The Option Investor Newsletter Tuesday 08-26-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Tale of Two Markets Futures Markets: Sound and Fury Index Trader Wrap: See Note Market Sentiment: Might Think Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-26-2003 High Low Volume Advance/Decline DJIA 9340.45 + 22.80 9353.86 9233.08 1.41 bln 1779/1417 NASDAQ 1770.65 + 6.30 1771.22 1737.15 1.35 bln 1699/1467 S&P 100 499.28 + 1.62 500.02 492.75 Totals 3478/2884 S&P 500 996.73 + 3.02 997.93 983.57 W5000 9637.01 + 48.30 9643.41 9510.94 RUS 2000 486.51 + 2.64 486.54 477.51 DJ TRANS 2635.69 + 2.70 2639.47 2605.50 VIX 20.33 + 0.01 21.70 20.25 VXN 29.75 + 0.41 31.52 29.41 Total Volume 3,013M Total UpVol 1,960M Total DnVol 972M 52wk Highs 241 52wk Lows 58 TRIN 0.85 NAZTRIN 0.63 PUT/CALL 0.90 ************************************************************ Tale of Two Markets If you had taken a short nap at 1:30PM you would have missed it. You would have gone to sleep at 9235 and -85 and could have awakened at 9350 +30 only 90 minutes later. The morning was full of gloom, doom, rumors and selling but the afternoon shocked traders with several strong buy programs and a flurry of short covering. What changed? Dow Chart Nasdaq Chart S&P Chart Before we get to the Jekyll and Hyde reversal we need to look at the morning factors. The Weekly Chain Store sales report was uneventful with a +0.2% gain but it was the third gain in the last four weeks. Tax checks are being cashed and back to school specials are benefiting. Wal-Mart raised estimates for August again on the strength of those sales. All is well in the retail world it appears. Even Sears raised estimates after the close. Consumers are not ripping the doors of the stores trying to get in but they are continuing to spend money. The Durable Goods numbers for July rose +1.0% and posted the second consecutive monthly gain. The gain was much slower than the +2.6% gain in July and that produced a muted acceptance of the numbers as positive. There was a remarkable change in the communications component which soared to 11.8 from 0.6 in June. The communications sector has been the technology black hole and any improvement there could be a leading indicator for a real recovery. Inventory levels fell again to 0.9%, which could be the result of stronger than expected demand. Once that replenishment cycle begins it could be strong. New Home Sales declined -2.9% from an upwardly revised 1.2M in June. That is still a record for June and the drop to 1.165 in July was barely a dent in the pace. Expectations were in the 1.145M range so they were able to beat that slightly. The current thought process is that any remaining buyers are rushing to buy something to lock in interest rates on the worry that they will continue up. This rate bounce has a historical precedent and this is typically what happens to those who have failed to act in time. Analysts expect sales to slow as we move into fall and rates continue to rise. The available inventory of houses for sale also fell on a year over year basis. The most critical report for the day was the Consumer Confidence which came in at 81.3 compared to estimates of 80.0. This was a rise from the 77.0 level in July and but there were some real concerns. The present conditions component fell to 61.6 compared to the futures expectations component rising to 94.4. Clearly the consumer is becoming concerned about the next several months but expects the beginning of 2004 to be better. The current index of business conditions is still flat at only 30.9 and showing only a minor improvement since the 28.4 in May. Those thinking jobs are plentiful ranked only an 11.1. The markets did not know which way to jump this morning with the conflicting data. On the surface it all appeared good but each had a negative component. Traders were not helped by the JPM comments that they were not seeing any PC upgrade cycle. Michael Dell said that despite their market share gains he was not seeing any significant increase in business spending. And for the fourth consecutive day an Intel executive cautioned that their guidance improvement may only be temporary. Craig Barrett went on record yet again that the sales rebound may only be temporary and the small increase they saw in July may not carry through the current quarter or extend into the 4Q. He said the gains could have been SARS related because overall the global economy was still weak. Sales delayed in Q2 due to SARS concerns were lumped into the first month of this quarter. Ok, we got it. You have filled the airwaves with the cautions for four days, now go sell some chips. The SOX, which hit a high of 459 on Friday after the Intel guidance