The Option Investor Newsletter Thursday 10-16-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Under Whelming Futures Markets: Dollar and equity strength Index Trader Wrap: See Note Market Sentiment: Tug of War Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-16-2003 High Low Volume Advance/Decline DJIA 9791.72 - 11.30 9823.42 9730.38 1.71 bln 1848/1314 NASDAQ 1950.14 + 11.00 1951.76 1930.28 1.76 bln 1822/1355 S&P 100 523.51 + 1.37 525.06 520.44 Totals 3670/2669 S&P 500 1050.07 + 3.31 1052.94 1044.04 W5000 10210.84 + 36.00 10234.32 10152.12 RUS 2000 529.64 + 2.29 530.49 526.05 DJ TRANS 2872.58 + 8.90 2891.61 2865.78 VIX 17.19 - 0.50 18.05 16.86 VXO VIX-O 19.12 - 0.14 19.83 18.70 VXN 25.47 - 1.30 27.13 25.37 Total Volume 3,729M Total UpVol 2,332M Total DnVol 1,313M 52wk Highs 675 52wk Lows 16 TRIN 0.97 NAZTRIN 0.94 PUT/CALL 0.65 ************************************************************ Under Whelming That was the term used to describe earnings reports from several Dow components that failed to live up to the great expectations. IBM, CAT and MO failed to impress investors and between the three they were responsible for over -50 Dow points. Take those three stocks out of the mix and the Dow would have set another new high. Interesting statistic but if small consolation to those expecting a continued rally. Dow Chart Nasdaq Chart S&P Chart It was a day of mixed economics but those that were positive were very positive. The Jobless Claims dropped to 384,000 and an eight month low. Ring a bell? That is because last weeks claims were also an eight month low at 382,000 but those numbers were revised up +6,000 to 388K. That took away the eight month title and passed it to this week with a higher number. Just word games but the bottom line was two consecutive weeks under 400K and the four-week moving average fell to the lowest level since February. Continuing claims rose to 3.67 million and a level not seen since June-28th. Layoffs may be easing but jobs are still hard to find. Last week the markets rallied strongly on the drop to 382,000 claims but this week they barely noticed. The Manpower CEO said that despite some recent signs of minor improvement he was unable to call an end to the current labor problems. His company is a leading indicator of job growth and he said improvement was still weak. The Consumer Price Index jumped +0.3% in September with energy prices continuing to rise. The core CPI rose only +0.1% and pushed the annual rate to a new 38 year low of +1.2%. Obviously the pricing environment remains very weak and this prompted Fed Governor Parry to warn that inflation could fall further and that deflation was still the bigger risk. The markets ignored his comments. Business Inventories fell more than expected at -0.4% compared to estimates of only a -0.1% drop. While this is a cause for concern this was August data and the market does not normally react to it. The same information is reported in several other reports on a more timely basis. This was the fourth consecutive monthly drop in inventories. Total business sales also fell in August by -0.2%. The inventory-to-sales ratio is at an all time low of 1.36. This would indicate a rapid buildup could occur if demand were to increase. That increase has yet to happen. Industrial Production rose +0.4% as expected but August was revised from a minor gain to a minor loss at -0.1%. This indicates only a very minor pickup in manufacturing. Automakers were responsible for the majority of the gains with incentives enticing even more consumers to upgrade. Capacity Utilization rose only slightly to 74.8% from 74.5% in August. With 25% excess capacity there is no need to buy more equipment or upgrade plants. This excess capacity is contributing to the decline in prices and drop in inflation. The NAHB Housing Index rose to 72 from 68 in September and jumped to the highest level since December 1999. The dip in mortgage rates over the last month prompted a quick rebound in housing activity. All components of the index were up. The seasonal activity also helped with homes hitting the market from the spring starts. While these numbers are up the number of new mortgage applications is already slipping and could be the beginning of a long term trend. Of course the housing bears have been claiming this for many months and the sector continues to grow. The most bullish report was the Philly Fed Survey, which blew away estimates of 16.0 with a headline number of 28.0. This was far better than anyone had expected and was the fifth consecutive month of expanding conditions. Shipments, New Orders and Employment rose strongly. However, inventories fell to -2.5 and the six month outlook fell to 55 from 66. This mix of conditions indicate that there may have been a burst of activity but the long term outlook has not really improved. Because most manufacturers receive orders and bids for orders many months in advance the business they received last month was expected many months ago. They are now looking at orders for 3-6 months from now and without some increase in demand soon those orders may not come through. Several analysts mentioned today that the 1Q-2004 could actually be weak as the real 4Q business patterns are reviewed. Everyone is expecting a strong 4Q but as of yet it is still just an expectation. If it appears on schedule then we could be off to the races but if it is weaker than expected then the 1Q could see yet another round of cost cutting. Last night we got earnings from IBM and as the headline to this article said, the results were less than exciting. The company met estimates and even said they could see hiring 10,000 new employees next year. Investors were not impressed. The key comment came from the CEO who said that although he was seeing signs of stabilization "it was too soon to call it a recovery." When coupled with Intel's comments that they were seeing strength in Europe/Asia but the U.S. orders were still soft you can see why tech investors were becoming worried. 