The Option Investor Newsletter Sunday 11-02-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: October Escape Futures Market: Nothing Day Index Trader Wrap: Deadlock Editor's Plays: Time to Bet on the General Market Sentiment: A Great Escape Ask the Analyst: 5 "beaten down" stocks for late October bull Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 10-31 WE 10-24 WE 10-17 WE 10-10 DOW 9801.12 +218.66 9582.46 -139.33 9721.79 + 47.11 +102.37 Nasdaq 1932.21 + 66.62 1865.59 - 46.77 1912.36 - 2.95 + 34.74 S&P-100 519.98 + 9.73 511.25 - 6.87 518.12 + 0.07 + 2.88 S&P-500 1050.71 + 21.80 1028.91 - 10.41 1039.32 + 1.26 + 8.21 W5000 10224.52 +241.02 9983.50 -114.88 10098.3 + 13.06 + 95.02 RUT 528.22 + 21.79 506.43 - 13.93 520.36 + 1.30 + 6.78 TRAN 2913.11 + 85.86 2827.25 - 20.03 2847.28 + 23.73 + 38.70 VIX 16.10 - 1.61 17.71 + 0.09 17.62 - 0.83 - 1.05 VXO 17.15 - 1.78 18.93 - 0.26 19.19 - 0.05 19.24 VXN 24.89 - 0.56 25.45 + 0.12 25.33 - 2.29 - 1.58 TRIN 1.02 1.44 1.59 1.24 Put/Call 1.12 0.91 0.64 0.93 ****************************************************************** October Escape by Jim Brown October 2003 will go down in the record books as one of the least volatile Octobers on record. As if to punctuate this fact the VXO closed at 17.15 on Friday after reaching a five year intraday low of 17.02. More than a few professional traders are scratching their heads over the combination of factors that produced these numbers. The good news remains that October went out with a strong gain with a Dow close over 9800 and the Nasdaq at 1932. The biggest drop for the month was a meager -2.5% in three days and far from the monster dips that dot prior Octobers. Dow Chart Nasdaq Chart S&P Chart Russell Chart What economics? One day after the GDP blew out estimates the reports were positive but less than exciting. The NY-NAPM came in at 226.4 and slightly more than the 222.2 in September. Not a blowout but it was the second consecutive monthly gain. The expectations component was not showing that much excitement. For the fourth time in five months the expectation component registered 62.5 and only slightly higher than the prior months. Current conditions is where the big gains were made with the component jumping from 51.1 to 58.2. This is the first time since Q2-2002 that the current conditions has been over 50 for two consecutive months. 62% of the respondents said they thought the recession in the NY area was not caused by the 9/11 attacks but by a longer term problem of general economic weakness. Manufacturing in the area slowed only slightly and still remained strong at 90. Employment grew for the month despite the high 9% unemployment rate in the city of NY. Shifting geography the Chicago PMI report was inline with expectations at 55.0 and was a jump from 51.2 last month. This would indicate that manufacturing activity accelerated rapidly in October. This is a strong supporting factor in believing that the Q3 GDP may be the start of something big. September had seen a sharp drop to 51.2 from 58.9 and the rebound to 55.0 may be a good indication that the dip was an anomaly. Prices paid did jump +19% to a seven-month high and that could be the first signs of the inflation monster returning. The Fed would be eager to shift their focus from unwanted disinflation to unwanted inflation. It is a much easier battle to fight. Also, inflation produces tax revenue and deflation subtracts it. Inventories continued to fall and the case for a huge buildup cycle is still improving. New orders jumped to 59.2 from 53.2 but backlogs fell due to a spike in production. It was still a good report. Personal Income rose +0.3% for September but personal spending fell -0.3%. This was the largest drop in spending since Sept. 2002. This was not a good sign. We already know that retail sales fell off a cliff in October and this spending number was for September. This would suggest that October could be down even further. In real dollars the drop in spending was close to -0.6% and that is a significant drop. The slowdown in personal income would suggest the wage cycle is weakening again with less overtime and more competition for jobs impacting income. The exporting of high paying jobs overseas is forcing workers to retrain and accept lower paying entry level positions in other professions. This type of report is seen as more long term negative than short term because most investors are only looking 3-6 months ahead. Should this trend continue for the next year it would draw significantly more attention. Contrary to the Personal Income/Spending news the Michigan Consumer Sentiment rose to 89.6 for the final October reading. This was two points above September but only slightly above the 89.4 preliminary reading. The sentiment has been flat since May and if the GDP numbers are real then the good news should have been flowing through to the consumer. We just saw that the consumer cut spending drastically in September and despite the growing list of good economic news it does not seem to be translating into higher sentiment. Analysts point to the more than nine million workers still unemployed, rising interest rates, oil prices and the worsening war in Iraq. The daily litany of several dead soldiers each day is continuing to drag on the overall feeling of well being. Almost everyone knows several families with members overseas and the daily attacks are killing soldiers with such randomness that nobody feels safe. Ok, everybody exhale. October is over and it was a good month. The Dow was up +2.5%, Nasdaq +8.2% and SOX +18%. Very good numbers for a month that is known for drops. The Nasdaq has only had 2 down months this year, Jan and Sept. The most bullish event for the week was a +4.3% gain for the Russell this WEEK! This is clearly mutual funds putting money to work at month end. Mutual fund selling was nonexistent and most funds should have booked very good returns. ICI reported Friday that cash inflows for September were in excess of $17 billion and TrimTabs is estimating those inflows rose to $30 billion for October. This is consumer sentiment in its purest form. As we move into November there will be outflows in at least one major fund. Putman, owned by Marsh Mclennan, is under direct attack by pension funds with huge amounts of money invested in Putman. Since Monday organizations with nearly $5 billion in pension deposits at Putman have said they will be withdrawing those funds due to the illegal trade practices currently under investigation. $5 billion in only a week and the snowball is just beginning to gain speed. Massachusetts is pulling out $1.7B, Rhode Island $69 million, Vermont $91 million, NY $395 million and the list continues too far to print. Numerous other states and pension organizations have expressed concern and will make decisions next week. One analyst was speculating the outflows could exceed $20 billion or more. Add to that the individual mom and pop accounts and it could turn into a flood. According to Morningstar, Putman's New Opportunities Fund top 5 holdings are ... PFE, QLGC, INTC, AZO, MSFT. Janus was accused of far less and they lost nearly $5 billion in Sept according to some estimates. Strong funds are also on the hit list and the ball is just starting to roll in their direction. This money is not all in U.S. equities but by far the majority. The current withdrawal amount for Putman at $5B is less than 2% of their assets. It is far from a life threatening event for Putman but is will impact the markets on a short term basis. If the withdrawals continue to grow at the same pace and do reach $20 billion over the next two weeks then the funds under attack will have to sell stocks to raise cash. $20 billion in sales is more than 60% of the estimated inflows from October and more than all of Sept. Most of this money will be reinvested back into the markets but there should be a 2-3 week lag time between selling to raise cash, transferring that cash, new funds being chosen and then reinvesting the received cash. This scenario should play out over the next couple weeks and there is always the potential for a workout period between the funds and the agencies to allow them to distribute funds over time to avoid impacting the market for the rest of the investors. Next week we should get a feeling for how November should go. Is it going to be a November to remember or a month of consolidation from seven months of gains? The caution comes from the market action the last two days. Art Cashin commented on Friday that floor traders were concerned about the lack of advancement after the excellent economic results. The Dow has not advanced more than a handful of points since Wednesday and traders are unsure why. The general consensus is that the good news was already baked into the cake. Most are very happy that there has been no sell off and almost all expect some profit taking next week. The stock traders almanac suggests that the first three days of November are bullish as new retirement cash is put to work and funds reinvest cash received from October sales. Without any October sell off to speak of there may or may not be any excess cash floating around. Any funds hoarding money for the "drop" may still be holding some cash. The incoming deposits could be offset by the withdrawals from funds like Putman mentioned above. This makes for a cautious atmosphere for next week. There is still a train of thought that has some funds adjusting their portfolios now that the October year end is over. They were able to close their year within 50 points of the Dows highs and fully invested. Many of those investments have increased +30, +50, even +100% over the last year and could easily stand to be rebalanced. This leaves investors with many decisions for next week. Do they put new money to work now with the market only a few points from new highs or do they wait for a pull back that may never come? Those that expected a bigger drop in Oct and held off making purchases are now cussing themselves as the markets pulled back to the highs. This problem is being faced by more than a few traders and I am sure more than a few funds that expected a dip as well. If I was a fund holding a lot of money and trying to get into the market I would be looking at the economic reports for next week and hoping for an upset. Hoping for anything to take the edge off and let me sleep better after making my entry. Those reports include some majors with the ISM at 10:AM on Monday, the ISM Services on Wednesday and the Nonfarm Payrolls on Friday. If I had to key on one it would be the ISM on Monday. Monday is the key day. If there is going to be any fund selling or window undressing it should be on Monday. If the ISM report is the slightest bit below expectations then we could see an acceleration of that selling. However, I doubt it will be serious in the overall context. There is simply too much good news and too much money flowing into the markets. Everybody has their eyes on a typical 4Q rally and it could turn into a self-fulfilling prophecy. Any continued rally into the 4Q would have a steeper road to climb. The earnings comparisons for 4Q-2003 will be a lot tougher and unless the economy catches fire we may see a cycle where the number of companies beating estimates drops substantially. Success breeds optimism and analysts fall all over themselves trying to up their estimates for the next cycle. Eventually they get ahead of reality and the whole things grinds to a halt. While I am not making any dire predictions for the 4Q there are already rumblings that earnings may not be as positive. The market is a forward-looking mechanism that typically focuses 3-6 months ahead. It has been focused on the 3Q expected GDP for the last three months. Now that it has passed the focus is on the current ISM numbers and any GDP revisions ahead. The 4Q advance GDP is not until Jan 27th and there is still plenty of time for it to be revised many times. Don't forget that tax cuts, tax rebates and a refinancing boom from rates at historic lows helped to power the 3Q GDP. Only a very little of that will carry forward into the 4Q. The major boost to the 4Q should be the beginning of the inventory rebuild as it appears the demand is beginning to accelerate faster than businesses anticipated. With inventories already extremely low any real demand should drive that rebuilding phase. The current estimates of 4Q GDP are between 4-5% depending on who you ask and what day of the week you ask. There is no credible estimate and that is part of the problem. What do you do with a +4% 4Q GDP estimate when the 3Q blew out at +7.2%. How do you relate it to the estimate for +4% GDP growth for the entire year? While economists and analysts are crunching numbers to come up with the "new" 4Q estimate for investors everyone is in a holding pattern. If the current estimate does not grow substantially then sentiment could fade. If economic reports begin to cool from the current positive trend then the Q3 GDP could start to look like a blip instead of a boom. All of these factors will weigh on stocks over the next couple weeks. I am going to try really hard to reduce the paragraphs above to as simple an outlook as possible. Sunshine with scattered clouds and intermittent showers. The overall trend should remain up. We are an optimistic bunch and until a series of bad economic reports spoil the party we will continue drinking from the Fed punchbowl. The month of November begins the best three months of the year for the S&P on a historic basis and this fact is not going to be lost on many traders. Add in a rebounding economy and a Fed on hold until May of 2004 and you have the fuel for a fire that could put California to shame. Is that bullish enough for you? The problems of the past are not gone but once investors have $ signs in their eyes they are going to overlook all but the most dire economic numbers. Assuming the ISM on Monday does not implode the stage should be set for the month. Even a negative jobs report on Friday should not spoil investor sentiment if the ISM was positive. We have heard jobless recovery so many times it has been completely discounted. If we happened to tack on more than 50,000 jobs in Oct we could really see some momentum build. At the risk of seeming too bullish I will close with the obligatory warning. For the first time in months the bulls really have something to cheer about and they were unable to mount a charge. Chalk it up to October uneasiness. One thing you cannot ignore is the VXO. It printed a 17.02 low and closed at 17.15 on Friday. It is showing exactly what I explained above, extreme bullishness. Traders are seeing the potential for another leg up in the current bull market and they have completely lost all fear. This is exactly when unexpected lightning normally strikes. To use another analogy everybody is standing in the front of the boat and that boat is struggling to make headway without dipping under the waves. Visualize waves breaking over the bow while the engine is sitting out of the water in the rear. We can't get any forward motion because the bullish sentiment in the front is too heavy. There needs to be balance in the boat to move forward and that means any rough water ahead could cause sudden and unexpected dips. Those dips should just be a balance adjustment that allows us to pick up speed. Grab a life jacket and keep your eyes open for rough water and maybe we can get through November without the seasick pills. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Nothing Day Jonathan Levinson Friday was a fascinating study in cycle juxtaposition, with the intraday cycles becoming sufficient opposed to prevent any meaningful movement in equity futures for the entire session. Bonds advanced, gold moved sideways, and the US Dollar Index closed its first positive week in months at its high. Daily Pivots (generated with a pivot algorithm and unverified): oifm103103_01.gif 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. 10 minute chart of the US Dollar Index The US Dollar Index finished the week strong, trading up to its high above 92.50 on weakness in the euro and CDN dollar. This is the first bullish week in 2 months, and added credence to the 90 level being a noteworthy bottom on this move. All those who shorted the dollar weakness below 92, which coincided with the first widespread publicity of the sinking dollar in the mainstream media, would now be at a loss. For the week, the US Dollar Index printed a higher low and lower high. Daily chart of December gold December gold managed to hold above 383 support on Friday, printing an inside week with a much higher low and slightly lower high. For the day, Dec gold gave us a high of 389.80, low of 382.50 and a flat close up .20 at 384.60. As discussed in Thursday’s Futures Wrap, overall bullishness on the sector is yielding to short term concern on my part, with the 390-410 resistance level looming large overhead and the daily chart oscillators looking tired. An email from a reader for whom I have great respect sums it up well with respect to the PHLX Gold and Silver Index (XAU): "I'm out waiting for the early bulls to be done selling. I will miss the first day of the next rally (which with $Xau may mean missing 5%!) but the whipsaws are too much for a MOC trader like me. I could ignore my system and go with my gut, but since the system is a 2000+ hour formalization of that gut, that wouldn't be too smart :-)" Daily chart of the ten year note yield The ten year note yield (TNX) dropped 3.8 basis points on Friday to close at 4.301%, holding within the midrange of the neutral pennant we've been following. The downphase on the daily oscillators lost some of its vigor this week with what turned out to be post-FOMC selling of treasury bonds. For the week, the TNX printed a doji star with a lower low and lower high. Bonds are looking as close to neutral as I've seen them in recent months, which I expect to continue until either the upper or lower trendline on the daily pennant gets broken. Daily NQ candles Like its peers, the NQ went nowhere on Friday, and it did so most uninterestingly. The daily chart oscillators ticked up to leave us with more "intimate" bullish kisses verging on buy signals, but there was absolutely no conviction in any direction. The NQ finished lower, and printed what was either a bearish "belt hold" or " dark cloud cover" candle on for the week- in any event, it was a bearish weekly print owing principally to the shooting star failure printed on Thursday below the rally high. The week finished positive, but the failure below the 52 week highs left a distinctly bearish flavor to the weekly candlestick. 30 minute 20 day chart of the NQ The NQ drifted sideways today, closing lower by 9.50. If the relentless supportive bids were caused by mutual funds keeping prices propped up to make their closing statement prints, it was an impressive display. The range was sufficiently tight to avoid triggering any of the range-limit orders I had set at the upper and lower Keltner bands (see the 150-tick ES chart below). Unfortunately for bears, this lack of movement coincided with a downphase on the 30 minute chart oscillators. This sideways downphase can portend an explosive upphase, as it is indicative of divergent demand on the buy side. Support at 1410, noted on Thursday, appears to be key, and after today's price action looks like the potential neckline of a head and shoulders pattern. Daily ES candles Again, a golfclap for those interested in higher closing prices for the week and month, as Friday's narrow range successfully limited the ES to a .75 point loss with a closing print of 1047.75. We have another doji star at the top of this impressive upleg, just below the 52 week high. The lack of pullback allowed the bullish kiss to inch toward a sell signal, but any downside on Monday should negate that. If, however, buyers emerge on Monday, we will have a truncated downphase at a much higher price level than the 987.75 from which the last daily oscillator downphase ended. This would likely precede a strong upleg, complete with short covering panic and new rally highs. In this regard, Monday is set up to be a very significant day for bulls and bears alike. 20 day 30 minute chart of the ES The 30 minute candle chart of the ES did not display particular strength today, but the lack of pullback atop the strong upleg was impressive. Bears will point to the rapid failure at the 52 week high, while bulls emphasize the pattern of higher lows. Both are right, and that dispute caused Friday's cycle juxtaposition. The market, as always, will have to settle it. A move below 1046 or above 1056 should get the ball rolling one way or the other. The 300 minute stochastic has plenty of room to the downside, but the lack of price traction on Friday's portion of the downphase is not bearish and could portend a strong upphase to follow. 