fell to hit a low of 425 today before the end of day rebound. The government announced today that the deficit for 2004 would be $480 billion but many analysts expect it to be well over $500 billion before it is over. The deficit for 2003 is now expected to be $401 billion. Comparing this to the last post war deficit in 1992 of $290 billion there is a lot of red ink in our future. The bond market sees this as a lot of supply coming to market. Bonds crashed on the news and yields on the ten year note rose to 4.60% again at midday but the rebound in the equity market produced a rebound in bonds as well. Still today ranked as the sixth highest yield close since the bond implosion began. So what happened to the markets? The morning started off with a rumor that there was going to be a big sell program released and traders were cautious about buying the initial good news. There was a cloud over the market from the open and everybody kept waiting for the "event" whatever it was. At 10:AM the good news from New Home Sales and the Consumer Confidence prompted a huge volume spike to the upside and it was met with an equally huge sell program. The Dow dropped from 9318 to 9257 in less than 10 minutes. Ok, it is over now let's go back to work. Sorry but that is when the next rumor hit that Alan Greenspan had been killed in an accident. Knock off another -35 points and the Dow is down -85 and the Nasdaq looks like it is headed for 1700 in a hurry. The negativity eased somewhat over the next four hours but the trend is still negative. In reconstructing the day it appeared the bears were trying hard at the open to crack the support. Tuesday was technically the end of the month for those funds who operate on a "settlement" basis. If they wanted these trades on their August end of month books they had to be made today. Now, if you were going to buy a lot of stock today and the markets started off in free fall you would probably want to wait to see if the drop was going to continue before pulling the trigger. The trend continued weak until about 1:PM. There was no confirmation of the Greenspan rumor and no more massive sell programs. At 1:PM there was a rumor that Saddam had been found. The Dow was only one point away from the low of the day and it quickly bounced about 30 points and while the bounce was not spectacular the result was. It bounced and then held its gains. Suddenly a panicked trader somewhere decided he was not going to buy them any cheaper and the first buy program fired at 2:21. Chalk up another +35 Dow points. That gain also held despite attempts by many bears to short the bounce. About 2:42 the final buy program triggered and it was strong enough to drag quite a few shorts with it. With volume on Monday the lowest for the year and the -270 point drop from Friday's highs there were a lot of shorts. The short covering was quick and triggered more buy stops in rapid succession. The markets reversed an -85 point drop into a +23 point gain in about 90 minutes. Was it a return to the bullish market from last week? I doubt it but there are those who believe we will see another test of resistance tomorrow. That resistance is very strong between 9350-9400. We closed at 9344 after struggling to break 9350 for an hour. With no material economic reports on Wednesday it could be a listless day. It is still August and volume is still going to be a challenge. Without volume it may be tough to break this resistance. The S&P has traded under the 50 DMA (990) twice this week and is resisting the attempts to close there. The last time it broke it took two weeks to recover. The Nasdaq rebounded nearly +30 points from its lows but failed to break strong resistance at 1772. Everywhere you look there are challenges for the bulls. On Friday Greenspan will speak at the conference in Jackson Hole, Wyoming. He has used this platform in the past to make more forward looking statements and the markets are not likely to ramp up into the speech. Also a potential problem is the economic reports on Thursday. We have the GDP revision for Q2 and if you remember it surprised to the upside at +2.4% when it was only expected to be +1.4% on July 31st. Everybody was shocked then and almost everyone is expecting downward revision of some sort. How bad is anybody's guess. We also get the Chicago Fed National Activity Index, Jobless Claims, Monthly Mass Layoffs and the Help Wanted Index. Not exactly a passive day. Traders will have to decide tomorrow if they want to be long or short going into the close with those reports in front of them. Fortunately only two, GDP and Jobless Claims are before the bell but the GDP could be the killer. I would not want to be long over that report with a potential downward revision in the wings. Choose your direction carefully and wait for volume to confirm your plan. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Sound and Fury Jonathan Levinson Equities managed to fake out bulls and then bears today, plunging on what appeared at first glance to be bullish data, and then breaking north out of a tired range in the afternoon, reversing all of the day's losses and closing on bullish hammer candle prints. Gold and treasuries advanced. Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index saw a great deal of mileage today, advancing from 3Am until its spike high just before 8AM, followed by a precipitous decline from 10AM, despite the positive economic data released at that time. The drop bottomed at 98.60, from which point began a so-far minor bounce. Coincident with this bounce, however, was a vertical flagpole rally in equities and a slight advance in bonds. Gold and the CBR had good days, with the CRB adding .75 to close at 241.07. Daily chart of December gold December gold hit a high of 367 and held it for several ticks before falling back to close at 365.70, up 3.30 for the session. HUI added 2.67 to close at 182.75 and XAU added 1.74 to 87.57. The move was sufficient to bring gold bears face-to-face with the descending upper trendline on the pennant, reversing the sell signals that yesterday's decline printed. Today's bullish engulfing candle spanned the entire range of the narrowing apex of the secondary pennant, and while a trading range would not be out of the question tomorrow, I'm expecting a break soon, particularly given the tumultuous action in the US Dollar Index. Note that lower support on the primary pennant is below at 352. Daily chart of the ten year note yield It was another tricky day in the treasury market, with trading mostly flat throughout the session after an initial push higher. Bonds saw buyers return to close yields lower, the FVX –4.4 basis points, the TNX –4.1 bps at 4.486% and the TYX –3. The outlook remains mixed here, with the TNX caught between trendline support and resistance, with the oscillators conveying mixed messages for another session. Daily NQ candles NQ added 1.50 today to close at 1308.50. The enormity of the statement isn't apparent from the price itself, but the length of the tail under the day's candle gives a better indication of the wide range traversed for this lightly positive close. NQ bounced from 1280 and ran over 30 points in under one and half hours before pulling back from its spike high. The move maintained the uptrend on the oscillators and actually has the NQ peeking back above the failed ascending trendline. 30 minute 20 day chart of the NQ The oscillator downtrend on the 300 minute stochastic is still intact, but the NQ will have to fail from its closing levels to maintain it. The Macd is on a buy signal from deep within oversold territory. It appears to have been a short squeeze that sent prices vertical, and whether there's further firepower left for bids is unknowable tonight. The 10 day and 300 minute stochastics both with up-phases, we can expect further upside. The bullish daily hammer print supports this. However, the move was feeling tired by the close of the session, and it's difficult to have any confidence in where the NQ wants to go in the short term. A print above fib resistance at 1312 will have me watching or a potential retest of the broken bear flag lower trendline at 1340. Daily ES candles The ES bounced from support at the top of the bull wedge on its daily candle chart, with an intraday low of 982.50. The oscillators continue to indicate the potential top of this up- phase, and the bounce did not reverse the sell signals that appear to be in the process of printing. 20 day 30 minute chart of the ES The afternoon upside launch reversed the sell signals on the 30 minute candle oscillators, and appears to have violated the trend of lower highs on the Macd. A failure here could set up a hunchback head and shoulders topping formation with the rising neckline at 983. Any further upside past 10000 will target the bear flag lower trendline. Chart of the 150-tick ES The two day chart shows the volume spike and impressive speed with which the flat rectangle was broken to the upside. Whether the end of session pause is a bull flag consolidation or a distribution top remains to be seen. The 300 minute stochastic implies that further upside is likely. Daily YM candles The YM added all of 10 points to close at 9330, a significant confluence zone. The closing print was on a pullback, and so this level should act as support. The oscillators continue to indicate that this action is within