The Option Investor Newsletter Wednesday 09-17-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: U.S. Markets Stall Futures Wrap: Dolor for the Dollar Index Trader Wrap: Not enough umph Traders Corner: Still Seeking Clarity Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 09-17-2003 High Low Volume Advance/Decline DJIA 9545.65 - 21.69 9594.43 9536.81 1.63 bln 1299/1507 NASDAQ 1883.10 - 4.15 1894.74 1876.24 1.88 bln 1498/1555 S&P 100 515.43 - 1.93 518.56 514.96 Totals 2797/3062 S&P 500 1025.97 - 3.35 1031.34 1024.53 RUS 2000 515.10 - 0.56 516.71 513.29 DJ TRANS 2761.20 - 12.18 2773.38 2757.84 VIX 19.62 + 0.31 20.14 19.47 VXN 31.75 + 0.09 32.51 31.17 Total Volume 3,867M Total UpVol 1,798M Total DnVol 1,962M 52wk Highs 648 52wk Lows 20 TRIN 1.02 PUT/CALL 0.74 ******************************************************************* U.S. Markets Stall by James Brown It was somewhat of a quiet day on Wall Street as U.S. stocks generally slipped lower amid fresh earnings warnings and a frenzy of news coverage over the beleaguered NYSE Chairman Richard Grasso. Investors could be merely pausing to catch their breath after Tuesday's afternoon rally but the general mood was cautious, especially considering profit warnings from Du Pont and the New York Times. The big story this evening is NYSE Chairman Dick Grasso's resignation. Grasso, 57, ends a 36-year career with the NYSE after disclosure of his $140 million deferred compensation lit a firestorm he and the NYSE board were unable to quench. Jim predicted that his days were numbered yesterday after pension fund managers from California, N. Carolina and New York all stepped forward yesterday calling for his head. Looking at the market action today the biggest event was the lack of follow through on yesterday's post-FOMC rally. The DJIA traded in a tight 80-point range and lost 21 points after a midday decline towards the 9450 level. The NASDAQ Composite also traded sideways in a 20-point range, failing twice at 1895 overhead before losing 4 points to close at 1883. Overall U.S. equity market losses were mild with Disk Drives, Hardware, Gold and Biotechs managing to close in the green. Meanwhile Asian exchanges added onto yesterday's big gains with another triple- digit rally for the NIKKEI to 10990 and a 68-point move to 11140 for the Hang Seng. European bourses were marginally lower. Market internals underscored the mellow profit taking with declining stocks outnumbering advancers 1507 to 1299 on the NYSE and 1555 to 1498 on the NASDAQ. Volume numbers were mixed with up volume edging past down volume 991M to 865M on the NASDAQ but losing 775M to 832M on the NYSE. Chart of the DJIA: Chart of the NASDAQ: Profit Warnings Putting the brakes on the rally were profit warnings from Du Pont, New York Times and Microchip. Last night, Microchip (MCHP) narrowed its Q2 revenue numbers to 2%-5% growth and said earnings would likely come in around 17 cents compared to estimates of 16- 18 cents. While not truly a warning, investors have been selling stocks that don't deliver on the improving outlook their share prices are based on. Shares of MCHP lost 3.3 percent, the second worst performer in the NASDAQ-100 behind Cintas (CTAS), -3.6 percent, who happens to be announcing earnings tomorrow morning before the bell. The New York Times (NYT) lost 3.7 percent and closed below support at $43 after warning Q3 earnings would be less than estimates blaming a weak advertising market. Those not familiar with the NYT may remember the disgrace over its reporter Jayson Blair, who was ousted for his plagiarism and fictional sources. Probably the most notable warning today was Du Pont's (DD). This Dow component lost 3.4 percent after stating that 2003 earnings would be at the low end of previous forecasts. The chemical conglomerate said business had not picked up yet but was hopeful about current signals pointing to a recovery in the fourth quarter. Tobacco on Fire Shares of tobacco stocks were hot today with both RJR and MO up double-digit percentage moves. Shares of Altria Group, previously known as Phillip Morris (MO), closed up 10.3% and helped prevent the DJIA's losses from being a lot worse than they could have been. MO gapped higher after the Illinois Surpreme Court decreased a bond set by a lower court from $12 billion to $6 billion. It's a tangled story but MO lost a fight over its "light" cigarettes marketing and a Madison County court levied a $10.1 billion judgment. The judge first told MO that it would have to post a $12 billion bond before it could appeal the judgment, a feat that would likely force MO into bankruptcy. Then after much negotiation the judge lowered the bond to just $6 billion. A higher court said this judge overstepped his bounds by lowered the bond amount and reset it to $12 billion. Thus, the Illinois Supreme Court decision was crucial for Altria Group and essentially gave it a new lease on life sans bankruptcy protection. Meanwhile rival tobacco company R.J.Reynolds (RJR) made big news after announcing it would cut 40 percent of its workforce, some 2600 jobs, to reduce $1 billion in expenses by the end of 2005. RJR also said it would refocus its marketing efforts on two of its four major brands, Camel and Salem, while taking a $340 million charge for the reduction efforts. The stock gapped up at the open and close higher by 13.6% above its simple 200-dma and its best close in over six months. Tomorrow Investors will have another round of economic reports to digest on Thursday with the weekly unemployment claims and the leading economic indicators. Economists are hoping for a decline in jobless claims from 422,000 to just 410,000. These reports tend to take on more and more meaning as Wall Street and Washington become painfully aware of the weakening labor market. Traders will also have to deal with potential volatility ahead of Friday's triple-witching option expiration. Also worth noting are a few earnings reports. Reporting tomorrow is 3Com, Bear Stearns, Nike, and Jabil Circuit. You may also want to keep an eye on your AOL stock. The AOL Time Warner board meets tomorrow and many on the street expect them to vote off its "AOL" prefix and revert its stock symbol back TWX. Watch those stop losses. ************ FUTURES WRAP ************ Dolor for the Dollar Jonathan Levinson The US Dollar Index spent the day seeking lower prices and finding them as euro futures and commodity futures gained. Bonds were higher and equities retreated. Daily Pivots (generated with a pivot algorithm and unverified): 15 minute chart of the US Dollar Index The US Dollar Index got sold from its 1AM high, the decline picking up speed with the 2PM release of the record US budget deficit. Support at 96 had held until then, and we saw treasuries rally, gold and the CRB advance as equities retreated. The CRB was led by strength in cotton, cocoa and coffee futures, adding .80 to close at 238.47. Daily chart of December gold December gold had a good day on the US Dollar weakness, attempting to regain the failed wedge trendline and pausing the daily chart oscillators early in their downphases. A gold bear would write the bounce off to a "return to the scene of the crime rally", which it might be, depending on whether tomorrow sees a continuation of the advance above the trendline or a failure. December gold was up 3.40 at 378 as of this writing, HUI +3.87 at 200.77, XAU + .76 at 93.19. Daily chart of the ten year note yield The TNX dropped 10 basis points today to close at 4.191%, below the horizontal support line we've been following. The oscillator downphase on the yield picked up speed, and bond bulls remain on track. The move is particularly encouraging if it continues tomorrow, as it would invalidate the bullish descending wedge we've been following on the TNX chart. The Fed added a paltry 250M net in overnight repos, refunding yesterday's expiring 2B with a 2.25B overnight repo to expire tomorrow. Daily NQ candles The "hanging man harami" on the daily NQ failed to touch a new high today, despite the morning's advance to within kissing distance of last week's levels. I had expected at least a stop- running spike, but none came. The jury is far from out, however, due to the lack of depth on the pullback that ensued. The oscillators continue to reflect the bounc-within-a-downphase that could see another push to the highs tomorrow. I don't want to downplay the bearishness of today's session. The opening breadth on NQ was very overweighted to the buy side, with a TRIN.NQ reading of .24 and put to call readings below .50. The failure of this level of bullishness to even reach the previous highs is indicative of a great deal of supply at current levels, just as the lack of pullback either indicates strong demand, or patience on the part of sellers. The market left us with a cliffhanger today, hopefully to be resolved tomorrow. 