The Option Investor Newsletter Monday 10-13-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: A Wave of New Highs Futures Wrap: Columbus Day Trading Index Trader Wrap: See Note Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 10-13-2003 High Low Volume Advance/Decline DJIA 9764.38 + 89.70 9783.49 9675.57 1.28 bln 2058/ 747 NASDAQ 1933.53 + 18.22 1940.97 1921.96 1.48 bln 2154/ 928 S&P 100 523.01 + 2.92 523.01 518.05 Totals 4212/1675 S&P 500 1045.35 + 7.29 1048.90 1038.06 RUS 2000 527.57 + 8.51 528.91 519.06 DJ TRANS 2874.72 + 51.17 2881.65 2822.41 VIX 17.55 - 0.90 17.91 17.42 VXN 26.77 - 0.35 27.20 25.97 Total Volume 3,039M Total UpVol 2,173M Total DnVol 816M 52wk Highs 1031 52wk Lows 14 TRIN 0.80 PUT/CALL 0.62 ******************************************************************* A Wave of New Highs by James Brown The first full week of Q3 earnings season is underway and the markets celebrated with another round of new highs. The DJIA closed above the 9700 level for the first time since June 2002. Broader indices like the NASDAQ Composite set a 19-month high, the S&P 500 closed at a 16-month high and the Wilshire 5000 index also closed at its best levels since June 2002. Volume was very light today but it was expected with the Columbus Day holiday. Contributing to a lack of action were the quiet bond markets, closed for the U.S. holiday and the Japanese markets were closed for their own local holiday. Overall the general feeling remains optimistic as investors position themselves ahead of what is expected to be a very good earnings season. One of Prudential's analysts mentioned that the three dozen plus S&P component companies who have already reported have on average been beating consensus estimates by 11 percent or better. That's exactly what investors want to hear. Current estimates are for Q3 earnings to be up 16 percent from last year. If businesses are beating the Q3 estimates by 10 percent or better then Wall Street can put more hope in the Q4 estimates for 20 percent profit improvement and that might actually keep the rally going. The buying pressure was pretty broad today. Only one major sector index, the OSX oil services index, closed in the red. The strongest buying was concentrated in Transports, Disk Drives, Software, Banks, Brokers and Gold stocks despite a small drop in December gold futures. The U.S. markets enjoyed a positive tail wind from their European counterparts with the English FTSE up 1.2% and the German DAX up 1.9% today. American markets posted strong advance/decline numbers with 20 winners for every 7 losers on the NYSE and 21 winners per 9 losers on the NASDAQ. Up volume was more than three times down volume on the big board (NYSE) and better than twice down volume on the NASDAQ. New 52-week highs hit 633 to just 10 new lows between the two exchanges. Chart of the DJIA: Chart of the NASDAQ: As would be expected during the onset of earnings season stocks were battered about by announcements and new analyst ratings. The three biggest stories today appeared to be Motorola (MOT), Honeywell (HON) and eBay (EBAY). MOT made headlines by announcing their Q3 results one day early. The company announced prior to the opening bell in response to a credit downgrade from Moody's, who cut MOT's rating from Baa2 to Baa3 over concerns from strong competition and revenue weakness. Surprisingly, MOT beat consensus estimates of 3 cents with 6 cents a share, excluding charges. Even more unexpected was MOT's positive guidance for the fourth quarter. Analysts had been expecting Q4 numbers to fall near 12 cents a share on revenues of 7.41 billion. Motorola now expects Q4 earnings in the 11 to 15 cent range on revenues closer to 7.8 billion. However, even the good news did little to assuage investors' fears with MOT's credit rating now just one level above junk. The stock added 8 cents to close at $13.87. The best performer among the Dow Jones components was Honeywell (HON), which jumped 4.6% on a positive article in Barron's over the weekend. Barron's highlighted the company and said the stock offers a very attractive valuation given what they see is a bottom in the manufacturer's business and a recovery in the global economy. With a forward-looking P/E of less than 16 the company is significantly under valued compared to the S&P's average P/E near 29. HON should announce earnings on Thursday morning with consensus estimates looking for 40 cents a share. Another headliner expected to announce on Thursday is EBAY. The online auctioneer was rattled for a 2.4 percent loss after a Smith Barney analyst downgraded the stock from a "hold" to a "sell". Problematic was the term analyst Lanny Baker used to describe EBAY's eBay Motors pricing model after surveying 150 car dealerships. The survey found that 30% are using the service but 40% used to but are no longer