150-tick ES There's not much to see on the 150-tick chart of the ES, which is the point. Cries of agonized frustration were doubtless heard above workstations everywhere, as they were over mine with price refusing to commit to a direction for longer than a few minutes. Daily YM candles 20 day 30 minute chart of the YM For the week, we had a bullish candlestick formation printed on the US Dollar Index, with ambiguous formations on gold and treasuries, and technically bearish candles on the otherwise bullishly-advancing equities. The lack of clarity on the candle patterns indicates a pause or hiccup in the prevailing trend, and the uncertainty derives from the possibility of either a resumption of the trend or a reversal. The strength of the rally in equities this week was sufficient to cause the intraday oscillators to trend in overbought, which has in turn caused the daily chart oscillators to hit a bump in their downphase. I will be watching Monday carefully, because a down day should be sufficient to restore the daily downphase, while an up day should kick off at least a short covering rally and set the daily onto a new upphase. If Monday drifts sideways, I will tear out what remains of my graying hair. Bonds and gold are equally uncertain, and while gold feels toppy to me, that's the been the theme through much of the past two months in gold. Again, I'm looking to Monday to provide answers. With this much flux in the different markets currently, the prescription is a nimble outlook and either patience on the sidelines or well-placed stops in the fray. I didn't trade the futures on Friday because I was unwilling to get ground up in the aimless drift. A break of any of upside resistance or downside resistance should change that and reward us with tradeable markets. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Deadlock Jonathan Levinson Friday gave us a trading range tight enough to be difficult to even scalp. The Dow added 14.51 points to close at 9801.12, the Nasdaq dropped .48 to close at 1932.21, and the SPX added 3.77 to 1050.71. It was a session in which traders counted the decimals. Volume was surprisingly strong given the lack of range, with 1.86B Nasdaq and 1.44B NYSE shares changing hands. The VXO (OEX volatility, the "old" VIX) went out at 17.15, down .35, with the VIX (SPX volatility index) dropped .23 to close at 16.1. There were some extraordinary put to call readings toward the close, with the ratio spiking to 1.13 at 2PM EST and remaining high for the remainder of the session. This was distinct from the sub-.50 readings earlier in the week. For the week, the Dow added 2.3%, with a 5.2% gain for the month and a 17.5% gain year to date. The SPX is up 2.1% for the week, 5% for the month and 19.4% for the year, while the Nasdaq added 3.6% for the week, 7.1% for the month and 44.7% for the year. This was a difficult week for most traders, both bearish and bullish alike, with the more ignorant blissfully aware of only the rising prices. The volatility indices have reached and are continuing to sustain levels from which even the most technically challenged are on guard for a pullback, and combined with the various oscillator divergences that dominated most of the week, there's good reason to expect that pullback to be serious. The lack of upside followthrough to the blowout, credibility-testing GDP number was bearish in the extreme, and yet price simply would not retreat. By the same token, there was an absence of short covering hysteria, no sustained vertical flagpole rallies. I can recall seeing rallies begin this year that blew through so many resistance levels so quickly as to render the numbers meaningless. With this many traders eyeing the low VXO and the intact-52 week highs, there have to plenty shorting the market, but so far, no short covering rallies either. The market feels as though most had priced in a great GDP number, and sheer well-placed disbelief was enough to prevent a rally on the news. There is no shortage of bad news in the markets either, and it appears for the moment that all are waiting for the next move before placing their bets. Perhaps the lack of movement on Friday was caused by support from mutual fund window-dressing. In any event, Monday is shaping up to be a key day, as our examination of the charts will show. Weekly COMPX candles The weekly Nasdaq shows a doji for the latest week below the 38.2% Fibonacci resistance line, always within the now-interminable rising wedge off the March 2003 low. The bearish divergence on the 10 week stochastic remains in play and portends a drop into a bear wedge breakdown, with the Macd topped out and on the verge of a sell signal. This is a toppy market, but it remains disturbingly firm at current levels. Weekly INDU candles The Dow shows the same characteristics, with the oscillators maxxed out and diverging within a typically bearish price pattern. 9600 is the key support on the Dow, coinciding with 1825 on the Nasdaq. Daily OEX candles The daily OEX candles show Friday's session at the apex of a pennant within the broad rising summer's range. The bounce from the lower trendline this week was sufficient to turn the daily chart oscillators to a preliminary buy signal, and if it sticks, OEX bulls will have an aborted downphase from a higher low than the previous daily cycle trough. 519-523 appears as the critical range in this timeframe. 20 day 30 minute chart of the OEX Zooming in to the 30 minute candles we see the bounce off the lows last week taking on another bear wedge pattern. The cycles on this timeframe have become juxtaposed by the sideways drift, with the Macd bearishly diverging from the uptrending stochastic. To my mind, the nascent upphase on the daily chart is key, and if Monday sees a positive close, the daily upphase will get confirmed. If the day closes lower, the downphase should reassert itself, and the 30 minute chart downphase will break the bear wedge, bringing in a wedge target of 506. In the meantime, with the stochastic and Macd fighting it out on the intraday chart, there wasn't much to be done on Friday. Monday should break the deadlock. Daily QQQ candles We have the same picture on the Qubes, with Friday's 19 cent loss absorbed by the tentative buy signal on the daily chart oscillators. On the 30 minute chart below, we have the oscillators in gear to the downside, unlike on the OEX, but with very little price traction. 35.05 is a potential head and shoulders neckline, with resistance above at 35.60. A decisive break either higher or lower will decide the fate of the nascent upphase on the daily oscillator above. 20 day 30 minute chart of the QQQ With the bearish divergence on the weekly cycles and indecisive downphases on the daily and 30 minute charts and 52 week highs looming overhead, Monday will be a critical day. Any buying could touch off a short covering rally, while selling will cause bulls to protect profits and encourage bears to press. The oscillators that have served us so well are waiting for the next move, and the key will be to remain nimble and open to either outcome. See you at the bell! ************************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 *********************************************************************** ************** Editor's Plays ************** Time to Bet on the General Glad I stayed neutral last week. We gapped open on Monday from 9600 and never looked back. October closed with a bang and we are looking eye to eye with November and not a bear in sight. Scary thought. Now that everyone from the shoeshine boy to the cab driver is convinced that the economy is recovering and the market is about to blow its top it may be time to bet on the general. GE is the proxy for the economy and it has been beaten severely recently. With the GDP blowing the doors off estimates GE may have found a bottom at $28. We will not have a 4Q rally without participation from GE. It is the biggest of the big caps and the widest representation of economic sectors. If the GDP was really a boom and not a blip then investors will start betting on the general to produce results in the 4Q. The recent high was $32.42 and the recent low of $28 was just a week ago during the temporary market dip. It has rebounded to $29 over the last three days and held with the market. I am looking at the Jan-$30 calls for $.85 cents. If we really do get a year end rally then GE should find some buyers. Hitting $32 again on some more positive economic data should not be a problem and if we do move over Dow 10,000 then $35 would be my target. This is simply a play on the market. We are betting 85 cents that we are going to close 2003 over Dow 10,000 and GE will be at $32 or better if we do. GE Chart ******************************** Play Recaps MMM Bull Put Spread (recommended 10/05) Dropping the MMM put spread. Once it broke $76 it never looked back. If we were to see a market event MMM would be the stock I would buy on the dip. http://members.OptionInvestor.com/editorplays/edply_100503_1.asp Powerball Now it is starting to get exciting. We are over the potential October dip without taking any serious hit. We have two months until the end of 2003 and all the economic factors appear to be positive. If we can just get over Nasdaq 2000 we could really get some tech momentum going. TLAB is the only real slacker and EMC has recovered from the acquisition hit two weeks ago. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** A Great Escape - J. Brown That's it! Investors can stop fearing the traditional October sell-off. Other than the dip a week ago the month was firmly in the bulls' control. The major averages are up between 4%-8% for the month. The only traders who had anything to fear were the bears and it seems like each passing economic report scares them deeper and deeper into their caves. So now the question some investors are asking, "did we escape the seasonal sell-off or did we just postpone it?" A few weeks ago there was a growing murmur among many analysts on Wall Street who expected Q3 earnings to be good but they expected short-term market weakness (a.k.a. profit taking) in November. After the most recent round of economic reports, namely the FOMC meeting and the GDP numbers, those whispers have disappeared. However, if you're a contrarian that may be just another clue. Investor sentiment is extremely bullish as evidenced by the multi-year low in the VXO (or old VIX). Let me repeat, the fear index, a tried-and-true indicator, is at a multi-year low. There is nothing in the rulebooks that say it can't continue to slip but it's a huge warning flag for bullish traders that the markets are toppy and vulnerable. This is not the type of environment we want to be making big bullish bets. So what are we supposed to do with all this conflicting data? Consumer confidence is up but spending is down. Initial jobless claims are still high but have spent weeks now under the pivotal 400K level. The FOMC is on hold for several more months to a year before they even consider raising rates. Manufacturing is expanding and all signs point to economic improvement. Meanwhile investors poured nearly $30 billion into mutual funds this October despite the growing Putnam illegal-trading scandal. The markets are long-term overbought and just under major resistance points at 10K and 2K for the DJIA and NASDAQ, respectively. On top of it all we are beginning the best three months of the year. I suggest caution. It can be dangerous to chase a trade (market) when normally if we're patient the right entry point will make itself available. I realize that anyone that was waiting for the big October dip is probably saying "yeah, right" but capital preservation is key to being a successful investor/trader. Influencing my cautious stance is the VXO but also the 5-dma on the ARMS index is approaching a bearish signal and we're seeing short interest up in the e-minis by commercial traders. Now may be a good time to re-evaluate those stop losses. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9850 52-week Low : 7197 Current : 9801 Moving Averages: (Simple) 10-dma: 9703 50-dma: 9563 200-dma: 8827 S&P 500 ($SPX) 52-week High: 1053 52-week Low : 768 Current : 1050 Moving Averages: (Simple) 10-dma: 1040 50-dma: 1025 200-dma: 946 Nasdaq-100 ($NDX) 52-week High: 1439 52-week Low : 795 Current : 1416 Moving Averages: (Simple) 10-dma: 1401 50-dma: 1307 200-dma: 1187 ----------------------------------------------------------------- Extreme bullishness is normally a sign for veteran traders to begin adjusting their outlook from bullish to bearish. When investors become complacent and fearless the markets normally knock the wind out of them in sharp bouts of selling. All three fear indices are suggesting the sort of extremes that should have us turning very cautious and protective with our capital. CBOE Market Volatility Index (VIX) = 16.10 -0.23 CBOE Mkt Volatility old VIX (VXO) = 14.15 -0.35 Nasdaq Volatility Index (VXN) = 24.89 +0.15 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.12 578,348 647,265 Equity Only 1.03 491,689 504,173 OEX 0.87 15,064 13,148 QQQ 14.02 19,435 272,537 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.3 + 0 Bull Confirmed NASDAQ-100 77.0 - 1 Bear Correction Dow Indust. 80.0 - 3 Bull Correction S&P 500 80.0 + 0 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-dma: 0.95 10-dma: 1.06 21-dma: 1.03 55-dma: 1.08 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 1500 1489 Decliners 1280 1579 New Highs 294 296 New Lows 10 6 Up Volume 908M 986M Down Vol. 873M 777M Total Vol. 1815M 1811M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 10/28/03 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 It's been a long week since last we looked at the COT data and we're still not seeing any big moves by the Commercial traders. The same holds true for small traders but they did reduce some of their short positions. Commercials Long Short Net % Of OI 10/07/03 390,232 402,964 (12,732) (1.6%) 10/14/03 391,972 410,299 (18,327) (2.3%) 10/21/03 394,176 411,246 (17,070) (2.1%) 10/28/03 391,596 412,498 (20,902) (2.6%) 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 10/07/03 138,644 88,018 50,626 22.3% 10/14/03 133,940 86,418 47,522 21.6% 10/21/03 136,643 88,290 48,343 21.5% 10/28/03 137,791 76,791 61,000 28.4% 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 Hmm... we are seeing some movement in the e-minis. Commercials have upped their short positions by 24K contracts. Small Traders may have gotten the hint too. Short interest is up but the real change is the 45K drop in long contracts. Commercials Long Short Net % Of OI 10/07/03 212,273 225,377 (13,104) ( 3.0%) 10/14/03 221,897 233,066 (11,169) ( 2.5%) 10/21/03 226,985 236,906 ( 9,921) ( 2.2%) 10/28/03 220,171 260,644 (40,473) ( 8.4%) 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 10/07/03 134,990 63,560 71,430 36.0% 10/14/03 161,208 59,213 101,995 46.3% 10/21/03 168,236 56,564 111,672 49.7% 10/28/03 123,569 59,742 63,827 34.8% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 This time it's the Small Traders making a move in the NDX futures. Long contracts are up nearly a third to more than 21K. Commercials are still comatose but the trend is growing slowly more bearish with a small bump in short positions. Commercials Long Short Net % of OI 10/07/03 33,253 40,861 ( 7,608) (10.3%) 10/14/03 34,639 41,880 ( 7,241) ( 9.5%) 10/21/03 36,314 43,305 ( 6,991) ( 8.8%) 10/28/03 36,168 46,272 (10,104) (12.3%) 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 10/07/03 18,182 9,688 8,494 30.5% 10/14/03 16,822 9,046 7,776 30.1% 10/21/03 16,917 9,750 7,167 26.9% 10/28/03 21,640 8,830 12,810 42.0% 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 There is very little change here for the Small Trader but Commercial Traders have upped both their longs and their shorts. Commercials Long Short Net % of OI 10/07/03 16,277 9,528 6,749 26.2% 10/14/03 16,595 9,433 7,162 27.5% 10/21/03 16,876 9,037 7,839 30.3% 10/28/03 20,504 11,366 9,138 28.7% 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 10/07/03 7,392 7,910 ( 518) ( 3.4%) 10/14/03 6,427 8,495 (2,068) (13.9%) 10/21/03 5,392 8,842 (3,450) (23.1%) 10/28/03 5,295 8,864 (3,569) (25.2%) 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: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** 5 "beaten down" stocks for late October bull The Stock Trader's Almanac notes that late October is a great time to for bulls to be buying stocks, "especially beaten down high-tech stocks" as October marks the end of the worst six months of the year. And while a call for subscribers to send me some lists of beaten down tech-stocks found just a few interested bulls replying, as there probably aren't any beaten down technology stocks to buy anymore, and the party is over, some said the bullish party was over more than 3-months ago! Here's a list of 5 stocks that look to have HUGE upside. Sure, some have more than doubled from their recession lows, but there's a few stocks out there that traded more than 500% higher at their peak, and if an online book seller like Amazon.com (NASDAQ:AMZN) $54.43 can gain 181% from its October 31, 2002 close, when the stock was "overvalued" at $19.35, then I'm looking for some other "overvalued" diamonds in the rough. S1 Corporation (SONE) - $0.25 and $0.50 box In a recent Ask the Analyst column on October 19, 2003 we discussed the "high pole warning." The chart of SONE intrigued me for a late October beaten down technology stock after seeing two prior "low pole warnings" find continued support at $3.50 as if bulls were starting to show some commitment to the stock. The recent triple-top buy at $6.00 on October 13 may be sign that this is one of the "favored" stocks for a turnaround. I was a little frustrated this morning to see the stock jumping 17% at the open after reporting earnings and announcing a $15 million share buyback program. It would have been nice to get that type of pop AFTER profiling the stock as a late October beaten down tech stock. Ciena Corp. (CIEN) Chart - Daily intervals One trader/investor asked about Ciena Corp. (CIEN) $6.41 as a late October beaten down tech candidate. The point and figure chart has sloooowly been building a long column of X up to $7.25. What intrigued me about CIEN is that the stock does look to be under accumulation. I could find no stock specific news on July 9 when the stock jumped from $5.75 to $6.75 to explain that day's trade. Then in mid-August, CIEN reported a quarterly loss of $0.09 per share, but for the first time in 6 quarters, CIEN reported quarterly revenue growth on a year-over-year basis. Brokers have been mixed with upgrades and downgrades, and a pattern of higher lows and higher highs looks bullish for a trade on a break above $6.75. On August 21, CIEN also announced its intent to buy privately held Akara, which is an emerging leader in the growing market of SONET/SDH-based extended storage area networks. On a break above $6.75, a stock trader/investor would look long the stock on the break and use upward trend, which was recent tested as support as a trailing stop. Options traders might look at the out the money April 04 $7.50 calls (EUQDU) or the in the money April 04 $5.00 calls (EUQDU) for partial positions. Should CIEN muster a CLOSE above $7.40, can round up positions, with an on or before April expiration target of $10.25. I would prefer April expiration, to try and allow for any potential carryover bullishness from the December (Q4) earnings, which tends to be the more seasonally strong quarter for technology stocks, as corporations will try and "last minute" spend on new equipment, and begin announcing 2004 annual budgets. In what certainly appears to be a recovering economy, CIEN's stock price may benefit from some anticipatory benefit for IT spending. I'm going to slow down a bit and profile an also "beaten down" stock, that you're probably familiar with. It's probably not exciting, but YUM! Brands (NYSE:YUM) $34.14 +0.53% didn't seem all that exciting at $26 earlier this spring. Darden Restaurants (DRI) Chart - Daily Intervals It is so tough to find some good "beaten down" stocks, that I really feel comfortable discussing for bullish trades. DRI just has what I feel are the making for a very bullish trade over the next 8 to 12 months. Somebody, or so it would seem, continues to gobble up DRI's shares on sharp drops lower, yet each drop continues to find a higher low. DRI caught my eye in late September after the company reported downside earnings, only because one of its all you can eat crab promotions at its Red Lobster unit was too popular, and customer ate too much crab. I thought to myself as the stock gapped lower, below its 200-day SMA, but right to its point and figure chart's bullish support