a topping process, but further upside from here could reverse that. 20 day 30 minute chart of the YM Note that the stochastic downtrend was violated. Tomorrow will bring us closer to a resolution on the gold question, as well as the afternoon rally in equities. With volume light today, it's tempting to dismiss the afternoon gains, except that this week promises lighter volume as we approach the holiday weekend. End-of-month window-dressing further muddies the waters. The potential for violent moves will be with us for the next three sessions. Use stops always, and be careful. ------------------------------------------------------------ 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: ------------------------------------------------------------ ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_082603_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Might Think -James Brown One might think that by looking at the "bearish" rollover in the VIX and VXN today coupled with the intraday bounces by the Dow Jones Industrial average and the NASDAQ that we still have some more upside left in this market. The bulls on Wall Street have to be feeling pretty good about the markets thus far this summer. The traditional post-July earnings season sell off has refused to show up. We continue to get bits and pieces of the economic picture that strengthens everyone's expectation that "yes, the economy is improving." If we keep this up then maybe September, historically the worst month of the year, won't be so bad. (Psst.. just don't look at the bullish percent charts for the major indices. They're all still near record highs and that should give bulls vertigo.) Keep an eye on the S&P 500 as buyers need to be able to push through several levels of resistance at 1000, 1010 and 1015. Should this occur then Wall Street might see a bear stampede instead of a bullish one. Also keep in mind that many veterans discount this entire period of the market with most of the professional traders gone on vacation and the retail investor more focused on getting the kids back to school than where the markets are headed. The low volume is testament to the lack of participation. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9499 52-week Low : 7197 Current : 9340 Moving Averages: (Simple) 10-dma: 9357 50-dma: 9190 200-dma: 8599 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 996 Moving Averages: (Simple) 10-dma: 995 50-dma: 990 200-dma: 919 Nasdaq-100 ($NDX) 52-week High: 1342 52-week Low : 795 Current : 1309 Moving Averages: (Simple) 10-dma: 1286 50-dma: 1255 200-dma: 1111 ----------------------------------------------------------------- The VIX rolled over under the 22 level while the VXN produced a nice doji candlestick after touching its 50-dma. While investors don't trade these like stocks they still tend to forecast direction and both of them look ready for more weakness. That means less "fear" in the markets and potentially more short-term upside before the inevitable top. CBOE Market Volatility Index (VIX) = 20.33 +0.01 Nasdaq Volatility Index (VXN) = 29.75 +0.41 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.90 443,079 399,275 Equity Only 0.68 329,154 224,525 OEX 1.25 20,051 24,977 QQQ 5.66 10,569 59,862 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 70.0 + 0 Bull Confirmed NASDAQ-100 73.0 - 2 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 77.0 + 0 Bull Correction S&P 100 82.0 - 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.04 10-Day Arms Index 0.95 21-Day Arms Index 1.01 55-Day Arms Index 1.08 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 1616 1617 Decliners 1196 1441 New Highs 52 82 New Lows 9 8 Up Volume 880M 869M Down Vol. 480M 453M Total Vol. 1400M 1363M 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 ----------------------------------------------------------------- ------------------------------------------------------------ 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. 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The Option Investor Newsletter Tuesday 08-26-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: BSX, EBAY, GILD, LLL, OMC, SPW New Calls Plays: None Put Play Updates: ESRX, LEH, WLP, XL New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** 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: ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** Boston Scientific - BSX - cls: 65.38 chg: -0.37 stop: 61.99 Strong words from Prudential for stent-rival Guidant (GDT) didn't do much for (or apparently against) shares of BSX. The brokerage came out with a recommendation to buy GDT ahead of its new stent program, claiming that GDT was undervalued compared to