4% of IBM earnings came from currency gains and not sales. Dow component IBM lost -3.46 for the day. Another Dow component Caterpillar lost -4.02 after raising its outlook for 2003 to $3.00. Sounds good but analysts were already expecting CAT to make $3.15 and the stock was punished severely. CAT said retirement of $40 million in bonds and higher costs offset gains in sales. They stressed gains made in cost cutting but that does not normally please investors. KO missed estimates by two cents despite a +2% gain in profits from currency gains. They were upbeat about sales and outlook but the two cent miss knocked nearly -$1.00 off the stock at the open. It recovered to close at $44.99 and +50 cents off its lows. Another Dow component, MO, reported earnings of +1.22 per share and beat the street by a penny but sales were slipping. Revenue jumped +4.7% to $20.9billion but primarily due to a favorable currency gains of +$940 million. Again, not a normal gain and MO dropped at the open but regained most of the losses by the close. Dow component HON reported earnings that dropped -20% but were inline with analysts estimates. They also guided inline with analyst estimates for Q4. Yet another Dow component UTX beat the street by three cents on the strength of its elevator business overseas. UTX was one of the strongest gainers with a +70 cent bounce to a new 52-week high. After the close there was a flurry of tech earnings as over 200 companies reported today. The overall tech earnings were positive tonight with BRCM, XLNX, AMD, AVID, DCLK, LEXR, PMCS, PLCM, RMBS, WEBX, FCS and ATML all beating the street. Only PXLW missed estimates. EBAY was the biggest company to report. They hit their numbers and raised THEIR estimates for revenue but their estimates for Q4 were for less than analysts had expected. EBAY dropped nearly -$4 in after hours. EBAY has a habit of disappointing analysts who constantly expect them to earn more. The estimates are always more than EBAY's and almost always sets up a failure situation. Despite the few high profile misses today earnings are coming in above expectations with 92% of the S&P companies either meeting or beating estimates. This is a very strong ratio but they are competing against a very weak 2002-Q3. Despite the weak comparisons First Call said the overall results were +6.4% above expectations. Top line growth is running at +8% and bottom line growth at +18%. There is positive momentum in almost all sectors. IDC reported today that PC shipments had risen +15% in Q3 with the strongest gains in Europe. In the U.S. growth was primarily in government and the consumer sector with slow growth in the business sector. IDC had previously projected +10.4% growth. The incentive was blowout specials and extreme competition in consumer PCs. Dell grew sales +27.9% with HPQ hot on their trail with a +28% gain. The combined sales of the next three vendors did not come close to those numbers. Dell is still in the top spot in the U.S. but HPQ is closing the gap according to IDC with strong momentum going into the 4Q. Dell's total market share for the quarter was 17.4% on 6.67 million units compared to HPQ at 17.1% and 6.55 million units. Not everyone was positive with NOK saying sales would be flat or only up slightly. They reported that prices were still falling due to intense competition. Maytag lost ground after saying that competition from cheaper products primarily in the vacuum cleaner sector had impacted results. They are closing plants and restructuring in an effort to lower costs to compete more effectively in the market. They are shifting their manufacturing to Mexico to benefit from the cheaper labor. Sounds familiar. Analysts expected 57 cents and MYG posted only 46 cents. HDI continued to fall on reports of stagnant sales and fears they would miss 4Q estimates. Sales slipped in the 3Q from the prior year and analysts fear they are a leading indicator for a slow down in the consumer sector. HDI is normally exempt from economic conditions as they are normally back ordered on their popular models. They announced plans to only increased the 2004 production estimates by +8.9% and contrary to historical double digit trends. If the sales growth trend has changed it could project weakness in the other high end toys and luxury cars. While the earnings picture is really very positive the mixed messages from a few high profile misses and opposing economic signals worked to keep the Dow locked in its trading range for one more day. The Dow has been trading between 9700-9800 for the last six days. It closed once again under 9800 and could either be poised to rocket ahead or begin profit taking once earnings are over. The Dow has been very strong and the bulls are still supplying an underlying bid on every dip. The Nasdaq managed to close at a new 52-week high but still below the intraday high set yesterday. The flurry of great tech earnings after the close are being overshadowed by the guidance change by EBAY and the massive after hours drop. The Nasdaq futures are down -4.00 but like IBM last night the broader strength in chips could offset the EBAY loss by morning. Friday is option expiration and the volume today was very light. The direction for the averages is still up for grabs and after more than 200 companies reporting earnings today the good news is likely to be priced in. With 92% of companies beating estimates, as expected, there may not be enough excitement left to push the indexes much higher. I speculated this week that Thursday could be the market high and next Tuesday the pivotal day once expiration settlement has occurred. I still believe that Tuesday will be critical and it remains to be seen if the indexes will trend down from here on year end fund selling over the next two weeks. The lack of any upward progress over the last week could be telegraphing a cooling of the bullish sentiment. This cooling is far from a sure thing. I receive emails daily suggesting Dow 11,000 could be reached soon. With earnings estimates still rising