trend, if this stock gets back above its 200-day in quick fashion, then it is most likely "sold out," and that's the last of any bad news (if having too many customers eating crab is bad news). I like DRI as a longer-term play, with a bullish 8-month objective of $27, stop $18.50 to begin. Earlier this year I had profiled share of online Internet service provider United Online (NASDAQ:UNTD) $28.85 +2.81% as bullish near the $15.00 level when the stock looked to be breaking out of a nice base. The stock has been under pressure in recent weeks after Time Warner's (NYSE:TWX) $15.29 AOL unit (Time Warner is proud of AOL it removed the AOL from its name and stock symbol) said it was going to offer a discount version of its online service. I thought to myself.... "AOL's had trouble defending its market share or making money in the premium service area, how does it plan to compete in the discount area?" Today, several brokers upgraded United Online saying AOL isn't a threat. United Online (UNTD) - $0.50 and $1 box UNTD's point and figure chart has been giving some mixed signals in recent weeks as market participants try and figure out just what impact if any a discount version of its Internet service might have on other discount Internet service providers. I was hesitant to profile a bullish trade on the now post split gap lower to $16.50, which was just above UNTD's bullish support trend and rising 200-day SMA, where both of these longer-term technicals often provide strong support for a bounce when first tested. Now that I've been able to see the stock reverse the bulk of its recent October decline, I think a good late-October or early November entry point is found at $17.50, using support above $16, to get another bounce going back higher with a target back to $28. Once long at $17.50, be reading for some volatility and prepared for the stock to work its way back and forth between $21 and $17.50, possibly setting up a triangle pattern. I'm willing to look long with support above $16.50 as October 15 short interest was high at 3.323 million shares, with days to cover at 9.27. My AdobePhotoshop conked out on me tonight, and I use it to capture the charts I display in my updates, but a 5th stock I was looking at for a late October rally is retailer Kohls (NYSE:KSS) $56.07 -0.03%. I've had a retracement bracket on KSS from $78.83 (05/20/02 high) to $44.00 (10/10/02 low) for quite sometime, and last week, the stock came down (from the 61.8% retracement relative high of $65.52) and settled right on top of the 19.1% retracement level of $50.65 all last week, along with an upward trend from the October 2002 low. I'd like a bullish entry on KSS for a partial position on a pullback into the curling higher 21- day SMA of $53.50, stop $49.00, then look for bullishness and strength above the 38.2% retracement of $57.30 to have the stock making headway above the currently trending lower 50-day SMA. A bullish target would be the recent relative high of $65.52, which has been a higher high from a pattern of higher lows, over the course of the next 2.5 months. We will revisit these 5-stocks in the intra-day updates at 01:00 PM EST from time to time to see how they are doing. **Disclosure: I currently hold a bullish position in Darden Restaurants (NYSE:DRI). I also hold a bullish position in YUM! Brands (NYSE:YUM). Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- ACDO Accredo Health Mon, Nov 3 Before the Bell 0.35 ACGL Arch Capital Group Mon, Nov 3 After the Bell 0.85 CEPH Cephalon, Inc. Mon, Nov 3 After the Bell 0.41 CHTR Charter Comm Mon, Nov 3 Before the Bell -0.34 CHD Church & Dwight Co Mon, Nov 3 -----N/A---- - 0.41 DVA DaVita Mon, Nov 3 -----N/A----- 0.56 EPD Enterprise Prdct Part Mon, Nov 3 Before the Bell 0.08 FIC Fair Isaac Corp Mon, Nov 3 After the Bell 0.65 FRT Fed Rlty Invstmnt TrstMon, Nov 3 -----N/A----- 0.65 FHCC First Health Group Mon, Nov 3 -----N/A----- 0.39 GLG Glamis Gold Ltd Mon, Nov 3 Before the Bell 0.04 GTM GULFTERRA ENERGY PART Mon, Nov 3 Before the Bell 0.43 HCP Health Care Prop. Mon, Nov 3 Before the Bell 0.90 HTG Heritage Prop. Inv Mon, Nov 3 -----N/A----- 0.66 K Kellogg Co. Mon, Nov 3 Before the Bell 0.51 MCY Mercury General Mon, Nov 3 -----N/A----- 0.76 MET MetLife Inc. Mon, Nov 3 After the Bell 0.73 NFS Nationwide Finl Serv Mon, Nov 3 After the Bell 0.68 NBIX NEUROCRINE BIOSCIENCESMon, Nov 3 After the Bell -0.36 PRE PartnerRe Ltd. Mon, Nov 3 After the Bell 1.46 PKZ PETROKAZAKHSTAN INC Mon, Nov 3 -----N/A----- 1.04 PDLI Protein Design Mon, Nov 3 After the Bell -0.21 RSG Republic Services, IncMon, Nov 3 After the Bell 0.27 SRX SRA Intl, Inc. Mon, Nov 3 After the Bell 0.27 STRA Strayer Education Mon, Nov 3 Before the Bell 0.23 TEVA Teva Pharmaceutical Mon, Nov 3 Before the Bell 0.49 PFG The Principal Finl GrpMon, Nov 3 After the Bell 0.61 WRE Wash. Rl Est Invst TstMon, Nov 3 After the Bell 0.51 WRC Westport Resources Mon, Nov 3 After the Bell 0.20 WGL WGL Holdings Mon, Nov 3 Before the Bell -0.45 ------------------------- TUESDAY ------------------------------ ACAS American Capital StratTue, Nov 4 After the Bell 0.64 AMH AmerUs Group Co. Tue, Nov 4 After the Bell 0.95 AMLN Amylin Pharm, Inc. Tue, Nov 4 During the Market -0.40 AOC Aon Corp Tue, Nov 4 Before the Bell 0.45 ASN Archstone-Smith Trst Tue, Nov 4 Before the Bell 0.45 ITU Banc Itau Hldng FinancTue, Nov 4 -----N/A----- 1.14 BJS BJ SVCS CO Tue, Nov 4 Before the Bell 0.40 VNT C. A. Nacl Tele de VenTue, Nov 4 After the Bell N/A CWG CanWest Global Cmmu Tue, Nov 4 -----N/A----- N/A CPG Chelsea Prop. Group Tue, Nov 4 After the Bell 0.87 CDL Citadel Broadcasting Tue, Nov 4 -----N/A----- -0.20 CCU Clear Channel Cmmu Tue, Nov 4 Before the Bell 0.39 CSR Credit Suisse Group Tue, Nov 4 Before the Bell N/A CEI Crescent Rl Estte EqtyTue, Nov 4 Before the Bell 0.32 EMR Emerson Electric Tue, Nov 4 Before the Bell 0.62 ENH Endurance Spclty Hold Tue, Nov 4 After the Bell 0.74 EOG EOG Resources Tue, Nov 4 Before the Bell 0.71 EOP Equity Off Prprty TrstTue, Nov 4 Before the Bell 0.70 EQR Equity Residential Tue, Nov 4 Before the Bell 0.55 EXPD Expeditors Intl WA Tue, Nov 4 -----N/A----- 0.29 FST Forest Oil Corp Tue, Nov 4 After the Bell 0.52 FMS Fresenius Medical CareTue, Nov 4 Before the Bell N/A GRP Grant Prideco Inc Tue, Nov 4 -----N/A----- 0.06 HNT Health Net, Inc. Tue, Nov 4 Before the Bell 0.71 HSIC Henry Schein Tue, Nov 4 Before the Bell 0.92 ICOS ICOS Corp Tue, Nov 4 After the Bell -0.80 IGT Intl Game Technology Tue, Nov 4 -----N/A----- 0.28 MAC Macerich Co Tue, Nov 4 -----N/A----- 0.86 MVL Marvel Enterprises Tue, Nov 4 Before the Bell 0.39 MAS Masco Tue, Nov 4 Before the Bell 0.52 MBI MBIA Inc. Tue, Nov 4 Before the Bell 1.17 MSM MSC Industrial Direct Tue, Nov 4 -----N/A----- 0.17 PY Pechiney Tue, Nov 4 -----N/A----- 0.24 PER Perot Systems Tue, Nov 4 Before the Bell 0.12 PCLN Priceline.com Tue, Nov 4 After the Bell 0.21 PRU Prudential Finl, Inc. Tue, Nov 4 After the Bell 0.56 RA Reckson Ass Rlty Corp Tue, Nov 4 After the Bell 0.54 REG REGENCY CTRS CORP Tue, Nov 4 After the Bell 0.79 RYAAY Ryanair Holdings Tue, Nov 4 Before the Bell 0.92 SPI Scottish Power Tue, Nov 4 Before the Bell N/A SBL Symbol Technologies Tue, Nov 4 -----N/A----- 0.06 TLM Talisman Energy Tue, Nov 4 -----N/A----- 0.48 TLD TDC A/S Tue, Nov 4 -----N/A----- N/A TI Telecom Italia Tue, Nov 4 -----N/A----- N/A G The Gillette Co Tue, Nov 4 Before the Bell 0.36 MNY The MONY Group Inc. Tue, Nov 4 Before the Bell 0.07 PNX The Phoenix Companies Tue, Nov 4 Before the Bell 0.11 TYC Tyco Intl Tue, Nov 4 Before the Bell 0.33 UPL Ultra Petroleum Corp Tue, Nov 4 -----N/A----- 0.11 UAG United Auto Group Tue, Nov 4 Before the Bell 0.61 ----------------------- WEDNESDAY ----------------------------- Y Alleghany Wed, Nov 5 -----N/A----- N/A DOX Amdocs Ltd Wed, Nov 5 -----N/A----- 0.23 AFR American Finl Rlty Wed, Nov 5 Before the Bell 0.21 ABC AmeriSourceBergen Wed, Nov 5 Before the Bell 1.05 AXS Axis Capital Holdings Wed, Nov 5 After the Bell 0.56 BZH Beazer Homes USA Inc Wed, Nov 5 Before the Bell 3.90 CPN Calpine Corp Wed, Nov 5 Before the Bell 0.24 CNQ Canadian Natural Res Wed, Nov 5 Before the Bell 1.32 CRE Carramerica Rlty Corp Wed, Nov 5 After the Bell 0.77 CSCO Cisco Systems Wed, Nov 5 After the Bell 0.15 CXR COX RADIO INC Wed, Nov 5 Before the Bell 0.18 DF Dean Foods Wed, Nov 5 Before the Bell 0.52 EIX Edison Intl Wed, Nov 5 Before the Bell 1.09 FOX Fox Entertainment Grp Wed, Nov 5 After the Bell 0.28 HIG Hartford Finl ServicesWed, Nov 5 After the Bell 1.17 IACI INTERACTIVECORP Wed, Nov 5 Before the Bell 0.18 LAMR LAMAR ADVERTISING CO Wed, Nov 5 Before the Bell -0.01 MGA Magna Intl Inc. Wed, Nov 5 -----N/A----- 1.19 MME Mid Atlantic Medical Wed, Nov 5 After the Bell 0.99 MLS Mills Corp Wed, Nov 5 Before the Bell 0.82 PHS PacifiCare Health Sys Wed, Nov 5 After the Bell 1.45 PDX Pediatrix Medical Grp Wed, Nov 5 Before the Bell 0.97 PSC Philadelphia Suburban Wed, Nov 5 Before the Bell 0.32 RL Polo Ralph Lauren Wed, Nov 5 Before the Bell 0.51 QCOM QUALCOMM Inc. Wed, Nov 5 After the Bell 0.29 DNY RR Donnelley Wed, Nov 5 Before the Bell 0.45 SRV Service Corp Intl Wed, Nov 5 Before the Bell 0.05 SHPGY Shire Pharm Group Wed, Nov 5 Before the Bell 0.36 SSI SpectraSite, Inc. Wed, Nov 5 After the Bell N/A NWS The News Corp Ltd Wed, Nov 5 After the Bell 0.20 REY The Reynolds & ReynoldWed, Nov 5 Before the Bell 0.44 SVM The ServiceMaster Co Wed, Nov 5 Before the Bell 0.22 TOM Tommy Hilfiger Wed, Nov 5 Before the Bell 0.58 TM Toyota Motor Corp Wed, Nov 5 Before the Bell N/A TRN Trinity Industries Wed, Nov 5 After the Bell 0.08 TXU TXU Corp. Wed, Nov 5 Before the Bell 0.93 UNM UnumProvident Corp Wed, Nov 5 After the Bell 0.42 VARI Varian, Inc. Wed, Nov 5 After the Bell 0.39 WPI Watson Pharm, Inc. Wed, Nov 5 Before the Bell 0.45 WTW Weight Watchers Intl Wed, Nov 5 After the Bell 0.38 ------------------------- THUSDAY ----------------------------- ATVI Activision Thu, Nov 6 After the Bell -0.12 AEG AEGON N.V. Thu, Nov 6 -----N/A----- 0.35 AAA Altana AG Thu, Nov 6 -----N/A----- N/A BRL Barr Labs, Inc. Thu, Nov 6 Before the Bell 0.67 BDX Becton, Dickinson Thu, Nov 6 Before the Bell 0.60 BRG BG Group Thu, Nov 6 Before the Bell 0.38 BIO Bio-Rad Labs, Inc. Thu, Nov 6 -----N/A----- 0.74 BNN BRASCAN CORP Thu, Nov 6 -----N/A----- 0.41 CPT Camden Prop. Trst Thu, Nov 6 After the Bell 0.76 CZN Citizens Cmmu Co. Thu, Nov 6 Before the Bell 0.10 CLX Clorox Thu, Nov 6 -----N/A----- 0.60 CNA CNA Finl Corp Thu, Nov 6 Before the Bell -1.97 CMLS Cumulus Media Inc. Thu, Nov 6 After the Bell 0.10 DEG Delhaize Group Thu, Nov 6 -----N/A----- N/A DVN Devon Energy Corp Thu, Nov 6 Before the Bell 1.47 ETM Entercom Cmmu Thu, Nov 6 Before the Bell 0.39 FLO Flowers Foods Thu, Nov 6 Before the Bell 0.28 FS Four Seasons Hotels Thu, Nov 6 Before the Bell 0.11 HCC HCC Insurance HoldingsThu, Nov 6 After the Bell 0.56 HEW Hewitt Associates Thu, Nov 6 Before the Bell 0.31 THX Houston Exploration Thu, Nov 6 Before the Bell 1.02 ICN ICN Pharm, Inc. Thu, Nov 6 Before the Bell 0.24 IDA Idacorp Holding Thu, Nov 6 Before the Bell 0.46 IN Infonet Services Corp Thu, Nov 6 After the Bell -0.03 KSE KeySpan Thu, Nov 6 Before the Bell -0.01 KGC Kinross Gold Thu, Nov 6 -----N/A----- 0.02 LTR Loews Corp. Thu, Nov 6 Before the Bell 1.17 CLI Mack-Cali Rlty Corp Thu, Nov 6 Before the Bell 0.94 NSANY Nissan Motor Co. Ltd. Thu, Nov 6 -----N/A----- N/A NVDA NVIDIA Corp Thu, Nov 6 After the Bell 0.12 PIXR Pixar Animation Stud Thu, Nov 6 After the Bell 0.13 PSA Public Storage Thu, Nov 6 -----N/A----- 0.74 SRE Sempra Energy Thu, Nov 6 -----N/A----- 0.92 TEM Telefonica Moviles Thu, Nov 6 Before the Bell N/A TBI Tom Brown Thu, Nov 6 Before the Bell 0.44 TRZ Trizec Prprty, Inc. Thu, Nov 6 Before the Bell 0.41 HLTH WebMD Thu, Nov 6 After the Bell 0.09 WMB Williams Companies IncThu, Nov 6 Before the Bell 0.04 XMSR XM Satellite Radio Thu, Nov 6 Before the Bell -1.17 ------------------------- FRIDAY ------------------------------- AXA AXA Fri, Nov 7 -----N/A----- N/A BUH Buhrmann NV Fri, Nov 7 -----N/A----- N/A DYS Dist y Servicio D&S SAFri, Nov 7 -----N/A----- 0.14 DTE DTE Energy Co Fri, Nov 7 Before the Bell 0.58 AHO Koninklijke Ahold NV Fri, Nov 7 -----N/A----- N/A MITSY Mitsui & Co Ltd Fri, Nov 7 -----N/A----- N/A TEO Telecom Argentina Fri, Nov 7 After the Bell N/A TOT Total Fri, Nov 7 Before the Bell 1.61 VNO Vornado Rlty Trst Fri, Nov 7 Before the Bell 1.02 WSC Wesco Finl Fri, Nov 7 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable AMRB Am River HoldingsCorp 3:2 Oct 31st Nov 3rd UNTD United Online 3:2 Oct 31st Nov 3rd EASI Engineered Support Systems3:2 Oct 31st Nov 3rd MNRO Monro Muffler Brake Inc 3:2 Oct 31st Nov 3rd CETV Cntrl Euro Media Ent Ltd. 2:1 Nov 4th Nov 5th BHE Benchmark Electronics Inc 3:2 Nov 13th Nov 14th LSTR Landstar System, Inc 2:1 Nov 13th Nov 14th BLUD Immucor, Inc 3:2 Nov 14th Nov 17th LYTS LSI Industries Inc 5:4 Nov 14th Nov 17th -------------------------- Economic Reports This Week -------------------------- Q3 Earnings are finally starting to fade as we move into the first week of November. Monday reveals the latest auto sales numbers, Construction spending and the ISM index. Wednesday will see the ISM services number and Friday has several smaller economic reports. ============================================================== -For- ---------------- Monday, 11/3/03 ---------------- Auto Sales (NA) Oct Forecast: 5.5M Previous: 5.4M Truck Sales (NA) Oct Forecast: 7.9M Previous: 7.9M ISM Index (DM) Oct Forecast: 55.8 Previous: 53.7 Construction Spnding(DM)Sep Forecast: 0.2% Previous: 0.2% ----------------- Tuesday, 11/4/03 ----------------- Goldman Sachs Capital Good Conf. ------------------- Wednesday, 11/5/03 ------------------- ISM Services (DM) Oct Forecast: 62.0 Previous: 63.3 Factory Orders (DM) Sep Forecast: 0.6% Previous: -0.8% ------------------ Thusday, 11/6/03 ------------------ Initial Claims (BB) 11/01 Forecast: N/A Previous: 386K Productivity-Prel (BB) Q3 Forecast: 7.3% Previous: 6.8% October Same-Store Sales Merrill Lynch Tech Conference ---------------- Friday, 11/7/03 ---------------- Personal Income (BB) Sep Forecast: 0.2% Previous: 0.2% Nonfarm Payrolls (BB) Oct Forecast: 50K Previous: 57K Unemployment Rate (BB) Oct Forecast: 6.1% Previous: 6.1% Hourly Earnings (BB) Oct Forecast: 0.2% Previous: -0.1% Average Workweek (BB) Oct Forecast: 33.8 Previous: 33.7 Wholesale Invntories(DM)Sep Forecast: 0.2% Previous: -0.2% Consumer Credit (DM) Sep Forecast: $5.5B Previous: $8.2B Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** 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
The Option Investor Newsletter Sunday 11-02-2003 Sunday 2 of 5 In Section Two: Watch List: Earnings & Strength Put Play of the Day: JBLU Dropped Calls: SYK Dropped Puts: None ************************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 ************************************************************** ********** Watch List ********** Earnings & Strength Barr Labs - BRL - close: 76.77 change: +0.07 WHAT TO WATCH: This is one drug stock that is out performing its peers. BRL has painfully climbed higher over the last twelve months and is now trading at all-time highs. The trend of higher lows in October look ready to carry over into November. It will be interesting to see how investors react to BRL's earnings report on November 6th. Chart= --- Countrywide Financial Corp - CFC - close: 105.12 chg: +0.67 WHAT TO WATCH: After smashing earnings last week (10/23) by $1.45 per share, CFC vaulted higher again to break the $100 mark. Now shares are consolidating sideways between 102.50 and 107. Bullish traders can look for a bounce from 100-102 or a breakout over 107. Bears are probably waiting for a slide under the $100 mark. CFC splits 4-for-3 in December. Chart= --- Magna Intl - MGA - close: 80.23 change: +1.00 WHAT TO WATCH: After a month-long decline in September, shares of MGA have roared back through most of October, minus a few days of consolidation. The recent support at the 50-dma looks good and the close over $80 is a tempting trigger for new bullish plays. With earnings expected on November 5th we're going to keep this one on our watch list. Chart= --- Digene Corp - DIGE - close: 35.10 change: -0.65 WHAT TO WATCH: Ouch! The bullish momentum reversed for biotech stock DIGE in late September after soaring towards the $50 mark. The stock finally broke its bullish technical support in October and now DIGE has failed under its 50-dma. Furthermore DIGE's P&F chart is showing a fresh triple-bottom sell signal and a price objective pointing towards the $25 mark. Earnings are on November 6th. This could be a stock to watch. Chart= --- Lehman Brothers - LEH - close: 72.00 change: +1.65 WHAT TO WATCH: Can LEH breakout above resistance at 72.50? If so bulls might be able to target the old highs near $76. Volume was pretty strong on Friday's gain and the broker/dealer index has been a leader for the markets, especially now given the spat of M&A activity and stronger trading volumes. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- BCR $80.05 +0.80 - Earnings in mid-October were strong and sent BCR to new all-time highs. Momentum traders may want to go long over 81 or short under 78. ING $20.84 +0.14 - This insurance stock might still have some gas in its tank if it can break through the 21.25 level. BZH $99.50 +0.97 - Homebuilders are hot and BZH is at new all- time highs. The $100 level should be round-number psychological resistance but shares may not stop, not with that trend of lower highs on its intraday chart. ************************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 ************************************************************** ******************** THE PLAY OF THE DAY ******************** Put Play of the Day: ******************** JetBlue Airways - JBLU - cls: 57.67 chg: -1.70 stop: 60.51 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Stryker Corp. - SYK - close: 81.11 change: -0.05 stop: 79.00 Early last week, SYK looked like an ideal breakout candidate, the way the stock had wedged itself up against major resistance at $82. After numerous attempts, the stock isn't any closer to making that breakout a reality, having been repeatedly turned back as the stock wedges into a tighter and tighter neutral wedge. While a breakout is still possible, with the way the daily oscillators are peeling off and the complete lack of bullish follow-through last week, we're going to err on the side of caution and pull the plug this weekend. There are plenty of better plays out there, so we'll clear this non-performer off the playlist to make room for them. Use any sort of intraday rally back near $82 to effect a more favorable exit from any open positions. Picked on October 26th at $81.51 Change since picked: -0.40 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 674 K Chart = PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************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 ************************************************************** ********** 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 Sunday 11-02-2003 Sunday 3 of 5 In Section Three: Current Calls: COO, FD, ICOS, JCI, LOW, QLGC, VRTS New Calls: APA, IMDC Current Put Plays: COF New Puts: JBLU ************************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 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Cooper Cos - COO - close: 43.45 chg: +0.05 stop: 41.15 *new* Company Description: The Cooper Companies, Inc. manufactures and markets specialty healthcare products through its CooperVision and CooperSurgical units. CooperVision markets a broad range of contact lenses for the vision care market. Headquartered in Lake Forest, Calif., it manufactures in Huntington Beach, Calif., Rochester, N.Y., Norfolk, Va., Adelaide, Australia, Farnborough and Hamble, England, Madrid, Spain and Toronto. CooperSurgical supplies diagnostic products, surgical instruments and accessories to the gynecology market. With headquarters in Trumbull, Conn., it also manufactures in Bedminister N.J., Cranford, N.J., Fort Atkinson, Wis., Malmo, Sweden, Montreal and Berlin. (source: company press release) Why We Like It: Boy, it was just a week ago we were pretty concerned with COO's slide back towards the $40 level. Thankfully, support at its simple 50-dma held up and the market strength boosted COO over the mid-October highs. The recent consolidation on Thursday- Friday is encouraging because investors have kept the stock above the $43.00 level, although we will note volume was pretty light. Short-term traders can begin planning their exit point as the stock approaches our first target at $45.00. One good day and COO could be there. We're encouraged by the bullish technical indicators on COO's chart but a couple of the short-term oscillators are already looking overbought. We would probably not suggest new bullish positions