL New Puts: ESRX, LEH, WLP ------------------------------------------------------------ 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: ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** Boston Scientific - BSX - cls: 65.61 chg: -0.89 stop: 61.99 Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices. The Company's products are used in a broad range of interventional medical specialties. (source: company press release) Why We Like It: This is the original play write up from Thursday: Plenty of good news and a positive outlook have shares of BSX significantly out performing most of the market the last couple of years. Fortunately, the rally does not appear to be over any time soon. As a matter of fact its next leg higher could be just starting. Since mid-June shares of BSX have struggled with overhead resistance in the $65-66 range. As of today, that obstacle has been conquered. Technical and fundamental developments over the last few weeks have lead the way for today's breakout. In late July Goldman Sachs upgraded BSX to "out perform" from "in-line" based on a number of factors and claimed that fair value on the stock was closer to $77. Around the same time BSX announced it would split its stock 2-for-1 contingent on a shareholder vote to approve an increase in authorized shares. The vote is to take place on Oct. 6th and the company expects the stock to split sometime in November. Additional news out this August includes an FDA approval for BSX's brain tumor device as well as the launch of BSX's next generation intravascular ultrasound (IVUS) imaging system. There was some potentially bad news around the 13th of August when a U.S. appeals court reversed a lower court patent case decision against Johnson & Johnson that might leave BSX open to penalties. However, most of Wall Street, including S&P, believe that BSX has resources to handle the $324 million fine placed on it by a lower court. Given the small dip on the news and subsequent bounce in BSX's share price it looks like investors are buying into recent comments from Merrill Lynch that BSX could start taking market share from JNJ in the drug-coated stent market. That's big news for an industry that MER believes will expand 60% to 80% in the 2nd half of this year. Our initial profit target is $70 but we suspect BSX could drive even higher (potentially $75). We're going to initiate the play at current levels with a stop at $62.00. Update: Friday's performance looks negative but given the rollover in the broader market indices it is not a surprise. Now that the $INDU and COMPX appear to be showing one-day (bearish) reversals and BSX is back under $66.00 we would not suggest new bullish plays at this time. Patient traders might want to wait and see if BSX bounces from the $64.00 level but we put emphasis on the word "bounce". Suggested Options: Bullish traders can choose from September, October and November calls on BSX. Our preference is for the September 65s and 70s or the October 70s (we'd probably lean towards the Octobers). ! We're not suggesting new entries until we see a bounce from $64-65 or a move back above $66.00. BUY CALL SEP 65 BSX-IM OI=32294 at $3.60 SL=1.85 BUY CALL SEP 70 BSX-IN OI=16405 at $1.45 SL=0.80 BUY CALL OCT 70 BSX-JN OI= 209 at $2.55 SL=1.20 BUY CALL NOV 70 BSX-KN OI= 2239 at $3.80 SL=1.85 Annotated Chart: Picked on August 21 at $66.50 Change since picked: -0.89 Earnings Date 07/22/03 (confirmed) Average Daily Volume: 2.78 million Chart = --- eBay, Inc. - EBAY - close: 110.98 change: -1.62 stop: 110.50*new* Company Description: After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. Why we like it: Did you harvest those gains on Friday morning? As noted in Thursday's update, the $114 level looked like a favorable level for conservative traders to book some gains on our EBAY play, as that was just above the downward-sloping upper Bollinger band. Sure enough, the stock gapped higher on the bullish comments from INTC, hitting an intraday high of $114.17 before the swoon began. By the time it was all over, EBAY had printed a pretty ugly looking bearish candle, closing just below $111. As we've been noting over the past few days, this play is getting a bit long in the tooth, and traders currently in the play should be very stingy about how much ground they're willing to give back. We're still hoping for a rally up to the $115 level, but Friday's early surge may have been all the bulls had to give. Tighten stops aggressively to $110.50 (just below Thursday's intraday low) and use a rally up into the $114-115 area to exit the play with a stellar gain. We are not recommending new positions at this time. Suggested Options: We are not recommending new positions at this time. Annotated Chart of EBAY: Picked on August 12th at $103.43 Change since picked: +7.55 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 6.67 mln Chart = --- Gilead Sciences - GILD - cls: 64.16 chg: -2.31 stop: 62.49 Company Description: Gilead Sciences is a biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases worldwide. The company has seven marketed products and focuses its research and clinical programs on anti-infectives. Headquartered in Foster City, CA, Gilead has operations in the United States, Europe and Australia. (source: company press release) Why We Like It: Shares of GILD have been a big winner for investors since they broke out above the $35 level back in March. The general market optimism and a string of positive news for the biotech sector fueled by clinical trial results pushed shares higher. In mid- July shares of GILD gapped higher on good news for its phase III trials for Emtriva, another AIDS treatment. Then in early August shares dropped on a warning from the FDA over some marketing practices. GILD appeared to build a new base at $60.00 and the bounce looked attractive as the technical oscillators began to curl back into bullish patterns. We suggested a call play on the breakout over $65.00 this Tuesday. Shares are back below this level now and might find support at the $64 mark (look at a 30-minute chart and it's easier to see). The bad news is that Friday's candlestick is a bearish engulfing candlestick pattern and that's obviously a negative development. We're seeing the same sort of pattern on the NASDAQ Compx. These types of patterns normally become one- day reversal signals. If GILD follows through and reverses trend then we certainly don't want to be adding long positions. Currently our stop loss is at $62.49. More aggressive traders willing to take the heat might want to use the simple 50-dma near $61.49 as a stop. If the 50-dma doesn't hold as support then the $60 level might do the job. Of course we'd be stopped out by then but we can always evaluate a new play on a good bounce (or buy puts if it breaks $60). Suggested Options: We are not suggesting new entries at this time. Annotated Chart: Picked on August 19 at $65.32 Change since picked: -1.16 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = --- Hartford Fin. Svcs - HIG - close: 53.11 change: -0.40 stop: 51.75 Company Description: Hartford Financial Services Group is a diversified insurance and financial services company. The company provides investment products, individual life, group life and group disability insurance products, as well as property and casualty insurance products in the United States. HIG writes insurance and reinsurance in the United States and internationally, and is organized into two major operations: Life and Property & Casualty. Why we like it: As we feared on Thursday, it looks like our HIG play is going to test support again before making an assault on resistance. The weakness in the rest of the market weighed on shares of HIG, resulting in a drop to close at the low of the day and just above the $53 level. In the process, the 10-dma ($53.60) was broken, and we're now looking at gap support in the 452.00-52.50 area, backed up by the 20-dma ($52.48) as critical support. A rebound from this area looks favorable for new entries, but this is an aggressive strategy. More conservative traders will need to see the rebound extend back over the recent intraday high ($54.49) and should use an entry trigger of $54.50. While the bottom of the early August gap is below $51, we're looking at the 50-dma ($50.74 and rising) as the real line in the sand. For that reason, we feel comfortable with our stop at $51.75, as a close below that level would confirm that our bullish premise for the stock has been refuted. Suggested Options: Shorter Term: The September 55 Call will offer short-term traders the best return on an immediate move, as it is the closest to being in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the October 55 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 will want to use the October 50 Call. BUY CALL SEP-50 HIG-IJ OI=3062 at $3.60 SL=1.75 BUY CALL SEP-55 HIG-IK OI=2084 at $0.75 SL=0.30 BUY CALL OCT-50 HIG-JJ OI= 70 at $4.30 SL=2.75 BUY CALL OCT-55 HIG-JK OI= 56 at $1.45 SL=0.75 Annotated Chart of HIG: Picked on August 14th at $54.14 Change since picked: -1.03 Earnings Date 11/05/03 (unconfirmed) Average Daily Volume = 2.30 mln Chart = --- L-3 Communications -LLL - close: 49.40 change: -0.68 stop: 48.90 Company Description: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why we like it: Our LLL play has certainly been an emotional roller coaster, hasn't it? First the stock threatened to violate our stop down near $47, and then it looked like a breakout with Thursday's intraday trade above the $50.50 level. But the negative action across the broad market on Friday did not do us any favors. LLL was once again rejected from resistance and dropped back for a 1.35% loss, ending just above the converged 10-dma ($49.30) and 20-dma ($49.10). As a precautionary step against another rejection at resistance, we tightened our stop to $48.90 on Thursday, which is just below both of those moving averages. Now it's crunch time and LLL will need to prove itself to remain on the Call list. We are done with trying to buy the dips on this defense-related stock. The only entries that hold any appeal now are on a breakout above $50.60. With daily oscillators turning down, the odds don't look good for that breakout move to materialize, but we'll let our stop be the guide. The 20-dma provided strong support on the last dip and if it fails to do so this time around, the risk is minimal to our stop. Suggested Options: Shorter Term: The September 50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the October 55 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 will want to use the October 50 Call. BUY CALL SEP-45 LLL-II OI= 282 at $4.90 SL=3.00 BUY CALL SEP-50 LLL-IJ OI=1355 at $1.30 SL=0.60 BUY CALL OCT-50 LLL-JJ OI=2710 at $2.20 SL=1.00 BUY CALL OCT-55 LLL-JK OI= 846 at $0.60 SL=0.25 Annotated Chart of LLL: Picked on August 3rd at $49.90 Change since picked: -0.50 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 923 K Chart = --- Omnicom Group - OMC - close: 76.79 chg: +0.04 stop: 72.99 Company Description: Omnicom is a leading global marketing and corporate communications company. Omnicom's branded networks and numerous specialty firms provide advertising, strategic media planning and buying, direct and promotional marketing, public relations and other specialty communications services to over 5,000 clients in more than 100 countries. (source: company press release) Why We Like It: There appear to be a number of developing reasons for investors to turn bullish on advertising stocks. The general economy is improving, we're starting the fall sports/tv line up, we'll soon see ads for the 2004-2005 political season, and there is going to be a free for all among the drug giants with the new ED drugs hitting the U.S. market soon. This hasn't been lost on shares of OMC. The breakout over $75-76 from a multi-week consolidation looks like a great place to gauge new entries. Our short-term target was $80 but we believe OMC can actually trade to the $85 level. Yet this can only occur if the markets cooperate. Shares of OMC, like many equities, gapped higher on Friday morning only to give most or all of it back by the close. OMC held up better than most stocks but that's still an ominous pattern. We suspect that patient traders will get another opportunity to enter OMC on a dip. We suggest that waiting for a pull back to the $75 mark might be the best bet. Wait for the bounce from $75.00. Suggested Options: Currently OMC has September, October and January calls to choose from. Our preference is for the September 75s and 80s. BUY CALL SEP-75 OMC-IO OI= 1373 at $3.30 SL=1.65 BUY CALL SEP-80 OMC-IP OI= 1585 at $0.90 SL=0.45 BUY CALL OCT-75 OMC-JO OI= 1442 at $4.50 SL=2.25 BUY CALL OCT-80 OMC-JP OI= 1816 at $2.00 SL=1.00 Annotated Chart: Picked on August 19 at $76.67 Change since picked: +0.12 Earnings Date 07/29/03 (confirmed) Average Daily Volume: 881 thousand Chart = --- SPX Corporation - SPW - close: 48.73 change: -0.84 stop: 46.75 Company Description: SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. The company offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices and metering and mixing solutions. The company also provides specialty service tools, diagnostic systems, service equipment and technical information services. SPW services a broad array of customers in a variety of industries, including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications, financial services, transportation and power generation. Why we like it: As was the case with most stocks on Friday, our SPW play took a much-needed day of rest, falling back below the $49 level. As noted when we initiated coverage of the stock, the $50 level was likely to be solid resistance on the way up, so it was no great surprise to see the stock turned back from Friday's intraday high of $49.94. This is also a clear demonstration of why we weren't interested in trying to enter on strength when we initiated the play last weekend. Sure, we would have preferred a clean breakout, but the market rarely gives us just what we want. With daily Stochastics starting to hook downwards, our attention needs to focus back on support near the $47.00-47.50 area. That is the likely bounce point and where we'll want to look for new entry points on that rebound. With our stop resting at $46.75, we're clearly expecting the 20-dma ($47.03) to continue providing support like it did a couple weeks ago. Once SPW manages to clear the $50 level on a closing basis, then our focus can shift to the upside potential, and we're still looking at the $53 level as our initial target. Suggested Options: Shorter Term: The September 47 Call will offer short-term traders the best return on an immediate move, as it is slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the October 50 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 will want to use the October 47 Call. BUY CALL SEP-47 SPW-IW OI= 663 at $2.25 SL=1.00 BUY CALL SEP-50 SPW-IJ OI=3679 at $0.95 SL=0.50 BUY CALL OCT-47 SPW-JW OI= 6 at $3.00 SL=1.50 BUY CALL OCT-50 SPW-JJ OI=2503 at $1.65 SL=0.75 Annotated Chart of SPW: Picked on August 14th at $48.14 Change since picked: +0.58 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume = 903 K Chart = ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** XL