The Option Investor Newsletter Wednesday 10-01-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Welcome to the Fourth Quarter! Futures Wrap: Treasuries rise, Equities Rally, Metals Drift Index Trader Wrap: Let's make sure they work Traders Corner: The Perfect Contrarian Indicator Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 10-01-2003 High Low Volume Adv/Dcl DJIA 9469.20 +194.14 9472.76 9276.80 1.79 bln 2360/ 490 NASDAQ 1832.25 + 45.31 1832.25 1796.09 1.81 bln 2188/ 924 S&P 100 510.33 + 11.77 510.33 498.56 Totals 4548/1414 S&P 500 1018.22 + 22.25 1018.22 995.97 W5000 9859.56 +209.88 9859.56 9649.68 RUS 2000 500.32 + 12.64 500.35 487.68 DJ TRANS 2736.34 + 62.48 2736.51 2672.64 VIX 21.07 - 1.65 22.82 20.99 VXN 31.33 - 1.50 32.70 31.11 52wk Highs 285 52wk Lows 20 PUT/CALL 0.79 TRIN 0.79 ******************************************************************* Welcome to the Fourth Quarter! by James Brown It was a big day for the bulls as investors looked ahead to the up coming Q3 earnings report and the fourth quarter of 2003. Yesterday's negative data from the PMI report and the Consumer Confidence numbers suddenly had traders on the defensive. The mood on Wall Street was guarded as everyone expected potentially devastating news that the economic recovery had fumbled in this morning's ISM report. Thankfully, the ISM numbers, while less than expected were still positive and the markets rallied! Economists had previously been looking for a headline number of 54.9 percent in the September ISM, up from August's 54.7. Yet Monday's surprisingly negative economic reports had investors bracing for bad news. When today's ISM report unveiled a slight drop to 53.7 Wall Street breathed a sigh of relief. Readings over 50 indicate that the majority of manufacturers surveyed said business was improving or at least holding steady. Today's report marks the third consecutive month of expansion. Probably the most impressive component of the report was the new orders number, which came in at 60.4 - its highest level in 16 months. Attributing to the positive mood was good news from the research firm Challenger, Gray and Christmas. They tally planned corporate layoffs each month and September marked yet another decline. Challenger said that the last four months of the year tend to be the heaviest for corporate layoffs and they were surprised by the drop to 76.5K in September, down 4 percent from August and the lowest level since June. Currently, corporate America has announced more than 872K layoffs this year, which is improvement from last year but analysts still expect 2003 to break the 1 million mark. The positive economic reports sent shorts scrambling and many feel that a significant part of the move today was definitely short covering. Today's market advance was both powerful and extremely broad-based with all of the benchmark indices up more than 2 percent. The DJIA added 194 points or 2.09% to close at 9469. The NASDAQ Composite added 2.53% to close back above the 1800 level. The S&P 500 jumped 22 points or 2.23% to break back above the 1000 mark. The Russell 2000 closed back above the 500 mark with a 2.59% gain and the Wilshire 5000 index added almost 210 points to close at 9859. Foreign exchanges got into the act as well. The Japanese NIKKEI jumped 142 points to 10,361. The Hang Seng added 88 points to 11,229. The British FTSE rallied 1.9% to 4169 and the German DAX added 2.24% to 3329. I know I'm repeating myself here but the rally here at home really was very broad. Every major sector index closed in the green with many adding more than two percent by the close. Homebuilding stocks were on fire today as the recent drop in rates has given them a second wind and today's construction report showed private residential construction hit an all-time high in August. The DJUSHB homebuilders index jumped 6.15% to mark its own all-time high. The retail sector was also very strong with luxury goods and specialty stores surging. The RLX retail index added more than 3 percent to close back above its simple 50-dma. Disk drives, software, networking, financials, brokers, oil and defense were also very strong. Market internals were very bullish with advancing stocks trampling decliners 23 to 5 on the NYSE and 22 to 9 on the NASDAQ. Up volume was more than five times down volume on the NYSE and up volume outpaced down volume by 2-to-1 on the NASDAQ. Chart of the DJIA: Chart of the NASDAQ: Chart of the S&P 500: The strong ISM data pushed Dow components United Technologies (UTX) and Caterpillar (CAT), both major manufacturers, to gains of more than 3.3 and 3.6 percent, respectively. The construction data this morning, while less than expected, helped build Dow component Home Depot's (HD) 3.29% gain. Outpacing them all were shares of Intel (INTC), which added more than four percent. Analysts also welcomed positive news from 3M last night who closed its first day of a two-day investor meeting by reaffirming its growth forecast for 12 to 14 percent in 2004. Investors were encouraged by even more good news from the likes of Clear Channel Communications (CCU) and Eli Lilly & Co (LLY). CCU told investors that its EBITDA numbers would be in the mid-to-high single digits for the third quarter of 2003. This news comes on the heels of an earnings warning from Viacom who told investors last month that earnings would miss due to slow local advertising for their radio network. Meanwhile, shares of LLY rose by more than six percent after announcing that it had received its second approval letter from the FDA for its Cymbalta treatment for depression. The FDA told LLY that no further clinical studies were needed but the government agency was still working with the company to clean up some quality control issues. One of the big stories of the day was the September auto sales numbers. General Motors (GM), the largest of the big three, said September U.S. sales were good. Car sales jumped 10 percent while truck sales surged 15 percent. However, the company did state that it would now offer 0% financing for its 2004 vehicles and its current promotions on 2003 vehicles would last through Jan. 2nd, 2004. This is going to put pressure on Ford and Chrysler to follow suit with their own incentives on the new 2004 models as all of them struggle to keep inventory flowing. Ford (F) said overall sales in the U.S. rose by 5 percent in September, lead by gains with their new F150 truck model. Meanwhile, Chrysler Group, part of DaimlerChrysler (DCX), was left in the dust as U.S. September sales fell by 15 percent. Minivans dropped 9 percent, trucks dumped 13 percent, SUV's shed 18 percent and car sales slid 22 percent. Is it just me or have the 2003 close out ads on TV suddenly become a blur. We all know that it happens every year. Dealers start blowing out the remaining 2003 models to "make room" for the 2004's but it seems like we're being bombarded with ads from almost every dealer. We've had two years of 0% financing with ever increasing incentives and skeptics may be wondering if there are any consumers left to take