using EBAY's used-vehicle auctions. Whether a survey of 150 car dealers out of the 80,000 dealers in this country is enough research is an argument enthusiastic bulls will have to carry. We've mentioned in the past that EBAY is richly valued with a current P/E near 125 and any upset in its execution could wreak havoc on the stock price. Yet today's downgrade was not met with sharp selling but dip buying. The stock quickly rebounded from its early morning lows to bounce from old resistance, now new support in the $57.00-57.50 range. The intraday rebound probably isn't a surprise considering that EBAY's execution is not only on track but apparently one-year ahead of schedule. Look for EBAY to report after the bell on Thursday. Estimates are for 18 cents a share. But enough about companies announcing on Thursday. The markets have plenty to watch tomorrow. Announcing earnings before the opening bell are several big cap stocks that could set the tone for the rest of the day. Many of them are bank stocks and economists will be listening to hear if loan demand has been picking up with the improving economy. The third-biggest U.S. bank by assets is Bank of America (BAC). Estimates for BAC are $1.70. Another big financial announcing tomorrow morning is Merrill Lynch (MER). We've already heard from the rest of Wall Street's big brokers and they've all beaten estimates, some by a wide margin. If MER doesn't turn in the same kind of results the XBD, currently at a fresh 52-week high, could easily see some strong profit taking. Estimates for MER are 85 cents a share. Dow component Johnson and Johnson (JNJ) also announces before the bell. Estimates for JNJ are 68 cents. Another big announcement could be Delta Airlines (DAL). Estimates for DAL are for a loss of $1.47/share. With all the positive press the airlines have been getting in recent weeks I wouldn't be surprised in the least to hear DAL beat that number. After the bell we'll hear from Dow component Intel Corp (INTC). The semiconductor titan has already raised guidance twice this quarter so investor expectations are probably pretty high. If INTC doesn't beat the estimates of 23 cents the SOX is likely to take a dive on Wednesday and the index is already fighting with resistance at 475 creating a potential double-top. Stay nimble and watch your stop losses. Earnings season can be dangerous with the potential for big gap opens in the morning that make stops hard to juggle. ************ FUTURES WRAP ************ Columbus Day Trading Jonathan Levinson With the bond market closed and the Fed resting on Friday’s 9B 6- day repo, there wasn’t much to see as equities pushed at the previous highs and held just below them in a very light volume session. Gold had an exciting reversal off its lows to close in the green. 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 ramped up overnight, reaching resistance at 92.40 before backing off to fade gradually lower as the session wore on. Metals and the CRB finished higher, with the HUI up 5.08 to 202.65, XAU +2.23 to close at 93.29, and the CRB, led by lean hogs, copper and soybeans, added 1.46 to close at 247.75. Daily chart of December gold December gold touched a low of 367.90, higher than the previous spike low of 364, and bounced to finish up .90 at 375. The move was enough to tentatively turn the 10 day stochastic sideways in its ongoing downphase. Fib resistance at 379 matched the high of the day, and will have to be cleared to give goldbugs a chance at an early end to the current downphase. Daily NQ candles Inevitably, we get called away from our screens from time to time. An urgent phone call, something beyond the front door that requires attention. A few minutes or a few hours go by, and you return full of fear and trembling at what might have happened. A rush of relief as you discover that during all that time, the markets went net nowhere. Today was one such day. There was a blast to the rally highs, followed by a dip to near the overnight lows, and a bounce into the close. With futures, catching part of these moves is sufficient for an OK trading day, but the hours spent in a narrow range are difficult to bear. The NQ touched a high of 1024, closing at 1018.50, near the middle of its day range. The ongoing daily oscillator upphase progressed further with no sign of a rollover. The step rise on the daily candles looks like a bear wedge, but that observation’s becoming trite in the extreme, as much of this year’s rally has been built on bear wedges, followed by partial break, and then the next leg up in yet another wedge. So long as price continues to advance, the daily trend remains up. The downside target on this bear wedge is 1300 NQ if it plays out. 30 minute 20 day chart of the NQ The 30 minute chart is sporting a nice bearish divergence on both the stochastic and Macd