30 minute 20 day chart of the NQ The 30 minute NQ left off on an oscillator downphase just beginning to show hints of aborting early. Rising support at 1368 connecting the lows from last Friday was not tested, with the higher lows painting a continuing bullish picture. Bears continue to have a benchmark from which to base their entries, with the rally high at 1392. Today's bounce failed at 1390.50. 1368 is the trendline and Fibonacci support that needs to fail before the pattern of higher lows in this timeframe can be written off. Daily ES candles The ES also failed to touch its previous high, printing the same reversal candle on the daily chart on a spike to 1029.75. The bounce came from just below 1023, but had no luster, failing repeatedly at 1024 and 1025 ES. Once again, while it's possible that the bears have their lower high, the lack of momentum on its failure left us on uncertain ground. The complication of option expiration doesn't help, as it seems counterintuitive that the indices will be closing near the high of their range, leaving a relatively large number of calls in-the-money. The cycle setup is the same as for the NQ, with the daily chart oscillators pausing at the beginning stages of their downphase. 20 day 30 minute chart of the ES The 1020 level remains the more significant support level, and it wasn't tested today. The lack of even stop runs to test the highs or the lows paints an unpleasant picture of rangebound action carrying into Friday, but it's more an intuition than a conclusion. The rising oscillator trendlines were violated today, a bearish development, but until price cooperates, the ball will remain in the bulls' court. Daily YM candles The setup on the YM is the same as for the ES. Once again, 9500 was not seriously tested, let along range support at 9480, while ES stopped shy of new highs, topping at 9558 today. 20 day 30 minute chart of the YM The combination of lower yields and a lower dollar fits with what we've seen earlier in the year, but the weakness in equities does not. There is no shortage of bearish news, but that has been the case for a long time now. The hurricane, whether strong or weak, is not bullish news, nor is the weekend WTO failure, or the talk of tariffs, or the Grasso affair, or the mutual fund scandals. All eyes will be briefly upon initial claims, but increasingly, equities appear to be a technical trade executed by robots. Fundamentals, if they ever played a significant role in the short term, seem even more distant. I don't expect this to persist, but for the moment it is reality for traders. We will continue to watch the current range for a breakout. So long as the top continues to hold, it looks good for bears, but the bulls' failure is insufficient for bears to declare victory. The selling will have to start soon in order to avoid a consolidation of recent gains at current levels. ******************** INDEX TRADER SUMMARY ******************** Not enough umph I thought today was one of the more exciting sessions that we've seen in awhile as I felt great pressure building, mostly from the bearish camp, that the major indices might make a bold break higher, but an anyone point in today's trade, there was something lacking where buyers just couldn't muster conviction for a push higher. I must also say there wasn't enough of a catalyst to get bears to further cover some short positions, as it relates to one of my primary catalysts for a continuation move higher being a good short-squeeze, which I think was largely due to yesterday's gains after the FOMC meeting. For the S&P 500 Index (SPX.X) 1,025.97 -0.32% which finished down 3.3 points and the narrower S&P 100 Index (OEX.X) 515.43 -0.37%, there just wasn't the "umph" from the S&P Banks Index (BIX.X) 304.81 -0.2% or the KBW Banks Index (BKX.X) 879.24 +0.14% to get a good push from these two financial sectors. The Securities Broker/Dealer Index (XBD.X) 608.90 -0.63% slipped 3.9 points by the close, only after this group of financials traded a second- consecutive 52-week high of 619.72 in the first-half of the session, but its tough to run forward when you're constantly looking back over your shoulder for some support from your friends. S&P Banks Index (BIX.X) - Daily Interval If there was one equity index that juuuuust didn't have some of the bullishness I think needed to really get the major averages to break some key levels of pivot analysis resistance in today's trade, it was the BIX.X. One pattern that I want to be aware of that I just noticed today when trying to figure out why the BIX.X found suspicious trade at 305.99 (I always find penny trades suspicious as it hints that somebody's eager just prior to a level) is a POTENTIAL head/shoulder pattern, which only comes to my attention as we've been noting how darned important 296 support, which could be a neckline for the pattern, has been holding support in recent months. The one question we won't get until earning pre-announcement season is in full swing is what impact higher lending rates (caused by higher Treasury YIELDS) had on the quarter. Was it overly negative? We know from our tracking of weekly Mortgage Banker Association data that new applications and refinancing dropped off notably from their spring fling. The probe into mutual fund dealing is currently underway and just beginning. The POSITIVE starting to form was a rebound last week in the MBA statistics and Treasury YIELDS starting to edge back. Today's trade saw the benchmark 10-year YIELD ($TNX.X) fall 10.0 basis points to 4.191%, matching a relative yield low in early August, with today's trade seeing this YIELD come very close to our WEEKLY S1 of 4.145%. Here too we may have seen some cash that could have bought equities to new highs flow toward Treasuries today, and that may have taken some of the "umph" out of gains that could have pushed the major indexes to new highs. Yesterday's gains for the dollar evaporated today with the U.S. Dollar Index (dx00y) 96.81 -0.88% still trading and falling and lower by 0.86 points. Just as yesterday's gains were a rather substantial move higher, today's declines for the dollar just as notable. We may think that some of my comments today that yesterday's gains in the dollar was foreign capital moving to the U.S. ahead of the FOMC report, and quickly leaving with a nice short-term gain from yesterday's equity performance. While this may be a crazy thought to some, just remember what Stanford Professor Zitzewits found from some of his research. In a CNBC interview, he said the bulk of the illegal after-hours trading was being done if International Funds, where hedge funds were more actively trading one-day trends based on a market's gyrations. Is it foolish to think foreign capital moves to the U.S. in one day for a trade, to then book a 1% gain in equities to move on the next? Professor Zitzewits's findings give the impression it may be a more common practice than we think. If a hedge fund is day trading mutual funds, it is no different than buying DIA, SPY, QQQ (or futures) for a day and selling the next on large scale. Is it? Oh.... It is LEGAL to trade