The Option Investor Newsletter Thursday 10-02-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: A Round of Applause Please Futures Markets: Central Bankers Index Trader Wrap: Groping for gains Market Sentiment: Count Down to Jobs Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-02-2003 High Low Volume Advance/Decline DJIA 9487.80 + 18.60 9511.06 9427.65 1.53 bln 1900/1244 NASDAQ 1836.22 + 4.00 1842.55 1823.64 1.60 bln 1734/1401 S&P 100 511.20 + 0.87 512.14 507.77 Totals 3634/2645 S&P 500 1020.24 + 2.02 1021.87 1013.38 W5000 9887.36 + 27.80 9900.72 9820.28 RUS 2000 503.20 + 2.88 504.25 499.76 DJ TRANS 2743.67 + 7.30 2751.39 2727.75 VIX 20.80 - 0.27 21.45 20.71 VXN 31.25 - 0.08 31.70 31.08 Total Volume 3,384M Total UpVol 2,043M Total DnVol 1,254M 52wk Highs 514 52wk Lows 23 TRIN 0.79 NAZTRIN 1.05 PUT/CALL 0.78 ************************************************************ A Round of Applause Please The October rally continued to the consternation of bears everywhere. After the nearly +200 point gains on Wednesday the Dow shook off some early weakness and rallied to tack on another +18 points and close very near the 9500 resistance level. The indexes traded on both sides of zero several times during the day but the only score that matters is the one at the final gun. Chalk a big one up for the bulls because they held the high ground. Dow Chart Nasdaq Chart The Jobless Claims came in higher than expected but the pencil pushers managed to slip it in just below 400K at 399,000. The claims from last week were revised up +5,000 to 386k and that is where they are likely to stay. The storm week will be chalked up as an economic blip and this week will probably end up revised over 400K next week. I can't remember off hand a drop in a revision recently. They are all revised up. Continuing claims rose again to 3.67 million and the highest level since July. The multiple economic reports lately with declining employment components and the rising continuing claims would indicate future weakness in claims. The nonfarm payrolls on Friday is expected to be weak as well. Factory Orders fell -0.8% and more than double the consensus estimates of -0.3%. Nondurable Orders fell -0.51% and Durable Orders fell -1.11%. Communications equipment fell to -4.89% from +11.78 in July and aircraft and parts to -2.50%, up from -13.89 in July. Computers dropped to +3.21 from +9.22 in July. Industrial machinery rose +5.78 from -8.31 and was the strongest component change. Still, a -0.8% headline number is a material change from the +2.0% gain in July. This report showed that the economy is still expanding from the late 2001 lows but the pace of expansion is very anemic. This report only represents orders to U.S. factories and with the change to overseas manufacturing it is hard to determine what the balance of orders really reflects. For Friday the big report is the nonfarm payrolls. The official consensus estimate is for a drop of -25,000 jobs. The whisper numbers I have heard are as high as -100,000. This has set the stock market up for a positive surprise or at least a non event. If everybody expects worse than -25K then a -40, -50 even -75K number could be met with a yawn. Ok, we knew that, so what else is new? Basically we spend a week posturing in front of the release and then the outcome is ignored. The only other material release on Friday is the ISM non manufacturing Services Index. The consensus is 62.8 and a decline from 65.1 in August and July. Services appear to have peaked in July/August and could be trending down if the consensus numbers are correct. Since July/August were the highest numbers posted since the creation of the index six years ago any decline is likely to be ignored unless it falls under 60. Any number over 60 represents a strong expansion and a strong contribution to the GDP for the balance of the year. If anything, the ISM Services represents the true state of the economy. With more and more manufacturing done outside the U.S. we are turning into a service economy. Unless there is a disaster I expect this release to be spun to the bulls advantage by analysts. IBM announced today that it was cutting 720 jobs and initially lost ground in the market but recovered to down only -50 cents. PSFT announced it was cutting 7% of its staff after completing the merger with J.D. Edwards. That could be up to 1000 jobs in an effort to save $207 million in 2004. PSFT also got signs of a reprieve from the Oracle death sentence. The Justice Dept is reportedly preparing a challenge to Oracle's hostile bid for the company. This would end the attack and allow PSFT to breathe again. Many customers were reluctant to buy their software because they were afraid Oracle would end up with the company and force the customers into an Oracle solution. Techs got another sunburn today after a Merrill Lynch analyst penned a scathing open letter to Sun Micro. The analyst said SUNW had reached a point of crisis and was bloated, unfocused and likely to suffer further loss of market share. He said the company would dwindle into irrelevance and eventually be bought for its installed user base. He said the SUNW CEO, Scott McNealy's brash and contrarian personality was getting old and he needed to clean up his act. He suggested SUNW cut 5-7000 jobs and quickly, spin off Java and narrow its focus. SUNW fired back that the analyst did not understand the SUNW business and if he had attended any of the Sun conferences he would know what they were focusing on. They called the attack a broken record and suggested the analyst try another tune. SUNW finished the day down a nickel. There were rumors on the street today that the gains we saw on Wednesday were partly due to a very large buy program by Goldman Sachs. They were said to be accumulating big cap stocks all day for a large customer. There is no way to verify this rumor although it was mentioned on CNBC several times. Also helping the markets was growth estimates by MMM of +12% to +14% for 2004. 3M affirmed the prior estimates and said the economy was showing signs of improvement. A DB analyst said 3M was closer to the beginning of a high-growth transformation than the end. These types of comments helped to maintain a bullish posture in the markets on Thursday. News of the big buy program helped to give bulls confidence that big bets were still being made at the beginning of the October tribulation period. This buying in front of the most volatile two weeks of the year smells of the plunge protection team at work but tracking them down is harder than getting evidence of aliens on the X-Files. The PPT exists but the secrecy surrounding their actions is better than that surrounding Area-51 in Nevada. The positive mood is contagious and the bulls pulled off a real trick by posting additional gains for the second consecutive day in October. Last year the first day of October saw a +340 point Dow gain and the 2nd day a -180 point loss leading to -743 points over the next seven days. We have successfully evaded the reversal drop so far but a two day string of gains is hardly a string. Regardless of the reason or the season the Dow did manage to test strong resistance at 9500 a total of four times on Thursday. While it failed each time it did not fail far. The Dow closed at 9488, only -12 points from the critical level and stretching its move over the 50 DMA to +22 points. The Dow closed less than 200 points from the September high of 9686. A pretty convincing performance all things considered. The Nasdaq was far less exciting but still clung to positive territory. After bouncing off the 50 DMA earlier in the week it rallied to close at 1836 with a +4 point gain but still well off the 1913 52-week highs. The Nasdaq traded in only a 19 point range and much of that range was early in the day. The SUNW attack and an earnings warning from NTIQ helped to restrain the eagerness