Capital Ltd. - XL - close: 74.29 change: -1.63 stop: 78.25*new* Company Description: XL Capital Ltd. provides insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. Insurance business written includes general liability, other liability, professional and employment practices liability, environmental liability, property, program business, marine and energy, aviation and satellite, as well as other product lines. Reinsurance business written includes treaty and facultative reinsurance to primary insurers of casualty and property risks, as well as life reinsurance, primarily European term assurances, group life, critical illness coverage , immediate annuities in payment and disability income business. Why we like it: Wasting no time in getting with the bearish program, our XL play got slammed lower with the rest of the Financial sector, losing more than 2% and closing at the low of the day. Even better than that though, the stock closed at a new 4-month low, eclipsing the August 1st low of $74.99. Adding conviction to this downward move, the stock declined on heavy volume (60% above the ADV) and daily MACD is now clearly rolling bearish from below the zero line. As noted on Thursday, the next obstacle for the bears to contend with will be gap support in the $72.50-73.50 area, and that could generate a near-term bounce. But our sights remain focused on the $70 level as our initial downside target, with the potential for a further decline to $67 (trendline support) or even $65, which is the PnF bearish price target. Resistance should now begin to firm up in the $76.00-76.50 area and failed rallies below that level look attractive for new positions. With price pressing below the lower Bollinger band and gap support less than a dollar away, we're not interested in breakdown entries right now. With the break below $75, it should be safe to lower our stop to $78.25 this weekend, as that is just above both the declining 20-dma ($77.59) and the intraday highs of the past week. Suggested Options: Aggressive short-term traders will want to focus on the September 75 Put, as it will provide the best return for a short-term play. Traders with a more conservative approach will want to utilize the October contract, as it should not be as susceptible to time decay issues in the near term. BUY PUT SEP-80 XL -UP OI= 375 at $6.50 SL=4.50 BUY PUT SEP-75 XL -UO OI= 352 at $2.65 SL=1.25 BUY PUT OCT-75 XL -VO OI= 297 at $3.60 SL=1.75 Annotated Chart of XL: Picked on August 21st at $75.92 Change since picked: -1.63 Earnings Date 10/30/03 (unconfirmed) Average Daily Volume = 813 K Chart = ************* NEW PUT PLAYS ************* Express Scripts - ESRX - close: 63.48 change: -1.45 stop: 65.75 Company Description: Express Scripts provides health care management and administration services on behalf of clients that include health maintenance organizations, health insurers, third-party administrators, employers and union-sponsored benefit plans. The company's fully integrated pharmacy benefit management services include network claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical information management services and informed decision counseling services through its Express Health Line division. Why we like it: After tracing out what looked like a classic double-top pattern in June and July, shares of ESRX broke down out of the ascending channel in lat July, not finding support until reaching the $65 level, $10 below the double top and conveniently right at the threshold of the double-top breakdown. In early August, the stock broke below that level, confirming the double-top and falling a bit lower to find support at $60. That resulted in a fairly tepid bounce back to the $65 level, which now appears to be acting as resistance. ESRX rolled over from just above that level on Friday and the more than 2% slide was enough to give a bearish crossover signal on the daily Stochastics. The PnF chart paints a pretty bearish picture as well, with the big Sell signal in July producing a bearish price target of $52. The early August decline down to $60 broke the bullish support line, so that won't really be a significant obstacle on the way down. New entries on a rebound failure between here and $65 look favorable, as do entries on a break below $63, which will break the intraday support that has been holding over the past 9 sessions. As would be expected, initial support will be found near the early August lows near $60, followed by the 200-dma ($58.29). Either of those levels could produce a near-term bounce, but so long as the pattern of lower highs remains in force, that bounce will likely only produce another entry point. We're targeting a decline down to the $55 level, which looks like pretty solid support. Set stops initially at $65.75, which is just above the horizontal topping formation of the past 2 weeks. Suggested Options: Short-term traders will want to focus on the September 65 Put, as it will provide the best return for a short-term play. Traders with a more conservative approach will want to utilize the October contract, as it should not be as susceptible to time decay issues in the near term. BUY PUT SEP-65 XTQ-UM OI= 697 at $3.20 SL=1.50 BUY PUT SEP-60 XTQ-UL OI=2556 at $1.20 SL=0.60 BUY PUT OCT-75 XTQ-VL OI= 35 at $2.40 SL=1.25 Annotated Chart of ESRX: Picked on August 24th at $63.48 Change since picked: +0.00 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 1.41 mln Chart = --- Lehman Brothers - LEH - close: 64.41 change: -0.74 stop: 67.25 Company Description: Through its subsidiaries, LEH constitutes one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individuals clients. The company is engaged primarily in providing financial services, including securities writing and direct placements, corporate finance and strategic advisory services, private equity investments and securities sales and trading. Completing its array of banking, research and trading capabilities, LEH also engages in the trading of foreign exchange, derivative products and certain commodities. Why we like it: That's right, we're going to take another run at the downside in shares of LEH. Recall last month we had a solid downside play and with the rebound from the $60 level looking like it is running out of steam, now looks like a good time to re-enter the fray. Ever since the middle of June, LEH has been drastically underperforming the overall Brokerage sector (XBD.X), and a big part of that relative weakness may be due to investor expectations that the company may have gotten hurt during the recent bond selloff, as it is one of the larger bond trading firms. We're going to get a peek at whether those fears are based on reality in about 3 weeks when LEH reports earnings on September 18th. In the meantime, we're looking for continued weakness and Friday's sharp intraday reversal is a good start. The $66 level has been solid resistance ever since it failed as support roughly a month ago, and the 50-dma ($66.23) falling towards that level is only going to reinforce that resistance. Taking a look at the PnF chart, we can see that it is still on a Sell signal and is still working with a bearish price target of $52. Another failed rebound below the $66 level looks attractive for new entries, although current levels look good as well, with daily oscillators just starting to tip bearish. Once back under $63 (the 50% retracement of the March-June rally), the next area of support will be the 200-dma ($61.15) followed by horizontal support at $60. We're expecting a breakdown below that level this time around, and if the XBD index begins to show any real weakness (beginning with a close back under its 50-dma), then we ought to see the $55 level coming into play in short order. That will be our target for the play. More aggressive traders can target a decline down to the $52 PnF target, but we don't want to be greedy. Set stops initially at $67.25, which is solidly above both the 50-dma and the upper Bollinger band at $66.61. Suggested Options: Short-term traders will want to focus on the September 65 Put, as it will provide the best return for a short-term play. Longer- term traders looking for a move down towards the $60 level or below will want to utilize the October 60 contract, which although it is currently out of the money, should provide enough time to achieve profitability before time decay has a pronounced effect. BUY PUT SEP-65 LEH-UM OI=3407 at $2.25 SL=3.50 BUY PUT SEP-60 LEH-UL OI=3354 at $0.70 SL=1.25 BUY PUT OCT-60 LEH-VL OI=6053 at $1.60 SL=0.75 Annotated Chart of LEH: Picked on August 24th at $64.41 Change since picked: +0.00 Earnings Date 09/18/03 (unconfirmed) Average Daily Volume = 3.02 mln Chart = --- Wellpoint Health Ntwk - WLP - cls: 75.65 chg: +0.01 stop: 77.51 Company Description: WellPoint Health Networks Inc. serves the health care needs of more than 13 million medical members and over 49 million specialty members nationwide through Blue Cross of California, Blue Cross Blue Shield of Georgia, Blue Cross Blue Shield of Missouri, HealthLink and UNICARE. WellPoint offers a broad spectrum of quality network-based health products, including open access PPO, POS and hybrid products, HMO and specialty products. Specialty products include pharmacy benefit management, dental, medical management, vision, behavioral health, life and disability insurance, long term care insurance, flexible spending accounts, COBRA administration and Medicare supplements. (source: company press release) Why We Like It: The last several weeks have been pretty ugly for the health care sector. Previous investor darlings like WLP have been getting taken to the woodshed. This weakness may come as a surprise to many investors as most healthcare/insurance companies like WLP, UNH, and ATH have all turned in strong earnings results. WLP itself beat estimates by 10 cents. Making the whole situation even more odd are comments from Wall Street analysts worried about slower enrollment when most of these companies guided higher for Q3 and Q4 based on higher enrollment expectations. Whatever the truth is it is easy to see that the new trend for WLP is down. To make matters worse for Wellpoint there was recent news that they might be part of an investigation by the SEC over their failed bid to acquire Maryland's CareFirst BlueCross BlueShield in a $1.37 billion buyout. Current shares of WLP are right at support of $75.00 and its simple 200-dma. We are going to use a TRIGGER at $74.95 to open the play. Until WLP trades at or below our trigger we're just spectators. However, if we see a bounce then more aggressive traders might want to consider opening bearish positions on another failed rally under $80. If we are triggered we will use an initial stop loss at $77.51. There is strong potential for support near the $72.50 level but our first target will be $70.00. Suggested Options: WLP currently has September, October and January options. Our preference is for the September & October 75's and 70's. BUY PUT SEP 75 WLP-UO OI=1464 at $2.05 SL=1.00 BUY PUT SEP 70 WLP-UN OI=1424 at $0.65 SL= -- BUY PUT OCT 75 WLP-VO OI= 482 at $3.40 SL=1.75 BUY PUT OCT 70 WLP-VN OI=2234 at $1.65 SL=0.85 Annotated Chart: Picked on August 24 at $xx.xx Change since picked: +0.00 Earnings Date 07/22/03 (confirmed) Average Daily Volume: 1.3 million Chart = ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Sunday 08-24-2003 Sunday 4 of 5 In Section Four: Leaps: Traders Corner: Spread The Joy – Along With The Mayo Traders Corner: Where is the Dow Going? Traders Corner: Elliott Wave Plays Brokers Corner: Readers Write ------------------------------------------------------------ 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: ------------------------------------------------------------ ***** LEAPS ***** One More Week By Mark Phillips mphillips@OptionInvestor.com The past 2 months have been excruciatingly tedious for those of us looking for some sort of resolution to this incessant range the market has been in since the middle of June. As August has progressed the action has become more and more irritating, primarily due to the absolute nonexistence of a tradable trend. My nature is not such that I enjoy being in and out of trades several times per week. I like to take a position when the technicals tell me it is time, ride that trade for a period of days to weeks to even months and then exit when the technicals once again tell me it is prudent to do so. This program-trade driven chop has been trying to most traders and if you had the foresight to step away from the market earlier this summer, I believe you've saved yourself a lot of brain damage. The good news is that I think things are about to change and for the better. We've had numerous setups over the past several weeks, all of which have shown the beginnings of weakness in various areas of the market. But time and again, each technical breakdown has been propped up by unseen hands. Market manipulation? I won't go that far, although I won't rule it out either. No, this is typical of the end of summer. Low volume, and lots of luck in finding a solid and dependable trend. I expect to see more of the same next week. Alright, let's look at the facts. The bullish percent charts have been telling us for weeks that the bulls are carrying the majority of the risks in the market, but still the markets refuse to sell off beyond the bottom of the recent range. In fact, last week, the DOW finally broke above its June 17th high, closing at a new high of 9428on Tuesday. That gave us the Dow Theory bullish confirmation, but remember the 9500 level I mentioned last week? Isn't it curious how Friday's intraday high was right at that level? I guess I'm not the only one that has noted its significance. That was a pretty big intraday reversal on Friday, dropping the old economy index back near 9350 at the close. The S&P 500 reversed just below its June/July highs near 1016 and still looks top-heavy. Clearly the leader to the upside the past several weeks has been the NASDAQ, which tagged a new high for the year at 1812 on Friday, before sliding sharply into the close. It is hard to make either a bullish or bearish case based on the weekly Stochastics readings, which have all declined well below overbought, and are now threatening to turn bullish again. An argument can be made for the trading range of the past two months in the DOW and S&Ps as a rectangular consolidation/continuation pattern, with potential upside equal to the initial move off the March lows. I think that's ridiculous from a fundamental basis, but so is the current strength in the market. An opposite argument can be made (which I happen to like much better) that the past two months have been a topping formation and once normal volume patterns return after Labor Day, we'll head right back down. I think I've actually got some light to shed on this debate, but am far too short on time to delve into it this weekend. But I'll sit down sometime before Monday and put my thoughts on the subject into a coherent form for Monday's Trader's Corner article. It was actually supposed to be last week's article, but I spent most of the week dueling (and losing) with technology demons. I believe they've all been exorcised from my workspace, so