DIA/SPY/QQQ and futures after 04:00 PM EST. Speaking of futures and lack of "umph," I was using the S&P futures contract (sp03z) with our newly fitted upside retracement, along with a very simplistic intra-day retracement technique to try and find that KEY level where a futures trade might send the equity markets into a state of euphoric gains. The pink and dark purple retracement brackets will be erased for tomorrow, but here too there just wasn't enough "umph" to get the move higher. Here's a quick recap of that chart, with today's session now complete. I'm writing down, and have an upside alert set at 1,029.90, say 1,030.00 for a good round number, in combination with the 1,029.10 level already discussed. S&P Futures (sp03z) - 5-minute bars With some mixed economic data and more of a mindset that it would be short-covering that would have the major indices being able to break above the two key levels in the INDU and NDX discussed last night, I was trying to identify a "trigger" level that might have the markets jolting to new highs. One benchmark on a closing basis for signs of further bullishness is if the S&P futures (sp03z) can hold a close above 1,029.10, which had 1,029.10 being settlement values for September 5 and 8. Why the futures can't close that level remains a mystery, but became a "fitted" retracement level that a curious trader marks. After all the MARKET seems to think it important. But the question for some traders today was.... C'mon Jeff! If you think I'm going to wait and see if the sp03z can close above 1,029.10 and when it settles 1,040 you then tell me we've got a further bullish bias signal from the futures market, then you're out of your mind! Can you give me an action point to get long these buggers just in case we sprint higher? A rather crazy, but technique I found that seems to work pretty good is to use your retracement tool with percentage levels set as shown (we use the same on our other bar charts) where all we do is monitor the first 5-minutes of trade (everyone has woken up by then and ready to go) and immediately set retracement levels as described. Once you've got the first 5-minute bar, you're simply taking that 5-minute range and defining up and down levels. Long-story short, I defined the 1,029.90 level as a trigger level, which if broken, might be a level that saw early morning gains progress higher. However, even the futures market just didn't seem to have enough "umph." I used this technique in the futures chart, only because I have my cash SPX chart nicely set up with the WEEKLY and MONTHLY levels and wanted to show a systematic approach of using more of a "fitted" retracement technique to display levels. Still, such hard work taken on by a full-time intra-day trader can be tied in with pivot analysis work as levels from the matrix (futures traders will use the futures matrix) can be tied together to sniff out potentially important levels. This can also help trader make sense from intra-day market commentary provided by Jonathan Levinson and Jim Brown, when from time to time I see them making comments regarding order depth at the bid and ask. Futures Monitor Comments - If you're trading futures, which have high intra-day leverage, I'd sure try and have some levels defined and follow along with other comments. Was Jonathan's observation of order depth meaningful? It made some sense to me. If I'm a cash SPX/OEX trader and see some tie with futures and the DAILY pivot matrix level of 9,529.21, was short/put going into the FOMC and saw SPX 10-points post-FOMC, then maybe, just maybe a bear is lining up his bid around the 1,024 level too? Let's take a look at tomorrow's pivot analysis matrix, and once again we see some of yesterday's "key" levels of resistance coming into play, and why I was trying to get some intra-day upside action points lined up in today's market monitor as WEEKLY R1s were traded in the Dow Industrials (INDU) 9,545 -0.22%, DIA $95.95 -0.05%, SPY 103.38 -0.19%, OEX 515.43 -0.37%, NDX 1,387.45 -0.43% and QQQ $34.26 -0.04%, but just lacked the "umph" or an upside trigger to extend yesterday's gains. Pivot Matrix Crud. After marking some boxes/levels I wanted to quickly cover, I didn't color the bulk of tomorrow's DAILY pivots red and with time limited, I decided to not go back and redo everything. Notes in PINK are to simply show how close the major indices and trackers (DIA, SPY, QQQ) traded with their WEEKLY R1s, and why I was trying to find that "trigger level" in the futures contract to push thing over the edge for a short-covering extension to yesterday's gains. Just not enough "umph." The S&P 500 Index (SPX.X) came within fractions, and if my intra-day commentary or work in the Market Monitor kept one anxious bull from perhaps jumping the gun on a new bullish entry today, then I feel that work may have been worth it. WEEKLY Pivots and DAILY S2 are full of correlative support. Remember, index expiration is tomorrow and there may be some last minute gyrations on index expiration and that's reason enough to think a DAILY S2 trade after bulls just didn't get the upside gains to get an extension of the rally continuing, to think a weaker open tomorrow, might have some shorter-term bulls pulling out early and looking to play the WEEKLY Pivot one more time. The BIX.X has just about every S2 to Pivot colored green, but each is a level, if broken to the downside, would have me thinking it takes some pressure off of broader market bears to cover. While I hold no bearish index trades at this point (except a QQQ put from May than went poof a long time ago) a rater easy giveback of early gains in the BIX.X didn't give the bearish side of me the impression that bears were overly pressed to cover further, as long as YIELDS were lower and BIX.X were not bidding from early open highs. Earlier comment on the BIX.X showing a POTENTIAL head/shoulder top pattern, with neckline at 296, would have that 296 between MONTHLY S2 and S1, so I have a sense of field position as it relates to the BIX.X and its MONTHLY pivot matrix as this week now grows shorter. Some traders have expresses an interest in viewing the SPX chart with a "fitted" retracement, similar to what I had done previously with the S&P futures chart on its daily interval bar chart, when we added an upper level of retracement when the futures contract broke to new highs. Here's the cash (SPX.X) chart using similar fitting technique used in the futures chart. What do you think? Are these levels in play? Have they shown some historical significance that would tie in with past trading, where the levels are being carried over to current day? What isn't explained in this retracement? S&P 500 Index Chart - Daily Intervals Wow! I like the support fit at 19.1%, and 38.2% and while we never know for certain, even the 50% looks like it was some type of target as the SPX broke to new highs and closed right at that level on September 2nd, when traders returned from the Labor Day holiday. What isn't explained by this fitted retracement is why the SPX was only able to reach the 1,032.41 level on September 8th. Hmmmm.... I had just gotten back from vacation myself and updated the WEEKLY pivot matrix levels for the 09/08 to 09/12 week. Boom! WEEKLY R1 was 1,031.93. Today, the WEEKLY R1 of 1,031.46 was almost tested. But, there just wasn't enough "umph." I've also shown some very simple upward trends using conventional anchoring to the March low and a relative low pullback. For lack of better terminology, I've labeled them aggressive, intermediate, and longer-term. Now I would be as amazed as even the most bullish of bulls if this longer-term-labeled trend held for the next several years and would deem 960 the biggest level of important support. But we can note how pullbacks to a first test of trend (after anchor and attachment to a relative low) combined with some of the levels shown from fitted retracement have offered some support when both were tested. Look at the MONTHLY Pivot analysis