oscillators, with the price spike failing before the oscillators could catch up. The rollover from a lower high against a higher price high indicates a spikier, more fragile price move, which coincides with what many of us observed. Friday’s closing ramp came from a routine buy signal that looked good for a couple of points at the outside. The spike came very quickly on light volume, and caught many by surprise, including the oscillators. Once again, however, an uptrend is an uptrend and must be respected. Support at 1413 is the line to watch. The closing uptick left the 30 minute chart oscillators hesitating in their downphases. With the short cycle oscillators very flighty today, tomorrow’s open is a coin toss, but the oscillator divergence combined with today’s light volume advance should both bulls and bears on guard. Daily ES candles The sharp daily uptrend on this most recent leg is dramatic on the ES, with the wedge targeting 990 to the downside. The upper trendline resistance just before 1050 coincides with today’s spike high, but looks slightly low for the current oscillator uptrend. Of course, a failure from here would print a bearish divergence on the oscillators and give us a beautiful sell signal in the rearview mirror, but it’s not useful currently. The oscillators want to run higher from here, but as we saw on the weekly view of the INDU and COMPX in the weekend Index Wrap, those oscillators are maxxed out, implying that significant further upside is unlikely. I would guess that if 1050 ES is going to be exceeded, it shouldn’t be by much, but the return of real volume tomorrow will tell the tale. 20 day 30 minute chart of the ES We see the same bearish divergence on the 30 minute ES candles. Trendline resistance again looks like 1050, but the bearish oscillator divergence portends a drop coming shortly. Note that the uptick in the 300 minute stoch on the NQ doesn’t appear on the ES or YM, but it’s too small to read much into, particularly given today’s very light volume of 1.04B NYSE shares. Daily YM candles The strength in the YM is a sight to behold, particularly given the weakness in GE again today. There was an ongoing liquidation in GE, which reached a low of 28.65 and closed at 28.83, even as the YM and ES reached new highs. It’s inconceivable to me that the markets will advance without The General, but it didn’t seem to bother most buyers today. Again, with the light volume today and Friday, tomorrow should bring a good dose of clarity to what is becoming an increasingly muddy picture. 20 day 30 minute chart of the YM We saw consistently low put to call readings today, with the SPX volatility index, the VIX, hitting a new alltime low for its short life and closing -.90 at 17.55. The old VIX, the VXO, closed up 09 at 19.33, a very low reading as well. It’s opex week, and so anything can happen, but the markets appear blissful and oblivious to any downside risk. The bearish divergences we’re watching atop a steep bear wedge deserve more than the complacency we’re seeing, but an uptrend is an uptrend. Bulls and bears need to be careful. I continue to think that the risk of 1000 YM points to upside pales beside the risk of 1000 points to the down, but we’ll trade what we see. See you tomorrow in the Futures Monitor. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_101303_1.asp ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Monday 10-13-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: BBY, BSC, CAT, EXC, FD, UTX Dropped Calls: None Dropped Puts: None Play of the Day: Call - BBY Watch List: Eyes on Some Big Board Stocks Updated on the site tonight: Market Posture: Bulls Celebrate Columbus Day with Green ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** BBY - call Adjust from $50.25 up to $51.25 BSC - call Adjust from $73.50 up to $75.25 CAT - call Adjust from $71.90 up to $73.00 EXC - call Adjust from $62.75 up to $63.25 FD - call Adjust from $42.75 up to $43.50 UTX - call Adjust from $78.50 up to $80.90 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** Best Buy Company - BBY - cls: 54.60 chng: +1.95 stop: 51.25*new* Company Description: Best Buy a specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. The company provides a broad selection of models within each product line in order to provide the customer with a meaningful assortment, offering more than 5800 products, not counting entertainment software titles. Growing its store count by 15% in fiscal year 2000, brought the grand total to more than 4000 in 41 states by year end. Why we like it: Just as we were beginning to fret that BBY might just roll over and die, the stock rocketed sharply higher on Thursday following the company's reaffirmation of its guidance. The entire Retail sector was strongly positive and that helped the bulls push to just 25-cents from our initial $54 target. Friday's lackluster session really didn't have anything to offer except for a bit of consolidation ahead of the weekend. Next week, we'll be looking for a breakout over $54 to confirm that our aggressive target of $57 is achievable. The best entries right now will come from a pullback and rebound from the $51.50-52.00 area, although momentum entries on a breakout over $54 should work too. Note that our stop is now set at $50.25 (just below the bottom of the 10/03 gap). Since BBY doesn't report earnings again until the middle of December, we have plenty of time to let the action play out. Why This is our Play of the Day Defying the odds, the broad market managed another solidly bullish close on Monday, despite the light volume. The Retail index (RLX.X) was a clear winner, advancing more than 1.1% to post its best close since the spring of 2000. As one of the leading stocks in the sector lately, BBY maintained its relative strength, kicking off the week with a 3.7% gain. With today's strong breakout over the September highs, it appears the bulls are setting their sights on the $57-58 area, the site of the highs from early 2000. New entries can be considered on a breakout over $55 for a quick run to our $57 target or on a dip and rebound from the vicinity of $53. Note that we've moved our stop up to $51.25 tonight. While that is still a bit above the 10-dma ($51.11), it will be well below that measure of support by tomorrow's open. Trader's buying into further strength need to be aware that BBY is already up against its upper Bollinger band, so a steep ascent from here has lower odds than waiting for a shallow pullback for entry. Suggested Options: Shorter Term: The November 55 Call will offer short-term traders the best return on an immediate move, as it is just at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the November 60 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 December 60 Call. BUY CALL NOV-55 BBY-KK OI= 4275 at $2.50 SL=1.25 BUY CALL NOV-60 BBY-KL OI= 542 at $0.85 SL=0.40 BUY CALL DEC-55 BBY-LK OI= 5297 at $3.50 SL=1.75 BUY CALL DEC-60 BBY-LL OI= 853 at $1.60 SL=0.75 Annotated Chart of BBY: Picked on October 5th at $51.00 Change since picked: +3.60 Earnings Date 12/17/03 (unconfirmed) Average Daily Volume = 3.87 mln ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** Watch List ********** Eyes on Some Big Board Stocks Winnebago Industries - WGO - close: 52.95 change: +1.14 WHAT TO WATCH: Shares of WGO are powering ahead after a recent breakout above the $50 mark, which had been resistance in September. Now the stock is hitting new all-time highs above resistance at $51.50, which held it back in March and November of 2002. What makes the recent surge notable is that volume has been way above average the last three days in a row. It makes one wonder if someone knows something about WGO's upcoming Thursday morning earnings announcement. Estimates are for 60 cents a share. Chart= --- Omnicom Group - OMC - close: 76.40 change: +0.13 WHAT TO WATCH: OMC is trying very hard to cement the recent breakout over its simple 50-dma but today's session turned in volume that was less than anemic. Fortunately, the MACD is looking pretty bullish as is most of the stock's technicals. Traders who prefer to target their entries on a dip can watch the $74-75 region for any such action. Momentum traders may want to key in on the $77.50 mark and use that as a signal to evaluate new long plays. OMC is expected to announce earnings near Oct. 27th. Chart= --- General Dynamics - GD - close: 82.62 change: +1.37 WHAT TO WATCH: One of the better performers in the defense group is GD. The DFI defense index has been mirroring moves in shares of GD and together they both broke back above their respective 50-dma's. GD's MACD has turned positive again and the stock has essentially filled the gap from mid September. We're a little cautious on the stock and wouldn't recommend new long positions right here, especially with earnings expected on Wednesday morning. Another bounce from the $80 level might be more palatable. Chart= --- Harley Davidson - HDI - close: 51.55 change: +0.94 WHAT TO WATCH: Enjoying a recent breakout above the $50 level is HDI. Shares recently found new support at their simple 50-dma last month and are now shooting higher ahead of the company's earnings report. HDI should announce on Wednesday morning before the opening bell. Good news could send it to overhead resistance near $55. Chart= ************** MARKET POSTURE ************** Bulls Celebrate Columbus Day with Green To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/mp_101303.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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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
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