will deliver on last week's article this week. I'm not even going to address the status of the bullish percent charts this week, other than to update their readings for you. Alright, I will make this one observation. Across the board, the patterns of weakness that we've seen in the bullish percents has been reversing itself. Take a look at those bullish percent SharpCharts and I think you'll see what I mean. Once again, I'll be looking for a lower high failure to confirm internal weakness in the major indices. Bullish Percent Readings NASDAQ-100 - 75% Bear Correction NASDAQ Composite - 70.57% (Bull Confirmed) DOW - 80% (Still in Bull Correction) S&P 500 - 77.45% (Bull Correction) S&P 100 - 84% (Bull Confirmed, at all-time highs) There are some changes there, but I'm having a hard time putting too much faith in their readings until we see some normal volume trading return. I know I keep harping on that issue, but I really do think it is important. How important? I idled all of my short-term trading accounts 2 weeks ago and will not reopen them until the Tuesday after Labor Day. Sure I will probably miss some profitable trades, but I've grown weary of trading within such a rather tight range in very choppy fashion. When volume returns, the range should expand, and we'll see what this market has under the hood. Unless I miss my guess, it is just one very tired hamster that is very near total exhaustion. He's continuing to keep things going on the expectation that help will arrive after Labor Day. I wonder how he'll respond when that 'help' turns out to be a band of cheerleaders and a maintenance technician to lubricate the wheel? Speaking of cheerleaders, have you noticed the infernal din of pundits and self-proclaimed experts that are now telling us "this time it is different"? It isn't different, it is exactly the same and I pity the uninformed investors that will blindly believe the market is back on the road to new highs. Obviously Harry Dent is the most deluded of the bunch calling for DOW 35000 by 2008 based on -- get this -- a comparison of the price action of the auto index from 1922-1929. I want some of what he's been smoking! The problem is that I know how the siren's song can draw in the uninformed public to believe they are going to get a second chance at the roaring 1990s. Fortunately we won't have to count ourselves among them. The other thing in the Financial press that is absolutely driving me nuts is the frequent assertion that this drop of the VIX under 20 is somehow different. Bull! When they can show me historical evidence of the VIX dropping from the 20 level to as low as 15, while at the same time, the market actually rallies, then I'll consider listening to their argument. Until then, they are just a bunch of idiots. I don't normally use such terms to describe other analysts, but how much clearer does it have to get. Look at every VIX below 20 for the past 5 years. Can you find a single example where the VIX continued to fall and the market rallied? Of course not! The reason why is that there is too much complacency in the market and no wall of worry to climb. I'll delve into the details of this in Monday's article, but for now, that ought to set the stage for what I expect over the near- term. It was really a busy week on the playlists, so I'm going to cut the commentary short here and dive into what transpired there. Portfolio: ADBE - Sigh. ADBE was looking so good from the bearish perspective, but you know what they say, "Stuff Happens". I'm not at all happy about it, but I wouldn't have played it any differently if I had it to do again. Details on the drop below. DJX - So do you have any doubts about the significance of the $95 level in the DJX? On Friday's early ramp, that was exactly the high before the steady bleed lower right into the closing bell. It has been a bumpy road getting to this point, but I think we've reached the tipping point. Look for one more week of irrational summer action and then the real trend can get underway after the Labor Day weekend. Traders still looking for an entry into the play should continue to use failed rallies below $95 as the entry trigger. We're maintaining our stop at $95.50, as a close over that level would indicate significantly more bullish power than I currently think exists in the market. BBH - I honestly didn't think the Biotechs would be able to battle back to fulfill our entry target in the $132-135 area, but they nailed it almost perfectly on Friday. Chalk up another new bearish Portfolio play. Details down below. GM - What was it I said last week? "Don't look for any excitement here." Boy, was I wrong! Just when it was least expected, the latest irrational spike arrived, fulfilling my optimistic entry parameters and GM is now in the Portfolio. Details below. LEH - It's the paragon of weakness in the Brokerage sector and on Friday, LEH gave us the entry setup we were looking for, failing right at the $66 resistance level. Make that three new Portfolio plays this week. You know where to find the full scoop! Watch List: WMT - Am I being too stingy in my requirement for a rejection from the $60 level before playing WMT to the downside? I really don't think so, especially now that the PnF chart has logged a new Buy signal. Friday's sharp reversal certainly looks bearish, and the bearish divergence on the daily Stochastics (5,3,3) certainly reinforces that view. But with the Retail index (RLX.X) yet to give any defined sign of weakness and WMT still above trend, I think caution is warranted. We might get our entry next week before the September swoon I'm expecting, but with 3 new Portfolio plays already this week, I'm content to let this one simmer for another week. QQQ - Just last week, I was thinking our QQQ play was setting up for a failed rally below the $32 level. Needless to say, I was a bit surprised by the strength in the NASDAQ, the majority of which I think we can attribute to the Semiconductor sector. QQQ surged to as high $33.37 on Friday (a new 52-week high) before dropping significantly into the close. Was that the high for this cycle? I honestly think it was, but I'm going to abide by our entry strategy, and that means waiting for a close back under $32 before playing. Once filled, we'll use a tight stop at $34.50. QQQ shouldn't be able to push through the strong resistance at $34.00, but that's what stops are for. SMH - We took our shot at a bearish play right at resistance and after a month of back and forth indecision, the bulls ran with the ball and stopped us out. That's precisely why we had such a tight stop. Last week I said that if we were stopped out, we'd cycle CMH right back onto the Watch List and so we have. Now we'll look to target shoot an entry near higher resistance in the $39-40 area. We may miss it completely, but if filled, the play ought to be a runner as it becomes clear that any bullish hopes for a stellar second half are badly misplaced. Radar Screen: HD - So here's the question that's plaguing me this week. Did I do the right thing by getting aggressive with the stop on our HD play? After stopping us out for a paltry gain, the stock shot sharply higher around earnings and is now right back where it was when we were stopped out. In retrospect, I think it was the prudent course of action, and I'm still watching for another prudent entry into the play. Perhaps on another failure below the $35 level, but I'm not willing to be aggressive, considering the way in which the stock continues to test its bearish resistance line on the PnF chart. FNM - I keep waiting for FNM to pop up to give us some sort of a failed rally on which to base a new entry, but the stock keeps weakening and continued rumors about financial problems at the company as a result of its derivative portfolio certainly aren't helping. The stock is currently resting just above strong support in the $58-60 area, so this clearly isn't the place to enter. My preference right now is for a failed pop into the $65-66 area, from which we could target a decline down to $51, the current bearish vertical count from the PnF chart. Of course, a trade at $66 would generate a new Buy signal and could change the overall picture significantly. For now, I'm content to wait and see. Closing Thoughts: One more thing. Last week I talked about the lack of a bullish confirmation with respect to Dow Theory. Well Monday's surge above 9400 provided that confirmation with new highs for this cycle in both the INDU and the TRAN. So that confirmed the status of the cyclical bull market in which we find ourselves. What I think is worth noting is that Dow Theory is not a trade timing system. The last clear confirmation we got was a bearish one back in October, within a few days of the bottom was put in. Obviously new bearish positions taken on that bearish confirmation would not have done well. And I suspect new bullish positions taken on last Monday's bullish confirmation will do correspondingly poorly. I dispensed with the majority of my technical commentary on the broad markets this week for two reasons. First, I want to devote some time this weekend to Monday's Trader's Corner article, which I think you'll find interesting as we head into the end of August. But more importantly, I don't have any great faith in my ability to call market direction this week. Simply put, I think the top is in and we're about to begin the trek down towards the next important low, probably in the mid-October timeframe. The problem I have with that statement is that I think I've said something similar on more than one occasion over the past couple months. Check with me next week and I'll have a more confident prediction of where we're headed. I consider the next week to be a good one to take one more final trip with the family or enjoy the summer sun. While I'll be away from the markets for at least the first part of next week, it won't be for any leisure activities. My number came up and I'll be doing my civic duty and reporting for jury duty first thing Monday morning. So do me a favor and keep the markets orderly for me, so we can all have fun together after the Labor Day weekend. Have a great weekend! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: DJX 07/31/03 '03 $ 92 DJV-XN $ 3.80 $ 3.90 + 2.22% $95.50 '04 $ 92 YDK-XN $ 8.20 $ 8.40 + 2.22% $95.50 BBH 08/22/03 '05 $125 XBB-ME $14.60 $14.60 + 0.00% $138 '06 $120 YEE-MD $15.50 $15.50 + 0.00% $138 GM 08/21/03 '05 $ 35 ZGM-MG $ 4.30 $ 4.90 + 0.00% $42.00 '06 $ 35 WGM-MG $ 6.80 $ 7.10 + 0.00% $42.00 LEH 08/22/03 '05 $ 65 ZHE-MM $ 9.80 $ 9.80 + 0.00% $70.00 '06 $ 60 WHE-ML $10.00 $10.00 + 0.00% $70.00 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: WMT 08/03/03 $60 JAN-2005 $ 55 ZWT-MK JAN-2006 $ 55 WWT-MK QQQ 08/10/03 $31.50-32.00 JAN-2005 $ 30 ZWQ-MD JAN-2006 $ 30 WD -MD SMH 08/24/03 $39-40 JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG New Portfolio Plays BBH - Biotechnology HOLDR $131.30 **Put Play** After the apparent breakdown in the Biotechnology sector, I must admit I had my doubts as to whether the BBH would be able to struggle back to give us a favorable entry point. But the rampant (and irrational) bullishness came through again last week, propelling the NASDAQ to new highs for the year and BBH reluctantly went along for the ride in what looked like a bear flag formation that is also tracing out the right shoulder of a H&S top formation that has its upward-sloping neckline at roughly $126. It isn't perfect, but I like the way the PnF chart will finally give a Sell signal with a trade at $124. So clearly we have some hurdles to cross on the way down before we'll have confirmation of the prudence of this aggressive play, but with the sharp reversal across the entire market on Friday, I like our odds. Recall that our targeted entry was for a rally failure in the $132-135 area, and BBH delivered perfectly, topping out just under $135 and then falling back under $132 by the close. In keeping with the aggressive nature of this play, we'll have to start with a pretty wide stop. I'm choosing $138, just above the top of the H&S pattern. While we're initially targeting a break below $120, I've got my eye on an eventual decline down near $100, which has been a pivotal level in the past. BUY LEAP DEC-2005 $125 XBB-ME $14.60 BUY LEAP DEC-2006 $120 YEE-MD $15.50 GM - General Motors $39.13 **Put Play** After last week, I'm sure you can all now understand reticence about entering this play when GM was trolling around the $36 level. Sure, it looked weak there, but after being burned a few times in the last year, I 'knew' there would be another irrational spike in the stock and that would be our opportunity to play. So what was the cause behind GM's bullish move last week, which really was capped off with Thursday's failed rally just below $40? Was it the announcement that the company would seek shareholder approval for its Hughes deal? How about the news that the company would be assembling a portion of its Cadillac line in China? Quite honestly, I don't think that has anything to do with it. GM was simply caught up in the buying frenzy (especially on Thursday and then Friday morning) in the broad markets and when that artificial prop was removed, the stock dropped back under the pull of gravity. Make no mistake, we're ahead of the game here in terms of technicals, as the PnF chart is still on a Buy signal. But I think that resistance at $40 will prove to be the bulls' Waterloo. I've enumerated the fundamental reasons why the stock should absolutely tank and now we'll see if the market wakes up from its stupor and agrees. Our initial target will be a return to the March lows at $30 and then we'll look for a downward continuation to new multi-year lows. Remember, the longer-term 2- point box size PnF chart is still on a powerful Sell signal and has a target of $12. It would take a trade at $42 to generate a new Buy signal on this timeframe, so that's where we'll place our stop. I don't expect this play to move quickly, but we've got plenty of time on those '05 and '06 LEAPS for it to play out over the next several months. BUY LEAP DEC-2005 $35 ZGM-MG $4.30 BUY LEAP DEC-2006 $35 WGM-MG $6.80 LEH - Lehman Brothers $64.41 **Put Play** Oh, if only I had been quicker on the draw, we would have been in this play up near $70, but there's no use crying about the trade we missed. I gradually lowered the entry target into the $66-67 area last week and with the help of the bullishness in the broad market, LEH finally got there on Friday morning, with a quick squirt up to $66.05 and then a pullback that lasted right into the closing bell. Looking first at relative performance, LEH has been grossly underperforming the Broker/Dealer index (XBD.X) ever since tagging its June highs and the relative strength chart is trading near 2-year lows and appears ready to break down. If the XBD index starts to weaken, then it should serve to pound LEH that much lower. Taking a look at the PnF chart, we have a solid Sell signal and a bearish price target of $52. There's potential support near $60-61, reinforced by the 200-dma ($61.15). But once under that level, LEH ought to seek out the $55 level and if I'm right, the $52 level is definitely a viable target. A big part of what I think is weighing on the