for the 4Q, now officially at +22%, unofficially at +26%, there is plenty of reason to expect more gains before the year is out. However, once earnings are "perceived" to be over for this quarter the urge to take some cash off the table could be strong. Using the roller coaster analogy from Tuesday, after a long climb we are beginning to level out. We still cannot see over the top to glimpse what is ahead but the tension is building. If the normal trend is buy the rumor, sell the news then what rumors are investors going to buy next week? Friday is flat economically with only Residential Construction and the final revision of the October Consumer Sentiment. Neither should be market moving. Next week is blank economically with only the Semi Book-to-bill on Monday night of importance. This leaves nothing to stimulate investors except for more earnings and we already know how that book ends. Typically the farther we get into earnings the weaker they become. The bigger blue chips with the best earnings announce first with the crowd of small to midcaps stretched over the next three weeks. There are still some big names left for investors to follow so we have not reached the credits on the earnings movie yet. You do sit through the credits when you go to the movies, right? We still have MSFT, AMZN and MMM leading a list of over 700 companies that will announce next week. There will be plenty of news but the question is will it be enough news to power the markets higher? Keep those seatbelts fastened. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Dollar and equity strength Jonathan Levinson The US Dollar Index managed to not sink today, equities advanced, and gold and treasuries extended their slides. 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 zigged, then zagged but ended up net slightly higher. It revisited this week's bounce high of 92.90 before failing to a higher low at 92, trading just north of 92.60 as of this writing. Gold and silver both declined, and the CRB was down 1.64 at 246 despite strength in coffee, wheat and platinum futures. Daily chart of December gold December gold got sold despite impressive gains in the XAU and HUI. It printed an intraday low at 371.25, bouncing to a lower high before rolling over on the late afternoon dollar strength, trading near its low as of this writing at 371.70. On the daily chart, we see a bearish tilt returning to the oscillators, with an uncertain fade on the bounce off the famous sub-364 low almost 2 weeks ago. Despite this weakness, the HUI and XAU both held strong gains through most of the day, staying above 205 and XAU above 93. This divergence is puzzling, and the only explanation I can find, other than the metal being sold as a hedge against longs in the equities, is the strength in the CDN dollar today. The CDN dollar rallied following the Bank of Canada's decision not to cut rates, and many of the component companies in the HUI and XAU are Canadian. In any event, the HUI approached its rally high on a negative day for gold. Daily chart of the ten year note yield Treasuries opened in the green, driving the ten year note yield (TNX) down to the rising daily trendline, only to reverse at midday, closing higher by 5.8 basis points at 4.455%. The move extended the ongoing yield rally, with no sign of oscillator weakness thus far. While a pause or pullback in the yield was anticipated, one might have expected it to last longer than a few hours. That said, the 10 day stochastic is approaching overbought territory. The bull wedge target remains 4.6% on a maximum upside fulfillment. Daily NQ candles The NQ closed higher by 11.50 points at 1428 today, but it could not undo the trendline break below the steep bear wedge on the daily chart. The end of day short covering rally managed to un- print what was earlier a bearish kiss on the 10-day stochastic. Bulls need to regain the failed trendline tomorrow to avoid what could be a bear wedge breakout coinciding with the topping of its recently daily stoch. The downside bear wedge target is 1300. 30 minute 20 day chart of the NQ A number of readers noted the bearish oscillator divergences through this leg of the recent rally, and I've highlighted them above. Today's action consolidated a failure below the rising trendline under this leg on the 30 minute chart, with resistance just above 1430 NQ. Once again, an uptrend is an uptrend, but steep ones are difficult to maintain. The residual upside in the 300 minute stochastic lines up with the ongoing upward momentum on the 10 day stoch above. This leaves the way clear for a possible revisit to the rally highs, potentially in a dramatic surge. But with these two cycles overlapping approaching the upper end of their range, it's going to take a lot of firepower for bulls to launch a new rally leg from here. Daily ES candles We have a similar, but slightly more bearish picture on the daily ES, with the same bear wedge failure, as well as a failed attempt to reverse it. Note that the 10 day stoch on this chart is already in a bearish kiss, despite a print as high as 1052.25 today. On this timeframe, it appears that the bulls are rapidly running out of racetrack. Support at 1039 has been successfully tested once, and will be the key level to take out to confirm the bears' even short term aspirations. 20 day 30 minute chart of the ES The ES is drifting below the rising trendline, currently at 1048, with the oscillators displaying a steeper divergence and the 300 minute stochastic already rolling over. Fibonacci support coincides with today's low above 1041, but chart confluence begins at last week's low of 1039. 