unless COO offered a bounce from the $42.00 level. We are going to raise our stop up a tad to $41.15, which is still below its simple 50-dma. Just an observation but those traders brave enough to buy the dip to the 50-dma last week have seen the November options double. Suggested Options: Short-term traders should probably look over the November options while longer-term traders can evaluate the February strikes. BUY CALL NOV 40 COO-KH OI= 869 at $4.00 SL=2.00 BUY CALL NOV 45 COO-KI OI=1551 at $0.75 SL= -- BUY CALL FEB 40 COO-BH OI= 795 at $5.30 SL=3.20 BUY CALL FEB 45 COO-BI OI= 421 at $2.45 SL=1.25 Annotated chart: Picked on October 12 at $41.40 Change since picked: + 2.05 Earnings Date 09/03/03 (confirmed) Average Daily Volume: 391 thousand Chart = --- Federated Dep Store - FD - cls: 47.55 chng: +0.59 stop: 45.50 Company Description: Federated Department Stores, Inc. is a retail organization operating department stores that sell a range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. As of February 2003, the company, through its subsidiaries, operated 394 department stores and 61 furniture galleries and other specialty stores under the names Bloomingdale's, The Bon Marche, Burdines, Goldsmith's, Lazarus, Macy's and Rich's. In addition to its stores in 34 states, Puerto Rico and Guam, the company conducts direct-to-customer mail catalog and e-commerce business under the Bloomingdale's By Mail and macys.com names. Why we like it: After another dip to support just above the 20-dma, FD spend last week wedging back up against the $48 resistance level, as the Retail index (RLX.X) pushed to new multi-year highs and then consolidated near the $385 level into the end of the week. With the RLX looking strong and the DOW closing back at 9800 and the SPX at 1050 on Friday, FD looks poised to finally break out over that $48 resistance next week. Another dip and rebound from above $46 can be used for new entries here, although the better approach would seem to be entering on the breakout. With earnings set to be released on November 12th, there should still be enough time to reach our $50 price target. We're recommending an exit from the play once that level is reached, as the first test of the 2001 highs will likely produce a bout of selling. Aggressive traders might hold out for a breakout move above that level, but with the rest of the market feeling like it is near an important top, we don't feel like pressing our luck. Maintain stops at $45.50. Suggested Options: Shorter Term: The November 45 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the November 47 Call or even the December 47. These options are 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 may want to use the January 47 Call due to its greater open interest than the December strikes. BUY CALL NOV-45 FD -KI OI=269 at $3.10 SL=1.50 BUY CALL NOV-47 FD -KW OI=389 at $1.35 SL=0.75 BUY CALL DEC-45 FD -LI OI= 50 at $3.80 SL=2.25 BUY CALL DEC-47 FD -LW OI= 9 at $2.15 SL=1.00 BUY CALL JAN-47 FD -AW OI=127 at $2.85 SL=1.50 Annotated Chart of FD: Picked on October 9th at $45.60 Change since picked: +1.95 Earnings Date 11/12/03 (unconfirmed) Average Daily Volume = 1.90 mln Chart = --- ICOS Corp - ICOS - close: 46.72 chg: +0.76 stop: 42.49 Company Description: ICOS is a product-driven company that has expertise in both protein-based and small molecule therapeutics. ICOS combines its capabilities in molecular, cellular and structural biology, high throughput drug screening, medicinal chemistry and gene expression profiling to develop highly innovative products expected to have significant commercial potential. ICOS applies its integrated approach to erectile dysfunction and other urologic disorders, and sepsis and other inflammatory diseases. ICOS' strategy targets multiple therapeutic areas with drugs that act through distinct molecular mechanisms, increasing opportunities to market breakthrough products. (source: company press release) Why We Like It: The drug battle royale has yet to begin in the U.S. but storms of conflict are on the horizon. The battle between ED drugs (erectile dysfunction) is coming. Pfizer has enjoyed a monopoly in the U.S. markets but the little blue pill is about to get some tough competition from the Eli Lilly-ICOS treatment Cialis. Cialis is already doing well in Europe and analysts have big expectations for the drug in the U.S. We don't have much time left in this ICOS call play. The company is due to report earnings after the bell on Tuesday, November 4th. Regular readers know we do not like to hold over an earnings announcement. Thus we will be closing this play on Monday or at the very latest on Tuesday afternoon. For this reason we are not suggesting new bullish positions in the stock. Hopefully, ICOS will have good news to say in their conference call and they will announce better than the expected 79 cent loss per share. Unfortunately, there are too many variables than can sabotage a bullish option position so we choose to step back and watch. We will be keeping ICOS on our watch list because the big inverse head-and-shoulders pattern is a very tempting bullish play. A post-earnings bounce from the $44.00 level might be a new entry point but then we'll have more data to digest to make a more informed decision. Suggested Options: Earnings are expected on November 4th after the bell. We are not suggesting new positions. OptionInvestor will close this play on Monday or Tuesday('s close) at the latest. Annotated Chart: Picked on October 26 at $45.42 Change since picked: + 1.30 Earnings Date 11/04/03 (confirmed) Average Daily Volume: 1.5 million Chart = --- Johnson Controls - JCI - close: 107.53 chg: +0.46 stop: 102.99 Company Description: Johnson Controls is a global market leader in automotive systems and facility management and control. In the automotive market, it is a major supplier of integrated seating and interior systems, and batteries. For non- residential facilities, Johnson Controls provides control systems and services including comfort, energy and security management. (source: company press release) Why We Like It: (original play description from Thursday) Building on the bullish wave in the markets and growing net income, shares of JCI have propelled themselves from the $72.50 level in April to $107 in October. The month of October has been exceptionally strong after Bank of America raised their price target on JCI to $125. Fellow vehicle-interior maker Lear Corp (LEA) also benefited from a strong start in October and positive analyst coverage. When the markets pulled back JCI investors saw shares dip toward the $103 level but dip buyers moved albeit on lower volume. Earnings were on Oct. 22nd and the company's fiscal Q4 profits rose 16% while they beat estimates by 3 cents with $2.31 a share. We will admit that the daily and weekly chart on JCI looks extended and overdue for a deeper correction. However, until that time comes we're going to play the trend, which is up, and see how far it can run. Its point-and-figure chart is currently showing a triple-top buy signal after faking out the shorts with a bear trap. We like entries at the current level but momentum traders can look for a new high over $107.40. If you prefer to enter on a dip wait for a pull back to $105 or $106. We're going to initiate the play with a stop loss at $102.99. We also note that JCI is a split candidate. The company last split its stock 2-for-1 on April 1, 1997 at the $80 level. There has been ample opportunity to split since and they did not. However, shares are now trading at all-time highs and October was the first time they broke the century mark. ! Weekend Update: JCI continued to stretch its winning streak through Friday and closed at a new all-time high. Dips to $105 or $106 still look attractive but the next stop may be $110. Suggested Options: Short-term traders can choose from the November and December options while longer-term investors may want to look at January 04 and April 04 strikes. We like the 105s and 110s. BUY CALL NOV 105 JCI-KA OI=563 at $3.70 SL=1.85 BUY CALL NOV 110 JCI-KB OI=249 at $1.00 SL= -- BUY CALL NOV 115 JCI-KC OI= 0 at $0.25 SL= -- riskier BUY CALL DEC 105 JCI-LA OI= 5 at $4.70 SL=2.50 BUY CALL DEC 110 JCI-LB OI= 10 at $2.00 SL=1.00 BUY CALL DEC 115 JCI-LC OI= 0 at $0.65 SL= -- Annotated chart: Picked on October 30 at $107.07 Change since picked: + 0.46 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 432 thousand Chart = --- Lowe's Companies - LOW - close: 58.93 change: -0.52 stop: 57.00 Company Description: As a retailer of home improvement products, Lowe's has a specific emphasis on retail do-it-yourself and commercial business customers. The company specializes in offering products and services for home improvement, home decor, home maintenance, home repair and remodeling and maintenance of commercial buildings. Why we like it: As we expected, LOW gave us that breakout over $59 last week, with price stretching all the way up to $59.95 before the bulls lost their nerve. Since achieving that peak on Tuesday, the stock has been gradually drifting back down, and it looks like old resistance in the $58.00-58.50 area is being tested to see if it can now hold as new support. Traders that didn't take the initial breakout over $59 are now getting a second chance to enter the play. Rebounds from above $58 look viable as new entry points, so long as our $57 stop is not violated. With just over 2 weeks to go until the company reports earnings on November 17th, there's still plenty of time for the stock to achieve our upside target of $65. More cautious traders may want to wait for a break above $60 before jumping aboard with new positions. Watch for continued strength in the Dow Jones Housing index ($DJUSHB) and the Retail index (RLX.X) to confirm continued bullishness in shares of LOW. Suggested Options: Shorter Term: The November 55 Call will offer short-term traders the best return on an immediate move, as it is currently in 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 LOW-KK OI= 2334 at $4.50 SL=2.75 BUY CALL NOV-60 LOW-KL OI=11019 at $1.20 SL=0.60 BUY CALL DEC-55 LOW-LK OI= 148 at $5.20 SL=3.25 BUY CALL DEC-60 LOW-LL OI= 981 at $2.05 SL=1.00 Annotated Chart of LOW: Picked on October 23rd at $58.65 Change since picked: +0.28 Earnings Date 11/17/04 (unconfirmed) Average Daily Volume = 3.91 mln Chart = --- QLogic Corp. - QLGC - close: 56.05 change: -0.14 stop: 52.99 Company Description: Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. Why we like it: We had a strong feeling that QLGC was setting up for a major breakout, especially with the Semiconductor index (SOX.X) still looking strong. The SOX had a stellar day on Tuesday, blasting through resistance to new highs for the year, and QLGC went along for the ride, handily taking out resistance near $54 and stretching above $56 by the close. That wasn't all this play had in store though, as the stock shot higher at the open on Thursday, hitting a high of $58.30 before falling back throughout the remainder of the day. Since clearing that level, QLGC has been finding intraday support just below $56 for the past few days and if that support gives way, then odds are good that we'll see a test of $54 as support. Should that rebound take place from the $56 area, it would be a mediocre entry into the play, but a dip and rebound from above $54 (old resistance becomes support) should be used for aggressive entries enroute to achieving our upside target of $60. Note that the 10-dma ($54.36) has now edged above $54, which should reinforce that support level. Maintain stops at $52.99. Suggested Options: Shorter Term: The November 55 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 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 55 Call. BUY CALL NOV-55 QLC-KK OI=5679 at $2.65 SL=1.25 BUY CALL NOV-60 QLC-KL OI=7079 at $0.70 SL=0.35 BUY CALL DEC-55 QLC-LK OI= 865 at $3.80 SL=2.25 BUY CALL DEC-60 QLC-LL OI=1311 at $1.65 SL=0.75 Annotated Chart of QLGC: Picked on October 21st at $54.21 Change since picked: +1.85 Earnings Date 1/14/04 (unconfirmed) Average Daily Volume = 4.70 mln Chart = --- Veritas Software -VRTS - close: 36.08 change: -0.26 stop: 34.00 Company Description: As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Why we like it: Last week's breakout over $36 resistance was just the catalyst we needed to look for another bullish play in VRTS, especially with the creation of yet another PnF Buy signal on the trade at $37. But with the stock having doubled in the past 6 months, it is getting harder for the bulls to just stage a breakout that can run higher. What that told us was that when VRTS broke out, it was likely to pull back and confirm that old resistance would act as new support. Sure enough, the stock has been pulling back over the past couple sessions and ended on Friday just a few pennies above that $36 level. Whether it holds as support next week will give us a lot of answers as to the play's viability. Intraday dips as low as $35 can be used for entry into the play, although more conservative traders will want to wait for price to recover back over $36 before playing. Assuming the breakout last week wasn't the end of the line for the bulls, our $40 initial target should be easily reached on the next move up the chart. The ease with which that target is reached will give us a clearer picture of whether our aggressive $45 target is possible or just wishful thinking. Maintain stops at $34, which is still just below the 50-dma at $34.25. Suggested Options: Shorter Term: The November 35 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 40 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 35 Call. BUY CALL NOV-35 VIV-KG OI=15445 at $2.25 SL=1.00 BUY CALL NOV-40 VIV-KH OI= 6621 at $0.35 SL=0.00 BUY CALL DEC-35 VIV-LG OI= 1467 at $2.95 SL=1.50 BUY CALL DEC-40 VIV-LH OI=10835 at $0.85 SL=0.40 Annotated Chart of VRTS: Picked on October 28th at $37.27 Change since picked: -1.19 Earnings Date 1/21/04 (unconfirmed) Average Daily Volume = 6.21 mln Chart = ************** NEW CALL PLAYS ************** Apache Corp. - APA - close: 69.72 change: +0.54 stop: 66.25 Company Description: Apache Corporation is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. In North America, the company's exploration and production interests are focused in the Gulf of Mexico, the Gulf Coast, the Permian Basin, the Anadarko Basin and the Western Sedimentary Basin of Canada. Outside of North America, Apache has exploration and production interests offshore western Australia, offshore and onshore Egypt, offshore The People's Republic of China and onshore Argentina, as well as exploration interests in Poland. Why we like it: As a rule Oil and Gas exploration stocks haven't really done that well in recent months. Sure there are many that have made some upward progress, but few have shown the steady gains demonstrated by shares of APA. The stock bottomed near $35 in September 2001 and since then has been steadily working higher in a broad ascending channel. There have been dips and troughs, but t the trend of higher lows and higher highs remains intact. Each new high is followed by a period of consolidation, before APA then turns higher to rally through to a new high. The most recent peak was more than 3 weeks ago, when the stock topped out near $73, and it has been slowly pulling back to support at the 50-dma ($68.98), which is reinforced by the midline of the rising channel ($68.40). The company handily beat earnings estimates just over a week ago on strong revenues and with the Natural Gas component in the company's repertoire, business looks to continue to be strong for some time to come. The PnF chart just reinforces the bullish picture, as the Buy signal back in August generated a bullish price target of $86, giving plenty of upside potential to the stock. We're looking to take an entry near current levels, but we want to make the stock prove that it really is going to bounce before we actually enter the play. So we're setting an entry trigger of $70.50, just over the intraday highs of the past 3 days, as well as the 20-dma ($70.41). Once the trigger is satisfied, momentum traders can enter on the initial breakout, while those with a more conservative style can look for a dip and rebound above the 50- dma as their entry trigger. Because we're looking for the rebound to commence from near current levels and using an entry trigger, we can use a tight stop of $67.95, which is below both the center-line of the rising channel and last Tuesday's intraday low. Suggested Options: Shorter Term: The November 70 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the December 75 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the December 70 Call. BUY CALL NOV-65 APA-KM OI= 371 at $5.10 SL=3.00 BUY CALL NOV-70 APA-KN OI=2688 at $1.30 SL=0.65 BUY CALL DEC-70 APA-LN OI= 134 at $2.15 SL=1.00 BUY CALL DEC-75 APA-LO OI= 222 at $0.55 SL=0.25 Annotated Chart of APA: Picked on November 2nd at $69.72 Change since picked: +0.00 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 1.39 mln Chart = --- Inamed Corp - IMDC - cls: 86.16 chg: +3.04 stop: 79.99 Company Description: Inamed is a global healthcare company with over 25 years of experience developing, manufacturing and marketing innovative, high-quality, science-based products. Current products include breast implants for aesthetic augmentation and for reconstructive surgery; a range of dermal products to treat facial wrinkles; and minimally invasive devices for obesity intervention, including the Lap-Band System for morbid obesity. (source: company press release) Why We Like It: Bulls are chasing strength again and IMDC has a 9-month head start on its rival for the re-introduction of silicone breast implants into the U.S. markets. Silicone was banned for implant usage back in 1992 in the belief that leaking implants lead to a number of autoimmune disorders. Yet most of the world still uses silicone implants due to their more natural feel. One article stated that 9 out of 10 European women chose silicone implants over saline. Inamed believed that silicone was safe to use and sponsored a clinical study to cover the issue. That data was discussed and voted on by an FDA advisory panel in October. So why all the buzz over the October 14-15 FDA advisory panel decision, where they voted 9-to-6 to approve silicone implants for U.S. usage? Wall Street is watching because breast implants are big business. In the last ten years the number of breast augmentations has soared more than 500%. Doctors performed more than 236,000 operations in 2002 alone. Now that the advisory panel has voted there is a 3-to-6 month wait before the FDA rules on the issue. Should it be approved then silicone sales could soar to $100 million after hitting the markets in mid-2004. Shares of IMDC were halted during the two-day panel meeting in October and on news of their approval the stock jumped more than 22%. Since the announcement we've seen shares of IMDC slide back to the $80 level before investors bought the dip and pushed it back up to a new all-time high by this last Friday. The company did announce earnings a couple of days ago and the results beat estimates by 3 cents with net income reaching 61 cents per share. Revenues were up almost 20% to $80.1 million. Bullish traders should note that IMDC is not without risk. Normally the FDA does follow the advice of their advisory panels but they could still choose to not approve silicone implants for the U.S. market. The FDA approval is probably still a few months away but a risk we're more likely to deal with are analyst downgrades based on valuation concerns. Shares of IMDC have soared and that makes it an easy target. Fortunately, when the markets were weak two weeks ago IMDC faded slowly to the $80 level before traders jumped in. We feel if the markets can cooperate IMDC might turn out to be a $100 stock. Let's not forget to mention it's a prime candidate for a stock split. We like bullish positions at current levels but if a pull back appears then a bounce anywhere above $82.50 should be playable. We're going to stick our initial stop loss at 79.99, which might feel a little wide. More conservative traders could attempt a play with a stop closer to $82. Very short-term traders may want to look for a dip then target $90, IMDC's next logical resistance point. Suggested Options: Short-term traders can choose the November or December options. January or Aprils are also available. We like the 85s but the 80s might work on a pull back. BUY CALL NOV 80 UZI-KP OI= 515 at $7.40 SL=4.50 BUY CALL NOV 85 UZI-KQ OI= 965 at $3.80 SL=1.50 BUY CALL NOV 90 UZI-KR OI= 123 at $1.40 SL=0.70 BUY CALL DEC 85 UZI-LQ OI= 205 at $5.60 SL=3.00 BUY CALL DEC 90 UZI-LR OI= 205 at $3.20 SL=1.60 Annotated Chart: Picked on November 02 at $86.16 Change since picked: + 0.00 