stock lately is investor fear that LEH (along with some other major bond trading firms) may have taken a serious blow from the sharp selloff in bonds over the past couple months and we ought to get a glimpse of whether there is any truth to that suspicion when the company reports earnings on September 18th. The $66 level has been strong resistance over the past month and with the 50-dma ($66.23) now nearing that level, this resistance should get even stronger. Even if it is breached near-term, we have solid resistance in the $68-69 area that should squash any rogue bullish move. Looking at the PnF chart again, LEH won't print a Buy signal until it trades $70, so that's where our stop goes. For those of you that may have missed the entry on Friday, I still like failed rallies in the $66-67 area for new entries. BUY LEAP DEC-2005 $65 ZHE-MM $ 9.80 BUY LEAP DEC-2006 $60 WHE-ML $10.00 New Watchlist Plays None Drops ADBE - $36.21 Alright, that was just downright unpleasant! I knew ADBE was going to find support in the $30-31 area, as it was not only gap support, but the site of the stock's PnF bullish support line, but with a PnF Sell signal in place, I was sure any rebound would be tepid at best. Well, Monday's rocket launch higher, spelled doom for our play as the stock rocketed through our $36 stop on the heels of the Piper Jaffray upgrade. The remainder of the week proved the wisdom of keeping our stop set at $36, as that trade generated a new PnF Buy signal and the subsequent rally shot ADBE as high as $39.19 at Friday's early high before some weakness was finally seen. Given the opportunity, I would take this trade again based on the technical setup, and other than perhaps being more aggressive with our stop like we did with HD a few weeks ago, I wouldn't have changed a thing. The underlying bullishness in the market just jumped up and bit me again. SMH - $34.15 We had to take the shot on our bearish play on SMH, as the $400-410 resistance in the SOX, combined with $33 resistance on the SMH looked like an excellent point to try picking a top in this momentum group. Things were looking good a couple weeks ago with the apparent breakdown, but as we can see, the group got launched higher 2 weeks ago and that vertical launch never even slowed down until the INTC euphoria wore off on Friday after the opening hour. By that time, we were long gone from the play, as our $33 stop was clipped shortly after the open on Monday. I would take this play again if given the opportunity, simply based on the risk-reward and the clearly defined resistance level. Chalk it up as a busted play. The downside still looks far more favorable than upside for this group, but there is no way I would have considered ignoring the stop on this play. Note that SMH was up nearly $5 from that point early on Friday. That's more heat than we should be willing to take, regardless of our risk profile. As I mentioned a couple weeks ago, if stopped out, I'd be looking to re-enter the play and I'm sticking with that notion here this week. We're not doing a new play writeup, but note that SMH is back on the Watch List this week, with an entry trigger at $39-40. There's very strong resistance in the $40-42 area, so we'll start with a more liberal stop at $43. Take note that we won't be entering into strength, as we'll need to see a reversal from that level in order to be tempted into the play a second time. ------------------------------------------------------------ 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: ------------------------------------------------------------ ************** TRADERS CORNER ************** Spread The Joy – Along With The Mayo By Mike Parnos, Investing With Attitude The Ponderosa was an impressive ranch. Ben, Hoss, Adam and Little Joe lived pretty well off that spread. The Jiffy Peanut Butter Company does very will with their spread. And Heidi Fleiss has made a fortune with her's. So, it only makes sense that we, at the CPTI, should profit by creating spreads of our own. Today we're going to look at vertical call and put spreads – which are created to take advantage of large up or down movement in a stock/index. The risks are limited and the potential profit (if you pick the direction right) is attractive. So, get out your bread and let's see if we can make a PB&J sandwich out of the stock market. ______________________________________________________________ Bull Call Spread = Bullish A bull call spread is the purchase of a call and the sale of a higher strike call with the same expiration date. The purpose of the sale of the higher strike call is to take in a credit that serves to reduce the risk. It also puts a cap on potential profits, but since, at the CPTI, our emphasis is to limit risk, we choose to use spreads instead of a pure directional put or call trade. Our example will be based on a 10-contract position. If you are bullish on the NASDAQ, a bull call spread might look something like this: It's August and the QQQs are trading at $32.44. 1. Buy the January 04 $32 call @ $2.60 = $2,600 2. Sell the January 04 $35 call @ $1.20 = $1,200 Total Risk: $1.40 = $1,400 Let's look at what we have created. In the bullish scenario, we're risking a grand total of $1,400. The maximum that we can collect if the QQQs trade through the $35 sold strike price is $3,000 (10 contracts) -- the difference between the $32 and $35 strike prices. At expiration, both options will be exercised and your profit will be $1,600 ($3,000 - $1,400). Notice that the further you go out of the money, the less the risk, but the greater movement necessary to achieve profitability. If, in the bullish scenario, we went further out of the money, the debit would be less and the potential percentage of profit would be higher. The Jan. $33 calls cost $2.10 and the Jan. 04 $36 calls would bring in $.90. The debit would be only $1.20, but the QQQs would have to close beyond $36 to achieve maximum profitability. That's a lot to ask. Bear Put Spread = Bearish If you are bearish on the NASDAQ, the scenario is the same, just bass-ackwards. The numbers aren't too different. At this writing, they're actually a little better. 1. Buy the January 04 $32 put @ $2.05 = $ 2,050 2. Sell the January 04 $29 put @ $.95 = $950 Total Risk: $1.10 = $ 1,100 In the bearish scenario, we're only risking a grand total of $1,100. The maximum that we can collect if the QQQs trade through the $29 sold strike price is $3,000 (10 contracts) -- the difference between the $32 and $29 strike prices. At expiration, both options will be exercised and your profit will be $1,900. When Do You Take The Money and Run? Now, keep in mind, we're dealing with a five-month position. A lot can happen in five months. It likely won't take the full five months for the QQQs to trade through the short strike. If, in the bullish scenario, the QQQs trade through $35 in just two months, we would need to evaluate the position. We may have decisions to make. You would be able to liquidate the position for an estimated credit of about $2,200. Your cost is $1,400, therefore, your profit would be appx. $800. That represents 50% of your profit target. Is that enough? Here's the question you have to ask yourself: Are you willing to risk the $800 you made during the first two months for the chance of making the additional $800 profit that you would make if you held the position to its maturity? Obviously, you have to re-evaluate. There are a lot of questions to answer that will help you make your decision. Is the chart still trending up or is it just a bear market bounce? Is there any serious resistance at the $35-36 level? Has there been good volume on the up days, and lower volume on the down days? Your choices are: 1. Take your profits on half your position and let the rest run with very tight mental stops and a lot more self-discipline than you have every time you open the refrigerator door. 2. Liquidate the position, take the $800 profit. 3. Roll the dice and let the position run - lighting candles, massaging your rabbit's foot, and your four-leaf clover for the last two months. This is the appropriate choice for you option traders that can't pick a winner in a one horse race. In bull call spreads, the curve on the graph tells us that, as the stock goes up, it reaches a point in time at which the price of the long option increases more slowly. At that point, it's questionable whether you should remain in the trade. It might be time to "take the money and run." There are no rules set in stone. You're going to have to make some choices. Remember, the more percentages you have in your favor, the better chance you have for success. _____________________________________________________________ SEPTEMBER POSITIONS – Remember that September is a five-week option cycle. Expiration is Friday, September 19th. September Position #1 – SPX Iron Condor – SPX @ 993.06 S & P 500 Index = SPX Sell 10 contracts of SPX 1040 Sept. calls Buy 10 contracts of SPX 1050 Sept. calls Look for a net credit of $1.30. Sell 10 contracts of the SPX 950 Sept. puts Buy 10 contracts of the SPX Sept. 940 puts Look for a net credit of $1.40 Total credit of $2.70 ($2,700). We have a huge maximum profit range of 950 to 1040. That's peace of mind! More aggressive investors can narrow the range a bit and take in more money. At 993.06, we're in good shape – for now. September Position #2 – SMH Sell Straddle Semiconductor Holders Trust = SMH As so many astute CPTI students pointed out, the premiums I listed here on Sunday were unrealistic. Well, I checked and, indeed, it was too good to be true. I had grabbed the November premiums instead of the September premiums. Picky, picky, picky. So, the SMH trade became null and void – and not worth pursuing. September Position #3 – COF Sell Straddle – COF @ $51.66 Capitol One Financial = COF Sell 10 contracts of COF Sept. $50 calls @ $2.35 Sell 10 contracts of COT Sept. $50 puts @ $2.50 Total credit of $4.85 ($4,850). We will make some profit if COF finishes anywhere between $45.15 and $54.85. The closer COF finishes to $50, the more money we'll make. Our bailout points are the parameters of our profit range. Maximum potential profit is, again, $4,850. COF moved up a bit, but at $51.66 we're still comfortably in profit territory. September Position #4 – EBAY Iron Condor -- EBAY We were going to put on an Iron Condor with a $95 to $110 range. However, EBAY gapped way up early in Monday's trading session. That changed the scheme of things and it was not prudent to enter the EBAY trade. If EBAY would have retreated back down to the $103 level, we might have entered the trade, but it did not. It was a wise choice since EBAY has continued on up to $112 and we would have been in a precarious position. ______________________________________________________________ SEPTEMBER REPLACEMENT POSITIONS For reasons discussed above, we did not enter into two of the proposed September positions. Here are a few replacement positions. Position #1 – HWP (Hewlett Packard) Bear Put Spread Let's use the strategy we discussed above. HWP is weak and may return to the $15 range. So, lets: Buy 10 contracts of the HWP Feb. 2004 $20 puts @ $2.25 Sell 10 contracts of the HWP Feb. 2004 $15 puts @ $.40 Total debit of $1.85. Potential max profit of $3.15. In reality, if HWP makes the move down, it will probably happen on the coattails of a market move down. It shouldn't take until February. I'd gladly accept a profit of $800-900 and close the position early if the opportunity presented itself. Position #2 – OEX – Bearish Calendar Spread – OEX @ $497.42 Maybe Friday was a reversal day. The market has run up pretty fast and perhaps it's time to give some gains back. Let's see if we can take advantage of this with a calendar spread. Buy 8 contracts of OEX November 470 puts @ 10.60 Sell 8 contracts of OEX September 470 puts @ 2.20 Total debit of $8.40. As the market retreats, we will sell near term puts against the November long 470 puts to further lower our cost basis. This position may take a few months to come to fruition. In addition to reasonable trades with decent profit potential, these two replacement trades will be good learning experiences as well. ______________________________________________________________ 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 ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould A while back I was watching one of those old swashbuckling pirate movies. In one of the scenes the ship was recuperating from a storm. After all the repairs were made the captain wanted to set sail again. He started giving out order after order. He wanted to raise the main sail, but before he did, he needed to have something else in place. Apparently timing was a critical issue so he gave the famous order, "Stand by to hoist the main sail." A few moments later, when everything was in place he gave the final order to hoist the main sail. I would like to give the market the order, "Stand by to reverse direction" but I think that is just a bit premature. Instead I am going to give the order, "Stand by to stand by." I know in the past I have dogmatically stated that the market was about to tank. I have since learned my lesson and I am going to moderate here a bit. I will not say categorically that the market is going to tank because that is yet to be seen. What I will state though is that we are approaching a major pivot point and after that point the market will take a severe reversal of course. (OK, I have been listening to too much of Ah-nold's political speak.) Let's take a look at some charts. Chart: S&P 500 Weekly 8/22/2003 The weekly chart shows that the S&P 500 has been in a steady decline since January 2000 tracing out a very clear five wave basic pattern. Currently the S&P 500 is putting the finishing touches on the C wave of the 4 (green square) wave retracement. The correction pattern of the 4 wave looks to be an expanded flat. The characteristics of an expanded flat are 1. The A-B-C waves segment into a 3 wave, a 3 wave and a 5 wave. So far the A wave is a 3 wave, the B wave is a 3 wave and the C wave is an incomplete 5 wave. 2. The A wave and B wave are the same height (plus/minus 25%). Right now the B wave is 90% of the A wave. 3. The C wave is somewhere between 1.38 to 1.62 times the height of the A wave. Currently the C wave is only 1.20 times the height of the A wave. The minimum retracement level of a 4 wave is 23.6%. A more typical retracement level is at least 38.2%. The S&P 500 has pierced the 23.6% retracement level and I believe it is on its way to the 38.2% level. The oscillator is losing momentum as it appears to be turning however if the S&P 500 does hit the 38.2% retracement level, it will rise a bit to the 138% level. Chart: S&P 500 Daily 8/22/2003 The daily S&P 500 chart shows that the C wave is indeed very near completion. The S&P 500 has retraced the minimum 23.6% in an apparent zigzag pattern. I did not think the S&P 500 would retrace so little and it may still retrace more should this turn out to be a head fake. But for now, with all the other indicators pointing to a higher high, I am going to go with the shallower retracement level. The oscillator has retraced about 95% and has reversed course. This is the typical pattern seen for the 5 wave