levels. See where MONTHLY S1 is at 1,006.76? That's pretty darned close to the fitted 38.2% retracement of 1,007.68, and may begin to be deemed a more important level of near-term support. Two separate tools giving indication of 1,007 correlative support this month, and may have to wait to look at next WEEKS pivot matrix to see of something near 1,036 shows up? We've noted the WEEKLY/MONTHLY 1,042-1,044 correlations, and yesterday we may have been more bullish at WEEKLY pivot than we were today at WEEKLY R1. The MARKET obviously was. S&P 100 Index Chart - Daily Intervals We can perhaps sense a bit of a "bull trap" in the making this morning as the OEX made a little juke-move above WEEKLY R1 with a session high of 518.54, but the afternoon rally between 12:00 and 01:00 did have the same impact as the OEX pegged 518.29 on that second test. Do bears have the upper-hand? Not hardly as buyers held the 515.29 level. I've said before that I don't like to enter new positions so close to expiration, but I've outlined a potential trade setup to look for tomorrow, where we might look for some option expiration volatility to see a early moved to 512, then a "swoosh" reversal back higher to an expiration close of 520. That would be something if it happened and my only reason for thinking something like this might unfold, is that I do truly believe there was some heavier call selling this summer, where the call selling by institutions in a range-bound market would have had quarterly (September) calls being sold. One way to mitigate or save some positions is to try and get a lower move going into expiration (sell some long stock you're going to lose in the covered calls), and when they get to a destination, turn and close out the calls more aggressively, get a rally going, and buy back equal dollar amounts in different stocks that may be gaining new favor with the market longer-term, which can then spur the rally back to 520. Dow Industrials Chart (INDU) - Daily Intervals INDU and OEX look very similar as it relates to the WEEKLY Matrix. INDU didn't match its early-September highs as closely as the OEX, and while I don't put GREAT weight in Oscillators, INDU's MACD below its SIGNAL is still somewhat cautious and most likely needs that kick above 9,618 to have MACD giving a bullish crossover. The last two weeks, it seems like I've seen a lot of comments about round number support/resistance all from 9,400, 9,500 and 9,600. One level not mentioned yet is 9,700, so let me be the first to mention this level, which would tie to WEEKLY R2 of 9,702. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals Recent economic data hasn't been that "hot," and 80% of the bullish part of me is looking for bearish short-covering to provide the bulk of the upside emphasis after the bounce from $33.00. If I were to grow some fur and take on a bear's technical view of things, imagine myself short 200,000 shares at $33.00, I'd be sweating a little, grasping to the observation that MACD is at relative high levels where pullbacks have come from, but when PRICE action matters, I'm staring at that WEEKLY R1 and hoping like heck it holds resistance so I can get things squared up back at $33.00. Bullish percent results today showed that the very narrow Dow Industrials Bullish % ($BPINDU) remained unchanged and still reads "bull confirmed" at 83.33%. The narrow S&P 100 Bullish % ($BPOEX) was also unchanged and still reads "bull confirmed" at 88%. The narrow NASDAQ-100 Bullish % ($BPNDX) was unchanged and still reads "bear correction" at 78%. The broader S&P 500 Bullish % ($BPSPX) saw a net gain of 3 stocks to point and figure buy signals with the bullish % inching up 0.6% to 82.4%. Still "bull confirmed." And the broadest-of-broad bullish % indicators had the NYSE Composite Bullish % ($BPNYA), which is compiled from roughly 3,000 point and figure charts show a net gain of 0.15%, say 5 stock seeing new point and figure buy signals. Still "bull confirmed" at 73.28% after reversing up to "bull confirmed" in early April at 42%. The NASDAQ Composite Bullish % ($BPCOMPQ) saw a rise of 0.28% (also about 3,000 PnF charts) to 76.68% and still reads "bull confirmed" after reversing up to bull confirmed status in April at 42% bullish. Jeff Bailey ------------------------------------------------------------ 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: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Still Seeking Clarity by Mark Phillips mphillips@OptionInvestor.com Over the past couple weeks, I've been discussing the frustrations I've felt (confirmed by numerous readers) in trying to determine a longer-term direction for this market. Traders that jump on the daily intraday trend in their chosen vehicle don't really need to expend much effort on this pursuit, but for those of us looking at taking positions to hold for weeks and months at a time, the current market action has proved to be frustrating in the extreme. My puzzlement does not really pertain to individual issues so much as it does to the broad market action, as many of the tools I focus on are most directly applied to the major indices. For the sake of our simplicity, I want to limit our focus to the S&P 500, as I think it provides the best view of the overall market, at least with respect to the tools I want to discuss. Aside from price patterns and assorted chart indicators, my two primary long-term tools are the CBOE Volatility index (VIX.X) and the Bullish Percents. They are both rather simple tools, but I have found them to be quite reliable in recent years for calling the major reversal points in the broad market. That is until the past few months, where I have gotten several false "market top" indications, which have then been followed by new highs in the market. It seems as if I've written enough about the VIX over the past year to choke a horse, so I don't want to dwell much on this indicator except to restate its primary benefit. It gives us a fairly good reading on overall market sentiment. Historically, readings above 30 have been indicative of a near-term market bottom (except when fear runs to the extreme as it has on roughly half a dozen occasions in the past 5 years, when it can rise as high as 60) and readings below 20 are indicative of a near-term market top. There's nothing magic about the 20 and 30 levels. Don't think of them as absolute trigger levels, but as areas of interest. When the VIX moves above 30 and then begins to reverse back down, that's when we start looking for a way to play the overall market in a bullish manner. Likewise, when it drops below 20 and then reverses upwards, we start looking for bearish trading opportunities. Or as the old saying goes, "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." I like to think of the Bullish Percent (BP) reading as a big- picture overbought/oversold indicator. Typically readings over 70% indicate an overbought market and readings below 30% denote an oversold market. But as we know from our study of any oscillator, overbought can always become more overbought and oversold can become more oversold. Basically, all the BP readings are telling us is the percentage of stocks in the chosen index that are on a PnF Buy signal. When that number gets over 70% and begins to reverse, we've normally got a pretty reliable indication of a near-term top in the market. Just as an upward reversal from a reading below 30% tends to indicate a near-term bottom is in place. The typical BP readings on the PnF chart give indications of Bull Confirmed, Bear Alert, etc. But I've found it rather difficult to ascertain accurate turning points with the BP charts in this format. Fortunately for me, one of my astute readers (Thanks, Brian!) emailed me last year with a different approach that I had never considered. Instead of displaying the BP reading in a PnF format, we can display it in a line format on the StockCharts.com site. Overlay a 10-dma on the BP line and look for a bearish cross of the BP line under the 10-dma when BP is above 70% (Sell signal) and a bullish cross of the BP line above the 10-dma when the BP is below 30% (Buy Signal). To add confirmation to this picture, we use a 20-period CCI oscillator and look for the crossovers into and out of the +/-100 zones to define strength or weakness. Paying attention to these two simple indicators has been quite fruitful over the past few years, so you can imagine that I've been a bit irritated in their failure to accurately call a top in the current market. Fortunately, I've got some bright readers out there that have taken the basic concepts I've written about in the past, tweaked and combined them to come up with a better mousetrap. Before we delve into their discoveries though, let's look at the basic setup that I've been using to define bearish signals on the SPX BP chart. 