150-tick ES The intraday chart of the ES has a head and shoulders feel to it, with potential neckline support between 1041 and 1044. This is a wide range, and my preference is for the 1041 level, but a sloping neckline is also possible. Daily YM candles The YM, hobbled by weakness in CAT, IBM and GE, did not post a green candle, and closed on a bearish kiss. We may be looking at our leader here. 20 day 30 minute chart of the YM The weakness is again most pronounced on the YM, even on the 30 minute chart, where the broken rising trendline is already history at 9800. Today gave us a continuation of the trend in treasuries, a countertrend move in the dollar, and uncertainty in equities and gold. With tomorrow the final day of opex week, I'm not reading much into today's trading, as the derivatives tail wags the underlying dog. It remains a tricky, rangy equity market, but there are signs that the next direction move may soon be upon us. Bulls in particular need to keep their stops on. See you at the bell! ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? 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Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_101603_1.asp ************************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 ************************************************************** **************** MARKET SENTIMENT **************** Tug of War - Linda Piazza Thursday, those who believe in an improving economy engaged in a tug-of-war with those who believe differently. With the sides equally weighted, U.S. bourses soon settled into the pin-them-to- a-number trading pattern that has become typical of Thursday's trading during option expiration week. Early earnings and economic releases did little to arm either side with more strength than the other. September CPI met expectations of a 0.1 percent increase, and core CPI increased 0.3 percent, slightly higher than the expected 0.2 percent increase. Initial claims fell 4,000 from the previous week's number, and capacity utilization and industrial production met expectations. The Nikkei closed above 11,000 for the first time in a month, but the European markets were headed down. Markets weighed IBM's outlook against Ford's. After digesting the various earnings reports, economic reports, and foreign market performances, market participants wrestled the markets to equilibrium levels . . . until the noon release of the October Philadelphia Fed number. At a surprisingly high 28, that Philadelphia Fed number far exceeded the previous month's 14.6 number and the expected 15.6- to-16 figure. Orders, hours worked, shipments, the number of manufacturers reporting improved business conditions, and the number of factories expecting to hire new workers in the next six months all rose. The release of that number armed the bulls and weakened the knees of the bears, initiating a wave of short- covering that drove the Dow from its 9758 level at noon to a high of 9823 an hour later. The S&P 500 spiked from 1047 to a high of almost 1053. Not one to be left out of a short-covering party, the COMPX scrambled from 1940 to almost 1952. Within two hours, however, the bears had managed to tug the bullish side back, with all three indices testing their pre- release levels again. Then shorts capitulated and the bulls sent the markets up again, although none of the markets reached their early afternoon highs. By the close, advancing issues had beat declining issues by 19:13 on the NYSE and 18:13 on the Nasdaq. Up volume beat down volume on both exchanges, and the new highs had reached 564, measured against only 14 new lows. Bullish sentiment prevailed. The battle may not be finished. After-hours reports included EBAY's warning that the company might miss Q4 earnings and SUNW's wider Q1 loss balanced against AMD's narrowing of its Q3 loss to 9 cents. Fortunately for those dizzied by the tug of war, earnings and economic reports lighten on Friday. Most earnings will be reported before the bell. Also released before the bell will be September building permits and housing starts. Building permits are issued when excavation begins and normally lead the housing starts figure. Although these were not market-moving numbers in the past, they have sometimes gained that status in recent months as the housing sector has become so important in our economy. They have been coming under closer scrutiny as the specter of rising interest rates looms over the sector. The prior numbers were 1.886 million building permits and 1.82 million housing starts, and the expectation is for a lower 1.835 million building permits and a higher 1.827 million housing starts. Housing starts had declined last month, but building permits had picked up, indicating that residential construction might remain strong several months out. Just after the market opens, the Preliminary October Michigan Sentiment number will be released. The previous number was 87.7, and expectations are for 88.2 for October. At 2:00 ET, the September Treasury Budget will be released, with expectations varying widely. However, with tomorrow being an option expiration Friday, we expect to see an early effort to establish an equilibrium level and hold the markets at that level throughout the day. Whether that effort will be any more successful than Thursday's effort remains to be seen. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9850 52-week Low : 7197 Current : 9791 Moving Averages: (Simple) 10-dma: 9697 50-dma: 9467 200-dma: 8767 S&P 500 ($SPX) 52-week High: 1053 52-week Low : 768 Current : 1050 Moving Averages: (Simple) 10-dma: 1040 50-dma: 1014 200-dma: 940 Nasdaq-100 ($NDX) 52-week High: 1439 52-week Low : 795 Current : 1426 Moving Averages: (Simple) 10-dma: 1401 50-dma: 1339 200-dma: 1169 ----------------------------------------------------------------- Hmmm... we're seeing new all-time lows on the Nasdaq's VXN and new lows for the adjusted VIX near 17. The old VIX (now VXO) is still flashing caution signs at 19. CBOE Market Volatility Index (VIX) = 17.19 -0.50 CBOE Market Volatility Index (VXO) = 19.11 -0.15 Nasdaq Volatility Index (VXN) = 25.47 -1.30 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.65 1,050,740 678,903 Equity Only 0.51 757,559 385,965 OEX 1.17 43,019 50,509 QQQ 7.71 29,874 51,017 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.8 + 0 Bull Confirmed NASDAQ-100 79.0 + 0 Bear Correction Dow Indust. 