to buy. Ironically there were numerous upgrades to tech stocks and many with new coverage started. Helping to restrain the gains were technical considerations where stocks bouncing over the last two days were nearing resistance again. With the high profile SUNW warning this week there may be some rethinking of the lofty expectations. The major hindrances to the current market are jobs, bonds and valuations with many stocks at new highs on hopes of strong earnings. On Thursday 516 stocks hit new 52-week highs. That was the highest level in over a week. While the jobs number tomorrow is likely to be ignored it was a cloud over the market today. Bonds sold off sharply at the open and gave back all the gains from the last two days. They did improve slightly on the day but the continuing confusion on foreign currency challenges, conflicting economic data and tomorrows Jobs report had them on the run. Fed President Moskow gave them the afternoon boost after saying the "job market was weak despite an upturn in household data." Another Fed President Santomero added to the worry saying "structural unemployment was an ongoing worry." In the war of words Dallas Fed President McTeer while acknowledging weak jobs said "We can't keep having growth that fast (3Q) without producing job growth pretty soon." This positive outlook was the primary cause for the spike in yields at the open. Not to be left out Ben Bernanke also said that "employment was a major concern" for the Fed. The September Jobs report will be the first look at a massive revision to previous payroll numbers as the Bureau of Labor Statistics attempts to include data that falls outside the normal payroll sample. The revision is made each June but we could get the first clue with the Sept report and the initial revision data. Economists are hoping for an upward adjustment of +200,000 jobs over the 12 month period ending in June. The adjustment comes from matching federal data with state unemployment filings. Personally, I think the barrage of Fed heads all speaking out on employment on a single day was an attempt to cushion the blow for Friday's report. The Fed gets a 24-48 hour advance look at most reports and this literal barrage of employment comments on the same day sure appears to concentrated to be coincidental. Either way the report has been filed and the numbers will hit the wires at 8:30 tomorrow morning. The overnight futures are flat and it appears there is a lack of concern. Traders have either gone flat or placed their bets and we are waiting for the cards to be shown. The problem that concerned me on Thursday was volume. The combined volume was only 3.4 billion shares across all markets. This was the lowest volume on record since Sept-15th and the day before the FOMC meeting. Just like that Monday we are not seeing any rush to place bets. Traders are either confident in their positions or flat. The lack of volume is a problem for the bulls as it takes lots of volume to overcome upward resistance. Tuesday and Wednesday were examples of a complete direction change. On Tuesday there was 4.1 billion shares, 3.1B down volume, 1.0B up volume and the Dow lost -105, Nasdaq -37. Yesterday there was 4.0 billion shares, 3.1B up volume, 0.9 down volume and the Dow gained +194, Nasdaq +45. Exactly opposite days by volume. Market Breadth Last 30 Trading Days People have been asking why the market is so hard to predict lately. First, because it has not been following normal calendar trends. The second reason is the stall at the top. Since September 1st we have been trading in a narrow range between 9400-9600 with the drop over the last week being the only major move out of that range. Take a look at the sheet above. It is the total market breadth for the last 30 days. Over the last 30 trading days over 110 billion shares have changed hands and the total points gained in that period was +61 on the Dow and +56 on the Nasdaq. Notice also the huge shifts in up and down volume. One day there are 900M in one direction and the next day it is over 3B. (The volume columns are in millions) What you should derive from this exercise is that when markets are at or near the top traders are nervous. Both bulls and bears are afraid of that next big move and they are quick to buy the dip or sell the top and do it in a hurry. Note also the increase in the range of point swings as we near the top of the chart. If you do not like one days massive move just wait and it will reverse. There is a lot of information in this sheet if you take the time to review it. It tells the psychology of the market without even looking at a real chart. I put this together for one reason. You can easily see the increasing volatility and bipolar swings in the U/D volume. Next week begins the two most volatile weeks of the year and the odds are good the numbers at the top two weeks from now will be even more bipolar. Nobody knows which way we are going or how far but the odds are we are going to be moving fast and we are likely to cover the same ground more than once. Keep those seatbelts fastened! Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Central Bankers Jonathan Levinson With news of the dollar allegedly being played by central banks, massive open market operations and speeches from the Fed, it’s becoming increasingly difficult to separate movements caused by supply and demand from those mandated by central policy. Bonds declined today, the dollar waffled, gold drifted, and equities advanced. 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 US Dollar Index dived to new lows overnight, was saved from just below the 92.10 level, peaked at a lower high below 92.70, and was trading 92.45 as of this writing. Once again, despite dollar weakness, December gold and silver futures traded in negative territory through most of the session. The Commodities Index (CRB) added just .28 to close at 244.56 led by crude oil, soybean and copper futures. Daily chart of December gold Ben Bernanke was out today discussing what his studies claim to be the minimal effect that Fed interest rate decisions have on the stock markets, and more particularly how rate hikes should not be sufficient to prick stock market bubbles. I had understood that Al Green denied the existence of Fed-induced bubbles. Either way, while the Bank of Japan and the Fed cannot seem to prop the dollar for longer than a few hours, gold seems to be easily sold, falling in dollar terms even as the dollar drops. Note that the gold futures market is not particularly large, and with under 600 December contracts traded today, it doesn’t take big money to move it. Gold was lower by 1.00 as of this writing, trading 384, despite strength in HUI and XAU which closed near their highs, up 2.07 at 198.83 and +1.27 at 92.90 respectively. The uncertain oscillators appear to be rolling over, and in light of the substantial gains made by gold on this move, it continues to look iffy at current levels. I write this despite feeling particularly bullish on gold in light of the ongoing dollar drama and what sounds like an increasingly shrill round of cheerleading from the Federal Reserve. Daily chart of the ten year note yield Ten year note futures got sold aggressively today but closed off their lows, with the TNX finishing higher by 7.7 basis points at 4.009%. The move is not as “clean” as one might hope, due to a large drain from the Fed via its open market operations. 