BSX. Considering how fast the stent market is supposed to grow and the new models set to hit the U.S. markets the whole industry should do pretty well. We did witness a bounce from the $65.00 (okay, really $64.90) level on Monday but BSX couldn't trade back above $66.00. We suggest traders looking for new entries continue to look for bounces from $64-65 or moves above $66.00. Picked on August 21 at $66.50 Change since picked: -1.12 Earnings Date 07/22/03 (confirmed) Average Daily Volume: 2.78 million Chart = --- eBay, Inc. - EBAY - close: 112.16 change: +0.67 stop: 110.50 Time is running out, but it looks like the bulls want to make one more run at the high's before EBAY's scheduled 2-for-1 split on Friday. We aggressively tightened our stop to $110.50 last weekend and despite a couple intraday dips slightly below that level so far this week, the bulls have vigorously defended that level. Last week's rally was turned back at the upper Bollinger band, as the sharply rising price collided with the declining band near $114. But now the band has turned back up and there should be room for the bulls to challenge the $115 level and hit our final exit target. Let's be clear. If the $115 level is traded over the next two days, that should be used as an automatic exit from the play. We're still not advocating new entries at this time due both to the proximity of our exit target and the company's split. Regardless of price action, we'll be dropping the play on Thursday to avoid getting caught in any post-split depression. So for those of you in the play, polish up those exit plans. We're maintaining our stop at $110.50. Picked on August 12th at $103.43 Change since picked: +8.73 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 6.67 mln Chart = --- Gilead Sciences - GILD - cls: 64.02 chg: -0.40 stop: 62.49 Could it be over already? We worried over the weekend that Friday's bearish engulfing candlestick could be pointing to a trend change in shares of GILD. We have seen some profit taking in the stock since but it has been mild and on low volume. With the intraday bullish reversal in today's session (okay, we're being optimistic) maybe the "trend change" forecasted by Friday's move is already over. Of course we have to note that the lows today almost took us out at our stop of $62.49. Fortunately, we did not get triggered and we're currently still (hypothetically) in the play. As a matter of fact, traders who like to target shoot entries on dips might find today's action entertaining and might want to consider opening new positions tomorrow. The rest of us, who like to see a little more momentum, might want to wait for GILD to trade back above $65 or even $66 before evaluating a new long position. Picked on August 19 at $65.32 Change since picked: -1.30 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = --- Hartford Fin. Svcs - HIG - close: 53.25 change: +0.18 stop: 51.75 Well, it looks like we were right in our call last weekend for HIG to test support before making another stab at resistance. Shares of the company drifted a bit lower on Monday, rebounding from an intraday low of $52.40. Not only was that the site of the 20-dma ($52.66), but it was very near the top of the August 7th gap, that we had expected to act as support on this pullback. Tuesday's action saw the stock test and rebound from the 20-dma yet again and close fractionally higher in a mixed market. Traders that took our advice to enter on the rebound from support got a solid entry and now we'll see if the bulls have enough strength to give us a real breakout over the $54 level. Traders waiting for confirmation before playing will want to see HIG clear $54.50 (just above the intraday high from last Monday) before playing. For now, we'll maintain our stop at $51.75. Picked on August 14th at $54.14 Change since picked: -0.89 Earnings Date 11/05/03 (unconfirmed) Average Daily Volume = 2.13 mln Chart = --- L-3 Communications -LLL - close: 50.13 change: +0.75 stop: 48.90 It certainly hasn't set any speed records, but LLL looks like it is going to take another run at the $50.60 resistance level, and Tuesday's close back over $50 certainly looks encouraging. While so far unable to manage a real breakout, it has been encouraging to see how the stock has continued to post higher highs (just barely) and higher lows in a classic bullish wedge formation. Aggressive traders can buy rebounds from the area of the 20-dma (currently $49.10), as that level has provided critical support both days this week. But our preferred entry strategy is to wait for a breakout over the $50.60 level before playing. Look for confirmation of strength on the breakout in the form of increasing volume and