Earnings Date 10/29/03 (confirmed) Average Daily Volume: 514 thousand Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Capital One Fin. - COF - close: 60.80 change: +1.12 stop: 62.00 Company Description: As one of the top 10 credit card issuers in the U.S., Capital One's secret weapon is its vast databases. The company uses this data to match a potential Visa or MasterCard customer to any one of its thousands of cards, varying in annual percentage rates, credit limits, finance charges and fees. Ranging from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor credit histories, the company has a credit card for just about anyone. The company also sells wireless phone services, mortgage services, and consumer lending products. Why we like it: We debated about whether to add COF to the put list on Thursday because of the stock's propensity to dole out bear traps. But in the end, the potential for a major breakdown outweighed the risks. Those risks were mitigated by using an entry trigger of $59, requiring COF to show us some weakness before we'd be lured into the play. That weakness never materialized on Friday, with the stock bouncing right from the opening bell and gaining 1.87% into the close. With the trigger, we're still safely waiting on the sidelines, rather than trapped in a losing position. We're going to stick with the initial game plan, requiring COF to break below $59 to make it a live play. That initial breakdown looks like a solid entry point, although more conservative traders may want to wait for the 50-dma ($58.82) to give way as well before playing. Stick with the $62 stop, as a move above Thursday's intraday high, as well as the 10-dma and 20-dma would be a clear sign that down is not the path of least resistance. Suggested Options: Aggressive short-term traders will want to focus on the November 55 Put, as it will provide the best return for a short-term play. Longer term traders will want to look to the December 55 Put, as it should provide ample time for the play to move in our favor without time decay becoming a major factor. BUY PUT NOV-60 COF-WL OI=6652 at $1.85 SL=1.25 BUY PUT NOV-55 COF-WK OI=4944 at $0.55 SL=0.40 BUY PUT DEC-55 COF-XK OI=3789 at $1.40 SL=0.75 Annotated Chart of COF: Picked on October 30th at $59.68 Change since picked: +1.12 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 2.62 mln Chart = ************* NEW PUT PLAYS ************* JetBlue Airways - JBLU - cls: 57.67 chg: -1.70 stop: 60.51 Company Description: JetBlue is a low-fare, low-cost passenger airline, which provides high-quality customer service. JetBlue operates a fleet of 48 new Airbus A320 aircraft and is scheduled to place into service another five A320s by the end of 2003. Based out of New York City's John F. Kennedy International Airport, JetBlue currently operates 184 flights a day and serves 22 destinations in 11 states and Puerto Rico and plans to commence service in January from Boston to Orlando, Tampa and Ft Lauderdale, FL, LA/Long Beach, CA, and Denver, CO. With JetBlue, all seats are assigned, all travel is ticketless, all fares are one-way, and a Saturday night stay is never required. (source: company press release) Why We Like It: It's been a tough gig to try and pick successful bearish plays with the markets near one-year highs. The recent week was truly rough with the INDU up five days in a row. However, the market strength may have helped set up this bearish play for JBLU. But first a little background. For months shares of this discount airlines appeared immune to profit taking and normal stock cycles. When JBLU finally hit the $70 level in early October we began to see some consolidation ahead of its earnings report. Once JBLU reported its Q3 numbers the stock was dumped as investors "sold the news". Prior to the earnings report UBS downgraded the stock to "reduce" from "neutral" on valuation concerns and after the report JPM did the same with a downgrade from "neutral" to "under weight" (a.k.a. sell). We don't think the profit taking is over yet and JBLU appears to be trading in a bear flag with a little benefit from the market strength this last week. This is somewhat of an aggressive play because the XAL airlines index is still in a bullish trend higher and JBLU might find some dip buyers. Yet somehow we don't think so. The failed rally on Thursday traded to the simple 50-dma just above the 60 mark before rolling over again. There is some support at $55 but our initial target is $50.00. We'll open the play with a stop loss above Thursday's high at 60.51. Suggested Options: Short-term traders can choose from the November or December options while longer-term players can check out the Januarys. We like the 60s and 55s. BUY PUT NOV 60 JGQ-WL OI=1452 at $3.90 SL=2.00 BUY PUT NOV 55 JGQ-WK OI=1759 at $1.45 SL=0.75 BUY PUT NOV 50 JGQ-WJ OI=1470 at $0.50 SL= -- riskier BUY PUT DEC 60 JGQ-XL OI= 814 at $5.30 SL=3.00 BUY PUT DEC 55 JGQ-XK OI= 368 at $2.75 SL=1.40 BUY PUT DEC 50 JGQ-XJ OI= 917 at $1.30 SL=0.65 Annotated Chart Picked on November 02 at $57.67 Change since picked: - 0.00 Earnings Date 10/23/03 (confirmed) Average Daily Volume: 1.5 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 *********************************************************************** ********** 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 Sunday 11-02-2003 Sunday 4 of 5 In Section Four: Leaps: Charge Up Your Force Field Traders Corner: Horatio Was The Founder – And The Loser Traders Corner: Where is the Dow Going? Traders Corner: In Quest of the Perfect Donchian Channel Breakout Signal Futures Corner: The New and The Old ************************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 ************************************************************** ***** LEAPS ***** Charge Up Your Force Field By Mark Phillips mphillips@OptionInvestor.com As I idly speculated some weeks back, the broad market indices are nearing important resistance that I expect to be a well-charged electric fence on the first attempt or two. Once again on Friday, the DOW closed over 9800 and it seems almost a guarantee that we'll see that 10K mark tested over the next couple weeks as it will now act as a price magnet. At the same time, the S&P 500 closed over 1050 and the 1065-1070 is beckoning to the bulls with its siren song of further gains. As I spoke of back in January, the NASDAQ has indeed been the leader to the upside in this cyclical bull market recovery and 2000 appears to be in the cards in the near future. There are doubtless a lot of traders that have those three measures of overhead resistance on their radar screens just as I do and I'm expecting that at least on the first attempt at a breakout those measures will act as a veritable electric fence. So if you're betting on a breakout to higher levels, it would seem to be prudent to charge up those force fields! The last time any of these measures of resistance were visited was in June of 2002 and a cursory glance at any of those charts shows just how strong resistance becomes on any push above there. The DOW has strong resistance from 10,000-10,300, the SPX from 1070-1100 and the NASDAQ from 2000-2100. While I won't argue that higher levels are impossible, the ability of the market to continue significantly higher with the incredibly low levels of the VIX appears doubtful. Regardless of whether we're looking at the OEX volatility index (VXO.X) or the SPX volatility (VIX), these levels are screaming "extreme complacency" on the part of the bulls. Using the higher reading of the VXO at 17.15, we haven't seen volatility this low since late 1998. I remember a few months back talking about one prominent analyst's prognostication of VIX levels in the 12-15 area as patently ridiculous, but yet here we go, approaching those levels that haven't been seen since 1992-1994. I pointed out that those levels should be impossible to achieve due to the fact that those low VIX readings were accompanied by a very narrow range of fluctuation in the underlying index, the OEX. Well, now our VIX is calculated on the SPX and looking at the movement over the past few months, I'm forced to concede that lower VIX levels may indeed be possible. Since early June, the SPX has traded in the range of 960-1050, which is only a little over 9% in a period of 5 months. Should this narrow range continue, then I think it is entirely possible that the VIX could continue to drop. Let me be clear though. Just because I concede that such a course of events is possible, does not mean that I think it is likely. Rather than the underlying fundamental conditions that prevailed in the early 1990s, the economic landscape feels a lot more like what we experienced at the end of 1999 and leading into early 2000 before the great bubble finally popped. During that period, money supply growth had been excessive and then the bubble popped as the Fed pulled back on the availability of money by raising interest rates and reducing the actual money supply. There's no hint of a rise in interest rates yet, but the rate of money supply growth has been falling significantly in recent weeks, as the Fed looks to walk the fine line between being accommodative enough and too accommodative. My prediction is that they will eventually fail in their attempts to engineer a recovery through monetary policy, but time will tell. I delved into my thoughts a bit last Monday and had intended to finish up that topic last Wednesday. Unfortunately, I spent most of last Wednesday preparing to evacuate due to the California firestorms and had to put that project on hold. I'll deliver the "rest of the story" this week. The bottom line for me is that there's still more upside potential for this rally, but it is getting very close to the point where it once again makes sense to attempt selling the top. I know a few weeks ago I said that I was done trying to pick a top in this market, but with the approach of major resistance levels, amazingly low VIX readings and a domestic economy that is growing according to government statistics, but really appears stagnant to me, this opportunity is too good to pass up. Bullish percent readings are still all very near their cycle highs, with the exception of the NASDAQ-100, currently in a bear correction condition, but have in all cases refused to give us confirmed bearish or reversal top readings. In my opinion, these readings are still telling us that the bulk of the risk is being carried by the bulls, but until we see some true weakness, trying to pick a top is still a risky venture. But I'm willing to give it a go. Care to join me for the ride? Portfolio: WMT - Despite the fact that WMT has failed to deliver any real downside action and bounced again last week, I'm encouraged by the stock's lack of relative strength. The DOW is pushing to new highs, the Retail index (RLX.X) broke out to new multi-year highs last week and WMT is still trolling along below descending trendline resistance. That trendline is now at $59.75, just above the mid-October high of $59.64. While this play hasn't yet begun to perform, I'm pretty happy with the point at which we took our position. Failed rally attempts below $59.50 still look good for new entries, and we'll maintain our stop at $61 for now. One note that I think is important to make is with respect to the decay in option premiums. We entered this Portfolio position when WMT was trading at $57.48 and it is now $58.95, for a rise of roughly $1.50. Yet our LEAP premiums have decayed by 18-20%! Welcome to the effect of what diving VIX readings will do, even to stocks that haven't historically been all that volatile. In my opinion, that makes entry at these depressed volatility levels more attractive, as ANY move will increase the volatility component of the option's price. Watch List: QQQ - Alright, it is time to bite the bullet here and either go for it or let it go. With the NASDAQ Composite getting close to a test of the 2000 level, QQQ has now tested the $36 level on a couple of occasions. The QQQ is still solidly within its rising channel, but on this last breakout attempt, was turned back from the center of the rising channel. Drawing things a bit differently, it is possible to draw a rising trendline connecting the peaks since the middle of June and last week's rally failed to reach that line as well. We're clearly getting more aggressive here and trying to pick a top, but I think the potential rewards if we're right outweigh the risks. I'm going to reinstate this play to active status this weekend, with dual entry triggers. The first is for the aggressive players, where we'll look to initiate a bearish position on a foray into the $36.50-37.00 area, looking to pick a top. To give the play some room to move before the decline gets underway, we'll set the initial stop at $39.25, just above the March 2002 relative highs. More conservative traders will want to stick with the initial plan we've been discussing, which is to wait for breakdown out of the channel. The bottom of the channel is currently $34.30, so the trigger there will be $34, which is also below the 50-dma. If entry is taken on the breakdown, stops should be placed just above the relative high. For instance, if the QQQ broke down early next week, our stop would go at $36.25. I personally don't think selling breakdowns is a viable strategy until the market gives up some of its ingrained bullishness, so the only entry we'll take in the Portfolio will be trying to short the top of this move. SMH - Isn't it amazing how the bulls can shake of a single report from KLAC and propel the Semiconductor index (SOX.X) to fresh highs? The SOX continues to trade very strongly within its rising channel, currently pressing against the upper edge of that channel at the end of last week. We're still premature to be considering shorting the top of this move, so we'll leave our SMH play on HOLD for another week. Our day will come and when it does, it should be quite exciting. Our primary task right now is to not jump in prematurely and consequently lose our confidence when the real entry arrives. NEM - Well, it's safe to say we're not going to see my desired entry point anytime soon. But at the same time, I'm just not willing to chase this stock higher. Gold and gold stocks are trading at or near recent highs and still appear vulnerable to a downside correction. The bull market in gold has plenty of room to run and I think that gives us the luxury of time. Let's continue to wait for an attractive entry. With the recent breakout above $40-42, I think the odds of a drop below $37 are slim. So I'll revise that entry strategy up to look for entry in the $37-38 area on the next significant pullback and rebound. SBUX - Crud! No hint of a pullback for us to buy and then SBUX launches higher, rallying through $31 and the top of its rising channel last week. Maybe this is the beginning of a runup ahead of the company's earnings report on November 13th, or maybe it was time. In either case, it appears we won't have an opportunity to play ahead of that earnings statement. We'll leave our entry strategy in place for now and re-evaluate after earnings have been released. Radar Screen: QCOM - QCOM broke out last week and for the most part managed to hang onto its gains heading into the weekend. This looks like a pre-earnings run, as the company is set to release its quarterly results on Wednesday. I still really like the bullish prospects for the stock, but we need to see a pullback before it will make any sense to play. The ideal scenario would now be a pullback and rebound from the $42-43 area, but it is hard to gauge if we will get the chance. I'm content to wait until after the earnings reaction settles out before placing any bets. Provided there are no nasty surprises in the earnings statement, a "sell the news" drop near the $43 area could prove to be a very attractive entry opportunity ahead of a continued rally up into strong resistance in the $60-65 area. Note that the PnF Bullish vertical count weighs in with a target of $67. Closing Thoughts: The longer we go in this agonizing rally with volatility levels continuing to plunge, the more bearish my overall view becomes. There are many problems in the current market, not the least of which is valuations. But I've beaten that horse to death over the course of the past few months, and I won't torture you with it here again tonight. Besides, if you're looking for commentary along those lines, you can tune into my article later this week which will build on the theme of the unintended consequences wrought by the Fed's meddling in affairs that they have no real hope of controlling over the long term. Take advantage of any continued strength over the next couple weeks to harvest gains in any bullish positions you might have and I think we can start aggressively leaning into the bearish camp, at least for longer-term positions. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: WMT 10/03/03 '05 $ 55 ZWT-MK $ 5.10 $ 4.10 -19.61% $61 '06 $ 55 WWT-MK $ 7.20 $ 5.90 -18.06% $61 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 10/05/03 $33-34 JAN-2005 $ 35 ZIE-AG CC JAN-2005 $ 30 ZIE-AF JAN-2006 $ 35 WIE-AG CC JAN-2006 $ 30 WIE-AF SBUX 10/12/03 $27.50-28.00 JAN-2005 $ 30 ZIE-AG CC JAN-2005 $ 25 ZIE-AF JAN-2006 $ 30 WIE-AG CC JAN-2006 $ 25 WIE-AF PUTS: QQQ 08/10/03 $36.50-37.00 JAN-2005 $ 32 ZWQ-MF $34 JAN-2006 $ 32 WD -MF SMH 08/24/03 HOLD JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG DJX 11/02/03 $99.50-100.00 DEC-2004 $ 96 YDK-XR JUN-2005 $ 96 ZDK-RR New Portfolio Plays None New Watchlist Plays DJX - Dow Jones Industrials $98.01 **Put Play** As I mentioned above, the DOW looks headed for the 10,000 level and it wouldn't surprise me a bit to see that level achieved next week. It might take longer, but we need to be ready. While that level is acting like a price magnet right now, with the VIX hitting multi-year lows, my expectation is that that magnet will become an electric fence when first reached. Weekly Stochastics have effectively been overbought for 6 consecutive months, something I've only seen a couple times in the historical charts and odds favor a sizable downside correction when Stochastics finally do drop down out of overbought. But the way the market is acting, if we wait for the breakdown before playing, we'll miss the majority of the move unless it really does turn out to be the END of this bull market correction. So we're going to play a bit on the aggressive side with this play, targeting entries where we expect to see a top put in. My entry target will be for a move into the $99.50-100.00 area. In order to allow for the expected volatility in that area, we'll use a fairly wide stop at $104, which should be sufficiently above next resistance in the $103.00- 103.50 area to keep us from being stopped out unless the bulls just continue to power higher. Our initial downside target will be for a return to major support at $89-90. Note that we've listed June contracts for 2005. This is because of that expiration month being the furthest out we can go. So far, there are no December 2005 contracts available. BUY LEAP DEC-2004 $96 YDK-XR BUY LEAP JUN-2005 $96 ZDK-RR Drops FRX - $50.01 I have to say that I haven't been impressed with the price action in FRX. Most areas of the market are continuing to push higher and this stock seems to be finding a stiff wall of resistance near $50-52, with the relative highs dropping over the past month. Oscillators have become muddled, and price action has been weak. This certainly isn't the recipe for a winning bullish play, and I think the best decision is to pull the plug here, before anyone gets the inclination to enter the play. Better safe than sorry, and FRX is not looking safe for the bulls right now. ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Horatio Was The Founder – And The Loser By Mike Parnos, Investing With Attitude Did you dress up for Halloween? I dressed up as a (surprise, surprise) couch potato. But it was a bitch dragging the couch from house to house. It was worth it. I scared the hell out of the neighbors and scored a 3 Musketeers bar, a caramel apple and 65-cents in change. Do I know how to have fun, or what? This week the market wasn't particularly scary either – at least not enough to seriously threaten our CPTI portfolio. Actually, we're in pretty good shape with our "hypothetical" trades. If the market would finish at current levels, we'd make a lot of "hypothetical" money. _____________________________________________________________ The History Of A Strategy This strategy was named after an obscure Civil War General, Horatio Backspread. His friends call him "Ratio" -- hence the strategy that has become known as the "ratio backspread." General Backspread was not very popular with his troops. Why? Because he used the same game plan as boxer Rocky Marciano. He believed it was worth taking two blows to land one. Marciano won many bouts, but his face looked like a Sloppy Joe without the bun. Horatio Backspread was a general for the Confederate army. It could be why they lost. The Ratio Backspread Let's start out by saying that ratio backspreads are directional plays. A put ratio backspread anticipates a downward movement of the stock. Conversely, a call ratio backspread anticipates an upward movement of the stock. Backspreads are not endorsed by the CPTI. Plus, if you do them, I want to be your bookie. However, in the spirit of fairness to "Ratio" and "Rocky," and in an attempt to make your option education complete, let's take a look and see how these buggers are supposed to work. For our example, let's assume we expect Netflix (NFLX) to move down significantly prior to November expiration. With NFLX trading at $57.30, we would: a) Sell one November $60 put for $4.90, then b) Buy two November $55 puts for $2.40 each = $4.80 We have a net credit of a dime (BFD). However, we are now in position to take advantage of the downward movement and it didn't cost us anything. How Low Must It Go? How large of a move is necessary for the backspread to be profitable? Let's take a look. First, we are short the $60 put and long a $55 put. That's a $5 exposure. NFLX has to go down far enough for the second long $55 put to have enough value to make up the $5. That means NFLX has to go below $50 for the second $55 put to have a value of $5.00. It's free sailing from there. The profit potential is unlimited – IF you guessed right. More What Ifs . . . If NFLX goes the wrong direction and finishes above $60, all three puts expire worthless. Nothing ventured, nothing gained. The worst-case scenario would be if NFLX finished right at $55. Then you'd have the $5 obligation from the difference between the short $60 put and your long $55 put. The other long $55 put would expire worthless. It's not quite as bad as that. Don't forget your dime credit. I bet that makes it more palatable. Warning! If, for some reason, this strategy appeals to you, I can't emphasize enough that the example above is not even hypothetical. It's absurd. I suggest we stick to what we know best – having time work for us. Now, I'm going to spend some quality time with my 3 Musketeers bar, my caramel apple, and, of course, my couch. Next year I'll need a new costume – or at least a lighter couch. Any suggestions on what I should buy with the $.65? By The Way If you believe the Horatio Backspread story, we need to talk. I have some prime swamp-land in Florida for sale and . . . _____________________________________________________________ NOVEMBER AND ONGOING POSITIONS Position #1 – SPX Iron Condor – Trading @ 1050.71 We sold 10 contracts of November SPX 985 puts and bought 10 contracts of November SPX 975 puts for a credit of $1.10 ($1,100). Then we sold 7 contracts of November SPX 1075 calls and bought 7 contracts of November SPX 1090 calls for a credit of $1.50 ($1,050) and a total net credit of $2,150. We've created a maximum profit range of 985 to 1075. With three weeks left, that's a reasonable range. Position #2 – AFCI Iron Condor – Position closed for $700 loss. Que sera, sera. Position #3 – OEX Iron Condor (By Request) – 519.98 We sold 10 contracts of the OEX November 490 puts and bought 10 contracts of the OEX November 480 puts for a credit of about $.90. Then, sold 10 contracts of the OEX November 545 calls and buy 10 contracts of the OEX November 555 calls for a credit of about another $.90. Our total net credit will be about $1.80. Our maximum profit range is 490 to 545. Position #4 – BBH – Siamese Condor - $128.75 Sell 10 contracts of the BBH November $130 puts and 10 contracts of the BBH November $130 calls for about $8.50. Then, buy 10 contracts of BBH November $140 calls and 10 contracts of the BBH November $120 puts for about $2.40. The net credit should be about $6.10. Our profit range is $123.90 to $136.10 and those are also our exit parameters. The closer BBH finishes to $130, the more we can make. Position #5 – QQQ Put Calendar Spread – Trading @ $35.20 We decided to risk a buck. Since many folks think the market is due to correct. We created a cheap play that will let us take advantage of a nice down move. Meanwhile, we will continue to sell against the January put while we wait. 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). The October $32 puts expired worthless and, on Wednesday, we rolled out to the November $32 and took in a $.30 credit. We now have a new cost basis of $.70. OEX – Bearish Calendar Spread – OEX @ $519.98 We own 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 sold the October 490 puts, took in another $3.10 and those also expired worthless. On Thursday we sold the November 485 puts for $2.60. Our cost basis is now $2.70. If we're going to make money on this position, we'll need some cooperation from the market. The OEX will have to trade down to about 490 in the next few weeks. Then, we may have to make an adjustment. This may get a bit tricky – another adventure and learning experience. QQQ ITM Strangle – Ongoing Long Term -- $35.20. We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. Then we sold 10 contracts of the QQQ Oct. 33 puts and 10 contracts of the QQQ Oct. 34 calls for a total credit of $1,900. We bought back our $33 puts and $34 calls and rolled out to November $34 puts and $34 calls, taking in another $1.15 ($1,150). So far, so good. HPQ (Hewlett Packard) Bear-Put Spread – HPQ at $22.08 This is a directional bet. We anticipate HPQ may return to the $15 range. We own 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. 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? 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 _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************** TRADERS CORNER ************** Where is the Dow Going? By Steve Gould Many moons ago I saw a comedy skit about a highly publicized boxing match. This was to be the match of the decade. The first contestant was the up and coming superstar. Dedicated, intense and committed, it was all a matter of time before he won the championship. The other contestant was a former champion and had been retired for a few years. He had to go back into training to prepare for the match which he did not take it too seriously. Privately, all the sportscasters had always thought of this guy as a buffoon. In the back of their minds they never really understood how he ever won the championship title. As the fight commenced, the two contestants came out of their respective corners and faced each other. Immediately the up and coming superstar threw one punch and the former champion was out cold. Total time of fight: 3 seconds. The camera cut back to the sportscasters who were totally unprepared for such a short fight. One guy was getting a coffee and donut. The camera caught him with a donut stuffed in his mouth and a look of panic on his face. The other sportscaster was seen running out of the bathroom with his zipper still open. It was even funnier than I could ever describe. I mention all this because last week I wrote: "Unless it isn't. The possibility still exists, although small, that the S&P 500 could rally and make a new high over the next several days. The critical level will be 1036 which is the low of the 1 (blue circle). If the S&P 500 prints higher than that before completing the 5 (blue circle) wave, the wave count is invalidated and the S&P 500 will most likely trend higher to 1060 – 1090 level." (As I reread this, I realize that I had better specify that I am portraying one of the sportscasters, not the buffoon!) The 1036 level was violated within minutes of the Monday opening. Not only was I not expecting this to happen, should it happen, I would not have expected it to have happened so quickly. I was caught off guard with a mouthful of coffee and dang near choked to death when I saw that level violated so quickly. Do you know what coffee does to a monitor screen and keyboard? You don't want to know. Now that my desk is cleaned up, let's see where we are now. Chart: S&P 500 Weekly 10/31/2003 It may not look like a lot has changed and much of what I noted last week still holds. For example, the S&P 500 has not yet touched the 38% retracement level of the wave 3 and no trend lines have been broken. Technically speaking, nothing significant has happened. (This is why trading off of weekly charts is not terribly exciting.) The one noteworthy change is in the oscillator. It is well on its way to the 1.62 level and showing no sign of slowing down. This could have important implications about whether the S&P 500 has completed the five wave basic pattern with a failed 5th wave or not. But I am going to withhold judgment until the daily and hourly chart confirm this. Chart: S&P 500 Weekly Close-up 10/31/2003 A close up view of the 4 wave shows that the S&P 500 is hovering between the 38.2% retracement level and the 1.38 expanded flat level. (For a more detailed explanation on the significance of these levels, see the last few articles.) This view also allows us to see in more detail that the oscillator is indeed still on an up trend. Chart: S&P 500 Daily 10/31/2003 The daily S&P 500 chart shows that the five wave basic pattern within the 5 (blue circle) is still intact. Until this pattern is invalidated, it will remain the preferred count. Right now nothing else makes sense. All the ducks are lined up, albeit not completely straight, to set up the topping pattern. The next week, maybe two, should determine just how high the S&P 500 will go before it completes the 5 (blue circle) wave and reverses direction. If the S&P 500 is going to follow Elliott Wave theory, there is really nothing else it can do. Chart: S&P 500 Hourly 10/31/2003 Always saving the best for last, the hourly S&P 500 chart is the most interesting because it is the most paradoxical. How this plays out will determine whether all the charts leading up to this one are valid or not. This chart spans the 5 wave of the 5 (blue circle) wave on the daily. The Elliott Wave pattern is far from ideal, but still valid...maybe. Some factors that invalidate the ideal form of an Elliott Wave five wave basic pattern all relate to the 4 (green square) wave. Note the red railroad tracks. Statistical analysis by Advanced Get shows that when the 4 wave surpasses the red railroad tracks, the probability that this is a four wave formation decreases to almost zero. Add on top of that the oscillator pierced the 1.62 mark and I am not feeling really confident about this wave count. So what are the options? 1. Even though the Elliott Wave five wave basic pattern violates all sorts of guidelines (not rules, mind you), this can still be a valid wave count. 2. This wave count is all wrong and something else is going on. However, I really have to stretch as to think about what that could be. Even if we consider the weekly pattern to be a completed five wave basic pattern with a failed 5th wave, the daily still prints out as a five wave basic pattern. It would just be an A wave instead of the C wave. It just doesn't seem likely that the S&P 500 is going to print this out as anything less than an ill formed five wave basic pattern that is going to be an exception to all the guidelines. So I predict over the next week or two that the S&P 500 will print out a new high to about the 1060 level to complete the 5 (blue circle) wave on the daily which would complete the C wave on the weekly which completes the 4 (green square) wave on the weekly. At that point, we should see the start of the 5 (green square) wave down to the 650 level. Bottom line is that even though not every Elliott Wave pattern is ideal, all the evidence suggests that the S&P 500 will top around the 1060-1090 level. This should happen next week, the week after at the latest. At that point the S&P 500 should be starting its long awaited trek down to the 650 level. ************** TRADERS CORNER ************** In Quest of the Perfect Donchian Channel Breakout Signal Linda Piazza If you happen upon a middle-aged woman jogging down the highway wearing full armor and muttering "match the offset to the ADX," that's me. I'm a woman in quest of the perfect Donchian channel breakout signal. My quest began, appropriately enough, on a day of rest and reflection. As an OEX trader, I avoid trading during low-volume days, using those days to tweak settings and perform research. On a recent day, that research centered on Donchian channels. Pegged one of the simplest of trend-following systems, Donchian channels pinpoint breakouts. Richard Donchian expounded on the system in a 1970 booklet, using the channels to employ his four- week rule. He constructed the Donchian channels with the top boundary set at the highest high for the previous four weeks and the lower boundary at the lowest low for that period. He advocated always being in the market, covering short positions and entering long ones when price exceeded the top channel and liquidating long positions and entering short ones when price declined below the bottom channel. The default 20 setting on most Donchian channels reflects that four-week setting, with twenty days composing four trading weeks. This system does prove simple, but don’t confuse simplicity with ineffectiveness. Studies comparing various trading systems consistently identify breakout systems as those that produced the most profits. That information convinced me to take a serious look at Donchian channels. I had no intention of constantly trading the OEX, but was interested in identifying breakouts. To my confusion, applying the default Donchian channel 20-period, no- offset configuration to a 30-minute OEX chart produced no breakout signals. 30-minute OEX chart with Donchian Channel with Default (20,0) Setting I scrolled back through a chart. Still no breakouts. How could a tool used to trigger breakout trades be helpful if it identified no breakouts? I experimented with the offsets, finally settling on an offset of +2. That offset translates the channel two periods to the right. Aha! Breakouts. 30-minute OEX chart with Donchian Channel with (20,2) Setting A quick calculation across several time periods showed some breakouts running for 5-10 OEX points, some far more. The quest had begun. I needed backtests to confirm that the (20,2) setting on a 30-minute OEX chart identified tradable breakouts. An effective exit strategy had to be determined. Over the next weeks, I chose a two-month test period at random and applied various test strategies to that time period. My first test of the Donchian channels proved disappointing. This test entered a trade on the first 30-minute close outside the Donchian channel and exited the trade on the first 30-minute close inside the channel. Fifty-four trades over that two-month period resulted in a total loss of 5.84 points. The maximum gain was 14.89 points and the maximum loss was 7.91 points. A second test covered the same period, but employed a different exit strategy. This strategy exited the trade when a 30-minute candle closed two points below the previous 30-minute close on a bullish trade and two points above on a bearish trade. That system resulted in 54.64 OEX points during the same time period, with a maximum gain of 35.93 points and a maximum loss of 8.54 points. I was onto something. When running the tests, I noticed peculiarities relating to the first 30-minute period of the day. If the OEX opened outside the Donchian channel, it often ran for several points, but such trades usually proved more profitable if entered at the open. An entry at the close of that first 30-minute period lopped off several possible points before what often turned out to be a quick reversal. Conversely, if a trade was carried overnight and the OEX opened inside the channel, it usually proved best to exit at the open. This anecdotal evidence needed to be verified in a backtest. I also decided to limit losses to four points from the entry, stopping the trade on a four-point move away from the entry rather than on a four-point close. Applying those parameters to the previously chosen time period and otherwise using the same exit strategy produced 91.34 OEX points, with the same maximum gain of 35.93 points and a maximum loss of 4 points. The maximum drawdown was 12.36 points. Now I had the right system. My quest had succeeded. However, a troubling 52 percent of the 33 trades resulted in losses. Perhaps I could tweak my methodology, using 100-sma/100-ema crossovers to guide entries. Bullish moving-average crossovers would mean no bearish entries would be taken, and bearish crossovers would mean no bullish entries would be taken. That methodology resulted in far fewer trades. The maximum gain remained 35.93 points and the maximum loss was four points, with a maximum drawdown of 8.36 points. The total gain was 75.08 points. A hefty 47 percent of the 19 trades still resulted in losses, however. Switching to a 10-sma/10-ema crossover and applying the same standards resulted in a total gain of 89.71 points for the period, with a maximum gain of 35.93 points and a maximum loss of 4 points. The maximum drawdown was 8.36 points, but 48 percent of the 25 trades resulted in losses. Another test used an exit system that I later learned was a recommended methodology. I added a short-term (5,2) Donchian channel to the chart, nested inside the longer-term chart. Bullish exits occurred when the OEX closed a thirty-minute period below the short-term channel. Bearish exits occurred when the OEX closed a thirty-minute period above the short-term channel. I tested the same two-month period and found that the trailing stop method produced the largest gains over the entire period. However, the maximum gain on a single trade expanded to 41.34 points when a (5,2) channel was used to trigger exits, and 50 percent fewer trades resulted in almost the same total gain for the period, 88.64 points. Fifty-five percent of the 22 trades resulted in losses, however. Next I tested the system against a control period. The control period I chose was the two-month period that had recently concluded at the time of the test. Applying the same standards with a trailing-stop exit that had resulted in a gain of 91.34 OEX points, the second test period resulted in a loss of 0.68 points. Sixty-one percent of the 18 trades resulted in losses. Ouch. Several modifications eventually produced modest gains for that period, but I ultimately concluded that the Donchian channel breakout system suffered from the shortcomings of all methodologies that work well in a trending market. They perform poorly in a range-bound one. Has my quest ended? No way. I just need a way to distinguish those trades likely to perform poorly from those likely to perform well. I have clues to help in my quest. I observed that trades tended to perform best when 21(3)3 stochastics were already pinned at overbought or oversold levels at the time the trade was triggered. That made sense. This evidence suggested that the trend was strong and I already knew that a breakout system did not trigger a trade until the trend had been in place over a few points. That observation also hinted that ADX might be useful in determining which trades should be entered and which avoided. I assumed that high ADX values, indicating a strong trend in place, would accompany the most profitable trades. I assumed wrong. Initial scans have not confirmed my impression, with below-18 ADX values being associated with some of the most profitable trades. My initial scans also show that ADX values near 20 produced trades that often settled at breakeven at best. Those clues must be pursued in future quests. An example occurred with a trade triggered on October 22. ADX measured 22.46 at the time the trade triggered and stochastics lines measured 49.12 and 70.21. My observations concluded that this trade likely would not be an optimal trade. One type of exit produced a 1.13-point gain and the other a more satisfactory 4.61 gain. The chart below follows the trade. 