83.3 + 0 Bull Correction S&P 500 80.9 + 0 Bull Confirmed S&P 100 78.7 + 0 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 0.98 10-Day Arms Index 0.94 21-Day Arms Index 1.13 55-Day Arms Index 1.06 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 1661 1771 Decliners 1145 1285 New Highs 299 313 New Lows 13 6 Up Volume 1007M 1086M Down Vol. 609M 646M Total Vol. 1660M 1760M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 10/07/03 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 After two weeks of little movement we're beginning to see commercial traders edge toward a more bearish position. Looking at the small traders we see a reduction in short positions and they remain overall net bullish. Commercials Long Short Net % Of OI 09/09/03 418,958 486,209 (67,251) (7.4%) 09/23/03 395,123 397,858 ( 2,735) (0.0%) 09/30/03 395,713 397,577 ( 1,864) (0.0%) 10/07/03 390,232 402,964 (12,732) (1.6%) 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 09/09/03 176,401 81,444 94,957 36.8% 09/23/03 139,482 87,981 51,501 22.6% 09/30/03 144,681 96,801 47,880 19.8% 10/07/03 138,644 88,018 50,626 22.3% 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're definitely seeing a small trend in the commercials' positions in the e-minis. Long positions have jumped strongly, outpacing new short positions, and the overall net short attitude is dwindling. Retail traders remain heavily net long. Commercials Long Short Net % Of OI 09/09/03 370,909 237,610 133,299 21.9% 09/23/03 109,417 204,026 ( 94,609) (30.2%) 09/30/03 163,828 218,991 ( 55,163) (14.4%) 10/07/03 212,273 225,377 ( 13,104) ( 3.0%) 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 09/09/03 59,692 130,270 (70,578) (37.1%) 09/23/03 175,750 62,558 113,192 47.5% 09/30/03 131,698 65,259 66,439 33.8% 10/07/03 134,990 63,560 71,430 36.0% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 We're still not seeing much movement in commercials willing to commit one way or the other in the NDX. They're currently net short but the margin is fading. Small traders haven't changed much either and remain net long. Commercials Long Short Net % of OI 09/09/03 44,677 62,369 (17,692) (16.5%) 09/23/03 32,648 42,565 ( 9,917) (13.2%) 09/30/03 33,571 42,993 ( 9,422) (12.3%) 10/07/03 33,253 40,861 ( 7,608) (10.3%) 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 09/09/03 28,788 13,370 15,418 36.6% 09/23/03 17,862 9,880 7,982 28.8% 09/30/03 19,803 9,917 9,886 33.3% 10/07/03 18,182 9,688 8,494 30.5% 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 It's the same story here in the DJ futures. There is little change between the commercials or the small traders over all positions. Commercials Long Short Net % of OI 09/09/03 25,807 10,756 15,051 41.2% 09/23/03 15,911 9,123 6,788 27.1% 09/30/03 16,561 8,932 7,629 31.5% 10/07/03 16,277 9,528 6,749 26.2% 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 09/09/03 7,429 13,796 (6,367) (30.0%) 09/23/03 7,505 7,779 ( 274) ( 1.8%) 09/30/03 7,578 8,125 ( 547) ( 3.5%) 10/07/03 7,392 7,910 ( 518) ( 3.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************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. 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The Option Investor Newsletter Thursday 10-16-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: AZO, BBY, BSC, CBE, COO, EXC, FD New Calls Plays: None Put Play Updates: COCO, MRK New Put Plays: MATK **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** None ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** AutoZone, Inc. - AZO - close: 93.94 change: +0.37 stop: 91.95 Our bullish play on AZO remains in a holding pattern. The stock looked ready to soar past the $95.00 level as of Tuesday's close. Yet with the markets trading mostly sideways AZO has done the same. Our trigger to go long is a move above $95.00. Given the less than exciting reception to IBM's earnings last night and EBAY's earnings on Thursday afternoon the Friday session could be a tough one for the bulls. We're going to be patient and wait for AZO to hit our trigger. Picked on October xxth at $xx.xx Change since picked: -0.00 Earnings Date 12/22/03 (unconfirmed) Average Daily Volume = 989 K Chart = --- Best Buy Company - BBY - cls: 53.62 chng: +0.24 stop: 51.75 The last two sessions of mild profit taking has not left BBY untouched. The stock tagged a fresh high on Wednesday morning before slipping backwards. Right on target too as the stock pulled back to the $53.00 level before bouncing. We had suggested on Tuesday that a pull back and bounce in the 53.00- 53.50 area could make a good entry point for new positions. If you missed it don't worry. You may get another chance. Friday could be another day of weakness and patient bulls may get another opportunity to buy BBY on the dip. If the major indices mount any sort of significant pull back then we wouldn't be surprised to see BBY come close to the $52.00 level. Picked on October 5th at $51.00 Change since picked: +3.62 Earnings Date 12/17/03 (unconfirmed) Average Daily Volume = 3.87 mln Chart = --- Bear Stearns Cos - BSC - close: 77.26 chg: -1.05 stop: 75.25 Hmm... we have mixed emotions about what's going on in BSC. The stock slid back about a dollar after the potential scandal involving five specialists firms began to solidify today. One of the five firms is Bear Wagner, partly owned by BSC. The NYSE says it will seek near $150 million in damages against the five firms but it's unclear how much of that fine may be levied at Bear Wagner. Investors certainly don't seem too concerned that it will have an impact on BSC's earnings but volume has been pretty strong the last couple of sessions. In just today's session BSC pulled back to the 76.60 level twice and both times was met with buyers. Volume was picking up towards the close on the afternoon bounce. Concerned traders can probably cinch their stop up towards the $76 level. We're going to leave ours at 75.25 for now. We probably wouldn't suggest any new positions until more details are made available on the growing story. Picked on