and should culminate in the divergence contour necessary for the completed five wave basic pattern. Since the weekly wave 4 is turning out to be an expanded flat, the C wave needs to trace out a length that is 1.38 – 1.62 times the height of the A wave. This would put the completed 5 wave at the 1046 – 1090 level. As it turns out, the MOB (Make or Break) level is also at 1046 and will add that much more to that resistance level. The 38.2% retracement level on the weekly falls at 1060. A closer look at the hourly chart will shed some additional light as to the anticipated behavior of the S&P 500 over the next week. Chart: S&P 500 Hourly 8/22/2003 The S&P 500 hourly chart shows that Friday's decline should be the A wave of the 4 wave retracement. I really do not think that this is the full extent of the retracement because no clear A-B-C corrective pattern can be seen. I suspect that on Monday or Tuesday we will see a small rally followed by a small anti-rally and then the final surge as the S&P 500 climbs its way up to the 1046 - 1090 level. Bottom line it appears that the S&P 500 is very near a top. It will probably complete the five wave basic pattern over the next week or so. Then sometime in September, the S&P 500, along with the Dow and the NASDAQ will reverse course. Just how far down they go is a subject for another day. For now, let's concentrate on the upcoming pivot point. ************** TRADERS CORNER ************** Elliott Wave Plays By Steve Gould Boeing – BA – close: 35.68 change: +0.74 Company Description: The Boeing Company (BA) operates in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications and Boeing Capital Corporation. Commercial Airplanes operations principally involve development, production and marketing of commercial jet aircraft and providing related support services. Military Aircraft and Missile Systems operations principally involve research, development, production, modification and support of military aircraft, both land-based and aircraft-carrier-based, as well as helicopters and missiles. Space and Communications operations principally involve research, development, production, modification and support of space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines and information and battle management systems. Boeing Capital Corporation is primarily engaged in the financing of commercial and private aircraft and commercial equipment. Why We Like It: Boeing has been in a 5 wave basic pattern up since March 12, 2003. Based on the wave 3 count (offered by the program) and the oscillator, the wave 3 looks just about complete. Also, the pink and aqua bar represents a resistance level from the previous 4 wave. BA is currently up against this resistance level. The interpretation of this bar is that BA is either going to reverse trend and start the 4 wave down or it is going to bust through it and continue higher. This is an important pivotal point for BA and a strategic spot to place a non-directional play. Chart: Daily The weekly chart shows BA in a 5 wave basic pattern down. BA is currently in a wave 4 correction. The wave 4 looks like it could be complete based on the following factors: 1. The oscillator has retraced about 125% 2. Wave 4 has retraced about 62% of wave 3 3. Wave 4 has segmented into an A-B-C corrective pattern. 4. Wave 4 is about the level of the previous wave 4 Additional evidence to support a top: 5. The stochastics are overbought and trending down 6. The ADX line is at 47 and has only been this high at major pivot points. Chart: Weekly Trade Setup On the weekly graph, BA should reach 19 by the end of the year. On the daily graph, the Fibonacci retracements for the 4 wave range from 32.50 (38%) to 29.60 (62%). BA could then head higher to 42-47 before ultimately heading down to 19. I have devised a play to take advantage of either move. As long as BA moves 4-5 points either way (although there is a bullish bias), this play will make money with very little risk. I am anticipating BA to make a move down to complete the wave 4 (daily) and then a move up to finish the wave 5 (daily) and then ultimately down to 19. This play takes advantage of this move, but works even if we are wrong. Options The original option values on 6/17/2003 were BA – 36.15 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 BAGF Jul 03 30 Call 6.10 6.40 -99.5 29 Buy 2 BAAU Jan 04 37.5 Call 2.70 2.85 52.6 25 Credit: 0.40 Current values on 7/25/2003 are (Buy back the Aug 30 Call) BA – 32.68 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 BAHF Aug 03 30 Call 2.75 2.85 -95 21 Buy 2 BAAU Jan 04 37.5 Call 0.75 0.80 26 22 Current values on 8/22/2003 are BA – 35.68 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 BAAU Jan 04 37.5 Call 1.60 1.65 44 22 Liquidation value: -2.85 + .40 + 3.20 = 0.75 Chart: BA update 8/22/2003 BA is due for a bit of a retracement but should continue up over the next several weeks. When the options reach $2.45, sell 1/2 the position. This will make this a risk free trade as we have recouped our initial investment. Picked on June 17 at $36.15 Change since picked: -0.47 Earnings Date 07/23/03 (confirmed) Average Daily Volume: 6.42 million ************************************************************** NASDAQ-100 Index – QQQ – close: 32.44 change: -0.20 Company Description: The NASDAQ-100 Index is a modified capitalization-weighted index, which is designed to limit domination of the Index by a few large stocks while generally retaining the capitalization ranking of companies. Representing 100 of the largest non-financial U.S. and non-U.S. companies listed on the National Market tier of The NASDAQ Stock Market, the NASDAQ-100 Index reflects NASDAQ's largest companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. Through an investment in the NASDAQ-100 Index Tracking Stock, QQQ, investors can participate in the collective performance of many of the NASDAQ stocks. Why We Like It Based on the analysis in "Where is the Dow Going?" for 6/13/2003 we want to play a put but hedge our bets. The NASDAQ mirrors the Dow, although sometimes it is a little out of sync. The NASDAQ (as well as the Dow) appears to be at a crucial junction where it is going to make a move either up or down (versus remain flat). We need some type of play that will make money whether the NASDAQ moves up or moves down. Trade Setup This is going to be a non-directional play in the sense that we do not care (really) which way the QQQs move, just as long as they move. It is slanted more toward a move down, but the spread will protect us should we be totally wrong and the QQQs move up instead. Even though we have a July expiration date, this is not a 5 week play. We have until December for the QQQs to make their move, a very likely event. We are only selling the July put as protection against being wrong. Although we will need a larger move to make a profit, we will risk substantially less should our direction be wrong. Option The original option values on 6/13/2003 were QQQ – 29.96 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 KLFME Jan 04 31 Put 3.00 3.20 -0.44 32 Sell 1 QQQSK Jul 03 37 Put 6.90 7.10 0.99 41 Credit: .50 Current values on 8/22/2003 are QQQ – 32.44 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 2 KLFME Jan 04 31 Put 1.60 1.65 -0.32 32 Sell 1 QQQSK Sep 03 37 Put 4.50 4.70 0.90 34 Liquidation 1: -1.50 + .50 = -1.00 Chart: QQQ update 8/22/2003 The QQQs will follow the S&P 500 and Dow. It will fall to about the $31.76 level as it completes the 4 wave. It will then rise to about $34 before it reaches its pivot point. At that time it will reverse course. If you have not already bought back the September put, when it reaches $34 will be an ideal time. Picked on June 13 at $29.96 Change since picked: 2.46 Earnings Date n/a Average Daily Volume: 93.0 million ************************************************************** AT&T – T – close: 21.73 change: 0.70 Company Description: AT&T Corp. (T) is engaged in providing voice and data communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish domestic and international long distance, regional, local and Internet communications services. The Company's primary lines of business are AT&T Business Services and AT&T Consumer Services. AT&T Business Services offers a variety of global communications services to over four million customers, including large domestic and multinational businesses, small and medium-sized businesses and government agencies. AT&T Consumer Services is a provider of domestic and international long distance and transaction-based communications services to residential consumers in the United States. Why We Like It: T has been in a 5 wave basic pattern down since December 2002. T is now undergoing a wave 4 correction that looks to be complete based on the following criteria: 1. Wave 4 has retraced about 60% of wave 3 2. The oscillator has retraced 138% but has not exceeded it. 3. Wave 4 has traced out an A-B-C correction pattern. This pattern appears to be a zigzag. 4. Wave C has completed a 5 wave basic pattern. (i – v) 5. The time frame of wave 4 falls within 1.38 – 1.62 of wave 3. Combining the price retracement with the time frame puts the peak of the 4 wave right in the middle of the black square. 6. The PTI is at 46. Anything higher than 35 signals a new low below the 3 wave. T appears to have started the first leg down and has completed wave 1. T should now retrace around 50% to 20.80. This will be our entry point. Chart: T Daily 6/23/2003 The hourly chart of T shows that the 5 wave basic pattern of the first wave should be complete. Look for a retracement level to the level of the last 4 wave at 20.80. Chart: T Hourly 6/23/2003 The weekly chart of T shows that it has already completed a 5 wave basic pattern. If that is indeed the case, then it will next undergo an A-B-C corrective pattern. This could very easily be the A wave up and T is ready for the B wave retracement. Note how the A wave has bounced off the 55 period moving average. Chart: T Weekly 6/23/2003 Trade Setup We are going to play T to go down by using a bear call spread (sort of). The first target is the bottom of the 3 wave at 13.81 but T could go as low as 12.19 by November. Option T: $19.83 Pos Num Sym Strike Type Bid Ask Delta Vol OI Sell 1 TGC Jul 15 Call 4.70 5.00 99.6 2 3695 Buy 2 TJX Oct 22.5 Call 0.90 1.00 36.0 38 9684 Credit: $270 Wait for T to retrace to about 20.83. If it appears to be headed higher, do not be in a hurry to purchase the options. See how high it goes. If it pierces the current wave 4 peak at 21.84, the 4 wave may not be done yet. If it turns around before the 50% retracement of 20.80, we may want to reevaluate which options to purchase as the deltas and volatility will change. We will have to do a risk analysis on the July 17.50 call and October 25 calls. That may be a better play at that point. Option T: $20.00 (entry) Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 TIC Sep 03 15 Call 5.00 5.30 100 21 Buy 3 TJX Oct 03 22.5 Call 0.50 0.65 31 22 Credit: $305 T: $21.73 Pos Qty Sym Strike Type Bid Ask Delta IV Sell 1 TIC Sep 03 15 Call 6.60 6.90 -99 60 Buy 3 TJX Oct 03 22.5 Call 0.75 0.85 43 30 Liquidation: -3.85 + 2.25 = -1.60 Chart: T update 8/22/2003 I think that T has head faked me and is now on its way up. Fortunately, this play can make money either way. T will finish up the 5 wave and then retrace to the $18 level. At that point, buy back the September option. We may run out of time so we will keep a close watch on this one. Picked on June 23 at $20.00 Change since picked: 1.73 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 5.21 million **************************************************************** Wendy's – WEN – close: 29.18 change: +0.05 Company Description: Wendy's International Inc. is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service and fast-casual restaurants. The Company has 6,253 Wendy's restaurants in operation in the United States and in 21 other countries and territories. The Company and its franchisees also operates 2,348 Tim Hortons restaurants and 210 Baja Fresh restaurants. Why We Like It: We are basing our play on the weekly chart and confirming it with the daily. Because it is weekly, it will take a little bit longer to play out. Let's examine the weekly chart first. The weekly chart shows WEN in a classic Type II set up based on the following criteria: 1. Wave 4 has retraced almost 50%. 2. The oscillator has retraced about 120% and has turned. 3. The wave 4 peaked between 138 – 162% of wave 3 in terms of time. 4. Wave 4 subdivides into an A-B-C correction pattern. Although the subdivisions are not as "ideal" as I would like to see it, they are clearer on the daily pattern. 5. WEN has broken through the red auto trend line. 6. The PTI is greater than 35. 7. This pattern has the "look" of a very well behaved Elliott Wave. Chart: WEN Weekly 7-22-2003 The daily chart shows that WEN is in the midst of a five wave basic pattern down, consistent with the weekly chart. Right now WEN is in the middle of the 3 wave which can be the most intense of the 5 waves. The five wave basic pattern starting in March could very easily be interpreted as an A-B-C correction pattern, thus satisfying the look of a 4 wave on the weekly. Chart: WEN Daily 7-22-2003 Trade Setup Based on the weekly chart, WEN should hit 21 by the beginning of the year. That gives us about a 6 month time frame. We are going to make this a straight directional play within that timeframe. The March 2004 puts would be the options of choice, but those options show no open interest nor volume. Therefore we will use the January option and carefully watch the time decay. The 25 put has a delta of -21 which is a little lower than I would like to see, the ideal being 25 - 30. The next available option is the 30 put but that has a delta of 48. I believe the 25 put is the better play because we could buy three 25 puts for the cost of one 30 and have a delta of 63 versus 48. The volatility of WEN is as low as it has been in the last year. As WEN goes lower, the volatility should increase, thus making the play even more profitable. WEN – 28.84 as of 7/22/2003 Option Sym Strike Type Bid Ask Delta Vol OI WENME 25 Put 0.85 0.95 -21.2 0 771 WENMF 30 Put 2.75 2.95 -48.7 0 555 Current values on 8/15/2003 are WEN – 28.52 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 WENME Jan 04 25 Put 0.50 0.70 -14 32 Chart: WEN update 8/22/2003 On the weekly chart WEN is still on target to $21. WEN hit the stop loss while I was on vacation so I wasn't able to update it. Right now WEN is overbought and should decline a bit. At that time, we can reevaluate the position so see if we should close them out. Picked on July 22 at $28.84 Change since picked: -0.34 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 0.652 million ************************************************************** Take Two - TTWO – close: 27.39 change: -0.18 Company Description: Take-Two Interactive Software Inc. (TTWO) is an integrated global developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the PC, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The Company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering, Joytech, PopTop, Global Star and under the Take-Two brand name. The Company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. Why We Like It: TTWO has been in a five wave basic pattern incline since March. Currently TTWO is undergoing the 4 wave retracement and has yet to complete it. TTWO should complete the 4 wave retracement in a few days when it hits 25 at which point the target will be 34. The Type I setup meets the following criteria: 1. The 4 wave has already retraced about 58% and should retrace about 63% when the 4 wave is complete. 