advantage of them. Tomorrow is a new day but given the markets' close near its highs for the session many believe the rally will continue into Thursday. We do have a couple of economic reports to watch for as the August factory orders are released and the weekly unemployment claims are reported. Economists are looking for a small bump in jobless claims towards the 395,000 level, up from last week's 381,000 but as long as the number remains below 400,000 then bullish investors probably won't notice. The big report that Wall Street is looking for is Friday's jobs report and unemployment rate, which comes out before the opening bell. This might stall any advance Thursday afternoon as traders hedge their bets or step back to wait for the result. Keep in mind that next week we'll hear from some early Q3 earnings reports with Yahoo (YHOO) reporting on October 8th. Then the floodgates will open on Tuesday, October 14th. ************ FUTURES WRAP ************ Treasuries rise, Equities Rally, Metals Drift Jonathan Levinson The first of what has tended to be a bearish month saw huge gains in equity futures, with ES and NQ adding more than 2%, YM falling just shy. Treasuries advanced slightly while precious metals traded sideways despite weakness in the US Dollar Index. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. 15 minute chart of the US Dollar Index The bulk of yesterday’s buying in the dollar wound up underwater today as the US Dollar Index sunk below the 92.50 level. Predictably, commodities valued in US Dollars rose, though only slightly, with the CRB adding .62 to close at 244.28. Coffee, lean hogs and soybean futures led the advance. Surprisingly, precious metals were negative though most of the session. Whether this is merely technical selling in the metals, or whether the various central banks admitting to intervention in the huge forex markets are covering their tracks by using some of their spare change to sell the miniscule metals markets, we can only guess. Whatever the case, gold and silver failed to advance today alongside weakness in the US Dollar Index. Daily chart of December gold December gold traded both sides of unchanged today, printing a high of 387.10 and a low of 383.60. The move changed nothing on the daily cycle chart or within the chart patterns we’ve been following, and it was in most respects a “nothing” day. Given the dollar weakness as discussed above, I find it significant, but price-wise, today merely ran the clock. December gold was lower by .10 at 386 as of this writing, with HUI up 1.42 at 196.76, XAU +.50 at 91.62. Daily chart of the ten year note yield The stochastic on the daily chart of the ten year note yield (TNX) continues to trend in oversold territory as the TNX dropped again today, losing 0.5 basis points to close at 3.932%. As the 6 month chart illustrates, the TNX is now into a confluence zone going back to May, and should find support at current levels. Risk is increasing on the long side of ten year notes as the TNX continues to look bottomy here, but as long as it lasts, the trend on TNX remains down. Daily NQ candles The real action was in equities today, with the NQ adding 2.14% on a 28 point move closing 4.5 points shy of its high of 1338.50. The move continues the disagreement over current levels, with this week giving us a bullish engulfing, followed by a bearish, and today’s nearly engulfing bull. This trading range needs to break 1340 to the upside or 1300 below, but affords ample opportunity for intraday trades while it lasts. Today’s gains did not abort the ongoing daily cycle downphase in progress. Volume on the Nasdaq exceeded 1.8B shares, which is heavier than we’ve seen this week and bodes well for bulls targeting a break of 1340. 30 minute 20 day chart of the NQ The bullish divergence did a great job of what proved to be a strong meltup, with the pattern of higher lows on the 30 minute chart oscillators presaging the big move. Those same oscillators may be bearishly diverging- if the NQ tops here, it will be from a lower stochastic high despite the higher price high. I’m really reaching here, as the signal isn’t printed yet, and it doesn’t pay to anticipate signals. The shape of the rise today was a bear wedge, despite the unsustainable upside break near the end of the session. There were a number of short covering surges, with the absence of dips that reeked of shorts panicking. Daily ES candles The ES daily chart is scaled differently from that of the NQ, but today’s 20 point gain off the lows was impressive any way you slice it. The move did not abort the ongoing downphase on this timeframe, but another day like today will do it. So long as the oscillators continue to point down, any upside is corrective, despite the difficulty I have in calling so strong a day “corrective”. NYSE volume of 1.7B shares was, like that on the Nasdaq, stronger than we’ve seen all week. 20 day 30 minute chart of the ES The 30 minute chart on the ES shows no potential bearish divergence on the toppy stochastic. If the ES doesn’t reverse its throwover above the bear wedge printed off yesterday’s lows, we will have a trending move underway. The 300 minute stochastic has not tended to become pinned in overbought or oversold, and the toppiness here suggests that we can expect lower prices tomorrow. I say “suggests”, because downside wasn’t the winning bet all afternoon, with virtually no hint of weakness. Bears need to see this afternoon’s gains unprinted quickly, but for now, resistance up to 1020 continues to look good. Daily YM candles The YM most closely resembles the ES. Note that today’s better than 170 point gain retraced approximately 38% of the decline from the September high, while not affecting the ongoing oscillator downphase on the daily chart. Again, it’s clearly corrective, but like the ES, this was the strongest day we’ve seen in months, and continued strength could change what remains a bearish picture. 20 day 30 minute chart of the YM Same story on the 30 minute chart of the YM, which tells the same story as that on the ES. Anecdotally, funds receive pension inflows at the beginning of the month, which can account for the show of strength today. Or, intervention, of which we’ve been reading much in the headlines this week. Dip buying, program trading, short covering. Whatever. The buyers showed up at higher lows today, following the 30 minute oscillators quite closely. These same oscillators are in a zone at which downside is more likely than significant upside. Nothing prevents a huge surge of trend-setting buy orders tomorrow, but the indicators we’re following don’t favor it. Above 1020, it should look like the lower-odds scenario is playing out, but below it, shorts will be looking for failed bounces on which to enter with tight stops overhead, and longs will be looking to protect profits. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Let's make sure they work I'd call today's rebound for stocks a "jaw dropper" as the Dow Industrials (INDU) 9,469.13 +2.09% jumped 194 points in today's session, and on the first day of trading in the new quarter, bulls quickly tested the new quarter's program trading-collars, which restrict index-arbitrage trading on a Dow Industrials advance or decline of 180-points. Today's rally was a roof raiser, especially for the homebuilders as the Dow Jones Home Construction Index (DJUSHB) 497.14 +6% surged higher by 28 points to a new 52-week high. The advance to record highs came after a rather modest 0.2% gain in construction spending in August, but some stability from the Mortgage Bankers Association reporting its weekly Mortgage Applications Index rose 1.1% in the latest week. The surge in the DJUSHB is both impressive and perplexing considering the weekly data showed the purchases index portion of the overall index (includes all mortgage applications for the purchase of a single family home) fell for a second-consecutive week. Mortgage Bankers Association - Weekly Statistics We've looked at this set of data before, but today's strong performance for the homebuilders comes despite the subset Purchases Index slipping for a second-straight week after rebound from its August 27 report. It would be my analysis that the homebuilders are experiencing major short covering on today's technical breakout, or as is many times the case, accurately predicting growing demand on a decline in mortgage rates. I've been keeping track of the MBA's weekly reports as to the national average 30-year fixed mortgage in the column (30-yr Fixed) and have highlighted the trough level found in mind-June, the recent peak high at the August 6 report, and last week's average 30-year fixed rate average of 5.67%, which was reported today. It would be my thought that should we see anything close to 5.0% on this decline in mortgage rates, or Treasury YIELDS, we should look for SELLING in Treasuries at or just above those levels. I also take a reading each Friday of the 5-day Average 10-year YIELD, which I think depicts a week's average 10-year YIELD. If I were to point to one economic positive taking place, it would be the stability of the subset Refinance Index. I've noted the 45.5% jump from the September 10 MBA report, and in past commentary we followed up after the 15.4% decline, with the thought that the 15.4% decline was not overly concerning after such a large jump the week prior. Traders can review their 01:00 PM EDT intra-day update from September 17. http://members.OptionInvestor.com/intraday/091703_3.asp The stability from the refinance index, while nowhere near the levels found in mind-June can be viewed as a positive, especially in the wake of a still weak job market, where some homeowners may be taking the opportunity to pull some liquidity from their homes, which may eventually find some of that money firming consumer spending. The S&P Banks Index (BIX.X) 311.74 +2.37% also make a strong move higher in today's session and broke above the correlative 308-309 resistance levels in its WEEKLY/MONTHLY pivot levels, and here too may be a strong response from the banks on stability in the Refinance Index statistics. An individual name that traders might want to monitor for strength near-term is shares of Washington Mutual (NYSE:WM) $39.26 -0.27% for strength above $40.00. Dow Jones Home Construction Index (DJUSHB) - Daily Interval The MARKET didn't seem too concerned about a housing bubble at this point. In yesterday's 03:15 PM EDT intra-day update I made brief comment of the homebuilder looking to break out from congestion and today, if there is a housing bubble in the future, it was filled with one heck of a lot of helium today and looks well positioned to rise to an altitude of 527. I've listed the various DJUSHB components in the above chart. As we review today's action in the pivot matrix, I think tomorrow's test for further upside will have to come from the NDX/QQQ and this would relate back to observations and thought made in early August. The INDU/SPX/OEX did their job today for bullish gains and showed strength above the correlative WEEKLY/MONTHLY pivots. Tomorrow, it would be rather important, that the NDX/QQQ follow this technical move. Pivot Analysis Matrix - I've "dashed green" the WEEKLY and MONTHLY pivots for the SPX/SPY/OEX as tentative support tomorrow as they were traded through to the upside today, but should now be viewed as near- term support tomorrow, should some giveback of today's rather impressive gains be found. An original upside target for the SPX on a break above 1,010 was viewed at 1,025 and we see multiple correlations in the matrix scattered around the 1,025 level, with perhaps greater emphasis of this level coming from the Dow Industrials (INDU) at its DAILY R1 and WEEKLY R1. In PINK, I've emphasized how the S&P Banks Index (BIX.X) may be leading in the pivot matrix, and with the BIX.X closing just above its September relative highs of 311.44 at today's close, has the BIX.X looking like it wants to mimic the Dow Jones Home Construction Index (DJUSHB), if not at least test its 52-week high of 317.94, which was set on July 14th. That very 317.94 52- week high would be very close to the BIX.X monthly R2. Sometime a market can have a very short memory. I, and hopefully you, have not forgotten some of the issues that may be in play as it pertains to the weaker dollar. As I type, the U.S. Dollar Index (dx00y) 92.29 -0.6% continues to weaken in today's trade. In this morning's 09:00 Update, it was noted that business in Japan made comment in the tankan sentiment survey, that there was concern among Japanese-based businesses of the yen's rise versus the dollar, which might have some businesses being less optimistic about the future, than those views expressed during the survey. December yen futures (jy03z) showed the yen gaining against the dollar today at 0.906 +0.72%. Meanwhile the December euro futures contract (eu03z) 1.1686 +0.55% are nearing a contract high of 1.1804, set on May 29. As an alert to any currency-related action, I'm going to also set a 10-year YIELD alert at the 3.903% YIELD level from the DAILY S1, which I would use as an alert to equity weakness. Here's why. One comment I read today at Briefing.com, was there mentioning that when they asked some of their contacts on the floor, which are in touch with several buy side mutual funds, and for the most part, the general tone was that the main strategy for fund managers is to protect their year-to-date gains, where many are not looking to further commit funds in October, but now take on more of a short-term focus, in an attempt to at times pad gains with shorter-term trading. And those comments, is perhaps where I think it somewhat important that the NDX/QQQ follow the INDU/SPX/OEX moves above their WEEKLY/MONTHLY Pivot resistance levels tomorrow. The only trade I see a BEARISH trader looking for tomorrow, is for the NDX/QQQ to struggle at the pivots, and find a reversal lower in the INDU/SPX/OEX back BELOW their WEEKLY/MONTHLY pivots, which would be a sign of a failed rally attempt in today's session. Should this type of action unfold with a further weakening dollar as it