October 9 at $77.50 Change since picked: - 0.24 Earnings Date 09/18/03 (confirmed) Average Daily Volume: 1.2 million Chart = --- Cooper Industries - CBE - cls: 52.39 chg: -0.24 stop: 49.25*new* We're not complaining but we sure wish we knew what caused the breakout on Wednesday. Volume surged to 891K as CBE burst through the $51 level to a new high. More importantly the stock was able to maintain most of its gains today. Given the recent consolidation in shares of CBE we now expect a continuation of the previous bullish pattern. CBE's technical indicator MACD is bullish as is its momentum indicator while its RSI and stochastics are nearing overbought. We're going to raise our stop loss to $49.25, just underneath its simple 50-dma. Don't forget that we only have one week before CBE announces earnings and we'll probably close the play ahead of the announcement. Picked on October 5 at $51.00 Change since picked: + 1.39 Earnings Date 10/23/03 (confirmed) Average Daily Volume: 539 thousand Chart = --- Cooper Cos - COO - close: 42.90 chg: +0.38 stop: 39.99*new* Six days in a row! Shares of COO are up six days in a row and following our script perfectly. Of course you know what that means. It is overdue for a pull back or at least some sideways consolidation. Should a dip occur we'd look for a new entry point near the $42.00 level, which should act as new support. In response to the recent rise we're going to inch up our stop loss to $39.99. Diligent investors may have seen the press release about these Optistock reports. A new financial report is highlighting the potential for double-digit growth for higher- margin specialty contact lenses. Gosh, who would benefit from such an improvement? Probably Coooper who just happens to be one of the "sponsors" of said investment report. Oh well, the cheer leading seems to be working. Picked on October 12 at $41.40 Change since picked: + 1.50 Earnings Date 09/03/03 (confirmed) Average Daily Volume: 391 thousand Chart = --- Exelon Corporation - EXC - close: 64.30 change: -0.06 stop: 63.25 If you were looking for another entry point on EXC we just got it. Shares pulled back to trade below the $64 level Thursday morning but bounced back into the close. We're still waiting on that breakout above the $65 mark and with one week before earnings on the 23rd we're running out of time. The UTY utility, while green, index didn't offer much help today and if the markets see more profit taking into the weekend EXC could pull back towards our stop. We hesitate to recommend new entries until EXC trades above the 65.00-65.15 region. We will close the play before their announcement next Thursday. Picked on September 28th at $62.64 Change since picked: +1.66 Earnings Date 10/23/03 (confirmed) Average Daily Volume = 1.22 mln Chart = --- Federated Dep Store - FD - cls: 46.98 chng: -0.31 stop: 44.25 Relative strength winners like FD continue to shine. The stock has been rising in a very narrow channel from its September 30th low and currently FD is near the bottom of that channel. We're not worried about a breakdown and would actually use a dip to evaluate new entries. FD's MACD indicator may be strong but the rest of its technicals are looking tired. A pull back to the simple 10-dma above $45.00 may be the spot to watch for a bounce. Picked on October 9th at $45.60 Change since picked: +1.38 Earnings Date 11/12/03 (unconfirmed) Average Daily Volume = 1.89 mln Chart = ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Corinthian Colleges - COCO - cls: 53.82 chg: +0.48 stop: 56.61*new* Well so much for point-and-figure chart support. Shares of COCO plowed right through it on Wednesday and almost hit our initial target near $50.00. The profit taking in COCO was mirrored throughout the educational/school sector with CECO, APOL, and EDMC all feeling the pain. We were a little disappointed by the big afternoon rebound on Wednesday but was not surprised to see COCO close on its simple 100-dma. Thursday's session witnessed a small continuation of the rebound before beginning to falter near the $54 mark. Traders can gauge new entries on any failed rally below the $55 level. We're going to lower our stop to $56.61, the high three days ago. Picked on October 14 at $55.24 Change since picked: - 1.42 Earnings Date 10/29/03 (confirmed) Average Daily Volume: 686 thousand Chart = --- Merck & Co - MRK - close: 49.09 chg: +0.20 stop: 51.50 Slowly but surely shares of MRK continue to melt lower. This week we've seen MRK fail twice at the $50 level, which is very encouraging for the bears. More conservative traders could actually reduce their risk by lowering their stop to $50.50. We're going to keep ours at 51.50 for the moment. A new relative low under $48.50 would offer new encouragement for bearish traders here. In the news today a press release stated that Merck and a biotech company named C Sixty are partnering up to develop C Sixty's fullerene antioxidants. Details were few but shares of MRK didn't react to it. Picked on October 6 at $49.90 Change since picked: - 0.81 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 6.2 million Chart = ************* NEW PUT PLAYS ************* Martek Biosciences - MATK - cls: 49.48 chg: -1.02 stop: 52.51 Company Description: Martek Biosciences Corporation develops, manufactures and sells products from microalgae. The Company's products include: (1) specialty, nutritional oils for infant formula that aid in the development of the eyes and central nervous system in newborns; (2) nutritional supplements and food ingredients that may play a beneficial role in promoting mental and cardiovascular health throughout life; and (3) new, powerful fluorescent markers for diagnostics, rapid miniaturized screening, and gene and protein detection. (source: company press release) Why We Like It: It's been quite a ride for MATK investors. Near its highs last month the stock had appreciated 350% from its August '02 lows. It had almost tripled just from its March '03 lows near $21.00. Since the bottom in March the stock