2. The 4 wave segments nicely into a zigzag. 3. The oscillator has peaked at the zenith of the 3 wave and has retraced about 150%. Chart: Daily The weekly chart of TTWO shows that TTWO has just finished a five wave basic pattern that completed at the end of 2002. TTWO could be in the midst of an A-B-C correction or it could be completing the five wave basic pattern. The oscillator is ambiguous at this point. This pattern is very similar to the one for the 5 wave of the last five wave basic pattern. If that is the case, then the oscillator is going a bit lower as the 4 wave completes and then rise again being almost an exact duplication of the previous five wave basic pattern. Chart: Weekly The hourly chart of TTWO shows TTWO to be in the process of a 4 wave retracement of the daily C wave. It is not entirely clear as to whether TTWO will first rise to about 28.60 first or head straight down to 25. In either case, we are going to wait for 25 as an entry point which should occur sometime late in the day on 7/30. Chart Hourly Trade Setup TTWO should reach 34 by October. The December options should give us plenty of time to complete the trade. When TTWO hits 25, the Ask should be about 1.35. Option The original option values on 8/4/2003 were TTWO – 25.00 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 TUOLF Dec 03 30 Call 1.20 1.35 31 45 Current values on 8/22/2003 are TTWO – 27.39 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 TUOLF Dec 03 30 Call 1.70 1.85 42 42 Chart: TTWO update 8/22/2003 TTWO is in the midst of a 4 wave correction on the hourly chart. TTWO will retrace a bit and then track higher as it completes the hourly 5 wave. At that point we will take partial profits. Picked on August 5 at $25.00 Change since picked: 2.39 Average Daily Volume: 1.17 million ************** BROKERS CORNER ************** Readers Write: This week's questions concern the use of index options as a hedging tool for bullish portfolios. Attn: questions@OptionInvestor.com Subject: Insurance Through Index Options Hi, As many investors, I am always concerned about the next big event that will spur a sell off in the markets as did the 9/11 attack. I have been reading several articles concerning the purchase of puts on various indexes as insurance against a major decline in the market. I have a few questions; assume that the majority of my stocks are on the nasdaq, so I would use the ndx or qqq as the index. My naked positions never exceed a 3 month expiration and my portfolio exposure is $200,000 with a 50% margin ($100,000 in cash). My puts are written 20% out of the money. My questions are: What strike price and expiration date would I purchase the puts? How many ndx or qqq puts would I need to purchase? Is this a viable strategy and at what cost? Thank you, MB Hello MB, Your questions were: What strike price and expiration date would I purchase the puts? I think this would depend on how much "Fire Insurance" you want to purchase. If you buy the shorter-term options, they will be cheaper, but the time-value premium will evaporate much quicker. The longer-term options will be more expensive, but if nothing happens, they will maintain their time value much longer. The strike prices that you choose will determine your "Deductible." The closer to the money the options are, the more expensive they become, and yet the more the options will appreciate if the market turns lower. Further out of the money options are cheap, however they also increase the deductible, or the price at which your portfolio is insured. In short, there is no right answer to this question. You need to be comfortable with the risk outlook in your portfolio and realize that this is insurance. If you cannot collect, you should not be upset. Again, I equate this to fire insurance on your home. You do not purchase insurance hoping that the house burns to the ground, but rather only to make-up the loss sustained if this terrible event happens. How many ndx or qqq puts would I need to purchase? This question is difficult to answer as it would really depend on your outlook for the market and how much insurance you wish to purchase. With the QQQs trading @ 32, ten options with a strike price of 32 would control $32k of the underlying issue. If you want $200,000 of insurance, you would need to purchase about 60 options. If this sounds like too much premium, you might consider selling some calls to help pay for the insurance. A trader can lower the cost of buying puts by a significant amount through the use of this technique, as long as he considers the additional risk and manages it appropriately. Is this a viable strategy and at what cost? I believe that the strategy is viable if you view it strictly as "Fire Insurance." The puts will help protect your portfolio if it consists of mostly NASDAQ stocks. Similar hedge positions could be constructed for Dow or S&P type portfolios. The above example (buying 60 QQQ JAN-$32 puts) would cost $12,600. This purchase would offset any downside potential in the NASDAQ until the middle of January. If you were to sell the JAN-$35 calls to hedge, you would receive $7200 in premium with a net cost of about $5400. If the QQQs do not rally more than 10%, the call options will expire worthless. Selling the calls is not always the best strategy, but the technique can help to reduce the cost of your insurance in favorable market conditions. 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The Option Investor Newsletter Sunday 08-24-2003 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Covered-Call Basics Naked Puts: Options 101: Why Focus On Technicals? Spreads/Straddles/Combos: Friday's Retreat Warrants Concern! Updated In The Site Tonight: Market Posture: Out of Steam ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: Covered-Call Basics By Mark Wnetrzak One of our new readers asked about the formula for determining potential profit in covered-call positions. Fortunately, there is a free calculator for this strategy (and others) available on the OIN web-site. Attn: Covered-Calls Editor Subject: Option Trading Calculator Hi Mark, I am new (trial) reader so please pardon the basic questions. In your covered-call candidates from 8-17, you listed a play on RF Micro (RFMD) with a cost of $8.07 on the stock and the Sep-7.50 call at $0.90. This leaves a cost basis of $7.17 for the stock. Since the maximum amount of profit I can earn is $0.33, how does that equate to a yield of 4%? My math says it's nearer to 5% (about 10% on margin) without commissions, and though that's not a big difference, I assume it could be a larger error on higher priced stocks. Please explain how you arrived at that number. Thanks! WR Regarding the potential yield for covered-calls: The target-yield or return on investment for covered calls is determined by two circumstances: Return if Called (RC), and return not called (RNC). Most traders use the RNC to evaluate plays since there is no assumption made on the movement of the underlying equity. To calculate the return, you take the net premium received and divide it by the cost basis. The cost basis would be the price paid for the stock, minus the premium received; this is the maximum amount of equity required for the duration of the play (not using margin). In the covered-call section, we use generally accepted formulas to calculate the return as shown below. For an in-the-money (ITM) covered call, the net premium would be the option premium received, minus the difference between the cost of the stock and the strike price. So, ITM RNC will be the same as RC since the sold strike is "in-the-money," and it is the maximum return possible. ITM example: ABC stock @ $12.00, strike = $10.00, option premium = $2.50 Net premium = 2.50 - (12 - 10) = 0.50 Cost basis = 12.00 - 2.50 = 9.50 RC = 0.50/9.50 = 5.26% after multiplying by 100 RNC = the same For an out-of-the-money (OTM) covered call, the premium for a RC calculation would be the option premium, plus the difference between the cost of the stock and the strike price, and assumes the stock price will move up to the sold strike! An OTM RNC calculation uses only the option premium and assumes the stock price remains unchanged. OTM example: XYZ @ $12.00, strike = $12.50, option premium = $1.00 Potential premium = 1.00 + (12.50-12) = 1.50 Cost basis = 12.00 - 1.00 = 11.00 RC = 1.50 / 11.00 = 13.64% RNC = 1.00 / 11.00 = 9.09% (Remember, you do not get the benefit of the stock price moving up to the strike price). All of the candidates in the Covered Calls section are ITM as the goal is to obtain the highest probability of making an acceptable (and consistent) return. Therefore, I calculate a "monthly based" Target Yield. Using the ITM example above of 5.26% and say an expiration of 3 weeks (21 days), I would calculate the target yield (TY) as follows: TY = 5.26 / 21 * 365 / 12 = 7.61%. Essentially the return is annualized and divided by 12. This helps to visualize the value of compounding a seemingly small return over and over again. Also note that I don't include the cost of commissions as they can vary greatly depending on which brokerage is used. Generally, the newsletter recommendations would require a purchase of 500 - 1000 shares in order to limit the impact of commissions. On a 1000 share order, the cost of commissions at E*trade (2 stock and 1 option) would be about $78.00, or $0.08 a share. Two stock options would be required because it is assumed the stock will be "called" away and thus a commission incurred for "selling" the stock. You can download a free option-trading calculator at this link: http://members.OptionInvestor.com/coveredcalls/cc_calculator.asp The spreadsheet is really nothing special (requires MSExcel-95 or higher) but it works well for common stock-option strategies. There is a brief explanation at the bottom of the screen for each column and there are six strategy tabs to choose from for various option trading techniques. Regards, Mark W. SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield WAVX 3.46 2.92 SEP 2.50 1.20 0.24* 7.7% XOMA 8.09 9.45 SEP 7.50 1.30 0.71* 7.6% ENER 10.39 11.85 SEP 10.00 1.10 0.71* 6.6% NWAC 8.30 9.10 SEP 7.50 1.40 0.60* 6.3% EPNY 5.07 5.05 SEP 5.00 0.40 0.33* 6.1% NEOF 12.45 13.10 SEP 12.50 0.90 0.95* 6.0% WAVX 3.20 2.92 SEP 2.50 0.85 0.15* 5.5% USG 14.11 15.53 SEP 12.50 2.35 0.74* 4.6% VSAT 15.09 15.52 SEP 15.00 0.80 0.71* 4.3% TKLC 15.46 15.20 SEP 15.00 1.15 0.69* 4.2% ISIS 5.33 5.84 SEP 5.00 0.60 0.27* 4.1% RFMD 8.07 8.75 SEP 7.50 0.90 0.33* 4.0% SNIC 11.18 12.20 SEP 10.00 1.70 0.52* 4.0% GSIC 11.52 12.03 SEP 10.00 1.95 0.43* 3.9% * Stock price is above the sold striking price. Comments: What goes up must come down; but does it have to happen on Friday? The reversal into the red on Friday is a bit worrisome and could be a sign of exhaustion -- mayby both sides -- bulls and bears. The model covered-call portfolio has benefited from the bullishness earlier in the week though next week could be a different story. Positions Previously Closed: None NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield PLXT 5.25 SEP 5.00 PIU IA 0.60 20 4.65 28 8.2% MCDTA 12.66 SEP 12.50 MQG IV 1.00 687 11.66 28 7.8% PLUG 5.13 SEP 5.00 PQL IA 0.45 1382 4.68 28 7.4% MCRL 12.60 SEP 12.50 MIQ IV 0.65 43 11.95 28 5.0% XOMA 9.45 SEP 7.50 MBU IU 2.25 1053 7.20 28 4.5% ADLR 13.96 SEP 12.50 UAH IV 1.90 192 12.06 28 4.0% CREE 16.30 SEP 15.00 CVO IC 1.75 5294 14.55 28 3.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** PLXT - PLX $5.25 *** Cheap Speculation *** PLX Technology (NASDAQ:PLXT) develops and supplies semiconductor devices that accelerate and manage the transfer of data in networking and telecommunications, enterprise storage, servers, PCs, imaging and industrial equipment. The company offers a complete solution consisting of 3 related types of products: semiconductor devices, software development kits and hardware design kits. The company's semiconductor devices simplify the development of data transfer circuits in high-performance embedded systems and computers and are compatible with microprocessors such as Motorola's PowerPC, Intel's i960 and StrongArm, Broadcom's MIPS, PMC-Sierra's MIPS and digital signal processors from such companies as Texas Instruments. PLX has been in a basing formation since last July and this position offers an excellent reward potential at the risk of owning this issue at a reasonable cost basis. SEP-5.00 PIU IA LB=0.60 OI=20 CB=4.65 DE=28 TY=8.2% ***** MCDTA - McData $12.66 *** Earnings On Monday *** McData (NASDAQ:MCDTA) is a provider of open storage networking solutions and provides highly available, scalable and centrally managed SANs that address enterprise-wide storage problems. The company's core-to-edge enterprise solutions consist of hardware products, software products and professional services. McDATA's SAN solutions improve the network reliability and availability of data, simplify the management of SANs and reduce the total cost of ownership. The company combines experience in designing, developing and manufacturing SAN solutions with knowledge of business-critical applications, service and support to solve complex business problems facing data infrastructures. Its solutions enable businesses to scale their operations globally through a comprehensive, manageable, flexible infrastructure that is optimized for rapid deployment and responsiveness to customer needs. With earnings due after the close on Monday, this position offers traders who are bullish on the company's future, a chance to target shoot an entry point close to support. SEP-12.50 MQG IV LB=1.00 OI=687 CB=11.66 DE=28 TY=7.8% ***** PLUG - Plug Power $5.13 *** Alternate Power Play *** Plug Power (NASDAQ:PLUG) designs, develops and manufactures on- site electric power generation systems utilizing proton exchange membrane (PEM) fuel cells for stationary applications. Plug's initial product is a fully integrated, grid parallel 5-kilowatt fuel cell system that operates on natural gas. This initial product is intended to offer quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. The company's R&D facility contains over 150 test stations where its conduct design optimization and verification testing, rapid-aging testing, failure mode and effects analysis, multiple technology evaluations, and endurance testing in the company's effort to accelerate the development and commercialization of its fuel cell systems. Shares of several fuel cell developers rallied after this country's historical blackout last week. Plug Power has been forging a Stage I base near $5 for a year and traders can use the inflated premiums to establish a bullish, relatively low-risk position in the issue. SEP-5.00 PQL IA LB=0.45 OI=1382 CB=4.68 DE=28 TY=7.4% ***** MCRL - Micrel $12.60 *** Intel Rally *** Micrel (NASDAQ:MCRL) designs, develops, manufactures