30-minute OEX chart with Donchian Channels Set at (20,2) and (5,2) In conclusion, my impressions, still to be verified, include the following: Donchian channel breakouts miss the first few points of a move, of course, but identify the big moves. These breakouts, using a 20- period channel with an offset of 2, also produce many false signals, during both trending and range-bound markets. When markets trend, however, the big gains more than offset smaller losses. Losing trades usually amounted to 45-55 percent of the total trades, but that percentage might be lessened as the entry and exit methodologies are perfected. An open above or below the (20,2) Donchian channel often runs for several points, with a trade best entered at the open. However, that first thirty-minute range often quickly reverses, so that a different exit system might be needed for such entries. If a trade was active at the open and the first OEX price gapped inside the channel, closing the trade at the open often proved to be a wise choice. Trades tended to perform best when the 21(3)3 stochastics were already pinned at overbought (in a bullish breakout) or oversold (in a bearish breakout) at the time a Donchian channel breakout triggered a trade, but further tests may refute this observation. Contrary to logic, the trades may perform best when ADX measures less than 18 at the time a breakout triggers a trade. Further tests may refute this observation. Many trades, once triggered, saw the OEX run for many points in the direction of the trade, but exit strategies still do not appear optimal. Future testing needs to focus on a SAR exit or on tightening the trailing stop on the trailing-stop method. Donchian channels prove simple to construct and simple to evaluate, so perhaps should be part of each technical trader’s toolkit. For now, I conclude that Donchian channel breakouts might best be used as adjuncts to other technical trading tools, confirming entries already suggested by those other means, but my quest continues. The hope of capturing 90 OEX point moves in one two-month period keeps me going. What if ADX levels correlate closely with the trade’s success? What if the channels might be offset to the left, using negative numbers, during periods identified as range-bound, so that no signals would be triggered until and unless a breakout proved particularly strong? Next week, I strap my armor on again and set out to finish my quest. If you spot me jogging along, muttering about the correlation of ADX levels to the offset, you’ll know I’m planning my next backtest of Donchian channel breakouts. ************** FUTURES CORNER ************** The New and The Old Keene Little I have been trading full time for a living the last four years but having survived for these particular four years, I feel like it has been at least eight. During this time, I've zeroed in a trading style that might seem new and yet it's one of the oldest forms of pattern recognition. I will be working with all of you in the Futures Monitor on a daily basis helping identify good swing trading opportunities and the occasional position trade as well. This is an introduction to me, my style of trading and risk management that I use and how I'll be guiding you in your trading. I will write some educational articles over time for those of you who would like to understand a little more about what Mr. R. N. Elliott discovered almost seventy years ago. That's pretty old. Yet for many of us, following Elliott Wave Theory is a very new experience. Human nature is what it is because it does not change. We are truly creatures of habit. The pattern of our behavior repeats time after time and has done so through the ages. One of the best reflections of our behavior, our psychological responses, is the stock market because it truly reflects our emotions. These patterns repeat in many different time frames and can be used to guide one's trading decisions whether you trade using monthly signals or 5-minute signals. For our swing trades, we will typically be taking signals from the 1-minute to the 10- minute charts while we use the longer 30-minute, 60-minute, daily and weekly to help us trade in the direction of least resistance. The longer-term charts will obviously be most helpful for the position trades. For those of you who will be working with us live in the Futures Monitor, I will be giving trade recommendations based on multiple inputs and I look for confirmation of the various signals to both increase my confidence in taking the trade and to lower my risk in identifying a stop-loss level. Elliott Wave (EW) is my primary "indicator" which I then back up by using more common indicators such as oscillators, trend lines and moving averages. It is a well-known fact that professional futures traders typically have only a 40% win/loss ratio, meaning they have more losing trades than winners. The only real secret to success is to keep your losses small so that the value of your winners will exceed the value of your losers. EW analysis gives me logical stop-loss points because the wave count is based on turning points. If after entering a trade the price turns around and takes out the last turning point, then the supposed count I was using is wrong and it's time to step aside and wait for the count to clear up. I will typically be trading the index futures, the e-minis for the DOW (YM), the SPX (ES) and the NDX (NQ). Once the e-mini futures for the Nasdaq (QCN) becomes more actively traded, we may try that one sometimes as well. My favorite index changes based on how well I can identify the EW pattern, how well it's behaving (or not) and how well I can control my risk. I like the YM because I can lower my risk it has a much tighter price between ticks. But sometimes I expect the techies to outperform the other indexes and therefore will prefer to trade the NQ. In all likelihood, I will also call out the value of the ES when we make a trade so that we're all singing off the same music sheet and can easily compare notes. As for the other vehicles to trade, such as bonds, metals, and other commodities, I only follow bonds, gold and silver. Silver e-mini futures (YI) trades thin and so I tend to leave it alone. Gold e-mini futures (YG) doesn't have a lot of volume but I've had pretty good luck getting in and out without any problems. I tend to position trade this when I see a significant turn coming. I actively trade the bonds because they're highly liquid and lately we've been seeing much more movement in them than we're seeing in equities. I follow the 30-year because it's the choice of many professionals and the movements follow fibonacci and EW patterns very nicely. But I prefer to trade the 10-year Notes' e-mini futures (ZN) because they have tighter pricing between ticks and I can better control my risk. To me it's a similar choice as between ES and YM. One tick in the 30-year bond (e-mini for it is ZB) is $31.25 whereas one tick in the ZN is half that at $15.63. The ZB will tick one point, the ZN will tick a half point. Trading the bonds is done exactly the same way as trading the equity futures so follow along if you haven't trade them before. So as not to complicate matters during the day, I will try to keep comments as concise as possible. Jim uses a good technique of calling out the trade and then as quickly as possible coming back and giving the value of the trade and the location of the stop. This is particularly useful for his momentum style of trading. I like to identify a value that if hit, I execute the trade. One could use a stop order to enter a trade in this case, but I like to give it one more look-see before jumping in. However, by identifying this value I can give you a heads up that I'm getting ready to trade and you can key up your order with me if you'd like. Be aware that you will sometimes see exactly opposite trading signals from Jim and I. We're trading different techniques and watching different indicators and therefore we may be forming different opinions (I think that's why they call it a market). This will create conflict in your mind and unless you're sure about the direction you want to take, that conflict may be a signal to stay on the sidelines and wait for better clarity. Initially I would recommend you paper-trade with me until you're comfortable enough with my trading style. In the interest of fairness, please don't blame me or give me credit for how your balance sheet looks at the end of the day. We provide a service at OptionInvestor but it is you who pulls the trigger and controls your risk. Do not take a trade just because I say so. You may want to exit a trade sooner than I'm recommending (can't go broke taking a profit). If you're not comfortable with my logic or risk in entering a trade, wait for the next bus. The wonderful thing about our profession is that if I don't like the looks of the bus that's pulling into the station, I can let it leave without me and I'll just grab the next one--they just keep sending me another bus if I miss the last one. The amount of profits I haven't taken would've made me a very rich man by now. But, the amount of losses I've not taken has kept me in the game. Someone's quote that I like is "I'd rather not be in a trade I should have taken than to be in a trade I should not have taken." Finding a new trade is much easier than finding new money. Only you can decide how you want to play this game. I hope you're all in the habit of immediately entering your stop order so that a communication glitch doesn't leave you exposed. Especially right now, this market is getting extremely twitchy (ok, Friday wasn't) and a trade can go huge against you in a heartbeat. I will be recommending stop levels but each person needs to assess their own risk tolerance. Depending on an entry point and a logical stop-loss level I may recommend a 4-point stop loss on the ES. That's $200 per contract. Your personal pain threshold may be only $100 per trade. In that situation I would recommend you not take the trade since a 2-point stop-loss level may not keep you out of danger of getting stopped out and then find it turn right around and go in the expected direction, leaving you behind and $100 poorer. My pain tolerance happens to be pretty low so I take fewer trades and have tighter stops based on higher confidence about the trade. For example, I try to keep my stops at about $50-100 per contract. If I put on a YM trade, I try to keep the stop to 10-15 points ($50-75 per contract), for an NQ trade I like to stay within 3 points ($60) and for ES, 1.50-2.00 points ($75-100). If the natural stop level will be more than this, I tend to pass on the trade and wait for the next bus. The only other recommendation I'll make to control risk is that you determine how many contracts you want to trade and how you enter and exit. We are working with many traders who trade one contract while others are trading lot sizes of 20 or more. I will not be offering trade recommendations about where to enter or exit partial positions. My signals are all or nothing. I'm either in or I'm out. However, what I will do is offer advice to those who are trading multiple contracts where I think some money should be taken off the table. These recommendations will result from an identified support level or wave count where I see the risk of reversal is high enough to get some money off the table but maybe not high enough to exit the trade. I was going to get into a chart to use as an example of what I watch for and how I develop my trading signals. This article became longer than I thought it would so I'll go into more of that kind of detail in my next article. My intention is to use these articles to get you more familiar with what I believe is a powerful trading tool Elliott Wave analysis. Many peoples' eyes glaze over as soon as I mention EW so I intend to take it slow. I will offer charts throughout the day and in articles that have wave counts on them, and I'll explain why they're labeled the way they are and what the alternative wave labels might be. This is not an exact science (otherwise we'd have no market) which is why I bring in many other tools for confirmation. This is a chart of how I see the market setting up for next week. We will expand on this on Monday in the monitor and I will begin to explain what you are looking at. ES Chart - 30 min So, until the next article, I look forward to working with all of you daily in the futures monitor. Please give me your feedback about what you like, dislike, what you'd like to see more of, less of, and I'll do my best to take care of the needs of our readers. I've been an OIN reader since 1998 and frankly doubt I'd be here today if not for the fantastic education I've received from the OIN writers. I'm honored to be joining the OIN team. I'll see you Monday morning before the bell and like they used to say during one of my favorite shows, "let's be careful out there." ************************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 Sunday 11-02-2003 Sunday 5 of 5 In Section Five: Covered Calls: Our Selection Process Naked Puts: Terms and Definitions Spreads/Straddles/Combos: No Fear Among Investors On "All Hallows Eve" Updated In The Site Tonight: Market Posture: So Ends Another Bullish Month for Wall Street ************************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 ************************************************************** ************* COVERED CALLS ************* Trading Basics: Our Selection Process By Mark Wnetrzak One of the most common questions we receive from new readers concerns the methods we use to pick stocks for covered-calls. There many important aspects in the stock selection process however for most short-term trading strategies, the technical health of the underlying issue is generally the most critical factor. In order to forecast the future trend for any financial issue, you must be able to identify the most common historical patterns and understand the implications of technical indicators. There are a number of advantages to this type of approach but most importantly, it eliminates the need to review and assess the infinite components of fundamental valuation. In addition, a selection process based on historical price analysis provides precise entry and exit signals, a major benefit to investors who participate in short-term positions such as "in-the-money" covered-calls. Technical analysis makes three basic assumptions. First, simple market data such as price and volume can indicate the true value of a specific security or financial instrument. Second, prices historically exhibit trends or distinctive patterns and third, history eventually repeats itself. These assumptions can be combined with the study of price and volume to provide investors the basic information they need to initiate profitable trading strategies. The technical indicators that identify buy or sell signals are contained in various chart formations and patterns and since the goal of any trader is to eventually profit from their predictions, most experts suggest that the best place to begin is with a thorough evaluation of the issue's recent price history or trend. Professional technicians say the ideal time to buy a stock is when it starts to move out of a well-defined base into a dynamic stage II pattern. The break-out above the top of the resistance area (and/or a long-term moving average) should be supported by heavy volume. As this cycle begins, the 30-week MA generally starts turning up shortly after the breakout. The initial rally is often followed by at least one significant pullback and that decline brings the stock price back to area near the break-out point, offering another opportunity to purchase the issue. The less the stock retreats into the underlying support area, the more strength inherent in the move. The potency of the pattern really becomes evident when each successive peak eclipses the previous one, and the corrections are progressively higher. As long as these gyrations continue to occur above the short-term (18-30 day) moving average, the bullish trend remains intact and long positions should be maintained until the target exit point is achieved. After the trend is well established and favorable profits are guaranteed, the primary objective is to manage the position for maximum return while avoiding potential losses. Despite the similarities in the initial evaluation process, the strategy we utilize in choosing positions for the Covered-Calls section is much different that an investor would use to select stocks for short-term trading. Our goal is to find stocks that have a high probability of remaining above a given price for a specific (short) period of time. In contrast, an investor who is purchasing stocks for upside potential should first assemble a collection of bullish candidates and then identify the best entry opportunity for each issue through chart reading and other types of timing analysis. Of course, learning when to buy and sell for maximum profit requires a thorough understanding of technical indicators and market trends. It is also crucial to utilize consistent, proven trading techniques to make the most of any favorable opportunities, whether they are in stocks, options, or other financial instruments. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield SGMO 5.10 4.96 NOV 5.00 0.55 0.41 7.8% XOMA 7.83 7.49 NOV 7.50 0.80 0.46 7.1% OXGN 10.51 10.21 NOV 10.00 1.10 0.59* 6.8% MONE 5.14 5.54 NOV 5.00 0.40 0.26* 6.0% TMM 3.44 3.20 NOV 2.50 1.10 0.16* 5.9% SEAC 15.57 15.45 NOV 15.00 1.50 0.93* 5.7% PLUG 5.91 6.32 NOV 5.00 1.15 0.24* 5.5% BVSN 5.31 5.03 NOV 5.00 0.65 0.34* 5.3% ALGN 15.60 15.41 NOV 15.00 1.60 1.01* 5.2% ALKS 14.33 12.97 NOV 12.50 2.50 0.67* 4.9% PUMA 5.54 6.99 NOV 5.00 0.85 0.31* 4.8% GSS 5.49 5.79 NOV 5.00 0.70 0.21* 4.8% CMNT 9.22 9.89 NOV 7.50 2.10 0.38* 4.6% VECO 25.67 25.30 NOV 25.00 1.85 1.18* 4.3% QSFT 14.90 14.90 NOV 15.00 0.55 0.55 4.2% BRCD 6.33 6.56 NOV 6.00 0.65 0.32* 4.1% CRYP 10.84 11.00 NOV 10.00 1.20 0.36* 4.1% SSTI 11.21 11.20 NOV 10.00 1.65 0.44* 4.0% TLAB 7.83 7.53 NOV 7.50 0.70 0.37* 3.8% ALKS 15.16 12.97 NOV 12.50 3.20 0.54* 3.3% * Stock price is above the sold striking price. Comments: The major averages rebounded after last week's drop but have yet to move above the mid-October highs -- even on the heels of an outstanding GDP report. Will the bullish momentum continue next month or is some consolidation due? Time will tell! In either case, re-evaluate any stocks you are holding and be ready to act accordingly. Positions Previously Closed: Ibis Technology (NASDAQ:IBIS). NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield ITMN 20.03 NOV 20.00 IQY KD 0.85 390 19.18 21 6.2% TLAB 7.53 NOV 7.50 TEQ KU 0.30 4729 7.23 21 5.4% CMOS 16.31 NOV 15.00 CQS KC 1.80 456 14.51 21 4.9% RTEC 26.15 NOV 25.00 UXH KE 1.95 62 24.20 21 4.8% EMBT 12.90 NOV 12.50 MBQ KV 0.75 55 12.15 21 4.2% CDN 15.39 NOV 15.00 CDN KC 0.80 2920 14.59 21 4.1% AFFX 25.63 NOV 25.00 FIQ KE 1.30 4109 24.33 21 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ITMN - Intermune $20.03 *** Bottom Fishing: Part I *** InterMune (NASDAQ:ITMN) develops and commercializes products for the treatment of serious pulmonary and infectious diseases and cancer. The company has three marketed products, growing product revenues and advanced-stage clinical programs addressing a range of diseases with attractive markets. Its three marketed products are Actimmune, Infergen and Amphotec. Actimmune is approved in the United States for two rare congenital disorders: chronic granulomatous disease and severe malignant osteopetrosis. ITMN markets Infergen in the U.S. and Canada for the treatment of chronic hepatitis C infections. It markets Amphotec worldwide for the treatment of invasive aspergillosis. InterMune has established a long-term support area near $18 and the recent technical indications suggest a reasonable entry point can be established with this position. NOV-20.00 IQY KD LB=0.85 OI=390 CB=19.18 DE=21 TY=6.2% ***** TLAB - Tellabs $7.53 *** Bottom Fishing: Part II *** Tellabs (NASDAQ:TLAB) designs, makes and markets communications equipment to telecommunications service providers worldwide. Their products include optical networking systems, broadband access systems and voice-quality enhancement systems. Tellabs' optical networking systems are designed to help service providers reduce operating costs, generate greater revenues and efficiently manage bandwidth. The company's broadband access systems consist of managed access and transport systems used to deliver wireless and business services. The company's voice-quality enhancement systems consist primarily of the Tellabs 3000 family of broadband and narrowband echo cancellers and its voice-quality enhancement solutions, which enable wireless and landline providers to improve voice quality in long distance, wireless and private networks. Tellabs has been in a Stage I base for almost a year and investors interested in the communications sector can use this position to speculate on the near-term performance of the issue. NOV-7.50 TEQ KU LB=0.30 OI=4729 CB=7.23 DE=21 TY=5.4% ***** CMOS - Credence $16.31 *** Rally Mode *** Credence Systems (NASDAQ:CMOS) designs, manufactures, sells and services engineering validation test and automatic test equipment (ATE) used for testing semiconductor ICs. They also develop, license and distribute software products that provide automation solutions in the design and test flow fields. Credence's hardware products are designed to test semiconductors at two stages of their lifecycle: at the prototype stage and as they