approaches the summer lows. There is building concern amongst traders and some institutions regarding what is going on with the dollar and its potential impacts on global markets. S&P 500 Index (SPX) Chart - Daily Interval Striking similarities found in early August (oscillators, moving averages, SPX/OEX/INDU trying to lead a rally, QQQ still pullback range) and while the SPX did hesitate intra-day right between its MONTLY pivot (1,008.86) and WEEKLY pivot (1,009.74) its was notable that when the SPX moved into that range, it began finding support at the monthly pivot, and when the break higher of 1,010 came, further gains in the afternoon built to the close. With some formidable looking resistance now nearing the 1,023 level, the SPX is counting on the QQQ for strength as the SPX tries to lead. Today's trade saw the broader S&P 500 Bullish % ($BPSPX) edge up 0.2%, so a net gain of 1 stock to a PnF buy signal was seen. Still "bull confirmed" at 77.00%. NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Interval I would expect bulls to POUND a move higher at $33.25 in the Q after today's break higher in the SPX/OEX/INDU above their WEEKLY/MONTHLY pivots and try to get a short-covering rally to take hold in the Q's. It is this expectation that becomes the test in tomorrow's trade. In Monday's Index Wrap, I touched on the similarity a QQQ trader might look for in the QQQ, and so far, history looks to repeat itself. But be ALERT to DIVERGENCE from the past. It took some guts, or selling to keep the QQQ's below the $33.22 and for August history to have a shot at repeating, I think the QQQ's need to see the break above $33.23. As a note, I changed my QQQ intervals to 1- minute intervals and the QQQ traded $32.23 for two-minutes at the highs of the session, which came at 03:42 PM EDT. This was AFTER trading curbs were in place at 03:26 PM EDT. Somebody, not institutional computers, were selling the Q's at this level ($33.22) so I still deem it resistance. With the banks looking to heat up, there may be some bulls that did take partial positions in a bullish trade on today's break, where a partial position made sense considering some of the currency issues currently at hand. Let's use the OEX chart and one of our old upward trends as a good upside test of resistance, should the banks really catch fire and break to new 52-week highs. On a further rally follow through tomorrow, to WEEKLY R1's, here's a way I think a bull could try and let things run a bit, but still snug up a trailing stop if the current move underway is simply a short-term mutual fund trade as discussed in the Briefing.com discussion. Today's trade saw a net loss of 1 stock to a point and figure sell signal in the NASDAQ-100 Bullish % ($BPNDX). This was enough to have this bullish % reversing BACK LOWER to "BEAR CONFIRMED" status at 74%. KEEP THIS IN MIND AS IT RELATES TO THE WEEKLY/MONTHLY PIVOT RESISTANCE! S&P 100 Index (OEX) Chart - Daily Interval The test for further gains in the OEX in my mind is to see the NDX/QQQ participate further. However, the BIX.X gains today were impressive and ANYTHING, I mean ANYTHING can happen when a group of stocks breaks to new highs (see today's DJUSHB). An OEX bull that may have taken a partial new bullish entry in the OEX on the break above 507 and WEEKLY Pivot of 506.53 sees 513.70 as resistance, but should the financials really catch fire, then OEX 520 not out of the question. A trader holding 1 OEX call may not have the flexibility to take a profit at/near the 513 level on strength as a trader holding 2 calls, where 1 call option might be sold to book a profit, and hold the other for potential further gain. One way I'd look to trade a 1 call position, would be to raise a profit stop under the WEEKLY 38.2% retracement, should the OEX advance to test the WEEKLY R1. Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Still "bull correction" status at 78%. Dow Industrials (INDU) Chart - Daily Interval In last night's Index Wrap I thought a trader might look to sell strength on a INDU rally back to 9,500. I can't say the bearish side of me after today's trade is excited to sell short or buy put at 9,500, but some of Briefing.com's comments do lay some groundwork where if it is true that buy side mutual find managers are only looking to pad some yearly gains, the a trade near 9,535 and QUICK reversal back below 9,500 may be first alert to this type of trade philosophy actually being in play. Further weakness back below the MONTHLY Pivot, in my mind, would be larger confirmation that the buy side is becoming more conservative. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" at 80%. I think we must ALWAYS be skeptical of what a floor trader says. I'm sure Briefing.com has some trusted sources, but I'm always a little skeptical that a floor trader telling me one thing, is to serve his/her purpose for being on the other side of the trade. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** Traders Corner ************** The Perfect Contrarian Indicator by Mark Phillips mphillips@OptionInvestor.com Me! While I say that in a rather tongue-in-cheek manner, I don't think I could have called the top in the market more accurately if I had tried. In recent weeks, I've detailed my frustrations in being unable to accurately read the market, having picked one too many tops in the recent bullish cycle. A few weeks ago, I finally threw in the towel and decided I'd play the bullish side of the coin until the market proved to me through its actions that a top was in. I now firmly believe that top is in and hindsight being what it is, I think it was put in just under 2 weeks ago when the S&P 500 ran into a brick wall at 1040 and promptly reversed from there. Rather than detail all of the indications that I misread in the recent past, I want to take our time here today to explain (largely in graphical format) the various pieces of the puzzle that have convinced me that the bears have come out to play for more than just a few days or even a week. Care to tag along for the journey with me? While I understand that there is much more to "The Market" than any one index, I want to keep our discussion focused today, so I'm going to lean heavily on the S&P 500 (SPX.X), as I think it most clearly demonstrates the various factors that have come together in the bears' favor. What I won't talk about is my fundamental view. While it is certainly germane to where the stock market is headed and is in sync with where I think it is currently pointed, today's discussion is purely of a technical nature. The fundamental problems facing this market have been discussed ad nauseum by myself and others, and long-time readers don't need to have them restated here. Let's start simply with the weekly chart of the SPX. We last looked at it a couple weeks ago, when I pointed out the possibility of bearish divergence forming. Is anyone curious how that has played out over the intervening time? Weekly Chart of the S&P 500 As you can see, the bearish divergence is still very much in effect, with one important difference. The