and markets a range of analog power integrated circuits and mixed-signal and digital integrated circuits. Micrel ships over 1,700 standard products and derived the majority of its product revenue for 2002 from sales of standard analog and high-speed communications ICs. These products serve various end markets, including cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks and industrial equipment. In addition, the company manufactures custom analog and mixed- signal circuits and provides wafer foundry services for customers that produce electronic systems for communications, consumer and military applications. Micrel has been in a trading range since last November with near-term support around $11. The company's shares spiked on Friday after Intel's (NASDAQ:INTC) raised outlook inspired the semiconductor sector. With a pullback towards support likely, investors who believe the recovery is on hand can use this position to target shoot an entry point in Micrel. SEP-12.50 MIQ IV LB=0.65 OI=43 CB=11.95 DE=28 TY=5.0% ***** XOMA - XOMA $9.45 *** New Drug Speculation *** XOMA (NASDAQ:XOMA) is a biopharmaceutical company that develops and manufactures products to treat cancer, immunologic and inflammatory disorders and infectious diseases. The company's products are in various stages of development and all are subject to regulatory approval before it or its collaborators can commercially introduce any products. In addition, XOMA has proprietary technologies relating to recombinant antibodies and proteins, including bacterial cell expression systems and the Human Engineering method for creating human-like antibodies, both of which are available for licensing. XOMA also uses these technologies in developing its own products. XOMA rallied sharply after New data showed that Genentech's (NYSE:DNA) experimental psoriasis drug Raptiva works better over the long term. The FDA's dermatologic and opthalmic drugs advisory committee will review on Sept. 9 Genentech and partner Xoma's biologics license application for Raptiva. Investors who expect good news can speculate on that outcome with this position. SEP-7.50 MBU IU LB=2.25 OI=1053 CB=7.20 DE=28 TY=4.5% ***** ADLR - Adolor $13.96 *** Trading Range *** Adolor (NASDAQ:ADLR) is a development stage biopharmaceutical corporation that discovers, develops and plans to commercialize proprietary pharmaceutical products for the treatment of pain and the side effects that are caused by pain treatments. The company has a number of small molecule product candidates that are in various stages of development ranging from preclinical studies to Phase III clinical trials. Adolor's lead product candidate, alvimopan, is designed to selectively block the unwanted effects of opioid analgesics on the gastrointestinal tract. The company's other product candidates are being designed as analgesics to treat moderate-to-severe pain and itch. Adolor is also exploring the development of an analgesic candidate that would be intended to produce the pain relief of an opioid while reducing side effects, such as constipation, nausea and vomiting. Adolor has been trading around $12 for almost two years and this position offers investors who believe the trend will continue a method to profit from that outcome. SEP-12.50 UAH IV LB=1.90 OI=192 CB=12.06 DE=28 TY=4.0% ***** CREE - Cree $16.30 *** Near Historical Support *** Cree (NASDAQ:CREE) is engaged in the development and manufacture of compound semiconductor materials and electronic devices made from silicon carbide (SiC), and a developer and manufacturer of optoelectronic and electronic devices made from gallium nitride (GaN) and related materials. The company also produces radio frequency (RF) power transistor components and modules for wireless infrastructure applications using silicon-based bipolar and laterally diffused metal oxide semiconductor (LDMOS) process technologies. Cree operates its business in two segments, the Cree segment, which consists of its SiC-based products and research contracts; and the Cree Microwave segment, which consists of RF transistors and RF transistor modules based on a silicon platform. Cree has been hampered recently by lawsuit issues and a SEC investigation but has recently rallied on no news. The current outlook is recovering and the recent bullish activity supported by heavy volume is encouraging. We simply favor the long-term support area around $14 and traders can speculate on the near-term performance of the issue with this position. SEP-15.00 CVO IC LB=1.75 OI=5294 CB=14.55 DE=28 TY=3.4% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield XING 7.71 SEP 7.50 QAE IU 0.70 877 7.01 28 7.6% STEL 7.52 SEP 7.50 URU IU 0.45 215 7.07 28 6.6% SEAC 10.01 SEP 10.00 UEG IB 0.55 89 9.46 28 6.2% RSYS 17.70 SEP 17.50 MKU IW 1.15 137 16.55 28 6.2% ACDO 24.01 SEP 22.50 DZU IX 2.45 293 21.56 28 4.7% MENT 20.00 SEP 20.00 MGQ ID 0.80 102 19.20 28 4.5% AMSC 11.60 SEP 10.00 QAY IB 2.00 349 9.60 28 4.5% NEOF 13.10 SEP 12.50 QZX IV 1.05 32 12.05 28 4.1% ASYT 13.40 SEP 12.50 QQY IV 1.35 479 12.05 28 4.1% WFII 15.28 SEP 15.00 QUU IC 0.80 56 14.48 28 3.9% SLNK 18.96 SEP 17.50 SXU IW 2.05 175 16.91 28 3.8% RINO 12.89 SEP 12.50 AGQ IV 0.80 1469 12.09 28 3.7% JNPR 15.48 SEP 15.00 JUX IC 0.95 8908 14.53 28 3.5% HELX 17.92 SEP 17.50 HHQ IW 0.95 56 16.97 28 3.4% BLDP 12.98 SEP 12.50 DUJ IV 0.85 670 12.13 28 3.3% ODP 17.75 SEP 17.50 ODP IW 0.60 139 17.15 28 2.2% ***************** NAKED PUT SECTION ***************** Options 101: Why Focus On Technicals? By Ray Cummins One of the most common questions among new readers is, "Why don't you concentrate more on a company's fundamentals when selecting naked-put candidates?" There are two basic approaches to analyzing stocks; technical and fundamental. The majority of older investors are more comfortable with fundamental analysis. That is the process where one attempts to predict the future earnings of a corporation by analyzing their market share, annual revenue, pricing structure, and similar data regarding the operation of the company's business. In contrast, technical analysis, which is the study of historical stock price trends and chart patterns, has nothing at all to do with the daily operations of the company. For this reason, it is often viewed as less than adequate by well-known "value" investors such as Warren Buffet and Benjamin Graham. In truth, there is intrinsic merit in both methods and each system can produce favorable results. Many of our subscribers are surprised to learn that we do little in the context of fundamental analysis when it comes to choosing stocks for this section. Of course, the most obvious reason for our choice of analysis is the limited time available for research prior to the publishing deadline. However, there are also many practical advantages to a "technicals-based" approach, not the least of which is the fact that it removes the need to assess the infinite number of components involved in fundamental valuation that market analysts find so intriguing. But more importantly, trading strategies based on historical prices can provide very precise entry and exit signals, which is a benefit to traders who participate in short-term strategies such as buying and selling options. Technical analysis makes three basic assumptions. First, simple market data such as price and volume indicate the true value of a specific stock or financial issue. Second, prices historically exhibit trends or patterns and third, history eventually repeats itself. These assumptions can be combined with the study of price and volume to provide traders the basic information they need to initiate profitable trading strategies. The technical indicators that identify buy or sell signals are contained in various chart formations and patterns and in many cases, no additional data is needed. Since the goal of any investor is to profit from their predictions, many experts suggest that the best place to begin is with proven practices such as evaluating an issue's price history and primary trend. For most investors, the easiest way to consistently make money in the market is to form the correct outlook for its future movement and position themselves to profit from that activity. In fact, that is the premise of the technician; that past price behavior can be used to forecast future trends, thus providing a means to profit from a successful forecast. Numerous systems have been developed to help traders form an opinion based on chart patterns and predict future turning points and direction in the underlying issue. The process begins by identifying the strength and primary direction of a trend. The underlying basis for future predictions is driven by the premise that once a trend is in motion, it will continue in that direction until a change in character occurs. Successful technical analysts will look at many indicators from different perspectives and identify signals that forecast upcoming changes or trend reversals. When you can do this accurately, and on a regular basis, your portfolio value will grow consistently, regardless of the overall condition of the market. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield AMSC 13.20 11.60 SEP 10.00 0.70 0.70* 6.5% 18.2% CBST 12.72 12.63 SEP 10.00 0.50 0.50* 4.6% 14.3% RIMM 24.61 28.74 SEP 20.00 0.75 0.75* 2.8% 9.1% OVTI 43.77 41.29 SEP 35.00 0.95 0.95* 2.4% 8.5% THER 13.93 13.63 SEP 12.50 0.55 0.55* 3.3% 8.5% BLUD 23.12 24.80 SEP 22.50 1.00 1.00* 3.4% 7.5% SEPR 21.76 26.06 SEP 17.50 0.50 0.50* 2.1% 7.3% TKLC 13.73 15.20 SEP 12.50 0.45 0.45* 2.7% 6.9% PHTN 28.90 29.57 SEP 25.00 0.65 0.65* 2.3% 6.8% JDAS 13.90 16.08 SEP 12.50 0.40 0.40* 2.4% 6.4% UTEK 25.75 27.64 SEP 22.50 0.55 0.55* 2.2% 6.3% SEPR 23.49 26.06 SEP 20.00 0.45 0.45* 2.0% 6.2% PDII 24.25 24.88 SEP 20.00 0.50 0.50* 1.9% 6.1% AEIS 21.02 23.09 SEP 17.50 0.30 0.30* 1.5% 5.0% * Stock price is above the sold striking price. Comments: Investors sold for profits Friday, ending a week-long rally that carried the major equity indices to 2003 highs. The only good thing about the sell-off was that it occurred on average volume, suggesting there is little conviction in a major trend reversal. That does not mean, however, that traders can be complacent with existing bullish positions and we recommend continued diligence in portfolio management. Issues on the "watch" list include: Therasense (NASDAQ:THER) and Cubist (NASDAQ:CBST). Previously Closed Positions: None WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield TIVO 10.91 SEP 10.00 TUK UB 0.30 283 9.70 28 3.4% 8.7% RIMM 28.74 SEP 25.00 RUL UE 0.60 4628 24.40 28 2.7% 7.8% IDTI 13.10 SEP 12.50 ITQ UT 0.35 2432 12.15 28 3.1% 7.6% NFLX 28.80 SEP 25.00 QNQ UE 0.55 3937 24.45 28 2.4% 7.2% SRNA 18.77 SEP 17.50 NHU UW 0.40 177 17.10 28 2.5% 6.5% BRCM 25.80 SEP 22.50 RCQ UX 0.35 9883 22.15 28 1.7% 5.2% PHTN 29.57 SEP 25.00 PDU UE 0.35 315 24.65 28 1.5% 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** TIVO - TiVo $10.91 *** Optimistic Growth Outlook! *** Founded in 1997 with the mission to dramatically improve consumers' television viewing experiences, TiVo (NASDAQ:TIVO) is a creator in television services for digital video recorders. TiVo's leadership has defined and inspired the entire category, earning the company patents for pioneering inventions associated with DVR software and hardware design. TiVo was the first to deliver on the promise of consumer choice and control over TV viewing, building a loyal and passionate subscriber base with over 97% of customers surveyed recommending TiVo to a friend. This enthusiasm has contributed to overwhelming growth over the past year, and the total subscriber base exceeds 700,000. Shares of TIVO climbed to their highest level in three weeks Friday after the company posted higher-than-expected subscriber additions. The company also upped its full-year revenue forecast, due to anticipated stronger demand from subscribers of DirecTV, the largest U.S. satellite service. Traders can speculate on the continued growth of TIVO's subscriber base (and its share value) with this position. SEP-10.00 TUK UB LB=0.30 OI=283 CB=9.70 DE=28 TY=3.4% MY=8.7% ***** RIMM - Research In Motion $28.74 *** Another New High! *** Research In Motion Limited (NASDAQ:RIMM) is a designer, builder, and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, the firm provides solutions for seamless access to time-sensitive information and communications, including e-mail, telephone, messaging and Internet- and intranet-based applications. The company's technology also enables a broad array of third-party developers and manufacturers around the world to enhance their own products and services with wireless connectivity. RIM's portfolio of products includes a family of wireless handhelds, the BlackBerry wireless e-mail solution, embedded radio modems and a suite of software development tools. Despite the recent legal woes, shares of RIMM reached a new "all-time" high this week and the company's lucrative niche in the wireless e-mail market will likely improve its bottom line in the coming year. SEP-25.00 RUL UE LB=0.60 OI=4628 CB=24.40 DE=28 TY=2.7% MY=7.8% ***** IDTI - Integrated Device Tech. $13.10 *** Break-Out Coming? *** IDT (NASDAQ:IDTI) is a leading provider of clock management and logic solutions and has leveraged its core competencies to develop a full array of products for the DIMM market. In addition to the new DDR2 RVB, IDT was the first company to introduce a complete chip set of JEDEC-compliant DDR2 DIMM logic components. The IDT DDR2 chip set includes a register that drives the address signals and supports 1:1 and 1:2 configurations, allowing designers to work with a single device for multiple DIMM configurations. The chip set is also comprised of a 1:10 PLL clock driver used for synchronization of clock signals from the system motherboard to all SDRAMs on the DIMM. The devices target registered DDR2 DIMMs that address the memory needs of growing market areas such as servers, workstations and communication devices. IDTI emerged in one of our technical scans as an issue with upside potential in the near-term and traders who favor the outlook for the company can speculate conservatively on its future share value with this position. SEP-12.50 ITQ UT LB=0.35 OI=2432 CB=12.15 DE=28 TY=3.1% MY=7.6% ***** NFLX - Netflix $28.80 *** New "All-Time" High! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. Shares of NFLX hit a new high this week and regardless of whether the activity is due to a potential buy-out or the CEO's quest to to become a billion-dollar company, the stock appears poised for higher prices in the near future. SEP-25.00 QNQ UE LB=0.55 OI=3937 CB=24.45 DE=28 TY=2.4% MY=7.2% ***** SRNA - Serena $18.77 *** Recovery In Progress! *** Serena Software (NASDAQ:SRNA) is the Enterprise Change Management (ECM) industry leader. For over twenty years Serena has focused exclusively on providing application change management solutions to the world's leading enterprises, and today its products are in use at over 3,000 customer sites -- including 46 of the fortune 50. Serena leads the way in ECM by providing a single point of control to manage software code and Web content changes throughout the enterprise, from the mainframe to the Web. Serena is headquartered in San Mateo, California and maintains international offices in Canada, Germany, France, Benelux and the United Kingdom. Serena announced last week that its second-quarter profit fell as costs rose, with total revenues up 8% over the second quarter of fiscal 2003. The news was followed by a slew of upgrades and the issue appears destined for continued upside activity over the next few weeks. SEP-17.50 NHU UW LB=0.40 OI=177 CB=17.10 DE=28 TY=2.5% MY=6.5% ***** BRCM - Broadcom $25.80 *** On The Rebound! *** Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated silicon solutions that enable broadband communications and the networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for all broadband communications markets. Their diverse product portfolio includes solutions for digital cable and satellite set-top boxes; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network processors; and SystemI/O(TM) server solutions. Shares on BRCM have been "on the rebound" since the company raised its near-term earnings outlook, saying revenue will rise about 10% from the previous quarter. Analysts support this view, with CIBC World Markets, Prudential, and Thomas Weisel recently posting bullish reports on the company. Traders can profit from a continued recovery in its share value with this position. SEP-22.50 RCQ UX LB=0.35 OI=9883 CB=22.15 DE=28 TY=1.7% MY=5.2% ***** PHTN - Photon $29.57 *** A New Trading Range? *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The firm's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing. Shares of PHTN have recovered from a recent slump and the question now is whether any near-term upside potential exists for this volatile issue. Traders can speculate on that outcome in a conservative manner with this position. SEP-25.00 PDU UE LB=0.35 OI=315 CB=24.65 DE=28 TY=1.5% MY=5.0% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield AMSC 11.60 SEP 10.00 QAY UB 0.40 1950 9.60 28 4.5% 12.6% MVL 22.80 SEP 22.50 MVL UX 0.95 666 21.55 28 4.8% 10.6% NVLS 40.02 SEP 7.50 NLQ UU 0.85 2432 6.65 28 13.9% 10.4% DPMI 25.48 SEP 25.00 DUD UE 0.85 55 24.15 28 3.8% 8.7% TRN 26.01 SEP 25.00 TRN UE 0.80 2025 24.20 28 3.6% 8.5% TXN 22.81 SEP 22.50 TXN UT 0.70 1658 21.80 28 3.5% 8.0% ELBO 31.63 SEP 30.00 LQB UF 0.85 1022 29.15 28 3.2% 7.8% RTIX 15.21 SEP 15.00 RQK UC 0.45 7 14.55 28 3.4% 7.7% SEBL 10.39 SEP 10.00 SGQ UB 0.25 6965 9.75 28 2.8% 6.8% PLAB 23.36 SEP 22.50 PQF UX 0.55 202 21.95 28 2.7% 6.6% TSA 31.50 SEP 30.00 TSA UF 0.70 110 29.30 28 2.6% 6.4% AFCI 20.98 SEP 20.00 AQF UD 0.45 202 19.55 28 2.5% 6.2% BRKS 24.42 SEP 20.00 BQE UD 0.25 20 19.75 28 1.4% 4.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Friday's Retreat Warrants Concern! By Ray Cummins Stocks finished an upbeat week sharply lower, despite optimistic forecasts from a technology bellwether and new data suggesting a recovery is underway in the U.S. economy. The day started with a brief bout of "irrational exuberance" as investors applauded the unexpected news from Intel (NASDAQ:INTC), which raised its revenue forecast for the current quarter due to stronger demand from computer makers. The optimism soon faded however, and by late afternoon all of the major equity indices had retreated into negative territory. The Dow Jones industrial average closed 74 points lower at 9,348 and the NASDAQ Composite Index ended 12 points lower at 1,765. The broader S&P 500 Index dropped 10 points to 993 with biotechnology, homebuilders, banks, and oil & gas services among the worst performing market groups. Trading volumes were moderate with 1.3 billion shares crossed on the Big Board, and 1.7 billion shares swapped on the technology exchange. Both the NYSE and the NASDAQ saw losers crush winners by more than 2 to 1. In the bond market, the 10-year note closed up 5/32, with its yield at 4.45%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position or to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status ADI 39.51 41.51 SEP 30 35 0.65 34.35 $0.65 Open BOW 38.57 43.12 SEP 30 35 0.60 34.40 $0.60 Open MXIM 39.11 43.78 SEP 30 35 0.65 34.35 $0.65 Open BBY 47.90 50.08 SEP 40 42 0.30 42.20 $0.30 Open JCI 96.49 98.31 SEP 85 90 0.65 89.35 $0.65 Open MBI 53.13 54.42 SEP 45 50 0.65 49.35 $0.65 Open WMT 57.77 58.40 SEP 50 55 0.50 54.50 $0.50 Open BSX 63.25 65.61 SEP 50 55 0.40 54.60 $0.40 Open SNPS 66.53 67.51 SEP 55 60 0.50 59.50 $0.50 Open LOW 48.90 52.91 SEP 42 45 0.00 45.00 $0.00 No Play LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss The new position in Lowe's (NYSE:LOWE) was not available near the target credit, due to Monday's "gap-up" at the open. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status INTU 42.86 46.00 SEP 50 46 0.30 47.80 $0.30 Open ESRX 62.23 63.48 SEP 75 70 0.60 70.60 $0.60 Open DB 59.64 58.10 SEP 70 65 0.60 65.60 $0.60 Open IFIN 28.42 28.86 SEP 32 30 0.50 30.50 $0.50 Open SAP 27.56 28.65 SEP 32 30 0.25 30.25 $0.25 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Intuit (NASDAQ:INTU) is on the "watch" list as a test of resistance near the sold strike at $47.50 seems likely in the coming weeks. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status MWD 48.54 48.28 SEP 40 45 4.45 44.45 0.55 Open MGAM 24.97 26.05 SEP 20 22 2.30 22.30 0.20 Open MUR 52.94 53.81 SEP 45 50 4.45 49.45 0.55 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Multimedia Games (NASDAQ:MGAM) was not available at the target debit, however the risk/reward outlook (potential profit of 8%) at a basis of $22.30 was acceptable for conservative traders. PUT DEBIT SPREADS ***************** No Positions SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status SHPGY 22.77 22.77 JAN 30 17 0.00 0.15 Open AVCT 27.83 29.87 SEP 30 25 (0.10) 1.30 Open? DV 27.16 25.75 NOV 30 25 (1.30) 0.00 No Play Avocent (NASDQ:AVCT) was the big winner this week with a potential profit of up to $1300 on $950 initially invested in less than one month. Devry shares (NYSE:DV) "gapped-up" on Monday, offering no opportunity to trade the synthetic position, and the subsequent sell-off on news of lower fourth-quarter profits was not conducive to a new entry in a bullish play. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status GP 19.25 22.61 OCT-20C SEP-22C 1.90 1.75 Open MSFT 27.31 26.22 JAN-27C SEP-27C 1.20 1.20 Open NE 34.86 35.06 DEC-37C SEP-37C 1.15 1.50 Open ING 19.07 19.86 JAN-20C SEP-20C 0.75 1.00 Open SPW 44.65 48.15 DEC-47C AUG-47C 2.50 3.20 Closed NSM 22.77 28.13 JAN-20C SEP-25C 3.90 5.30 Open BDY 20.65 24.28 JAN-22C SEP-22C 1.35 1.60 Open? MDCO 26.17 27.71 JAN-30C SEP-30C 1.50 1.60 Open National Semiconductor (NYSE:NSM) has exceeded all expectations, offering a potential profit of up to $1.40 on $3.90 invested in less than one month. The position in SPX Corporation (NYSE:SPW) was closed during Monday's rally as there was not enough premium in the SEP-$50 call to warrant a transition to a diagonal spread. The recent position in Brady Pharmaceuticals (NYSE:BDY) was far more bullish than we expected, but the brisk upside activity on the day after the spread was offered left little opportunity to enter the play at the target debit and required close attention to achieve a profit before issue continued its sharp rally. The position will be removed from the summary next week. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status OVER 23.68 23.86 SEP 25 22 1.50 1.60 Closed SNE 30.74 32.41 OCT 30 30 3.75 4.35 Open AMTD 10.00 10.07 OCT 10 10 1.45 1.25 Open TRI 30.50 31.01 NOV 30 30 4.90 4.75 Open ADBE 34.36 37.40 SEP 35 35 2.80 4.25 Open Adobe Systems (NASDAQ:ADBE) was a winner this week, offering up to $1.45 gain on $2.80 invested in less than five days. The Sony (NYSE:SNE) straddle has also achieved a small profit, however the position in Overture (NASDAQ:OVER) has been closed to preserve capital. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** ISIL - Intersil $27.58 *** Testing 52-Week Highs! *** Intersil Corporation (NASDAQ:ISIL), a world leader in the design and manufacture of high performance analog and wireless networking solutions. Intersil's product portfolios address fast growing markets such as flat panel displays, optical storage (CD and DVD recordable), power management and wireless networking. Intersil brings added customer value in providing silicon, software and reference design solutions to unique products that enhance the computing experience for people wherever they live, work or travel. ISIL - Intersil $27.58 PLAY (conservative - bullish/credit spread): BUY PUT SEP-22.50 UFH-UX OI=175 ASK=$0.20 SELL PUT SEP-25.00 UFH-UE OI=246 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$24.75 ***** POWI - Power Integrations $32.08 *** Up-Trend Intact! *** Power Integrations (NASDAQ:POWI) designs, develops, manufactures and markets proprietary, high-voltage, analog integrated circuits for use primarily in alternating current to direct current power conversion. The firm's products address market segments including communications, consumer, computer and industrial electronics. The company's high-voltage power conversion ICs include TOPSwitch, TinySwitch, LinkSwitch and DPA-Switch. Since introducing its TOPSwitch family of products in 1994, the company has shipped into the market approximately 890 million ICs. These ICs achieve a high level of system integration by combining a number of electronic components into a single IC. POWI - Power Integrations $32.08 PLAY (conservative - bullish/credit spread): BUY PUT SEP-25.00 QPW-UE OI=196 ASK=$0.30 SELL PUT SEP-30.00 QPW-UF OI=122 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$29.50 ***** VIA'B - Viacom CL-B $44.64 *** Trading Range? *** Viacom (NYSE:VIA), together with its subsidiaries, is a widely diversified worldwide entertainment company. The company owns and operates advertiser-supported basic cable television program services through MTV Networks and BET: Black Entertainment TV and and premium subscription television program services through the Showtime Network in the United States and internationally. The Television segment consists of the CBS and UPN television networks. Infinity's operations are focused on "out-of-home" media with operations in radio broadcasting. The Entertainment segment's principal businesses are Paramount Pictures, which produces and distributes motion pictures. The company operates in the home video retail business, which includes both rental and sale of videocassette and DVD products. The company also publishes and distributes consumer hardcover books. VIA'B - Viacom CL-B $44.64 PLAY (conservative - bullish/credit spread): BUY PUT SEP-40.00 VMB-UH OI=3835 ASK=$0.25 SELL PUT SEP-42.50 VMB-UV OI=6025 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$42.25 ***** AMGN - Amgen $66.48 *** Consolidation Underway! *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical firm dedicated to developing immune system science to protect human health. Immunex has developed two major products, Enbrel and Leukine, and has two other products, Novantrone and Thioplex, which can be used in treating multiple indications. AMGN - Amgen $66.48 PLAY (speculative - bearish/credit spread): BUY CALL SEP-75.00 YAA-IO OI=5712 ASK=$0.10 SELL CALL SEP-70.00 YAA-IN OI=12854 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$70.45 ***** MEDI - MedImmune $34.58 *** Too Much Flu Vaccine? *** MedImmune (NASDAQ:MEDI) is a biotechnology company with a range of unique products on the market and a diverse product pipeline. The firm is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease, immune regulation and cancer. MedImmune actively markets three products, Synagis, Ethyol and CytoGam and MEDI's Chief Executive David Mott expects the FDA to approve its inhaled influenza vaccine FluMist sometime this quarter. MedImmune will co-market the vaccine with Wyeth and the companies expect to provide the vaccine initially to healthy people between 5 and 49 years old, which will mean a potential market of 160 million people a year in the United States. MEDI - MedImmune $34.58 PLAY (conservative - bearish/credit spread): BUY CALL SEP-40.00 MEQ-IH OI=9160 ASK=$0.20 SELL CALL SEP-37.50 MEQ-IU OI=8420 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$37.75 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** CTSH - Cognizant Technology $31.90 *** Solid Outlook! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Technology $31.90 PLAY (less conservative - bullish/debit spread): BUY CALL SEP-25.00 UPU-IE OI=66 ASK=$7.10 SELL CALL SEP-30.00 UPU-IF OI=734 BID=$2.60 INITIAL NET-DEBIT TARGET=$4.40-$4.50 POTENTIAL PROFIT(max)=11% B/E=$29.50 ***** HSY - Hershey Foods $69.64 *** A Reader's Request! *** Hershey Foods Corporation (NYSE:HSY) is the leading North American manufacturer of quality chocolate and non-chocolate confectionery and chocolate-related grocery products. Some of the firm's most popular products include Hershey's milk chocolate bars, Hershey's Kisses chocolates, Reese's peanut butter cups, Jolly Rancher, and Twizzlers candies. The company also is a market leader in the gum and mint category and also makes flavored syrup and cocoa. HSY - Hershey Foods $69.64 PLAY (speculative - bearish/debit spread): BUY PUT SEP-75.00 HSY-UO OI=48 ASK=$5.50 SELL PUT SEP-70.00 HSY-UN OI=132 BID=$1.40 INITIAL NET-DEBIT TARGET=$4.00-$4.10 POTENTIAL PROFIT(max)=21% B/E=$70.90 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** GNTA - Genta $13.95 *** Genasense Speculation! *** Genta Incorporated (NASDAQ:GNTA) is a biopharmaceutical company with a diversified product portfolio that is focused on delivering innovative products for the treatment of patients with cancer. The company's research platform is anchored by two major programs that center on oligonucleotides (RNA/DNA-based medicines) and small molecules. Genasense (oblimersen sodium), the firm's lead compound from its oligonucleotide program, is being developed with Aventis and is currently undergoing late-stage, Phase 3 clinical testing. The leading drug product in Genta's small molecule program is Ganite(gallium nitrate injection), which the company intends to launch this year for treatment of cancer-related hypercalcemia that is resistant to hydration. GNTA - Genta $13.95 PLAY (speculative - bullish/diagonal spread): BUY CALL OCT-12.50 GJU-JV OI=911 ASK=$3.40 SELL CALL SEP-15.00 GJU-IC OI=135 BID=$1.35 INITIAL NET DEBIT TARGET=$1.90-$1.95 INITIAL TARGET PROFIT=28% B/E=$14.45 *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** BBY - Best Buy $50.08 *** Earnings Speculation! *** Best Buy (NYSE:BBY) is America's leading specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The company's subsidiaries operate retail stores and/or Web sites under the names: Best Buy (BestBuy.com), Future Shop (FutureShop.ca), Geek Squad (GeekSquad.com), and Magnolia Hi-Fi (MagnoliaHiFi.com). The company's many subsidiaries reach consumers through nearly 700 retail stores in the United States and Canada. Best Buy's quarterly earnings report is due 9/17/03. BBY - Best Buy $50.08 PLAY (very speculative - neutral/debit straddle): BUY CALL SEP-50.00 BBY-IJ OI=11536 ASK=$2.05 BUY PUT SEP-50.00 BBY-UJ OI=1428 ASK=$2.00 INITIAL NET-DEBIT TARGET=$3.80-$3.95 INITIAL TARGET PROFIT=$1.25-$1.50 ***** ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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