12-Month SPX Bullish Percent Sharp Chart Alright, the picture portrayed there is old news to those of you that have been with me awhile. We saw three consecutive BP sell signals followed by a steady reversal that took the SPX BP right back to its highs. But this is where the interesting observations start to come into play. Let's start with the one I got from Brian (who incidentally, was the guy that initially turned me onto the idea of using the SharpChart view to look at Bullish Percent). "Recently, I began using a relative strength of SPX vs. the stock with a 10 bar moving average. I coupled this with a Money Flow, also with a 10 bar moving average. Look at bar charts with these two indicators in daily, weekly and even monthly time frames. This shows that the stock is getting stronger/weaker than the broad market and money is moving in/out of it, too. Of course this setup isn't perfect, but I'm finding it to be a pretty good screen before putting on directional short to intermediate term plays." Now, my charting program doesn't have the Money Flow indicator that Brian mentioned, but that's not the critical issue. He reminded me that we can use various oscillators on the SPX and look for relative strength and weakness between the current action and that seen in the past. If we see lower oscillator highs along with the higher price highs that have been the case lately, then we can make a case for bearish divergence. Now I know this isn't exactly what Brian was pointing at, but I think its two sides of the same coin. As Brian correctly points out, don't just look at the daily. See if there is a similar divergent pattern on the weekly or even monthly timeframes. Remember, the longer the timeframe in which this divergence shows up, the stronger the signal it provides. So I went back and loaded up my daily, weekly and monthly SPX charts and guess what? Particularly on the weekly and monthly charts, we've got some pretty compelling bearish divergence setting up. It isn't complete yet, but take a look at the charts below and I think you'll see what I do. Notice that I used three different oscillators and they're all telling me the same thing. Weekly Chart of the SPX With Oscillators I selected three different oscillators at random from my toolbox and applied them to the SPX weekly chart above and Voila! Every one of them is telling me the same thing. I have POTENTIAL bearish divergence setting up on the Stochastics, Momentum, and Williams %R oscillators. None of the oscillators has finished topping yet, so the formations are not complete, but it gives us something concrete that we can monitor. To abort this bearish divergence setup, we'll need to see these oscillators move to higher levels than that seen in roughly the April/May timeframe before falling back under the low of the troughs put in place in late July/early August. We're looking at a weekly timeframe and that means we can place a fair amount of emphasis on this divergence if it does in fact confirm with these oscillators falling below the August lows ahead of taking out the spring highs. In the pursuit of completeness, I repeated the application of these very same oscillators to the monthly chart of the SPX, and there the picture is, if anything, more compelling. Monthly Chart of the SPX With Oscillators I know some of you may find this confusing, but once again we have bearish divergence at work, with lower price highs in opposition with much higher oscillator highs. In order to negate this very bearish chart setup, the SPX will need to trade through the late 2001/early 2002 price highs near 1160 before these oscillators tip over and fall out of overbought territory. That seems like an awfully tall order for the bulls unless that economic recovery comes on strong and soon. The main takeaway from this exercise is that if we are looking at trying to determine what is going on in the longer-term view, then we have to look at the longer term charts. And one of my favorite ways to evaluate long-term strength or weakness is through the use of oscillator divergences. My heartfelt thanks goes out to Brian for giving me the inclination to delve into this view! Please remember though, that these divergent patterns must complete before they will truly be tradable. They are not actionable yet. Believe it or not, I'm completely out of time today and I haven't even gotten to the really interesting stuff. One of my long-time readers (Gumby) sent me some very interesting observations on both the Bullish Percents and the VIX -- talk about hitting all the high notes -- and I really was hoping to get to it today. But time and space constraints must be observed. Next week, we'll delve into those additional observations. And I think by the time we're through, we'll all be ready to check out of the asylum -- although I'll probably only be given a day pass. Have a great week! Mark ------------------------------------------------------------ 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. 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The Option Investor Newsletter Wednesday 09-17-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Call - AMGN Spreads, Combinations & Premium-Selling Plays: A Necessary Consolidation! Watch List: Following the ABC's Updated on the site tonight: Market Posture: Just Another Quiet Trading Day ------------------------------------------------------------ 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: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED 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: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** Amgen, Inc. - AMGN - close: 69.63 change: -0.18 stop: 66.75 -Company Description- The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. - Most Recent Update (Thursday, May 15, 2003)- AMGN appeared to be Teflon-coated throughout the rise from last fall, right through tagging its most recent high near $72 in the middle of July, as nothing seemed able to drag the stock back very far or for very long. Finally, after hitting that $72 level (exactly reaching its PnF bullish price target), AMGN pulled back and has spent the past two months consolidating in a very healthy manner, and in the past few weeks has been finding support at the long-term ascending trendline that was established between late- September and mid-February. That trendline has been gradually lifting AMGN higher and last Friday the bulls pushed it back above its 50-dma ($68.32) and we've seen some nice follow-through already this week. Looking at the PnF chart, we can see that it is right on the verge of giving a new PnF Buy signal and all it needs to do is trade the $70 level. Since AMGN is currently on a mild PnF Sell signal right now (which looks a bit like a bear trap), that allows us to get a new vertical count from this Buy signal if we can get it. Just trading $70 will give us a bullish vertical count of $81 and that's ample upside potential to keep everybody happy. While momentum traders may be content to enter on a trade at $70 and with that new PnF Buy signal, we would advise caution due to the fact that price is pressing right up against the