27.75B in expiring multiple-term repurchase agreements were replaced with 16B for a net drain of 11.75B today. Given the lack of damage done to equities despite last night’s technically overbought condition, one must assume that the redemptions were made via sales of treasuries. Whatever the cause, the bottomy TNX made solid gains today, and given the oversold oscillators on the charts, today may prove to have been a good selling opportunity for bonds. Daily NQ candles It was a quiet, positive day for equities, noteworthy as it followed yesterday’s massive upside move. NQ added 4 points or .30%, ES 3.50 or .34% and YM +36 or .38%. Recall that the blast off in equities coincided with word on the wire that Japan was buying dollars again. Whether part of today’s vertical moves were caused shorts covering, “bargain” hunters or residual buying from some of those central bank dollars, we do not know. I suspect that it’s not the latter, as the .3% gains would have been 3% instead, for all the subtlety that the primary dealers tend to show. I’ve drawn what appears as a bullish descending wedge on the daily chart with today’s move constituting a trendline break. 30 minute 20 day chart of the NQ. This formation projects to the rally highs on a maximum fulfillment, but for now the oscillator trend remains lower. Despite the strength today, no buy signal has yet been printed on this longer timeframe. 20 day 30 minute chart of the NQ The 30 minute NQ reveals a slight bearish divergence on the 300 minute stochastic, but it’s the own one of its peers with no such print on the ES or the YM. The 300 minute stoch and the Macd both bottomed and reversed from higher lows, respecting uptrends both on the indicators and in price. I note these facts first because my gut feeling is particularly bearish on equities, and I don’t want the bullish technical case to get forgotten. The formation appears to be a bear wedge, and the upphase on the oscillators is seen within the context of an ongoing daily cycle downphase. The volatility indices were green for much of today’s session, and the buying was not sufficiently strong to move the indices much more than sideways. Whether my gut feel turns out to constitute a bullish “wall of worry” will have to be seen, but it’s difficult to imagine getting excited about owning the NQ here. It felt today like much of the buying was from worried shorts. Daily ES candles One might be tempted to observe that dollar weakness proved to be very bullish for stocks, bonds and commodities earlier this year. Our review of the money supply and subsequent news stories revealed that the money supply had increased during that time, and the theory is that this “hot” money was chasing everything with an offer. While money supply may still be increasing, the price of all assets is not. Equities have corrected, as is gold, and we saw the CRB dip below 240 last week. Equities and treasuries are no longer rallying together. In 2002, the 20% drop in the US Dollar Index was matched by a precipitous drop in equities. Bernanke’s speech today sounded like a “don’t blame us” statement, but again, it could just be my own bias coloring my perception. The ES looks stronger than the NQ again, and the reversal printed on the Macd fast line is matched by an upward twitch on the 10 day stochastic. It’s just a twitch, and not yet a signal, but it’s there. More than half of the decline from the rally highs has been retraced by this rapid upmove. 20 day 30 minute chart of the ES The upward reversal this afternoon caught many by surprise, including the oscillators on the 30 minute chart. The reversal from much higher lows is bullish. The upmove in price seems very steep, and the market seems to be struggling with the prospect of a trip to the upper trendline at 1026-7. Current resistance at 1020 is 61.8% above the 987.75 low. A move to the 74.6% will attract sellers in droves, but for the moment, bears have been unable to complete even a 30 minute oscillator downphase. Tomorrow should resolve this afternoon’s gridlock one way or the other. Longs at the lower trendline feel risky to me, and I’ll be assessing shorts at resistance above or on a break of the steep lower trendline. Daily YM candles Once again, the YM resembles the ES most closely, nothing to add. 20 day 30 minute chart of the YM The oscillators on the 30 minute charts have been working very well for the past weeks, but today’s reversal was a surprise as it happened. I’m hoping for tomorrow to resolve the deadlock. An upward trending move would be counter to the current daily and weekly chart oscillator downtrends. It would surprise many participants, which is its strongest recommendation, but the odds do not favor it. See you at the bell! ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ******************** INDEX TRADER SUMMARY ******************** Groping for gains The major indices traded in a rather narrow range as California's gubernatorial candidate Arnold Schwarzenegger, and his past improprieties on "rowdy movie sets" more than a decade ago, received more coverage than the 0.8% decline in August factory orders and a weekly jobless claims report that continues to hover around the 400,000 level. A level that economists say is the waterline for an improving or deteriorating job market. The August factory orders news is considered "old" data these days where greater focus will be given to tomorrow's nonfarm payrolls data for September, where economists are forecasting the economy to have lost an additional 25,000 jobs in September, after losing 93,000 in August. Perhaps the weekly 399,000 new filings for state unemployment claims, a smidge under the 400,000 level, was enough to have the broader S&P 500 Index (SPX.X) 1,020.24 +0.19% gaining 2-points by the close. If economists' are correct in their monthly nonfarm forecasts it would be an 8th consecutive monthly decline for nonfarm payrolls, where a recovering U.S. economy would have lost 635,000 jobs in the past 8 months. If today's trade lulled anyone to sleep, the get out those smelling salts, as you may want to be sharp tomorrow! Tonight I want to lay out a little plan and build some observations that may help keep a trader calm, when before the opening bell, the markets are going to get September nonfarm payrolls, September unemployment rate (forecasted at 6.2%, up from August's 6.1%), September hourly earnings (forecasted +0.2% from August's +0.1%) and September's average hours worked per week (forecasted 33.7 hours from August's 33.6 hours). While I strongly suspect the pre-market economic reports will grab the day's headlines, at 10:00 AM EDT, ISM Services (non- manufacturing) are forecasted at 63.0%, down from August's 65.1% reading. There are two levels I think a trader might want to monitor tomorrow morning AFTER the all the payroll data is announced, in order to judge a market's response. If by the cash open at 09:30 AM EDT S&P futures are holding above 1,015.50, then I would have to hold a neutral to bullish bias. Below this level, the downside risk could immediately be found to 1,007.80 and from there, 1001.80. On the upside, a trade in the futures at 1,019.20 would be bullish in my opinion, where upside builds to 1,029.10. Here's the layout for my DOWNSIDE, thoughts. While I'm bullish at tonight's close, here's my thinking. December S&P futures (sp03z) - Daily Intervals This is the same chart of the S&P futures (sp03z) we put together several weeks ago after the S&P 500 broke to new highs. The reason I say I carry a bullish bias into tomorrow's session, is the ability of the futures to hold above 1,015.50. If the MARKET is trading these levels, then it made some sense yesterday that a break higher at sp03z had upside to 1,015.50, the next level higher. Right now, it makes sense that futures above 1,015.50 has upside to 1,029.10. With that chart in mind, where the blue retracement still give us further upside targets, if the S&P 500 decides it want to break to another 52-week high, lets look at a futures chart, and lets just pretend that the recent 52-week high is THE high for the next several months, and lets say that the recent high and Tuesday's low becomes a more critical near-term range, and use the more CONVENTIONAL approach to retracement. Regardless of what retracement you use, make NOTE of 1,007 and 1,029. S&P