has not closed below its simple 50-dma. That technical strength failed this week. Shares peaked above $58 in late September and we've seen a trend of lower highs ever since. That trend has blossomed into a technical breakdown below its 50-dma and the $50 mark, a psychological level of support and resistance. Volume has been rather strong on the recent declines through support indicating some conviction by sellers. We're going to target a simple 38.2% retracement of the March to September run. That should bring MATK back towards the $44 level. A secondary target could be the $40 mark. A quick look at the point-and-figure chart also shows MATK on a fresh triple- bottom sell signal. However, P&F traders have been fooled before when MATK turned a bear sell signal into a bear trap in mid August. We do have to state that MATK is not without its own element of danger for bears. The latest data (as of September) showed short interested measured almost 19% of the float. We will initiate the play with a stop loss at 52.51 Suggested Options: Short-term traders can choose between the November and December options for MATK while longer-term traders can look over the March 04 options. Our preference is the DEC 50's or 45's. BUY PUT NOV 50 KQT-WJ OI= 88 at $3.20 SL=1.60 BUY PUT NOV 55 KQT-WK OI= 19 at $6.60 SL=4.50 BUY PUT DEC 45 KQT-XI OI=470 at $1.95 SL=1.00 BUY PUT DEC 50 KQT-XJ OI=152 at $4.10 SL=2.00 BUY PUT DEC 55 KQT-XK OI=117 at $7.30 SL=5.00 Annotated Chart: Picked on October 16 at $49.48 Change since picked: - 0.00 Earnings Date 09/09/03 (confirmed) Average Daily Volume: 466 thousand Chart = ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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 10-16-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - MATK Futures Corner: Indicator Setup - Revisited ********************* PLAY OF THE DAY - PUT ********************* Martek Biosciences - MATK - cls: 49.48 chg: -1.02 stop: 52.51 Company Description: Martek Biosciences Corporation develops, manufactures and sells products from microalgae. The Company's products include: (1) specialty, nutritional oils for infant formula that aid in the development of the eyes and central nervous system in newborns; (2) nutritional supplements and food ingredients that may play a beneficial role in promoting mental and cardiovascular health throughout life; and (3) new, powerful fluorescent markers for diagnostics, rapid miniaturized screening, and gene and protein detection. (source: company press release) Why We Like It: It's been quite a ride for MATK investors. Near its highs last month the stock had appreciated 350% from its August '02 lows. It had almost tripled just from its March '03 lows near $21.00. Since the bottom in March the stock has not closed below its simple 50-dma. That technical strength failed this week. Shares peaked above $58 in late September and we've seen a trend of lower highs ever since. That trend has blossomed into a technical breakdown below its 50-dma and the $50 mark, a psychological level of support and resistance. Volume has been rather strong on the recent declines through support indicating some conviction by sellers. We're going to target a simple 38.2% retracement of the March to September run. That should bring MATK back towards the $44 level. A secondary target could be the $40 mark. A quick look at the point-and-figure chart also shows MATK on a fresh triple- bottom sell signal. However, P&F traders have been fooled before when MATK turned a bear sell signal into a bear trap in mid August. We do have to state that MATK is not without its own element of danger for bears. The latest data (as of September) showed short interested measured almost 19% of the float. We will initiate the play with a stop loss at 52.51 Suggested Options: Short-term traders can choose between the November and December options for MATK while longer-term traders can look over the March 04 options. Our preference is the DEC 50's or 45's. BUY PUT NOV 50 KQT-WJ OI= 88 at $3.20 SL=1.60 BUY PUT NOV 55 KQT-WK OI= 19 at $6.60 SL=4.50 BUY PUT DEC 45 KQT-XI OI=470 at $1.95 SL=1.00 BUY PUT DEC 50 KQT-XJ OI=152 at $4.10 SL=2.00 BUY PUT DEC 55 KQT-XK OI=117 at $7.30 SL=5.00 Annotated Chart: Picked on October 16 at $49.48 Change since picked: - 0.00 Earnings Date 09/09/03 (confirmed) Average Daily Volume: 466 thousand Chart = ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** FUTURES CORNER ************** Indicator Setup - Revisited By Jim Brown Putting the Plan Into Motion Obviously everything will always work out on paper and when back testing any promising setup. Actually translating those setups into profits is another story. After a week of watching the current setup I continue to find myself wanting to fade them and not take the signals when indicated. This is because of our subconscious sentiment. I keep thinking "strong resistance is only X points away" or "that support at XXXX has got to hold." Unfortunately after plotting all the support/resistance levels for the last two weeks and then running the chart backwards the levels failed more than 65% of the time. When the levels failed there was normally a strong move. If I did not take the signal I would have missed a big move many times. Going against the normal thought processes is hard for me. On Wednesday morning (10/15) I passed on a perfect gap and crap setup because I was expecting a rebound and did not expect the minor gap up on Intel earnings to fade more than a couple points. The indicators showed a short at 1050.50, when I was expecting 1050 to be support, and I did not take it. The drop printed a low of 1044 and would have been a nice trade. After a week of extended testing and multiple changes in the Futures Monitor I have changed the previous setup slightly. The intent is not to produce a "system" but simply a set of indicators that should keep us on the right side of the market and keep us from trading our bias. Some indicators work in most conditions but none work in all conditions. One