fast line (blue) has now crossed below the slow line (red) giving us a classic Stochastics Sell signal. The one caveat here is the fact that this is a weekly chart and the weekly candle won't finish painting until Friday's closing bell. If today's sharp rally is an indication of what is in store for the remainder of the week (which I doubt), then we could see this crossover reverse, telling us that the all-clear for shorting this market is still not quite here. Remember, my focus here is not on what is going to happen this week or next, but on trying to divine a longer-term trend that we can play, preferably one that might last for 2-3 months or more. That's why they call them position trades. So if we're looking at the longer-term, it certainly can't hurt to look at even a broader view than the weekly chart -- the monthly chart, which gives us a very clear view going all the way back before the euphoric ramp in the late 1990s got underway. Monthly Chart of the S&P 500 Here we can see bearish divergence as well, albeit of a slightly different sort. Here we have lower price highs and higher Stochastics highs to deal with. We looked at this picture a couple weeks ago, and the bearish divergence was far less developed than it is tonight, with the Stochastics now well into overbought territory and just beginning to tip over. The same caution about waiting for the weekly candle to finish painting applies here. With the current candle on the monthly chart only being one day old, we clearly have a while to wait before we'll know if we truly have confirmed bearish divergence on this longer view. But if we see the fast line cross under the red line and drop out of overbought territory before price can exceed 1177 (the high from January 2002), then it could be a rough holiday season for the bulls. I've decided to put aside my ire over the manner and timing in which the "new and improved" VIX has been introduced and just accept it at face value. Afterall, it seems unlikely that the intellectual flaws in the way the data is being provided will be corrected. I'm not a conspiracy nut, but this whole process really smells bad to me. At any rate, let's take a look at the current VIX chart, imperfect as it is. Daily Chart of the VIX The VIX has been channeling gradually lower for 5 months now, with only two signs of a breakout to the upside. The first one in early August was accompanied by the ADX moving slightly above 20, indicating a strengthening trend. But that breakout was quickly reversed. Over the past few days, we've seen the VIX breaking out over the top of the channel, along with the ADX creeping back over the 20 level. With today's strong rally and a more than 7% slide in the VIX, it looks like the nascent breakout above the channel along with the ADX over 20 is just another head-fake to get the bears overly anxious. Of course, I'll leave you with this tantalizing tidbit of information -- If we look at the VXO (which is really the correct value for the old VIX based on the OEX), we can see it closed today at 22.01. I find it interesting to see that value is ABOVE the top of the descending channel in the VIX chart above. Let's just say this is one of many annoying inconsistencies in the "new and improved" VIX. The correct information is still there, but we have to dig a little bit deeper. To me the key point to be derived from looking at the VIX is that it MIGHT be getting ready to break out of its slump, but it remains unclear so far. The last piece of the puzzle I want to review is the SharpChart of the S&P 500 Bullish Percent chart. As we've discussed recently, the standard process I use (thanks to Brian's astute observations last year) of interpreting this indicator in this format gave three false Sell signals during the summer. Each time (mid-June, mid-July and early-August), the BP line crossed below the 10-dma and the CCI oscillator fell below the -100 line. Despite the pattern of lower highs in BP that accompanied these signals and the CCI each time moving to a lower low, the market (and BP) reversed sharply higher into the middle of September before finally tipping over with some real conviction. Take a look below and I think you'll see the situation seems to be significantly different this time. 1-Year Bullish Percent Chart of the SPX Look at the separation in the Bullish Percent line and the 10-dma this time. It looks a lot more like what we saw last January, don't you think? In addition, we've seen the CCI oscillator finally decline below -200, another confirmation we haven't seen since January. It isn't a guarantee of course, and it is likely we'll see one more failure to move to new highs before the BP chart tips over for good, but I view this pattern as very constructive if we're looking for a market decline in the months ahead. So let's briefly recap what we've looked at here today. Both the weekly and monthly charts of the SPX are showing us as being very close to having confirmed bearish Stochastics divergence, and I might add that these instances of divergence show up on other oscillators as well. Stochastics just happens to be my personal favorite. Our favorite Sentiment indicator (VIX) is hinting that the gentle downward trend may be getting ready to reverse. Nothing confirmed yet, but we could be close. And finally, the BP SharpChart is giving us the most convincing Sell signal of the past 9 months. I don't know about you, but my fundamental views, along with the lackluster case for economic growth has me personally leaning to the short side the most heavily I have since before the latest war with Iraq. One final note of clarification: Today's strong rebound is in perfect keeping with what I would expect to see following this first sharp downward move. Bullish sentiment is still quite strong in this market, so chasing your favorite stock or index lower is not what I would call a high-odds strategy. Short into the rallies near resistance, not on breakdowns below support. As a benchmark, I would view a failed rally in the SPX in the 1030 area to be a viable entry strategy for a position trade as we head into the October earnings cycle. Have a great week! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. 