futures (sp03z) - Daily Intervals Here's the same S&P futures chart (sp03z), but this time I'm showing the more conventional use of retracement. Even with this retracement, it would appear a bullish bias was carried into today's close, as this futures contract was able to close above 1,019.20. The little black tick you see as a bar, is tomorrow's session already underway. Do you see some of the commonality at 1,029 and 1,007 in the above chart, that also presents itself in the first chart, using our fitted retracement technique? The reason I think there's a pretty good chance we could see a trade at 1,029 right now, and continues to be a test of early and mid-August is represented by the PINK circles I've drawn. See how in August, when the S&P 500 rebounded from the 981 level, it traded 5 PINK circles higher, before it ever came back through (below) a prior level? Today's trade and ABILITY to CLOSE 1,019.20 would be a 4th level of upward trade. This would be a pattern we might look for DUPLICATION. Follow that first pattern of PINK circles. How many levels lower did it trade, before a new high was set. I count 3. But look at the CLOSE. See how the futures never CLOSED below that 1,007.29 level? On an intra-day basis, the futures ALWAYS seemed to want to close above the third level lower and perhaps there was just too much demand still in place. The reason I have a RED lower arrow below 1,007 right now, is that we've only seen 4 upward levels traded, and a trade below and CLOSE below 1,007, would be DIVERGENCE of the August pattern. I point this out, for one reason. Some traders may be playing the SIMILARITY pattern from August based on the pivot levels. Note that in the above chart, I've calculated the difference between today's S&P futures (sp03z) settlement, and the S&P 500 Index (SPX.X) 1,020.24 cash close. In tomorrow morning's 09:00 AM EDT update, I'll report what stock futures are doing at the time of writing and all you need to do is add about 0.64 to the futures number, to figure out where the cash will open at 09:30 AM EST. Here's tomorrow's Pivot Matrix. Remember.... 1,007 and 1,029. Pivot Analysis Matrix - OK... so 1,007 and 1,029 don't show up EXACTLY in the MATRIX, but I've highlighted some very close correlations, where within 2 or 3 points, these two levels become rather important, and I think the SUPPORT levels and WEEKLY/MONTHLY pivots become VERY important tomorrow. It would be my opinion that some of the slight softening in economic data will place GREAT emphasis on the nonfarm numbers tomorrow. The scenario for gain to WEEKLY/MONTHLY R1's is if the nonfarm data comes anywhere close to economists' forecast, it may be just enough to get the bid higher and keep investors/traders hanging in their for one more week, where a bull gets his/her trade target of WEEKLY/MONTHLY R1. However, a miss on the data may have some of last night's mentioning of trader talk that mutual fund managers are now playing more short-term moves, looking to pad buy side results with more modest gains, and we see the markets get "flushed" back lower, and thought begins to build that this rally is a failed rally, and the SPX gets pushed back below the WEEKLY/MONTHLY Pivots. Where the futures come in, I think, is if things get flushed back lower, then a futures CLOSE below 1,007 then has our CASH MONTHLY R1s in play. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval I received several e-mail from traders asking if we should "believe" the QQQ break above the WEEKLY/MONTHLY pivots, or even "believe" today's advance as it came on light volume. Under the scenario that a bull plays the SIMILARITY of the August rally, the decline in volume might well be a good sign. While today it is easier to say that in August, the QQQ may have simply been "sold out" and that the light volume rally was simply due to lack of sellers. At some point, the QQQ will not lack sellers, but I thought a trader should trade the QQQ's long on today's move back above the WEEKLY/MONTHLY pivot resistance. A jittery bull, like myself, could follow with a tight stop under today's low, especially if looking of any DIVERGENCE to the past, where in August, when the QQQ began its rebound, the QQQ didn't trade below a prior day's low until August 25, when the QQQ traded below its Friday, August 22 session low of $32.33. And a bullish stop under today's low, or even the recent lows might not be a bad idea as the NASDAQ-100 Bullish % ($BPNDX) saw a net loss of 2 stocks to a point and figure sell signal. This has the bullish % falling 2% to 72%. Still "bear confirmed." S&P 100 Index (OEX.X) Chart - Daily Intervals I think traders should continue to notice the "distance" between the QQQ/NDX and its weekly/monthly pivot and the OEX/SPX/INDU and their WEEKLY/MONTHLY pivots. One shorter-term trader was "smart" and after having taken a bullish trade in the SPY yesterday, sold that trade and decided to rotate to the QQQ. His thought was... "if they're going higher, why not play follow the leader." That thought will be tested tomorrow. The reason I think this was "smart" is that he at least booked a profit in one trade, and didn't overleverage to the bullish side. Today's trade saw the narrower S&P 100 Bullish % ($BPOEX) see a net gain of 1 stock to a point and figure buy signal. This has the bullish % edging up to 79%, but still reading "bull correction" status. Right now, it would take a reading of 84% to have this bullish % reversing back up to "bull confirmed." The broader S&P 500 Bullish % ($BPSPX) saw a net gain of 0.2%, so a net gain of 1 stock to a point and figure buy signal was found. Still "bull confirmed" and edging back up to 77.2%. Dow Industrials (INDU) Chart - Daily Intervals The INDU came into our zone of near-term resistance and closed about as close to its now rounding flat 21-day SMA, without closing right on it we could possibly have imagined. Today's trade was hardly that of a "rowdy movie set," but grab you popcorn and a soft drink, as I think tomorrow's trade has the potential of a quick hitting action film! Today's trade saw a net gain of 1 stock to a point and figure buy signal as the very narrow Dow Industrials Bullish % ($BPINDU) rose 3.33% to 83.33%. Still "bull correction" status and would take a reading of 86.66% to reverse back up to "bull confirmed", while a reading of 78% would be further internal deterioration to "bear confirmed" status. Do you sense the range in the bullish % too? Caterpillar (NYSE:CAT) $72.70 +1.90% was the Dow component and the OEX component and most likely the SPX component that gave the "buy signal." Remember how CAT had achieved a prior bullish vertical count of $72, traded $73, then eventually gave a "sell signal" at $68? It has now reversed back up on today's news it may be in line to win an Iraqi reconstruction bid. Today's buy signal now has the stock building a bullish vertical count to $81, and this type of bullish count may indeed be a "new revelation" that has the MARKET thinking higher prices are in store for the CAT. Jeff Bailey ************************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. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** Count Down to Jobs -J. Brown The markets hit the pause button as investors decided to wait and see what tomorrow's September jobs report will reveal. Economists are expecting the Labor Department's employment report to show the U.S. economy losing jobs for the eighth month in a row. Current estimates, per a Bloomberg survey, are for a loss of 25,000 jobs last month and a jump in unemployment to 6.2 percent, up from 6.1 in August. Should this number come in significantly weaker than expected then look for turmoil in stocks as investors hit the sell button in a knee-jerk reaction to lock in profits. If the report is positive, then it's off to the races as Wall Street heads into the Q3 earnings reporting season. Looking at today's action the overall mood was still somewhat optimistic as the major indices tended to drift higher into the afternoon. The lack of profit taking on yesterday's big moves is encouraging. Recent comments from the Chicago Federal Reserve President and the Dallas Federal Reserve President regarding strong growth for the U.S. economy for the remainder of this year and throughout 2004 helped soothe investors concerns. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9686 52-week Low : 7197 Current : 9487 Moving Averages: (Simple) 10-dma: 9447 50-dma: 9365 200-dma: 8705 S&P 500 ($SPX) 52-week High: 1040 52-week Low : 768 Current : 1020 Moving Averages: (Simple) 10-dma: 1013 50-dma: 1003 200-dma: 932 Nasdaq-100 ($NDX) 52-week High: 1406 52-week Low : 795 Current : 1337 Moving Averages: (Simple) 10-dma: 1345 50-dma: 1311 200-dma: 1150 ----------------------------------------------------------------- It appears the recent rise in the volatility indices was a false alarm. Both have rolled back over as the markets rebound from Tuesday's lows. CBOE Market Volatility Index (VIX) = 20.80 –0.27 Nasdaq Volatility Index (VXN) = 31.25 –0.08 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.77 495,796 384,012 Equity Only 0.55 386,713 213,906 OEX 1.53 16,855 25,892 QQQ 0.67 25,310 17,140 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 72.0 + 0 Bull Confirmed NASDAQ-100 72.0 - 3 Bear Confirmed Dow Indust. 83.0 + 3 Bull Correction S&P 500 77.2 + 1 Bull Confirmed S&P 100 79.0 + 1 Bull Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.20 10-Day Arms Index 1.34 21-Day Arms Index 1.25 55-Day Arms Index 1.07 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1698 1676 Decliners 1109 1372 New Highs 228 149 New Lows 12 12 Up Volume 988M 829M Down Vol. 496M 730M Total Vol. 1521M 1593M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/23/03 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 The latest option/futures expiration appears to have reduced some outstanding positions and commercial shorts saw the biggest drop. Suddenly, professional longs are dead even with shorts. Meanwhile, small traders closed a large chunk of long positions. Commercials Long Short Net % Of OI 08/26/03 410,378 472,987 (62,609) (7.1%) 09/02/03 417,973 482,392 (64,419) (7.2%) 09/09/03 418,958 486,209 (67,251) (7.4%) 09/23/03 395,123 397,858 ( 2,735) (0.0%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 08/26/03 170,424 76,967 93,457 37.8% 09/02/03 169,030 75,748 93,282 38.1% 09/09/03 176,401 81,444 94,957 36.8% 09/23/03 139,482 87,981 51,501 22.6% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 We have a major reversal in the works here. Commercial long positions dropped about 260K, instantly changing sentiment to bearish. Small traders had a change of heart and suddenly went excessively long, which is ironic now that the SPX just broke support. Commercials Long Short Net % Of OI 08/26/03 338,766 234,841 103,925 18.1% 09/02/03 347,724 224,011 123,713 21.6% 09/09/03 370,909 237,610 133,299 21.9% 09/23/03 109,417 204,026 ( 94,609) (30.2%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 08/26/03 52,131 120,853 (68,722) (39.3%) 09/02/03 56,709 134,094 (77,385) (40.6%) 09/09/03 59,692 130,270 (70,578) (37.1%) 09/23/03 175,750 62,558 113,192 47.5% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 The recent expiration appears to have reduced the number of outstanding positions but sentiment remains bearish for commercials and bullish for small traders. Commercials Long Short Net % of OI 08/26/03 33,991 55,849 (21,858) (24.3%) 09/02/03 37,002 55,379 (18,377) (19.9%) 09/09/03 44,677 62,369 (17,692) (16.5%) 09/23/03 32,648 42,565 ( 9,917) (13.2% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 08/26/03 26,108 8,864 17,244 49.3% 09/02/03 23,168 10,561 12,607 37.4% 09/09/03 28,788 13,370 15,418 36.6% 09/23/03 17,862 9,880 7,982 28.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL The same can be said for the $INDU futures with outstanding positions dropping, the sentiment remains the same with commercials feeling bullish. However, small traders are feeling a lot more neutral with a drop in short positions. Commercials Long Short Net % of OI 08/26/03 24,586 10,386 14,200 40.6% 09/02/03 25,462 10,447 15,015 41.8% 09/09/03 25,807 10,756 15,051 41.2% 09/23/03 15,911 9,123 6,788 27.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 08/26/03 14,115 5,592 8,523 43.2% 09/02/03 6,629 13,402 (6,773) (33.8%) 09/09/03 7,429 13,796 (6,367) (30.0%) 09/23/03 7,505 7,779 ( 274) ( 1.8%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************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. 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The Option Investor Newsletter Thursday 10-02-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: JCI Call Play Updates: AMZN, APOL, EXC, RYL, SLB New Calls Plays: CAT, UTX Put Play Updates: CCMP, GILD, ITT New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** Johnson Controls - JCI - cls: 97.60 chng: +0.95 stop: 97.75 We'll have to chalk this one up to a stock that just doesn't want to drop. As soon as it gave us our PnF Sell signal by breaking under $95, the bulls came tearing back with volume running strong. We maintained a fairly wide stop to allow for this sort of volatility, but it wasn't enough, with our $97.75 stop (more than $4.50 above Monday's low) being tagged early in the session. The stock did close below that level by a small amount, but there just wasn't enough weakness to warrant continuing to lean to the bearish side right now. Use any opening weakness on Friday to gain a more favorable exit. Picked on September 25th at $95.75 Change since picked: +1.85 Earnings Date 10/22/03 (confirmed) Average Daily Volume = 486 K 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 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amazon.com - AMZN - close: 50.09 change: +0.97 stop: 47.25*new* Continuing its bullish pattern, AMZN caught a strong bounce yesterday from support at the 20-dma (currently $47.73), which was just below the mid-line of the rising channel. Despite the lackluster trade in the broad market today, the stock tacked on nearly 2% to squeak out a close back over the $50 level. Now the top of the channel has risen enough to give us a decent shot at next resistance at $52. Dip buyers that took advantage of the rebound yesterday got a great entry point and it should now be safe to raise stops to $47.25, which will be below the supportive 30-dma (currently $47.20) by tomorrow. This moving average hasn't been violated on a closing basis since late July, so if it is violated, we'll know this bullish run is over. But right now, the bulls definitely are in charge. Conservative traders may want to harvest some gains on a move near $52, but we're going to hold out for a push up to our aggressive $55 target ahead of earnings in a little over 2 weeks. Picked on September 18th at $47.89 Change since picked: +2.20 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 9.02 mln Chart = --- Apollo Group - APOL - close: 67.95 chg: -0.22 stop: 64.75*new* APOL looks ready for its next leg higher. The stock enjoyed a nice bounce from the $65 level with the markets big surge on Wednesday. Traders who took advantage of the dip to $65 should be looking good and traders who waited for a move over $67 now have an opportunity to gauge a new entry. We would have liked to have seen volume really confirm the bounce but volume has been fading, which is normally not a bullish sign. We are raising our stop loss to $64.75. Given the expectation for a strong quarter we might actually witness a pre-earnings ramp up. APOL should announce on Oct. 7th. Picked on September 16 at $68.45 Change since picked: - 0.50 Earnings Date 10/07/03 (confirmed) Average Daily Volume: 1.9 million Chart = --- Exelon Corp. - EXC - close: 64.65 change: +0.05 stop: 61.75*new* Didn't we say EXC was unlikely to be a fast-moving play? Well, maybe we erred on the side of conservatism, as this staid Utility stock is really tearing up the chart so far. Starting with Monday's breakout, this has been a very bullish week for the stock, helped along by the strong action in the Utility Sector index (UTY.X), which is closing in on strong resistance in the $295-300 area. EXC is looking a bit extended right here, as price is above both the upper Bollinger band and the top of its rising channel with daily Stochastics starting to flatten out in overbought territory. That doesn't mean it can't head higher, just that a bit of consolidation may be necessary first. For traders still looking to enter the play, we're only comfortable suggesting pullback entries near $63 (both the center of the rising channel and a re-test of broken resistance). Note that we've raised our stop to $61.75, just below the 20-dma. Should EXC break higher from here, harvesting some gains in the $66-67 area would be a prudent move. Picked on September 28th at $62.64 Change since picked: +2.01 Earnings Date 10/28/03 (unconfirmed) Average Daily Volume = 1.17 mln Chart = --- The Ryland Group - RYL - cls: 78.65 chng: +0.77 stop: 74.00*new* Talk about your impeccable timing! No sooner than we added bullish coverage of RYL, than the whole Housing sector exploded to the upside yesterday, with the $DJUSHB index tacking on more than 6%. No slacker, RYL delivered it own 6.5% advance. The stock gave us one fleeting opportunity at a solid entry with the opening dip to $72.65 before really turning on the afterburners. Proving that those gains weren't a fluke, the stock advanced a bit further on Thursday, ending at another new all-time closing high. There's still the possibility of some resistance at $79 (the July intraday high). As a measure of just how strong the buying pressure has been, today RYL found SUPPORT at the upper Bollinger band. That's right, the stock spent the entire day outside the Bollinger bands, which is a rather uncommon occurrence. RYL is feeling a bit frothy here after yesterday's sharp gain, but we don't want to rush out of the play with buying volume running so strong. But we clearly can't advocate initiating new positions at this altitude. In fact, conservative traders might be wise to harvest some gains here or tighten stops to $76.90 (just below today's intraday low) and then look for a re-entry on a dip and rebound near $75. We're still anticipating a breakout above $80, so we're cautiously raising our stop to $74 tonight. Picked on September 30th at $73.11 Change since picked: +5.54 Earnings Date 10/21/03 (confirmed) Average Daily Volume = 835 K Chart = --- Schlumberger Ltd. - SLB - cls: 49.67 chng: +0.19 stop: 48.00*new* Here we go again! By the close of trading, SLB was looking like it was headed south with its close below the ascending trendline. But in a miraculous recovery, the stock was buoyed by the broad market action and it is right back at that pesky $49.75 resistance from which it broke out in the middle of September. Another breakout over that level looks like a viable entry opportunity, with a rejection likely to create problems. The stock is still building a pattern of higher lows and higher highs and as long as that pattern remains intact, then the bulls should keep smiling. Because of the last pullback below the ascending trendline, we're not advocating pullback entries at this time. SLB needs to prove its bullish intentions for us to add more capital to the play. Raise stops to $48.00, which is just below Tuesday's intraday low. Picked on September 21st at $50.99 Change since picked: -1.32 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 3.16 mln ************** NEW CALL PLAYS ************** Caterpillar Inc - CAT - close: 72.70 chg: +1.36 stop: 67.50 Company Description: For more than 75 years, Caterpillar Inc. has been building the world's infrastructure and, in partnership with its worldwide dealer network, is driving positive and sustainable change in every continent. With 2002 sales and revenues of $20.15 billion, Caterpillar is a technology leader and the world's leading manufacturer of construction and mining equipment, clean diesel and natural gas engines and industrial gas turbines. (source: company press release) Why We Like It: There appears to be a lot of positives being reflected in CAT's stock price. The recent ISM data reassured investors that the manufacturing sector was still expanding for its third month in a row. Analysts are still suggesting investors look to cyclicals to benefit from the pick up in economic activity. CAT shareholders are also eager to find out if CAT will be awarded a major contract to the U.S. government for power generators to rebuild Iraq. The latest news, regarding the potential contract, hit the wires today and contributed to CAT's breakout of its trend of descending highs. CSFB's analyst John McGinty said the potential deal could be worth 25 to 30 cents a share to CAT's earnings for 2004. Details were muddy but the expectation is for an announcement sooner rather than later. He reiterated his "out perform" and $79 price target for the stock. Meanwhile, we really like the technical breakout for CAT. MACD took a long time to drift back from overbought and today's move helped create a fresh buy signal. The stock's stochastics, RSI and momentum oscillators all look positive as well. Today's jump even created a fresh buy signal on its point-and-figure chart (see below). We're going to target the $79-80 level and start the play with a stop at $67.50 (the recent low). More conservative traders might be able to sneak by with a stop closer to $69.00. Earnings are in two weeks so we might actually see some pre-earnings momentum. Suggested Options: Short-term traders can look at the October and November strikes, while those investors who enjoy a little more time can evaluate the January's. We like the 70's and 75's and would probably play the Novembers. BUY CALL OCT 70 CAT-JN OI=7034 at $3.60 SL=1.75 BUY CALL OCT 75 CAT-JO OI=3610 at $0.85 SL= -- BUY CALL NOV 70 CAT-KN OI=2966 at $4.60 SL=2.30 BUY CALL NOV 75 CAT-KO OI=1311 at $1.95 SL=0.95 BUY CALL NOV 80 CAT-KP OI= 387 at $0.70 SL= -- speculator BUY CALL JAN 70 CAT-AN OI=8348 at $6.00 SL=3.75 BUY CALL JAN 75 CAT-AO OI=5101 at $3.40 SL=1.65 BUY CALL JAN 80 CAT-AP OI=1136 at $1.65 SL=0.85 Annotated Chart: Picked on October 2 at $72.70 Change since picked: + 0.00 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 2.9 million Chart = --- United Technologies - UTX - cls: 80.45 chg: +0.57 stop: 77.00 Company Description: United Technologies Corp., based in Hartford, Connecticut, is a diversified company that provides a broad range of high technology products and support services to the building systems and aerospace industries. Its four main business segments are Otis, Carrier, Pratt and Whitney, and Flight Systems. (source: company press release) Why We Like It: It's back! We're adding UTX back to the call list because it finally looks finished with its consolidation between $77 and $80.50. Fundamentally, the company should benefit from the economic expansion in the manufacturing sector as evidenced from the ISM report earlier this week. The stock didn't react to last week's multiple-broker downgrade of the defense sector. Technically, we like the new relative high and breakout over the $80.50 level (okay, it closed back below it by a nickel). The stock's MACD has drifted back from overbought and looks ready to print another buy signal. Plus, there are just two weeks left before its earnings report and we might actually see some pre- earnings momentum. Our first target will be the old highs near $87. We'll start the play with a stop at $77 and look to raise it as shares progress higher. More conservative traders may want to wait for a little more