maintain stops at $48.90 just in case the bulls lose their nerve. Picked on August 3rd at $49.90 Change since picked: +0.23 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 898 K Chart = --- Omnicom Group - OMC - close: 76.03 chg: -0.22 stop: 72.99 Stocks move in cycles, it's a fact of life. Investors focus on long-term cycles and traders focus on short-term cycles. We think it's time for OMC to product its next short-term up cycle. The stock had broken out above the $75-76 level. It has now pulled back in profit taking to retest the $75 area as support and bounced. After just over two weeks of steadily trading higher shares of OMC were due for a pull back. The last three sessions have produced a 50 percent retracement of the early August to last Friday's high. Now that the stock has bounced this looks like an entry point for new positions. Our first target is $80.00. More conservative investors can probably get away with a tighter stop near $74.00 or even 74.50. We're going to leave ours at $72.99 for the moment. Picked on August 19 at $76.67 Change since picked: -0.64 Earnings Date 07/29/03 (confirmed) Average Daily Volume: 881 thousand Chart = --- SPX Corporation - SPW - close: 48.60 change: +0.93 stop: 46.75 Believe it or not, bullish sentiment is still alive and well, and that is certainly seen by the pattern building on the daily chart of SPW. With the rebound from just above $47.50 this morning, we can see that the bulls are defending a steeper trendline than we had initially looked at. This one connects the 7/23 and 8/07 intraday lows and currently rests at $47.40, just below today's intraday low before the stock rebounded strongly into the afternoon to end the session with a 1.95% gain. The pattern of higher lows and higher highs is still being formed and traders that took advantage of Tuesday's dip to initiate new positions look to have caught a solid entry, albeit just a bit above our expected $47.00-47.50 rebound zone. Remember, there's still a lot of congestion near the $50 level (the primary reason that we haven't been advocating entries on a break above the recent highs), so buying dips still appears to be the best approach. Aggressive traders can consider new positions on a breakout over $50, but need to watch for a failed breakout. Next solid resistance comes in near $53. Picked on August 14th at $48.14 Change since picked: +0.45 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume = 896 K Chart = ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ 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: ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Express Scripts - ESRX - close: 62.54 change: +0.46 stop: 65.75 Was that a breakdown and oversold bounce, or was it a false breakdown and subsequent bear trap. Given the heavy volume yesterday, it looks like a real breakdown, but there was pretty decent volume (although still 30% below the ADV) accompanying Tuesday's gain. Well, there are a couple of easy technical levels to monitor to give us a more objective answer to the question. First up is the combined 10-dma and 20-dma at $63.91 and $63.76, respectively. If this is just an oversold bounce following a true breakdown under $63 support, then ESRX shouldn't be able to push back over those moving averages with any conviction. So a failed rally in the $63.50-64.00 area looks like a good place to test the waters with new entries. Remember there's still support resting at $60 (the site of the early August lows) and just over $58 at the 200-dma. For that reason, we're really not excited about chasing a breakdown lower, as we'd prefer to focus on selling into the failed rally. Maintain stops at $65.75, just over the mid-August intraday high. Picked on August 24th at $63.48 Change since picked: -0.94 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 1.37 mln Chart = --- Lehman Brothers - LEH - close: 64.54 change: +0.91 stop: 67.25 Just when it looked like we might get some downside continuation, the Financial sector held firm and prevented a serious breakdown. We had anticipated the $63 level would be an important level of support and indeed it was on Tuesday, with the stock printing an intraday low of $62.91 before rebounding into the close. What's so special about $63? Only that it is the 50% retracement of the entire March to June rally, and it has been acting as a price magnet for over a month now. We're still expecting price to break down, due in large part to the stock's continued weakness relative to the Broker/Dealer index (XBD.X). Since LEH was up today while the XBD was down, that is a bit of divergence from the past few month's action, but this feels like the prelude to another entry