upper Bollinger band, which is currently flat. This likely means a couple tests will be required for AMGN to push and hold above the $70 level. So our preferred strategy would be to wait for the trade at $70 to give the PnF Buy signal and then look to enter on an intraday pullback in the $68-69 area, with the 50-dma serving as key support. Note that the ascending trendline and the 20-dma currently line up in the $67.25-67.50 area and that should be very strong support if this bullish move has any life at all. We're initially placing our stop at $66.75, which is also just under last Wednesday's intraday low. Since AMGN trades so much in sympathy with the overall Biotechnology index (BTK.X) look for confirming strength from the BTK before playing. - Play of the Day Comments - The BTK biotech index was one of the few sectors closing in the green today. If it can mount a breakout over 490 then AMGN should be able to lead a move above $70 (and vice versa). If not, and the market pulls back, then look for a dip from the $68 level. - Suggested Options - Shorter Term: The October 70 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 January 75 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 January 70 Call. BUY CALL OCT-65 YAA-JM OI=16013 at $5.30 SL=3.25 BUY CALL OCT-70 YAA-JN OI=34773 at $1.95 SL=1.00 BUY CALL JAN-70 RQB-AN OI=21519 at $4.20 SL=2.50 BUY CALL JAN-75 RQB-AO OI=10328 at $2.25 SL=1.10 Annotated Chart of AMGN Picked on September 16th at $69.81 Change since picked: +0.18 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 8.26 mln 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: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Necessary Consolidation! By Ray Cummins Stocks retreated Wednesday with declines in Dow component Dupont (NYSE:DD) leading the blue-chip segment lower while weakness in energy shares weighed on the broader market. The Dow Jones Industrial Average fell 21 points to 9,546, despite gains in tobacco giant Altria Group (NYSE:MO) and a 52-week high for International Business Machines (NYSE:IBM). Hi-tech issues also slumped with the NASDAQ composite down 4 points at 1,883 as profit-taking emerged in the semiconductor segment. The Standard & Poor's 500 Index slipped 3 points to 1,025 as oil, oil service, natural gas, and airline issues moved lower. Trading volume was moderate at 1.3 million on the NYSE and 1.9 billion on the NASDAQ. Declining issues outpaced advancing shares by a 6 to 5 margin on both the Big Board and the technology exchange. Treasurys edged higher with bullish activity across the maturity spectrum. The 10-year note added 27/32 to yield 4.18% while the 30-year bond swelled 1 22/32 to yield 5.09%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 9/16/03 *************** 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. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) 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 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 trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield DRIV SEP 17 17.15 28.45 $0.35 4.88% 2.04% IMCL SEP 30 28.85 45.69 $1.15 8.88% 3.99% LLTC SEP 32 31.75 39.22 $0.75 4.40% 2.36% OVTI SEP 30 29.15 43.52 $0.85 6.18% 2.92% SINA SEP 22 21.90 39.66 $0.60 5.80% 2.74% ZRAN SEP 20 19.60 25.59 $0.40 4.92% 2.04% CBK SEP 22 22.80 28.16 $0.30 3.42% 1.32% IMCL SEP 30 29.45 45.69 $0.55 5.18% 1.87% LLTC SEP 32 32.00 39.22 $0.50 3.64% 1.56% NVLS SEP 30 29.55 38.55 $0.45 3.92% 1.52% OVTI SEP 30 29.35 43.52 $0.65 5.83% 2.21% PCLN SEP 25 24.65 37.27 $0.35 4.03% 1.42% PHTN SEP 22 22.10 32.73 $0.40 5.24% 1.81% RIMM SEP 20 19.60 32.37 $0.40 5.78% 2.04% URBN SEP 40 39.40 49.50 $0.60 3.78% 1.52% AEIS SEP 17 17.10 22.75 $0.40 5.97% 2.34% AEIS SEP 20 19.50 22.75 $0.50 7.31% 2.56% FLML SEP 17 17.00 37.44 $0.50 9.88% 2.94% IMCL SEP 35 34.50 45.69 $0.50 4.45% 1.45% JCOM SEP 25 24.70 43.82 $0.30 4.30% 1.21% MGAM SEP 22 22.20 27.61 $0.30 4.08% 1.35% NFLX SEP 22 22.25 35.90 $0.25 4.01% 1.12% NTES SEP 40 39.55 62.31 $0.45 4.13% 1.14% PHTN SEP 25 24.60 32.73 $0.40 5.15% 1.63% RIMM SEP 22 22.15 32.37 $0.35 5.48% 1.58% SINA SEP 25 24.70 39.66 $0.30 4.23% 1.21% ANPI SEP 35 34.55 50.67 $0.45 4.69% 1.30% AEIS SEP 20 19.75 22.75 $0.25 5.01% 1.27% BRKS SEP 20 19.75 25.65 $0.25 5.72% 1.27% FLML SEP 22 22.05 37.44 $0.45 8.41% 2.04% LLTC SEP 37 37.10 39.22 $0.40 3.84% 1.08% OSIP SEP 30 29.65 36.40 $0.35 5.39% 1.18% NFLX SEP 27 27.05 35.90 $0.45 6.69% 1.66% NTES SEP 40 39.60 62.31 $0.40 4.59% 1.01% NVLS SEP 37 36.85 38.55 $0.65 6.00% 1.76% PHTN SEP 27 27.15 32.73 $0.35 4.93% 1.29% QCOM SEP 37 37.05 44.89 $0.45 4.27% 1.21% RCII SEP 28 27.74 32.29 $0.26 3.49% 0.94% FLML SEP 25 24.80 37.44 $0.20 5.16% 0.81% NTES SEP 45 44.65 62.31 $0.35 5.15% 0.78% KVHI SEP 25 24.80 28.31 $0.20 4.39% 0.81% TTWO SEP 32 32.20 35.82 $0.30 4.89% 0.93% Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CVTX SEP 32 32.95 26.53 $0.35 5.65% 1.06% MEDI SEP 40 40.65 37.78 $0.65 4.68% 1.60% RJR SEP 35 35.55 34.19 $0.55 4.15% 1.55% CVTX SEP 30 30.45 26.53 $0.45 8.12% 1.48% APC SEP 45 45.55 42.08 $0.55 4.55% 1.21% JCOM SEP 40 40.70 43.82 ($3.12) 0.00% 1.72% * ANPI SEP 50 50.35 50.67 ($0.32) 0.00% 0.70% * Positions in j2 Global Communications (NASDAQ:JCOM) and Angiotech (NASDAQ:ANPI), which were submitted by our guest editor on 9/3, should have been closed early due to recent upside activity. The bearish position in Accredo Health (NASDAQ:ACDO) has previously been closed to limit losses. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status KSS 60.64 59.91 SEP 50 55 0.60 54.40 $0.60 Open WHR 66.05 69.95 SEP 55 60 0.60 59.40 $0.60 Open XAU 82.67 92.43 SEP 70 75 0.55 74.45 $0.55 Open APPX 43.86 38.47 SEP 30 35 0.55 34.45 $0.55 Open CHIR 46.33 56.75 SEP 40 42 0.25 42.25 $0.25 Open TIF 37.42 39.02 SEP 30 35 0.45 34.55 $0.45 Open AMZN 43.76 46.24 SEP 37 40 0.30 39.70 $0.30 Open KLAC 54.35 57.54 SEP 47 50 0.30 49.70 $0.30 Open RCII 30.32 32.29 SEP 26 27 0.24 27.76 $0.24 Open BBY 51.45 52.66 SEP 42 45 0.20 44.80 $0.20 Open MUR 53.62 57.57 SEP 45 50 0.25 49.75 $0.25 Open VIP 54.95 57.80 SEP 45 50 0.50 49.50 $0.50 Open SNDK 61.21 63.23 SEP 50 55 0.40 54.60 $0.40 Open SYMC 58.48 61.06 SEP 50 55 0.40 54.60 $0.40 Open The new position in Murphy Oil (NYSE:MUR) was not available at the target price due to the "gap-up" at the open, on the day after the play was offered. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status UNH 48.79 50.08 SEP 57 55 0.30 55.30 $0.30 Open WLP 76.49 78.81 SEP 90 85 0.50 85.50 $0.50 Open CTX 73.74 77.00 SEP 85 80 0.65 80.65 $0.65 Open NBIX 49.52 53.50 SEP 60 55 0.60 55.60 $0.60 Open? MRK 52.12 53.79 SEP 60 55 0.55 55.55 $0.55 Open APOL 60.52 68.45 SEP 70 65 0.60 65.60 ($2.85) Open KBH 56.31 59.50 SEP 65 60 0.50 60.50 $0.50 Open? LLY 62.10 61.00 SEP 70 65 0.30 65.30 $0.30 Open SOHU 34.05 39.67 SEP 45 40 0.30 40.30 $0.30 Open? The spread in Apollo Group (NASDAQ:APOL) should have been closed last Friday, for a smaller than published loss, when the issue moved above the sold (call) strike at $65. Intuit (NASDAQ:INTU) and the older play in Eli Lilly (NYSE:LLY), which is profitable, have previously been closed to limit losses. KB Home (NYSE:KBH) and Sohu.com (NASDAQ:SOHU) are on the early-exit "watch" list. Synthetic Positions ******************* No Open Positions Debit Straddles *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ABC 60.00 57.47 NOV 60 60 7.25 7.75 Open Amerisourcebergen (NYSE:ABC) has achieved profitability in a short time but if the trend of the issue reverses direction, traders may need to "leg-out" of the play to preserve capital. 