confirmation with a move over today's high. Suggested Options: There are just two weeks before UTX's earnings and we don't plan to hold over the report, which means traders could use the October calls, but they remain higher risk. We're going to suggest trading the Novembers. BUY CALL OCT 75 UTX-JO OI= 489 at $6.30 SL=4.00 BUY CALL OCT 80 UTX-JP OI=2604 at $2.20 SL=1.10 BUY CALL OCT 85 UTX-JQ OI= 973 at $0.45 SL= -- pretty risky BUY CALL NOV 75 UTX-KO OI=2145 at $7.00 SL=4.50 BUY CALL NOV 80 UTX-KP OI=1591 at $3.40 SL=1.75 BUY CALL NOV 85 UTX-KQ OI= 424 at $1.15 SL= -- Annotated Chart: Picked on October 2 at $80.45 Change since picked: + 0.00 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 1.9 million Chart = ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Cabot Microelect. - CCMP - cls: 55.13 chng: -0.32 stop: 58.25 The perfect picture of relative weakness, shares of CCMP just keep falling lower and lower. This is in spite of the fact that the Semiconductor index (SOX.X) found support and rebounded over the past couple sessions. We expected the stock to find some support in the $55-56 area, but the resilience of support in this area has been a bit surprising. Even the intraday dips below $55 have found buyers over the past two days. But with nothing on the chart to indicate any strength, we'll continue to ride it lower as long as the pattern of weakness prevails. Aggressive traders can consider adding to current positions on another failed rebound below $57, but we'd be hesitant to chase a breakdown lower with next support at $52.50. In fact, we'd suggest harvesting some gains in that area, especially if reached ahead of the weekend. For now, we're maintaining our stop at $58.25. Picked on September 23rd at $59.05 Change since picked: -3.92 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 770 K Chart = --- Gilead Sciences - GILD - close: 58.89 chg: +2.10 stop: 60.01 Uh-oh! We've been cautious on GILD the last three days after its big intraday bounce and today's move makes us even more cautious. Thursday's pop higher also erases most of the short-term gains for this bearish play. Two weeks ago, JPM downgraded GILD and started the mid-September drop. Soon after JPM's downgrade, Merril Lynch came out defending the stock and now they're doing it again. GILD's 3.7% gain today was fueled by MER raising its earnings estimates for the company on its Viread (HIV treatment) growth prospects. The stock remains under resistance at $60 but many of its oscillators are turning bullish again. We considered closing the play but since it's currently a little better than break even, we're going to let it ride with the stop at $60.01. No new bearish entries are suggested. Picked on September 16 at $59.40 Change since picked: -0.51 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = --- I T T Industries - ITT - cls: 61.09 chg: -0.11 stop: 62.51 Headlines continue to be sparse for ITT but the company did win another $15 million contract from the Defense department on Wednesday. Yet we doubt it had any affect on yesterday's gain, which was probably market related. Bears should be cautious. The rally yesterday put ITT back above its simple 200-dma and we're seeing a very short-term trend of higher lows. This is not good news and with the market's excessive bullishness we could see ITT continue to drift higher. We would not suggest any new bearish positions in ITT until the stock trades back below the $60 mark. If ITT continues its bounce tomorrow we'll probably close the play in the weekend newsletter. Picked on September 28 at $59.64 Change since picked: +1.45 Earnings Date 07/28/03 (confirmed) Average Daily Volume: 546 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 10-02-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - CAT Traders Corner: Get The Itching Powder – It's That Time Of The Month ********************** PLAY OF THE DAY - CALL ********************** Caterpillar Inc - CAT - close: 72.70 chg: +1.36 stop: 67.50 Company Description: For more than 75 years, Caterpillar Inc. has been building the world's infrastructure and, in partnership with its worldwide dealer network, is driving positive and sustainable change in every continent. With 2002 sales and revenues of $20.15 billion, Caterpillar is a technology leader and the world's leading manufacturer of construction and mining equipment, clean diesel and natural gas engines and industrial gas turbines. (source: company press release) Why We Like It: There appears to be a lot of positives being reflected in CAT's stock price. The recent ISM data reassured investors that the manufacturing sector was still expanding for its third month in a row. Analysts are still suggesting investors look to cyclicals to benefit from the pick up in economic activity. CAT shareholders are also eager to find out if CAT will be awarded a major contract to the U.S. government for power generators to rebuild Iraq. The latest news, regarding the potential contract, hit the wires today and contributed to CAT's breakout of its trend of descending highs. CSFB's analyst John McGinty said the potential deal could be worth 25 to 30 cents a share to CAT's earnings for 2004. Details were muddy but the expectation is for an announcement sooner rather than later. He reiterated his "out perform" and $79 price target for the stock. Meanwhile, we really like the technical breakout for CAT. MACD took a long time to drift back from overbought and today's move helped create a fresh buy signal. The stock's stochastics, RSI and momentum oscillators all look positive as well. Today's jump even created a fresh buy signal on its point-and-figure chart (see below). We're going to target the $79-80 level and start the play with a stop at $67.50 (the recent low). More conservative traders might be able to sneak by with a stop closer to $69.00. Earnings are in two weeks so we might actually see some pre-earnings momentum. Suggested Options: Short-term traders can look at the October and November strikes, while those investors who enjoy a little more time can evaluate the January's. We like the 70's and 75's and would probably play the Novembers. BUY CALL OCT 70 CAT-JN OI=7034 at $3.60 SL=1.75 BUY CALL OCT 75 CAT-JO OI=3610 at $0.85 SL= -- BUY CALL NOV 70 CAT-KN OI=2966 at $4.60 SL=2.30 BUY CALL NOV 75 CAT-KO OI=1311 at $1.95 SL=0.95 BUY CALL NOV 80 CAT-KP OI= 387 at $0.70 SL= -- speculator BUY CALL JAN 70 CAT-AN OI=8348 at $6.00 SL=3.75 BUY CALL JAN 75 CAT-AO OI=5101 at $3.40 SL=1.65 BUY CALL JAN 80 CAT-AP OI=1136 at $1.65 SL=0.85 Annotated Chart: Picked on October 2 at $72.70 Change since picked: + 0.00 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 2.9 million Chart = ************************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 *********************************************************************** ************** TRADERS CORNER ************** Get The Itching Powder – It's That Time Of The Month By Mike Parnos, Investing With Attitude Two weeks left until expiration. It's that time of the month when traders are itching to trade. It's either that or body lice. Let's assume it's the former. If it's the latter, you've got a more serious problem than trading boredom. Email volume tends to pick up this time of the month. Traders are lonely, bored, horny or all of the above. Maybe you don't have enough TV stations and you've seen that episode of "Murder She Wrote" four times. Maybe your dog buried your remote control in the backyard. I empathize, but that's no reason to trade. Patience, my children. Patience. Time is working for us. Remember, at the CPTI, we're the casino. We're going to win most of the time. Premium is eroding away and finding its way into our pockets. So, get some itching powder, take a cooking class, do some yoga, eat another pizza – do whatever is necessary to scratch that itch – but DON'T trade just for the sake of