point. Another rollover near the $66 resistance level, backed up by the 50-dma ($65.81) looks like the ideal entry point. More conservative traders will want to see more weakness before playing, and a break back under $62.50 would seem to do the trick, especially if accompanied by renewed weakness (below $550) in the XBD index. Maintain stops at $67.25. Picked on August 24th at $64.41 Change since picked: +0.13 Earnings Date 09/18/03 (unconfirmed) Average Daily Volume = 2.97 mln Chart = --- Wellpoint Health Ntwk - WLP - cls: 76.28 chg: +0.95 stop: 77.51 This is suddenly looking pretty DANGEROUS. Shares of WLP quickly followed through on recent weakness and early Monday morning it traded through our trigger of $74.95. However, by late Monday morning shares had bounced and the stock closed back above the $75 mark while remaining below its 200-dma. Today's session looks even worse for the bears as WLP has continued to bounce and is now above both the $76 mark and its 200-dma. Shares were due for a bounce but we expected any bounce to occur above the $75 mark without being triggered. We would now expect WLP to retest its simple 10-dma before rolling over again. Unfortunately, that's awfully close to our current stop near $77.51. We are NOT SUGGESTING new bearish entries at this time. More aggressive players might want to look for a failed rally under $78 as a new entry point. Very conservative traders might want to consider cutting their losses now and watching for another bearish entry point. Picked on August 25 at $74.95 Change since picked: +1.33 Earnings Date 07/22/03 (confirmed) Average Daily Volume: 1.3 million Chart = --- XL Capital Ltd. - XL - close: 75.51 change: +0.26 stop: 78.25 Well, those bulls certainly don't give up easily do they? XL finally gave us that breakdown under $75 late last week and followed through to the downside Monday morning. But the dip buyers were lying in wait at the top of that unfilled gap from early April and the stock rebounded back to above $75, a level that held up on Tuesday as well. While it is disconcerting to see a rebound so soon, it was not unexpected, as that gap in the $72.50-73.50 area was likely to provide near-term support. Now we need to see where this rally fails. Resistance should be strong in the $76.50-77.00 area and a rollover there should make for a favorable entry into the play. Watch the action near the 10-dma ($76.41) and then the 20-dma ($77.28) as reversals at those averages may provide favorable action points. Maintain stops at $78.25, and look for renewed weakness in the Financial sector to confirm new bearish entries into XL. Picked on August 21st at $75.92 Change since picked: -0.41 Earnings Date 10/30/03 (unconfirmed) Average Daily Volume = 827 K Chart = ************* NEW PUT PLAYS ************* None ------------------------------------------------------------ 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 Tuesday 08-26-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - OMC ********************** PLAY OF THE DAY - CALL ********************** Omnicom Group - OMC - close: 76.03 chg: -0.22 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) Most Recent Update (Tuesday, August 26, 2003): Stocks move in cycles, it's a fact of life. Investors focus on long-term cycles and traders focus on short-term cycles. We think it's time for OMC to product its next short-term up cycle. The stock had broken out above the $75-76 level. It has now pulled back in profit taking to retest the $75 area as support and bounced. After just over two weeks of steadily trading higher shares of OMC were due for a pull back. The last three sessions have produced a 50 percent retracement of the early August to last Friday's high. Now that the stock has bounced this looks like an entry point for new positions. Our first target is $80.00. More conservative investors can probably get away with a tighter stop near $74.00 or even 74.50. We're going to leave ours at $72.99 for the moment. - Play of the Day Comments - Shares of OMC were due for a pull back and it bounced just where we thought it might. Traders can pick how tight they want their stop loss and aim for the $80 level. 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= 1384 at $2.70 SL=1.45 BUY CALL SEP-80 OMC-IP OI= 1566 at $0.65 SL= -- BUY CALL OCT-75 OMC-JO OI= 1437 at $4.00 SL=2.00 BUY CALL OCT-80 OMC-JP OI= 1808 at $1.70 SL=0.90 Annotated chart: Picked on August 19 at $76.67 Change since picked: -0.64 Earnings Date 07/29/03 (confirmed) Average Daily Volume: 881 thousand 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. 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
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