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 new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED 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. ************** APPX - American Pharma Partners $38.87 *** On The Move! *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty drug company that develops, manufactures and markets injectable pharmaceutical products, focusing on the oncology, anti-infective and critical care markets. The company is one of the largest producers of injectables, with more than 130 generic products in more than 350 dosages and formulations. APPX has acquired the exclusive North American rights to manufacture and market ABI-007, a proprietary nanoparticle injectable oncology product that has completed Phase III clinical trials for metastatic breast cancer and for which the FDA has granted "Fast Track" designation. The NDA submission has commenced and it is anticipated that the entire submission will be completed in 2003. The company believes that it has established the only commercial scale protein-engineered nanoparticle manufacturing capability in the United States. APPX - American Pharma Partners $38.87 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 30 AQO VF 228 0.45 29.55 5.2% 1.5% * SELL PUT OCT 33 AXD VV 1,195 1.05 32.33 9.0% 3.2% SELL PUT OCT 35 AQO VG 402 1.45 33.55 10.5% 4.3% ************** CELL - Brightpoint $31.65 *** New 2-Year High! *** Brightpoint (NASDAQ:CELL) is one of the largest distributors of mobile phones. Brightpoint supports the worldwide wireless telecommunications and data industry, providing quickly deployed, flexible and cost effective third party solutions. The firm's innovative services include distribution, channel management, fulfillment, eBusiness solutions and other outsourced services that integrate seamlessly with its customers. The company is planning to split its common stock 3-for-2 on October 15 for shareholders of record on September 30. CELL - Brightpoint $31.65 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 25 ULN VE 119 0.60 24.40 8.2% 2.5% * SELL PUT OCT 30 ULN VF 51 2.00 28.00 14.6% 7.1% ************** CEPH - Cephalon $48.06 *** Trading Range? *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril for the treatment of partial seizures associated with epilepsy. CEPH - Cephalon $48.06 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 40 CQE VH 1,490 0.85 39.15 6.7% 2.2% * SELL PUT OCT 45 CQE VI 1,595 2.00 43.00 10.5% 4.7% ************** CVTX - CV Therapeutics $27.49 *** Bottom Fishing! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's New Drug Application (NDA) for Ranexa (ranolazine) for the treatment of chronic angina has been filed at the U.S. FDA. Tecadenoson (CVT-510), an A1-adenosine receptor agonist, is being developed for the potential reduction of rapid heart rate during atrial arrhythmias. CVT-3146, an A2A-adenosine receptor agonist, is being developed for the potential use as a pharmacologic agent in cardiac perfusion imaging studies. Adentri, an A1-adenosine receptor antagonist, is being developed by the company's partner, Biogen, for the potential treatment of acute and chronic congestive heart failure. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into human clinical testing. CVTX - CV Therapeutics $27.49 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 20 UXC VD 709 0.30 19.70 4.9% 1.5% * SELL PUT OCT 22.5 UXC VX 3,329 0.70 21.80 9.9% 3.2% SELL PUT OCT 25 UXC VE 664 1.30 23.70 12.6% 5.5% ************** DIGE - Digene $43.40 *** Another 2-Year High! *** Digene (NASDAQ:DIGE) develops, manufactures and markets proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. DIGE - Digene $43.40 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 35 QDG VG 120 0.40 34.60 4.1% 1.2% * SELL PUT OCT 40 QDG VH 76 1.55 38.45 9.5% 4.0% ************** HEPH - Hollis-Eden Pharmaceuticals $28.23 *** Rally Mode! *** Hollis-Eden Pharmaceuticals (NASDAQ:HEPH), a development-stage pharmaceutical company, is engaged in the discovery, development and commercialization of products for the treatment of immune system disorders and hormonal imbalances. HEPH's development efforts target a series of indications in which the body is unable to mount an appropriate immune response: radiation and chemotherapy induced immune suppression and immune dysregulation caused by infectious diseases like HIV, malaria and tuberculosis. The company's initial technology development efforts are focused on a series of potent hormones and hormone analogs that are key components of the body's natural regulatory system. HEPH - Hollis-Eden Pharmaceuticals $28.23 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 22.5 QGQ VX 120 0.65 21.85 9.8% 3.0% * SELL PUT OCT 25 QGQ VE 173 1.25 23.75 12.8% 5.3% ************** LLTC - Linear Technology $38.77 *** Next Leg Up? *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $38.77 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 32.5 LLQ VZ 146 0.30 32.20 3.0% 0.9% TS SELL PUT OCT 35 LLQ VG 486 0.70 34.30 5.3% 2.0% * SELL PUT OCT 37.5 LLQ VU 597 1.50 36.00 9.1% 4.2% ************** NFLX - Netflix $35.75 *** Entry Point? *** 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. NFLX - Netflix $35.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 27.5 QNQ VY 2,004 0.35 27.15 4.4% 1.3% * SELL PUT OCT 30 QNQ VF 735 0.80 29.20 8.1% 2.7% ************** RIMM - Research In Motion $33.15 *** Hot Sector! *** 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. RIMM - Research In Motion $33.15 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 27.5 RUL VY 553 0.60 26.90 6.9% 2.2% * SELL PUT OCT 30 RUL VF 741 1.10 28.90 9.3% 3.8% ************** VRNT - Verint Systems $25.52 *** Testing All-Time Highs! *** Verint Systems (NASDAQ:VRNT), headquartered in Melville, New York, is a leading provider of analytic software-based solutions for communications interception, video security and surveillance, and enterprise business intelligence. Verint software, which is used by over 1,000 organizations in over 50 global countries, generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data sent from multiple communications networks. Verint Systems is a subsidiary of Comverse Technology (NASDAQ:CMVT). VRNT - Verint Systems $25.52 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 22.5 JOQ VX 29 0.50 22.00 6.2% 2.3% * SELL PUT OCT 25 JOQ VE 20 1.35 23.65 11.7% 5.7% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** ANF - Abercrombie & Fitch $30.49 *** Bullish Retailer! *** Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries as specialty retailers, operates stores selling casual apparel, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, abercrombie and Hollister Co. brands. As of February 2, 2002, the company operated 491 stores in the United States. A&F's stores and point-of-sale marketing are designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are carefully planned and coordinated to create a shopping experience that is consistent with the A&F lifestyle. ANF - Abercrombie & Fitch $30.49 PLAY (conservative - bullish/credit spread): BUY PUT OCT-25.00 ANF-VE OI=94 ASK=$0.25 SELL PUT OCT-27.50 ANF-VY OI=358 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$27.20 ************** CFC - Countrywide Financial $75.19 *** Consolidation Complete! *** Countrywide Financial (NYSE:CFC), formerly Countrywide Credit Industries, is a holding company that originates, purchases, sells and services mortgage loans through its major subsidiary, Countrywide Home Loans. The company's mortgages are principally prime credit first-lien mortgage loans secured by single one- to four-family residences (prime credit first mortgages). The firm also offers home equity loans and sub-prime credit loans. CFC, through its other wholly owned subsidiaries, offers products and services that are largely complementary to its mortgage banking business, including lender-placed mortgage insurance, insurance brokerage, mortgage-backed securities brokerage and underwriting, brokerage of bulk servicing transactions, loan processing and servicing in foreign countries, and retail banking. The company conducts its business through four segments: Insurance Segment, Capital Markets Segment, Global Segment and Banking Segment. CFC - Countrywide Financial $75.19 PLAY (conservative - bullish/credit spread): BUY PUT OCT-65.00 CFC-VM OI=3012 ASK=$0.55 SELL PUT OCT-70.00 CFC-VN OI=2576 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$69.50 ************** MO - Altria Group $44.65 *** Favorable Legal Decision! *** Altria Group (NYSE:MO), formerly Philip Morris Companies, is a holding company and the parent company of Philip Companies. The company's wholly owned subsidiaries, Philip Morris USA (PM USA), Philip Morris International (PMI) and its majority-owned (84.2%) subsidiary, Kraft Foods (Kraft), are engaged in the manufacture and sale of various consumer products, including cigarettes, foods and beverages. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary, is primarily engaged in leasing activities. The company's former wholly owned subsidiary, Miller Brewing Company, was engaged in the manufacture and marketing of various beer products prior to the merger of Miller into South African Breweries plc in 2002. MO - Altria Group $44.65 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-40.00 MO-VH OI=19837 ASK=$0.30 SELL PUT OCT-42.50 MO-VV OI=1831 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$42.15 ************** OHP - Oxford Health $38.60 *** On The Rebound? *** Oxford Health Plans (NYSE:OHP) is a healthcare company providing health benefit plans in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice plans and also third-party administration of employer-funded benefit plans. The company offers its products through its HMO subsidiaries and also through Oxford Health Insurance, a health insurance subsidiary. OHP - Oxford Health $38.60 PLAY (conservative - bullish/credit spread): BUY PUT OCT-32.50 OHP-VZ OI=139 ASK=$0.20 SELL PUT OCT-35.00 OHP-VG OI=477 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$34.75 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option 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 options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very 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 price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond 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. *************** APC - Anadarko Petroleum $41.55 *** Next Leg Down? *** Anadarko Petroleum (NYSE:APC), through RME Petroleum Company, RME Holding Company, Anadarko Canada Energy, Anadarko Canada Corporation, RME Land and Anadarko Algeria Company, is a global independent oil and gas exploration and production company. The The company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the shallow and deep waters of the Gulf of Mexico, as well as in Canada and Algeria. APC is also active in Venezuela, Qatar, Oman, Egypt, Australia, Tunisia, Congo and Gabon. APC - Anadarko Petroleum $41.55 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 45 APC JI 5,813 0.45 45.45 3.1% 1.0% TS SELL CALL OCT 42.5 APC JV 2,858 1.10 43.60 6.2% 2.5% ************** TRMS - Trimeris $31.30 *** Sell-Off In Progress! *** Trimeris (NASDAQ:TRMS) is a biopharmaceutical firm engaged in the discovery, development and commercialization of novel therapeutic agents for the treatment of viral disease. The core technology platform of fusion inhibition is based on blocking viral entry into host cells. FUZEON, recently approved in the U.S. and the European Union, is the first in a new class of anti-HIV drugs called fusion inhibitors. Trimeris' new fusion inhibitor product candidate, T-1249, has received fast track status from the FDA and is in Phase I/II clinical testing. Trimeris is developing FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche Ltd. TRMS - Trimeris $31.30 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 40 RQM JH 1,004 0.40 40.40 5.7% 1.0% * SELL CALL OCT 35 RQM JG 3,019 1.20 36.20 11.7% 3.3% ************** BRCM - Broadcom $26.32 *** Profit-Taking Underway? *** 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. BRCM - Broadcom $26.32 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 30 RCQ JF 5,821 0.50 30.50 6.5% 1.6% * SELL CALL OCT 27.5 RCQ JY 8,993 1.20 28.70 10.8% 4.2% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** FRX - Forest Labs $49.56 *** Trading Range? *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, an SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Labs $49.56 PLAY (conservative - bearish/credit spread): BUY CALL OCT-60.00 FHA-JL OI=3525 ASK=$0.40 SELL CALL OCT-55.00 FHA-JK OI=4221 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$55.60 ************** KO - Coca-Cola $43.01 *** Thomas Weisel Downgrade! *** Coca-Cola (NYSE:KO) is primarily engaged in the manufacture, sale and distribution of nonalcoholic beverage concentrates and syrups in markets across the world. The company manufactures and sells soft drink and noncarbonated beverage concentrates (referred to as beverage bases) and syrups, including fountain syrups. The company also manufactures and sells some finished beverages, both carbonated and noncarbonated, including juice-drink products and water products. In addition, the company has ownership interests in numerous bottling and canning operations, including Coca-Cola Enterprises, Coca-Cola Hellenic Bottling Company S.A., Coca-Cola Amatil Limited, Panamerican Beverages, and Coca-Cola FEMSA, S.A. de C.V. KO - Coca-Cola $43.01 PLAY (very conservative - bearish/credit spread): BUY CALL OCT-47.50 KO-JW OI=2206 ASK=$0.10 SELL CALL OCT-45.00 KO-JI OI=4728 BID=$0.30 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$45.25 ************** MEDI - MedImmune $37.03 *** Revenge Play! *** 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 four products, Synagis, Ethyol and CytoGam and FluMist. MedImmune co-markets the FluMist vaccine with Wyeth and the company plans an initial product run of 4 to 5 million doses of FluMist for the 2003-2004 flu season but hasn't given a sales projection for the upcoming quarter. MEDI - MedImmune $37.03 PLAY (conservative - bearish/credit spread): BUY CALL OCT-42.50 MEQ-JV OI=128 ASK=$0.40 SELL CALL OCT-40.00 MEQ-JH OI=5255 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$40.30 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** Following the ABC's Allergan Inc - AGN - close: 80.69 change: -0.31 WHAT TO WATCH: Shares of AGN have been consolidating under resistance near $81.00-81.50 for months. The recent "strength" near the $80 level has a mild trend of higher lows suggesting bulls are building up steam for a breakout. The point-and-figure chart is currently showing a quadruple-top and trade at $82.00 would be the breakout! Chart= --- AutoZone Inc - AZO - close: 87.60 change: +0.10 WHAT TO WATCH: We're a bit early but AZO might be a good candidate to put on your watch list. The stock has pulled back to its previous highs near $87.50. The last two weeks have seen shares bounce above the $86 level several times. We suspect that a move above $88.50-89.00 might portend a retest of the current highs or better. Chart= --- Bear Stearns - BSC - close: 72.47 change: -0.24 WHAT TO WATCH: Yesterday shares of BSC broke out to new relative highs above resistance at $72.00. Following strength in the XBD broker-dealer index bulls probably expected some follow through. Unfortunately what they got today was profit taking directly ahead of BSC's earnings report tomorrow. Will investors sell the news? Or will BSC deliver promising forecasts for the future in their conference call? Chart= --- Caterpillar - CAT - close: 70.23 change: +0.53 WHAT TO WATCH: The stock may be on a current P&F sell signal but it could be forming a bullish reversal. Shares have produced both lower highs and lower lows since the top near $74 in mid- August. The trend reminds us of a bullish flag consolidation pattern. Now that the stock has bounced from the $67 level and its simple 50-dma we are looking for a breakout through the trend of lower highs. The close above $70 today is a good start and its MACD is beginning to curl back towards a bullish signal. Chart= ************** MARKET POSTURE ************** Just Another Quiet Trading Day To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_091703.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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