trading. If you need some action, call a 900 number. It's cheaper than making a bad trade. _________________________________________________________________ Hi Mike, I am new to OI and so far I have been enjoying all the content, specially your CPTI approach. Would you mind explaining the "Joined" Iron Condor with maximum risk to maximum reward scenario. What is the best and the worst that can happen in an Iron condor? Thanks. Sameer Hi Sameer, Thanks for the kind words. Glad you're benefiting from my column. A "Joined" Condor consists of a bull put spread and a bear call spread with the sold puts and calls being at the same strike price. For example, IBM is trading at $89.45 and we believe it will stay near $90 for the next few weeks. We would sell the Oct. $90 put for $2.55 and sell the Oct. $90 call for $2.10 -- a total of $4.65. We would buy (for protection) the $100 call for $.15 and the $80 put for $.30 -- a total of $.45. The total credit would be $4.20. The closer IBM finishes to $90 at expiration, the more of the $4.20 you get to keep. Your exposure is the 10-point difference in the spreads less the $4.20 credit = $5.80. That's the worst that could happen, but we would never allow it to get to that point. We would exit the position if IBM traded above $94.20 or below $85.80 -- and the loss would likely be only a few dollars. With the regular Iron Condor, we would establish a range by selling the $85 puts and buying the $80 puts for a credit of $.50. Then we would sell the $95 calls and buy the $100 calls for a credit of $.40. The total credit would be $.90. We would keep the $.90 if IBM finishes anywhere between $85 and $95. With the Iron Condor, your exposure is the 5-point difference in the spread less the $.90 credit = $4.10. _____________________________________________________________ Hi Mike One question I have been meaning to ask on your Iron Condors. If a stock goes thru one of the sell strikes, do you also close out the long or just the short? Example: COF. Short Option: Sept. $55 call. Long option: Sept. $60 call. COF goes to $55.65, so we close the short...do you also close the long or leave it open? I have been closing it as well, but not sure that is the correct way. Thanks again. Gary Hi Gary, You have to decide if you think the stock (COF) has established a new trend and if you believe it will continue beyond the short call. If it's early in the option cycle, and you believe the stock will continue, you can hold onto the long. If you're right, and the stock moves to $65, your long call will have an intrinsic value of at least $5.00. But that's IF YOU"RE RIGHT! You're risking the entire value of the long call – which should be significant if it's still early in the cycle. Remember, that at the CPTI, we try NOT to pick a direction – or risk very little if we do. Another situation is if you will only receive a nickel or dime if you sold the long call. For that amount, it might be worth a flyer that the stock will spike up. Financial stocks traditionally don't spike up, so it probably would not be a good idea with COF. However, if you were dealing with a long put, leftover from a bull put spread, you might consider keeping it. Why? Because bad news can cause a stock to tank significantly – financial or otherwise. _____________________________________________________________ OCTOBER POSITIONS October Position #1 – SPX Iron Condor – Trading @ 1020.24 We were going to create an Iron Condor with a range of 995-1075 and take in $2,300 in premium. However, on the Monday following expiration Friday, the SPX gapped lower. So, we adjusted our condor to take the gap into consideration. We created the Iron Condor with a new range is 980-1065. We sold 10 contracts of the October 980 puts and also sold 10 contracts of the October 1065 calls. Then we bought our protection in the form of 10 contracts of the October 970 puts and 10 contracts of the October 1075 calls. We took in a total of $2,300 in premium and that's our maximum potential profit. Our maximum profit range is 980 to 1065. Our safety range is 977.70 to 1077.30. We're at 1020.24, right in the middle of our Iron Condor position – a nice place to be. October Position #2 – QQQ – Put Calendar Spread – Trading @ $33.26 We decided to risk a buck. Since many folks think the market is due to correct. So we created a cheap play that will let us take advantage of a nice down move. We bought 10 contracts of January 04 QQQ $32 puts and sold 10 contracts of October 03 QQQ $32 puts for a total debit of $1.00 ($1,000). If/when the QQQs make their move down, the January $32 put will increase in value more rapidly than the October $32 put. We'll look for a $500-$750 profit on this position and take the money and run. The risk is small. The percentage profit potential is very appealing. This week the market moved down nicely. Another few points down for the QQQs and we'll be in healthy profit territory. October Position #3 – FDC (First Data Corp.) "Joined" Condor – Trading at $40.25. We selected FDC, a financial stock, because is may be less vulnerable volatile movements of the tech stocks. We're going to sell 10 contracts of the October FDC $40 calls and sell 10 contracts of the October FDC $40 puts for a total credit of $2.40 ($2,400). Then, for protection, we'll buy 10 contracts of the October FDC $45 calls and 10 contracts of the October FDC $35 puts for a total debit of $.30 ($300). Our total net credit is $2.10 ($2,100). Our profit range is $37.90 to $42.10. The closer FDC finishes to $40, the more profit we will make. The parameters of our profit range are also our bailout points. October Position #4 – INTC (Intel Corp.) "Joined" Condor – Trading at $28.62. We're going to sell 10 contracts of the October INTC $27.50 calls and sell 10 contracts of the October INTC $27.50 puts for a total credit of $2.10 ($2,100). Then, for protection, we'll buy 10 contracts of the October INTC $32.50 calls and 10 contracts of the October INTC $22.50 puts for a total debit of $.20 ($200). Our total net credit is $1.90 ($1,900). Our profit range is $25.60 to $29.40. The closer INTC finishes to $27.50, the more profit we will make. The parameters of our profit range are also our bailout points. OEX – Bearish Calendar Spread – OEX @ $511.20 We bought 8 contracts of OEX November 470 puts @ $10.60 and sold 8 contracts of OEX September 470 puts @ $2.20 for a total debit of $8.40. The Sept. 470 puts obviously expired worthless. We were going to sell the October 490 puts and take in another $2.10. However, with the Monday market gap-down, we were able to take in $3.10 instead. Our new cost basis is $5.30. QQQ ITM Strangle – Ongoing Long Term -- $33.26. We bought 10 contracts of the 2005 QQQ $39 puts @ $7.00 = $7,000 and also bought 10 contracts of the 2005 QQQ $29 calls @ $7.30 = $7,300 for a total debit of $14,300. Then we sold 10 contracts of the QQQ Oct. 33 puts @ $.85 = $850 and also sold 10 contracts of the QQQ Oct. 34 calls @ $1.05 = $1,050 for a total credit of $1,900. HPQ (Hewlett Packard) Bear-Put Spread – HPQ at $19.52. HPQ is weak and may return to the $15 range. So, we bought 10 contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10 contracts of the HPQ Feb. 2004 $15 puts @ $.40. Total debit of $1.85. Potential max profit of $3.15. We'd gladly accept a profit of $800-900 and close the position early if the opportunity presents itself. This is a long-term position. __________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? The OptionInvestor archives offer a wealth of information – from my columns to past and present informational and educational columns by my OI colleagues. To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. ___________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************************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. 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