of the hardest things for me is to avoid letting my market bias interfere with my trading. You need a market bias when trading options in general but when trading futures it can be dangerous. We cannot fight the trend. This is the hardest thing I have to overcome. The second thing I fight is the microscopic view. I seem to adopt tunnel vision once the opening bell sounds. The farther into the day the more focused I am on each tick. This prevents seeing the overall picture. I can see it fine when doing the recaps and wraps at the end of the day and when studying the market at night. Once that bell rings the focus becomes microscopic. The problem with indicators is that the majority are trailing indicators. That means the market will have already turned and moved several points before the indicator signals a trade. We can address that in some cases by shortening the cycle or the averages used inside the indicator. If you shorten them too much you are then faced with too many signals that chop you to ribbons. The answer is to use multiple indicators and tune each to come as close as possible to each other. Since each indicator works on different principles some will trigger early and some later. The early ones give you warning and the later ones confirm it was a real signal. There is no way to make it flawless but I am trying to make it as idiot proof as possible. I am also trying to keep the indicators very simple with yes/no type signals. I want to eliminate as much judgment as possible. I am using a 500-tick chart in Tradestation. Besides the ticks and the Parabolic SARS all the other indicators are available in Qcharts. The indicators I am using on a 500-tick chart are: CCI (21,1,100,-100) (Qcharts ok) This is a change from the 30 or 28 I have been using. I have found that the 21 is just slow enough to keep us out of trouble without being too slow to give up too many points on market turns. The problem with this indicator on Qcharts is a lack of a 500-tick chart. This throws the cycles off from the tick chart and kills them if you include the "all sessions" option. MACD (15,26,11) (Qcharts OK) Also a departure from previous settings. This speed has shown to be very accurate for the ES on a 500 tick chart. It is less accurate on a time chart and does not work as well on any other tick interval. Momentum (14, OHLC)on Qcharts, Momentum (14, ((close+open+high+low)/4) on Tradestation I have found this to be less volatile than the CCI and more predictive. It seems to give a deeper level of conviction and is less prone to the single candle CCI spikes. It also tends to lag and I would use it only for confirmation of the other indicators. Exponential Moving Average (Qcharts OK) TradeStation (9, ((Close+open+high+low)/4), Offset = -5) Qcharts (9, OHLC), Offset = +5) The 9ma is yellow on my chart. Exponential Moving Average (Qcharts OK) TradeStation (6, ((Close+open+high+low)/4), Offset = 0) Qcharts (6, OHLC), Offset = 0) The 6ma is red on my chart. The 6ma is the trigger line, red on my charts. When the 6ma crosses above the 9ma go long, when the 6ma crosses below the 9ma average go short, assuming all the other indicators agree. The -5 offset (+5 Qcharts) pushes the 9ma average ahead of the 6ma and gives you a spread between them. I am still experimenting with the different average lengths and would be interested if you find a combination that works better. (Qcharts uses a +5 instead of a -5) Parabolic Sars (0.02, 0.2) (Not on Qcharts) This is actually a stop loss indicator that I am using to give the very visual yes/no signal at turning points. This one is not mandatory if you do not have it available. It is the most unreliable of the group but is also the best early warning indicator. 500 Tick Chart I am using a 500-tick chart on Tradestation. Unfortunately Qcharts does not offer variable ticks. This causes a problem because volume of trades differs on a day to day basis. Some days a 2 min chart would work, other days it would take a 5 min chart. The trick is knowing which day is which. Concept The concept is simple. When ALL the indicators line up in one direction trade in that direction. Yes, you will get false signals on sideways days. Yes, you will get false signals on program trades. Yes, you will get false results when you cheat. Yes, you will sometimes miss 2-3 points of a sharp reversal especially if there was a sharp move just in front of it. However, as long as you follow the indicators you should always be on the right side of the trade within 2-3 candles. You can take quite a few quick reversals before you catch a longer move if the market is flat. Below is a sample chart showing the current indicator setup. For ease of visibility I have coded the bars on the chart to represent agreement by all the indicators and highlight the trend. Notice that the moving average cross on the left of the chart did not turn red because the CCI had not confirmed the cross. When they all confirm the signal is very clear. That was a sample of a good day. The chart below is a sample of a bad day. When the markets are flat the indicators will tend to center around the flat line and provide alternating signals until the range breaks. This is very frustrating because you never know when the next signal is going to be the "one". A case in point is the last LONG signal in the very choppy chart above. Notice in the chart below how that signal ran for +16 points. If you had not taken it on faith after several failed reversals then you would have missed the big gain. To recap, there is no perfect system. There are only combinations of indicators that will help to reduce the odds against you. You need to find the combination of indicators that works for you and that same set may not work for anybody else. I hate Bollinger Bands but others love them. It is all in what you like and what works for you. Jim Brown ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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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