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The Option Investor Newsletter Wednesday 10-01-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Call - AMZN Spreads, Combinations & Premium-Selling Plays: Stocks Soar On Bullish Manufacturing Data! Watch List: A Few More Bullish Candidates Updated on the site tonight: Market Posture: Bulls Stampede Into October ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ********************** PLAY OF THE DAY - CALL ********************** Amazon.com - AMZN - close: 49.12 change: +0.69 stop: 46.50 -Company Description- Amazon.com is a website where customers can find virtually anything they want to buy online. The company lists millions of unique items in categories such as books, music, DVDs, consumer electronics, toys, software, computer and video games, lawn a patio items, kitchen products and wireless products. Through its Amazon Marketplace, Auctions and zShops services, any business or individual can sell virtually anything to AMZN's approximately 30 million cumulative customers. - Most Recent Update (Tuesday, Sept 30, 2003)- The last few days have proved quite volatile for the Internet stocks with our AMZN play looking weak on Friday, strong yesterday and weak again today. The good news is that it remains in the upper half of its channel and above what should now be strong support near $47. The bad news is that the stock ended the day at its low of the day and slightly below Friday's close. We're looking for a serious test of support over the next couple days and the outcome of that test will determine whether the play is still viable. First support comes in at the center of the channel (currently $47.90), then the 20-dma ($47.44) and then prior resistance near $47.25. A solid rebound from this zone of support can be used for new (although aggressive) entries. Traders looking to enter on strength will want to see AMZN get back above the $50 level before considering new positions. Maintain stops at $46.50 for now, as that remains just below the 30-dma. - Play of the Day Comments - It was tough to find a bullish play that hadn't run too far ahead of itself given the 200 point rally in the DJIA and the 2.5% jump in the NASDAQ. The bounce today in shares of AMZN was off previous resistance that had now become support. It looks like a good place to evaluate new long positions. Traders who might be concerned about AMZN's very short-term trend of lower highs can wait for a move above the $50 mark for confirmation. - Suggested Options - Shorter Term: The October 47 Call will offer short-term traders the best return on an immediate move, as it is slightly in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the November 50 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the November 47 Call. BUY CALL OCT-47 ZQN-JW OI=11616 at $2.90 SL=1.50 BUY CALL OCT-50 ZQN-JJ OI=17674 at $1.60 SL=0.75 BUY CALL NOV-47 ZQN-KW OI= 230 at $4.50 SL=2.50 BUY CALL NOV-50 ZQN-KJ OI=10662 at $3.20 SL=1.65 BUY CALL JAN-47 ZQN-AW OI= 2657 at $6.10 SL=4.25 BUY CALL JAN-50 ZQN-AJ OI= 9714 at $4.80 SL=2.40 Annotated Chart of AMZN: Picked on September 18th at $47.89 Change since picked: +1.23 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 8.79 mln Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Stocks Soar On Bullish Manufacturing Data! By Ray Cummins The major equity averages rallied Wednesday amid signs the U.S. economy may truly be recovering. The Dow Jones Industrial Average closed up 194 points at 9,469 on strength in Alcoa (NYSE:AA), Caterpillar (NYSE:CAT), Home Depot (NYSE:HD), Walt Disney (NYSE:DIS), 3M (NYSE:MMM), J.P. Morgan (NYSE:JPM), and United Technologies (NYSE:UTX). The NASDAQ was also a big mover, up 45 points to end at 1,832 as virtually all technology sectors saw renewed buying pressure. The broader S&P 500 index added 22 points to 1,018, with retailers, brokers, and banks among the best performers. Advancers outpaced decliners by a 5 to 1 margin on the New York Stock Exchange where 1.5 billion shares changed hands. Breadth was less bullish on the NASDAQ as winners moved past losers by more than 2 to 1 on volume of over 1.8 billion shares. Treasuries held their own, despite the upside activity in stocks. The benchmark 10-year note finished the day up 2/32 at 102 18/32 to yield 3.93%. The yield remains at its lowest closing level since mid-July. *************** SUMMARY OF CURRENT POSITIONS - AS OF 9/30/03 *************** 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 APPX OCT 30 29.55 31.36 $0.45 5.20% 1.52% CELL OCT 25 24.40 32.78 $0.60 8.23% 2.46% CEPH OCT 40 39.15 45.89 $0.85 6.73% 2.17% CVTX OCT 20 19.70 22.02 $0.30 4.92% 1.52% DIGE OCT 35 34.60 40.86 $0.40 4.06% 1.16% HEPH OCT 22 21.85 24.24 $0.65 9.81% 2.97% * LLTC OCT 35 34.30 35.93 $0.70 5.35% 2.04% NFLX OCT 27 27.15 33.56 $0.35 4.44% 1.29% RIMM OCT 27 26.90 38.20 $0.60 6.95% 2.23% VRNT OCT 22 22.00 21.41 ($0.59) 0.00% 2.27% * AMHC OCT 35 34.50 41.91 $0.50 6.10% 1.45% APPX OCT 33 32.73 31.36 ($1.37) 0.00% 1.99% * ELAB OCT 35 34.50 38.34 $0.50 5.51% 1.45% FLML OCT 30 29.60 33.71 $0.40 5.85% 1.35% MATK OCT 50 49.30 52.63 $0.70 5.03% 1.42% NFLX OCT 32 31.90 33.56 $0.60 7.09% 1.88% RIMM OCT 27 27.20 38.20 $0.30 5.00% 1.10% RIMM OCT 30 29.35 38.20 $0.65 8.18% 2.21% UNTD OCT 35 34.35 34.79 $0.44 4.65% 1.89% * VIP OCT 55 54.40 60.86 $0.60 3.99% 1.10% Conservative traders should have closed a number of these positions during the recent sharp sell-off. Among the most obvious candidates for exit are American Pharma Partners (NASDAQ:APPX), Verint Systems (NASDAQ:VRNT), United Online (NASDAQ:UNTD), and Hollis Eden Pharmaceuticals (NASDAQ:HEPH). Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield APC OCT 45 45.34 41.76 $0.45 3.14% 0.99% TRMS OCT 40 40.40 25.07 $0.40 5.74% 0.99% BRCM OCT 30 30.50 26.66 $0.50 6.47% 1.64% IMCL OCT 50 50.45 38.93 $0.45 6.53% 0.89% PCLN OCT 35 35.50 29.04 $0.50 8.64% 1.41% ZRAN OCT 25 25.35 19.57 $0.35 9.44% 1.38% Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status ANF 30.49 27.71 OCT 25 27 0.30 27.20 $0.30 Open? CFC 75.19 78.28 OCT 65 70 0.50 69.50 $0.50 Open MO 44.65 43.80 OCT 40 42 0.30 42.20 $0.30 Open OHP 38.60 41.31 OCT 32 35 0.25 34.75 $0.25 Open AMZN 49.61 48.43 OCT 42 45 0.35 44.65 $0.35 Open AZO 94.51 89.53 OCT 85 90 0.65 89.35 $0.18 Open? NE 33.98 33.99 OCT 30 32 0.25 32.25 $0.25 Open Autozone (NYSE:AZO) and Abercrombie & Fitch (NYSE:ANF) are at "key" moments and any further downside activity would put them on the early-exit list. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status FRX 49.56 51.45 OCT 60 55 0.60 55.60 $0.60 Open KO 43.01 42.96 OCT 47 45 0.30 45.30 $0.30 Open MEDI 37.03 33.03 OCT 42 40 0.25 40.25 $0.25 Open LXK 65.14 63.01 OCT 75 70 0.55 70.55 $0.55 Open NOC 86.00 86.22 OCT 95 90 0.50 90.50 $0.50 Open WTW 43.15 41.60 OCT 50 45 0.40 45.40 $0.40 Open 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 54.05 NOV 60 60 7.25 8.00 Open Amerisourcebergen (NYSE:ABC) has achieved profitability in a short time and today the value of the bearish portion (NOV-$60 Put) of the position paid for the entire cost of the straddle. Traders should consider "legging-out" of the straddle to lock-in gains or 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. ************** AMHC - American Healthways $43.08 *** Near All-Time Highs! *** American Healthways (NASDAQ:AMHC) is the nation's leading and largest provider of specialized, comprehensive care enhancement services to hospitals, physicians and health plans. In addition, American Healthways is the only company in its industry whose programs are designed to meaningfully address the needs of 100% of its customer populations. The clinical excellence of the firm's programs have been reviewed and approved by Johns Hopkins, and their quality has been recognized by the National Committee on Quality Assurance, the Joint Commission on Accreditation of Health Care Organizations, and the American Accreditation Health Care Commission, making American Healthways the first and only care enhancement provider in the nation to be accredited or certified by all three organizations. American Healthways contracts to provide disease and care management programs to health plans with members in all 50 states, the District of Columbia and Puerto Rico. The company also operates diabetes management programs in hospitals nationwide. AMHC - American Healthways $43.08 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 QMH VG 115 0.25 34.75 4.5% 0.7% * SELL PUT OCT 40 QMH VH 61 1.30 38.70 14.2% 3.4% ************** ERES - eResearch Technology $34.72 *** Uptrend Intact! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $34.72 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 UDB VF 209 0.30 29.70 5.4% 1.0% * SELL PUT OCT 32.5 UDB VZ 850 0.90 31.60 12.1% 2.8% ************** HELE - Helen of Troy $25.11 *** Retailers Rally! *** Helen of Troy (NASDAQ:HELE) designs, develops, imports and sells hair care appliances, hair brushes, combs, hair accessories, hair and skin care liquids and powders and other personal care products. The company purchases its products from unaffiliated manufacturers in the People's Republic of China, Thailand, Taiwan and South Korea. The company is comprised of three operating segments. The North American segment sells hair care and other personal care products in the United States and Canada. The International segment sells the same products outside the United States and Canada. The firm's third segment, Tactica, markets personal care and other consumer products to retailers, and uses direct response marketing to sell such products directly to consumers. HELE - Helen of Troy $25.11 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 EHQ VX 265 0.50 22.00 10.6% 2.3% * SELL PUT OCT 25 EHQ VE 80 1.20 23.80 18.2% 5.0% ************** JCOM - j2 Global Communications $38.47 *** Entry Point? *** j2 Global Communications (NASDAQ:JCOM) provides outsourced value added messaging and communications services to individuals and businesses throughout the world. The company offers faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. j2 Global markets its services principally under the brand names eFax and jConnect. The company delivers its services through its global telephony/Internet protocol network, which spans more than 600 cities in 18 countries across five continents, including four capital cities in Latin America where j2 Global is in the process of launching its unique service. JCOM - j2 Global Communications $38.47 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 JQF VZ 1,309 0.35 32.15 6.1% 1.1% * SELL PUT OCT 35 JQF VG 1,415 0.85 34.15 11.2% 2.5% ************** MSTR - MicroStrategy $46.00 *** Consolidation Complete? *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. MSTR - MicroStrategy $46.00 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 EOU VH 307 0.60 39.40 7.8% 1.5% * SELL PUT OCT 45 EOU VI 290 2.00 43.00 17.4% 4.7% ************** NFLX - Netflix $34.51 *** Solid Earnings! *** 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 $34.51 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 2,138 0.55 26.95 12.5% 2.0% * SELL PUT OCT 30 QNQ VF 1,754 1.05 28.95 17.2% 3.6% SELL PUT OCT 32.5 QNQ VZ 638 1.80 30.70 22.4% 5.9% ************** RIMM - Research In Motion $38.06 *** Rally Mode! *** 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 $38.06 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 32.5 RUL VZ 1,383 0.25 32.25 4.3% 0.8% * SELL PUT OCT 35 RUL VG 2,153 0.70 34.30 9.2% 2.0% ************** USG - USG Corp. $17.71 *** Asbestos Speculation! *** USG Corporation (NYSE:USG) produces a range of products for use in new residential, new non-residential and repair and remodel construction, as well as products used in certain industrial processes. Its operations are organized into three operating segments: North American Gypsum, which manufactures Sheetrock brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region, and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceiling products, joint compound and other building products throughout the United States. USG - USG Corp. $17.71 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 15 USG VC 4,561 0.25 14.75 9.1% 1.7% * SELL PUT OCT 17.5 USG VW 1,464 0.90 16.60 19.6% 5.4% ************** YHOO - Yahoo! $36.40 *** Next Leg Up? *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. YHOO - Yahoo! $36.40 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT OCT 32.5 YHQ VZ 13,006 0.35 32.15 5.4% 1.1% * SELL PUT OCT 35 YHQ VG 14,097 0.95 34.05 11.4% 2.8% ************** 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. *************** HOV - Hovnanian Enterprises $69.15 *** Hot Sector! *** Hovnanian Enterprises (NYSE:HOV) constructs and sells single-family detached homes and attached condominium apartments and townhouses in more than 196 new home communities in New Jersey, Pennsylvania, New York, Virginia, Maryland, North Carolina, Texas and California. The firm offers a wide variety of homes that are designed to appeal to first-time buyers; first- and second-time, move-up buyers; luxury buyers; active adult buyers, and empty nesters. In addition, the company provides financial services, including mortgage banking and title services to the homebuilding operations' customers. The firm does not retain or service the mortgages that it originates, but rather sells the mortgages and servicing rights to investors. HOV - Hovnanian Enterprises $69.15 PLAY (less conservative - bullish/credit spread): BUY PUT OCT-60.00 HOV-VL OI=1132 ASK=$0.25 SELL PUT OCT-65.00 HOV-VM OI=414 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$64.45 ************** KBH - KB Home $64.20 *** A Big Day! *** KB Home (NYSE:KBH) is a diversified homebuilder with operations in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas. KB Home builds homes that cater primarily to first-time and "move-up" homebuyers, generally in medium-sized developments close to major metropolitan areas. The company, through its main subsidiary Kaufman & Broad S.A., also has operations in France. KBSA constructs single-family homes and high-density residential properties such as condominium complexes and commercial projects. During the fiscal year ended November 30, 2002, the firm delivered 25,452 units and operated an average of 330 active communities. The company also provides mortgage banking services through its subsidiary, KB Home Mortgage Company. KBH - KB Home $64.20 PLAY (conservative - bullish/credit spread): BUY PUT OCT-55.00 KBH-VK OI=2498 ASK=$0.20 SELL PUT OCT-60.00 KBH-VL OI=840 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$59.55 ************** RJR - R.J. Reynolds $40.32 *** New Trading Range? *** R.J. Reynolds Tobacco (NYSE:RJR) is a cigarette manufacturer with wholly owned subsidiaries, including its operating subsidiaries, R. J. Reynolds Tobacco company (RJR Tobacco) and Santa Fe Natural Tobacco Company. The company's largest selling cigarette brands are Camel, Winston, Salem and Doral. Those brands and its other brands, including Vantage, More and Now, are manufactured in a variety of styles and marketed in the United States to meet a wide range of adult smoker preferences. During 1999, RJR and Nabisco Group Holdings completed a series of transactions to reorganize their businesses and capital structures. In May 1999, RJR and RJR Tobacco sold the international tobacco business to Japan Tobacco. RJR - R.J. Reynolds $40.32 PLAY (conservative - bullish/credit spread): BUY PUT OCT-35.00 RJR-VG OI=1456 ASK=$0.10 SELL PUT OCT-37.50 RJR-VU OI=1023 BID=$0.30 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$37.25 ************** 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. *************** CVTX - CV Therapeutics $22.01 *** Back In A Rut! *** 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 $22.01 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL OCT 27.5 UXC JY 1,644 0.20 27.70 7.3% 0.7% * SELL CALL OCT 25 UXC JE 1,898 0.55 25.55 14.6% 2.2% ************** IMCL - ImClone $37.88 *** No Rally Here! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL - ImClone $37.88 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 QCI JI 8,303 0.50 45.50 9.9% 1.1% * SELL CALL OCT 40 QCI JH 2,756 1.55 41.55 18.0% 3.7% ************** SINA - SINA Corporation $35.26 *** China-dot-com Slump! *** SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $35.26 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 NOQ JI 9,979 0.40 45.40 9.1% 0.9% * SELL CALL OCT 40 NOQ JH 5,471 1.15 41.15 18.5% 2.8% ************** 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. ************** DNA - Genetech $79.72 *** Premium-Selling Only! *** Genentech (NYSE:DNA) is a biotechnology firm using human genetic information to discover, develop, manufacture and commercialize biotherapeutics for significant unmet medical needs. The company manufactures and commercializes 10 biotechnology products directly in the United States. These include Herceptin, Rituxan, TNKase, Activase, Cathflo Activase, Nutropin Depot, Nutropin AQ, Nutropin human growth hormone, Protropin and Pulmozyme. The company also licenses several additional products to other companies and its product development efforts, including those of its collaborative partners, cover a wide range of medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders and inflammatory and immune problems. DNA - Genetech $79.72 PLAY (less conservative - bearish/credit spread): BUY CALL OCT-90.00 DNA-JR OI=4373 ASK=$0.25 SELL CALL OCT-85.00 DNA-JQ OI=12947 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$85.50 ************** SNPS - Synopsys $30.71 *** Post-Split Slump? *** Synopsys (NASDAQ:SNPS) is the world leader in electronic design automation (EDA) software for integrated circuit design. The company delivers technology-leading IC design and verification platforms to the electronics market, enabling the development of complex systems-on-chips. Synopsys also provides intellectual property and design services to simplify the design process and accelerate time-to-market for its customers. The company is headquartered in Mountain View, California and has offices in more than 60 locations throughout North America, Europe, Japan and Asia. SNPS - Synopsys $30.71 PLAY (conservative - bearish/credit spread): BUY CALL OCT-35.00 YPQ-JG OI=4084 ASK=$0.15 SELL CALL OCT-32.50 YPQ-JZ OI=1674 BID=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$32.75 ************** XLNX - Xilinx $27.99 *** Consolidation In Progress? *** Xilinx (NASDAQ:XLNX) designs, develops and markets complete programmable logic solutions, including advanced integrated circuits, software design tools, predefined system functions delivered as intellectual property cores, design services, customer training, field engineering and technical support. The programmable logic devices include field programmable gate arrays and complex programmable logic devices. These devices are standard products that its customers program to perform desired logic functions. Its products are designed to provide high integration and quick time-to-market for electronic equipment manufacturers primarily in the telecommunications, networking, computing, industrial and consumer markets. XLNX - Xilinx $27.99 PLAY (conservative - bearish/credit spread): BUY CALL OCT-32.50 XLQ-JZ OI=4488 ASK=$0.15 SELL CALL OCT-30.00 XLQ-JF OI=3893 BID=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$30.25 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** A Few More Bullish Candidates United Technologies - UTX - close: 79.88 change: +2.60 WHAT TO WATCH: A Dow component and a major manufacturer, shares of UTX enjoyed a strong bounce on the positive ISM data this morning. Bullish traders might want to watch for a move above the $80.50 mark as an entry to open new long positions. Our first target would be $85.00. Chart= --- Amgen Inc - AMGN - close: 66.28 change: +1.76 WHAT TO WATCH: The rebound in the markets today brought some buying interest into the Biotech index's largest component, AMGN. The stock appears to be in a descending channel and the recent bounce is off the bottom of that channel. Aggressive bulls could use the move today as an entry point with a target near $69-70, just watch out for the wavering 50-dma overhead. Chart= --- Caterpillar Inc - CAT - close: 71.34 change: +2.50 WHAT TO WATCH: CAT is another manufacturer that jumped higher on the positive factory data in the ISM report today. Its MACD has slowly drifted back toward the zero line and looks ready to produce a new bullish buy signal. However, CAT has not yet broken its six-week trend of lower highs. A move above $72 might be a good entry point for bulls to evaluate new long positions. Chart= --- Countrywide Financial - CFC - close: 80.82 change: +2.54 WHAT TO WATCH: Shares of CFC surged to a new all-time high on very strong volume today. The strong pace of residential construction and the drop in mortgage rates means more home loans for this lender. The stock just received another upgrade yesterday with Piper Jaffray raising their price target to $110. Traders might want to keep CFC on their watch list for a dip back to the $78 level. Earnings are in two weeks. Chart= ---------------------------------- RADAR SCREEN: more stocks to watch ---------------------------------- HAR $101.99 +3.64 - Shares of HAR closed at a new high after announcing a 2-for-1 stock split to be approved at its November shareholder meeting. PNRA $39.00 -2.01 - PNRA broke through support at the $40 level on very big volume and looks ready to test its 200-dma near $36. CTX $82.56 +4.68 - Homebuilders are hot and CTX has broken out above its recent consolidation and looks ready to target its old highs near $87.50. PHM $70.88 +2.87 - PHM is another homebuilder breaking out to the upside. Volume was strong today and we could see PHM hit $75 soon. ************** MARKET POSTURE ************** Bulls Stampede Into October To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/mp_100103.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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