are produced in high volume. Their software products enable design and test engineers to develop and troubleshoot production test programs prior to fabrication of the device prototype. Collectively, the company's customers include major semiconductor manufacturers, fabless design houses, foundries and assembly and test services companies. Credence is in a stage II climb that is showing no signs of slowing down. Investors who believe the rally will continue can profit from that outcome with this position. The company's earnings are expected on November 24. NOV-15.00 CQS KC LB=1.80 OI=456 CB=14.51 DE=21 TY=4.9% ***** RTEC - Rudolph Tech $26.15 *** Breaking Out! *** Rudolph Technologies (NASDAQ:RTEC) markets and sells products to all major logic, memory and application-specific integrated circuit (ASIC) device manufacturers. The company provides its customers with versatile full-fab metrology solutions by offering families of systems that meet their metrology needs. Its systems are designed for semiconductor manufacturing facilities and offer automated wafer handling and 200- and 300-millimeter configurations to satisfy customers' manufacturing needs. Its MetaPULSE, S-ultra and S products are all built on the Vanguard automation platform that provides a common software system, user interface and hardware base. RTEC's products involve three main categories: transparent thin films, opaque thin films and macro-defect inspection. Shares of Rudolph exploded higher after this week's earnings report. The bullish move on heavy volume suggests further upside potential and traders can use this position to speculate on that outcome. NOV-25.00 UXH KE LB=1.95 OI=62 CB=24.20 DE=21 TY=4.8% ***** EMBT - Embarcadero $12.90 *** Next Leg Up? *** Embarcadero Technologies (NASDAQ:EMBT) provides software products that enable organizations to effectively manage their database infrastructure and manage the underlying data housed within that infrastructure. The company's database administration, enterprise data architecture, enterprise data integration and performance management products offer customers comprehensive solutions for managing the database life cycle, which is the process of creating, optimizing and managing the databases that support critical business applications. By simplifying management of the database life cycle, Embarcadero's products allow their customers to ensure the availability, performance and reliability of their critical business applications and extract maximum value from their corporate data. Shares of Embarcadero continue to "stair-step" higher as the market exhibits its delight with the company's recent earnings report. Investors who have a bullish outlook for the company can establish a reasonable cost basis in the issue with this position. NOV-12.50 MBQ KV LB=0.75 OI=55 CB=12.15 DE=21 TY=4.2% ***** CDN - Cadence $15.39 *** New 52-week High *** Cadence Design Systems (NYSE:CDN) provides a range of software and other technology and offers design and methodology services for the product development requirements of electronics companies. Cadence licenses its electronic design automation (EDA) software and hardware technology and provides a range of services to companies worldwide to help accelerate and manage their product development processes. Their products and services are used by firms to design and develop complex ICs and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. Cadence continues to rally and the stock made another new 52-week high this week. This position offers a reasonable entry point in a bullish stock with a cost basis close to technical support. NOV-15.00 CDN KC LB=0.80 OI=2920 CB=14.59 DE=21 TY=4.1% ***** AFFX - Affymetrix $25.63 *** Bottom Fishing: Part III *** Affymetrix (NASDAQ:AFFX) develops, makes, sells and services systems for genetic analysis in the life sciences. The company has developed and intends to establish its GeneChip system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. Affymetrix's integrated GeneChip platform consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, as well as software to analyze and manage genetic information from the probe arrays. Their related microarray technology includes instrumentation, software and licenses for fabricating, scanning and collecting and analyzing results from low-density microarrays. Shares of Affymetrix have been in a Stage I base for almost two years. Investors can use this position to speculate on the company's future with a cost basis near a long-term support area. NOV-25.00 FIQ KE LB=1.30 OI=4109 CB=24.33 DE=21 TY=4.0% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield ADAT 11.51 NOV 10.00 HAU KB 2.25 14 9.26 21 11.6% RETK 10.02 NOV 10.00 QRD KB 0.60 63 9.42 21 8.9% RHAT 15.01 NOV 15.00 RCV KC 0.80 1161 14.21 21 8.1% FALC 7.52 NOV 7.50 XMQ KU 0.40 1051 7.12 21 7.7% ELN 5.13 NOV 5.00 ELN KA 0.35 3999 4.78 21 6.7% CCBL 10.08 NOV 10.00 LQE KB 0.50 101 9.58 21 6.4% LNUX 5.10 NOV 5.00 UKF KA 0.30 1274 4.80 21 6.1% ALSC 7.70 NOV 7.50 ASU KU 0.50 64 7.20 21 6.0% SUPG 10.32 NOV 10.00 UQG KB 0.70 1443 9.62 21 5.7% NEOL 15.28 NOV 15.00 UOE KC 0.85 1134 14.43 21 5.7% ASML 17.55 NOV 17.50 MFQ KW 0.70 1619 16.85 21 5.6% PLCM 20.01 NOV 20.00 QHD KD 0.75 1096 19.26 21 5.6% OPSW 8.22 NOV 7.50 UWA KU 1.00 247 7.22 21 5.6% FCEL 15.28 NOV 15.00 FQG KC 0.80 1491 14.48 21 5.2% CCRD 17.91 NOV 17.50 UCD KW 1.00 63 16.91 21 5.1% AKAM 7.90 NOV 7.50 UMU KU 0.65 1905 7.25 21 5.0% APCC 20.29 NOV 20.00 PWQ KD 0.90 1217 19.39 21 4.6% ***************** NAKED PUT SECTION ***************** Options 101: Terms and Definitions By Ray Cummins A few weeks ago, we began a review of option pricing concepts for new traders. That series continues today with a simple explanation of volatility and probability. Traders without knowledge of the way volatility and probability affect option pricing and potential risk-reward have little chance of surviving in the derivatives market. Volatility is one of the most important factors in option trading because it measures the amount by which the underlying asset fluctuates in a given period of time. Before you can estimate the future volatility of an issue, or the probability of the issue reaching a certain price, you must understand how a stock's movement is quantified from a statistical standpoint. Historical volatility is calculated by using the Standard Deviation of an underlying asset's price changes (from close of trading each day) for a certain time period. By definition, standard deviation of a collection of numbers is the square root of the difference between the mean of the squares of the numbers and the square of the mean of the numbers. In simpler terms, the standard deviation is basically the "mean of the mean," and it can often help you find the story behind the historical data. To better understand this unique concept, you must learn more about what statisticians call "normal" distribution. A normal distribution of data means that most of the examples in a set of data are close to the "average," while relatively few examples tend to one extreme or the other. If you depicted normally distributed data on a graph, it would look something like this (the infamous bell-curve): Normal Distribution Chart: The x-axis (the horizontal one) is the value in question, and the the y-axis (the vertical one) is the number of data points for each value on the x-axis. Not all sets of data will have graphs that look this perfect. Some will have relatively flat curves, while others will be steeper. Sometimes the mean will lean a bit to one side or the other. However, all normally distributed data will have something like this same bell-curve shape. The standard deviation is a statistic that tells you how tightly all the various examples are clustered around the mean in a set of data. When the examples are fairly tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the examples are spread apart and the curve is relatively flat, that suggests a relatively large standard deviation in the data. Computing the value of a standard deviation is complicated but here what a standard deviation represents graphically: Standard Deviations Chart: One standard deviation away from the mean in either direction on the horizontal axis (the red area on the above graph) accounts for somewhere around 68% of the possible outcomes in this group. Two standard deviations away from the mean (the red and green areas) account for roughly 95% of the outcomes. Three standard deviations (the red, green, and blue areas) account for about 99% of all the possible outcomes. If this curve were flatter and more spread out, the standard deviation would have to be larger in order to account for the number of possible outcomes. That is why the standard deviation can tell you how dispersed the results in a set are from the mean. Without going into a complex study of probability analysis, you can use a simple probability calculator (or preferably, a "monte-carlo" style calculator) to determine the likelihood of the issue trading above or below a specific number or within a given profit range. Of course, the fact that it "should" remain in a particular range doesn't mean it will and that's the reason traders have to learn to manage losing plays effectively -- so they don't create catastrophic draw-downs on one's portfolio. It should be obvious by now that volatility is an important piece of the trading puzzle, not only for assessing an issue's potential for price movement but also for analyzing an option's fair value. Although prices for exchange-listed options are established in the marketplace by computerized pricing models, buyers and sellers do exert a strong influence on actual market values. More importantly, pricing models are based upon the mistaken assumption that all stock price movement is "random." Clearly, there are many stocks that are moving in well-defined price trends, as opposed to moving randomly, and if you can identify those stocks whose price trends are likely to continue, you can achieve an edge against the option-pricing model. Much of our effort at the OIN is devoted to finding stocks that exhibit such trends, so our subscribers can profit from buying undervalued options, selling overvalued options, or initiating limited-risk spreads on these issues. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield ONXX 24.76 24.42 NOV 20.00 0.50 0.50* 2.8% 9.6% ESPR 23.02 23.87 NOV 20.00 0.60 0.60* 3.4% 9.6% ONXX 25.93 24.42 NOV 20.00 0.60 0.60* 2.7% 9.0% XMSR 19.10 20.25 NOV 17.50 0.85 0.85* 3.7% 8.9% CYD 27.57 29.90 NOV 22.50 0.50 0.50* 2.5% 8.4% FCEL 14.35 15.28 NOV 12.50 0.50 0.50* 3.0% 8.2% AFCI 26.70 24.07 NOV 22.50 0.60 0.60* 2.4% 7.4% PXLW 12.10 12.08 NOV 10.00 0.30 0.30* 2.2% 7.1% CVTX 23.42 17.70 NOV 17.50 0.30 0.30* 1.9% 6.5% MTZ 12.81 12.89 NOV 10.00 0.25 0.25* 1.9% 6.4% NWAC 12.18 13.70 NOV 10.00 0.25 0.25* 1.9% 6.2% SCUR 14.09 14.38 NOV 12.50 0.30 0.30* 2.1% 6.0% ALGN 15.21 15.41 NOV 12.50 0.25 0.25* 1.8% 6.0% FCS 20.04 22.60 NOV 17.50 0.40 0.40* 2.0% 5.9% SCRI 25.49 26.78 NOV 22.50 0.40 0.40* 2.0% 5.7% AVCT 36.00 37.80 NOV 32.50 0.75 0.75* 2.1% 5.6% PALM 25.06 27.24 NOV 22.50 0.40 0.40* 2.0% 5.5% CNX 21.88 21.70 NOV 20.00 0.55 0.55* 2.0% 5.4% IDXC 24.30 26.20 NOV 20.00 0.35 0.35* 1.5% 5.3% SCHN 36.92 37.54 NOV 30.00 0.40 0.40* 1.5% 5.3% CY 20.44 21.46 NOV 17.50 0.40 0.40* 1.7% 5.1% * Stock price is above the sold striking price. Comments: A fear of "sky-high" share valuations crept into the market on Halloween Friday, holding the major equity averages to minimal gains despite news of favorable economic data. The long-term outlook continues to be one of "cautious optimism" but traders are cautioned to be ever-vigilant in their portfolio management as complacency is a sure route to ruin. The most obvious issue on the early-exit list is CV Therapeutics (NASDAQ:CVTX), which was hammered by investors on Friday after the U.S. FDA said it would grant conditional approval for the company's angina drug Ranexa, but also indicated that it wants "additional clinical information" before it grants final marketing clearance. The announcement was a total surprise and based on the heavy-volume sell-off, there appears to be little hope of a rebound in the near-term. Advanced Fibre (NASDAQ:AFCI) remains on the "watch" list. Previously Closed Positions: None WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield CYD 29.90 NOV 25.00 CYD WE 0.65 1004 24.35 21 3.9% 12.2% ESPR 23.87 NOV 20.00 SPU WD 0.35 628 19.65 21 2.6% 8.4% XMSR 20.25 NOV 17.50 QSY WW 0.30 7339 17.20 21 2.5% 7.7% INSP 26.05 NOV 22.50 IOU WX 0.35 599 22.15 21 2.3% 7.0% CELL 28.65 NOV 23.38 UKE WX 0.30 226 23.08 21 1.9% 6.7% FFIV 25.01 NOV 22.50 FLK WX 0.35 428 22.15 21 2.3% 6.5% FCS 22.60 NOV 20.00 FCS WD 0.25 242 19.75 21 1.8% 5.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** CYD - China Yuchai $29.90 *** Uptrend Intact! *** China Yuchai International (NYSE:CYD) is a medium-duty diesel engine manufacturer in China that also produces diesel power generators and diesel engine parts. The firm owns a primary interest in Guangxi Yuchai Machinery and owns, through six subsidiaries, 76.4% of the outstanding common shares of Yuchai. Yuchai makes and sells diesel engines for medium-duty trucks in China. Yuchai's primary products are its 6105QC and 6108 medium-duty engines, which are principally used in medium-duty trucks with a load capacity of five to seven tons. In addition, Yuchai also offers the 4-Series light-duty engines and the 6112 heavy-duty engines. Besides diesel engines, Yuchai produces a limited number of diesel power generators and engine parts. Yuchai's products are in high demand due to China's rapidly growing infrastructure and the modernization of the world's most populous country bodes well for the company's bottom-line in the near-term. NOV-25.00 CYD WE LB=0.65 OI=1004 CB=24.35 DE=21 TY=3.9% MY=12.2% ***** ESPR - Esperion Therapeutics $23.87 *** Drug Speculation *** Esperion Therapeutics (NASDAQ:ESPR) discovers and develops pharmaceutical products for the treatment of cardiovascular disease. Esperion intends to commercialize a novel class of drugs that focuses on a new treatment approach called "HDL Therapy," which is based on the company's understanding of high- density lipoprotein, or HDL, function. HDL is the primary facilitator of the reverse lipid transport, or RLT, pathway by which excess cholesterol and other lipids are removed from artery walls and other tissues and are thus transported to the liver for elimination from the body. Esperion's primary goal is to develop drugs that exploit the beneficial functions of HDL within the RLT pathway and the company currently has four product candidates in clinical development. ESPR is a unique issue, both because of its proprietary drug products and because it is involved in a lawsuit in which a large portion of the common stock float is frozen due to alleged improper trading activity of the Durus Capital Management hedge fund. Investors are advised to investigate this company thoroughly before entering any positions. NOV-20.00 SPU WD LB=0.35 OI=628 CB=19.65 DE=21 TY=2.6% MY=8.4% ***** XMSR - XM Satellite Radio $20.25 *** The Rally Continues! *** XM Satellite Radio (NASDAQ:XMSR) is America's #1 satellite radio service. With nearly 930,000 subscribers, XM is on pace for 1.2 million subscribers later this year. Broadcasting live daily from studios in Washington, DC, New York City and Nashville, Tennessee at the Country Music Hall of Fame, XM provides its loyal listeners with 101 digital channels of choice: 70 music channels, more than 35 of them commercial-free, from hip hop to opera, classical to country, bluegrass to blues; and 31 channels of premiere sports, talk, comedy, kid's and entertainment programming. Compact and stylish XM satellite radio receivers for the home, the car, the computer and even a "boom-box" for on the go are available from retailers nationwide. In addition, XM is available in more than 80 different 2004 car models. XMSR is once again in "rally mode" and traders who think the trend will continue in the coming weeks can profit from that outcome with this position. NOV-17.50 QSY WW LB=0.30 OI=7339 CB=17.20 DE=21 TY=2.5% MY=7.7% ***** INSP - InfoSpace $26.05 *** On The Move! *** InfoSpace (NASDAQ:INSP) develops and delivers a wireless and Internet platform of software and application services to a range of customers that span each of its wireline, merchant and wireless business units. Many of the company's products and application services are offered to its customers, which, in turn, offer these products and application services to their customers as their own solutions. InfoSpace provides its services across multiple platforms, including personal computers and non-PC devices. INSP soared to a new 52-week high this week after posting better-than-expected results for the third quarter and issuing a solid fourth-quarter outlook. Wedbush Morgan upgraded InfoSpace to a "buy" with a 12-month price target of $30 a share, based on "management's solid balance-sheet management and ability to wring profits out of the business." Traders who agree with that bullish assessment should consider this position. NOV-22.50 IOU WX LB=0.35 OI=599 CB=22.15 DE=21 TY=2.3% MY=7.0% ***** CELL - Brightpoint $28.65 *** New 2-Year High! *** Brightpoint (NASDAQ:CELL) is one of the largest distributors of mobile phones. Brightpoint supports the worldwide wireless telecommunications and data industry, providing quickly deployed, flexible and cost effective third party solutions. The firm's innovative services include distribution, channel management, fulfillment, eBusiness solutions and other outsourced services that integrate seamlessly with its customers. The company has recently split its common stock 3-for-2 and they also reported revenues that grew 58% to $533 million this year. Investors who like the outlook for this volatile issue can establish an entry point closer to technical support with this position. NOV-23.38 UKE WX LB=0.30 OI=226 CB=23.08 DE=21 TY=1.9% MY=6.7% ***** FFIV - F5 Networks $25.01 *** New Trading Range? *** F5 Networks Inc. (NASDAQ:FFIV) provides integrated products and services to manage, control and optimize Internet traffic. FFIV's core products, the BIG-IP Controller, the 3-DNS Controller and the BIG-IP Link Controller, help manage traffic to servers and network devices in a way that maximizes availability and throughput. The company's iControl Architecture integrates its products and also allows its customers to integrate them with other third-party products. FFIV's solutions address many elements required for successful Internet and Intranet business applications, including high availability, high performance, intelligent load balancing, fault tolerance, security and streamlined manageability. FFIV spiked to a two-year high this week after the company said it returned to profitability in the fourth quarter due to an increase in sales across all product lines. The technical indications suggest a bullish bias in the near-term and this position offers traders a way to profit from upside movement in the issue with relatively low risk. NOV-22.50 FLK WX LB=0.35 OI=428 CB=22.15 DE=21 TY=2.3% MY=6.5% ***** FCS - Fairchild Semiconductor $22.60 *** Entry Point? *** Fairchild Semiconductor (NYSE:FCS) is a leading global supplier of high performance products for multiple end markets. With a focus on developing leading edge power and interface solutions to enable the electronics of today and tomorrow, Fairchild's components are used in computing, communications, consumer, industrial and automotive applications. Fairchild's employees design, manufacture and market power, analog & mixed signal, interface, logic, and optoelectronics products from its company headquarters in South Portland, Maine, USA and numerous locations around the world. FCS recently posted a third-quarter loss that included a significant restructuring charge, but the company also predicted gains in fourth-quarter revenue and profit as a result of strong bookings, including regional strength in Asia. The recent consolidation area near $19 should give the stock some support in the event of a share value slump and investors who wouldn't mind owing the issue can establish a cost basis near that price range with this position. NOV-20.00 FCS WD LB=0.25 OI=242 CB=19.75 DE=21 TY=1.8% MY=5.4% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield SSTI 11.20 NOV 10.00 SJV WB 0.25 6949 9.75 21 3.7% 10.3% APCC 20.29 NOV 20.00 PWQ WD 0.60 258 19.40 21 4.5% 10.3% OIIM 21.31 NOV 20.00 XQQ WD 0.55 4 19.45 21 4.1% 10.3% PHTN 37.82 NOV 35.00 PDU WG 0.85 70 34.15 21 3.6% 9.4% CMVT 18.04 NOV 17.50 CQV WW 0.45 604 17.05 21 3.8% 9.1% NPSP 26.33 NOV 20.00 QKK WD 0.30 10117 19.70 21 2.2% 7.8% NLS 15.61 NOV 15.00 NLS WC 0.25 582 14.75 21 2.5% 6.2% QCOM 47.49 NOV 45.00 AAO WI 0.70 13972 44.30 21 2.3% 5.9% LPX 19.02 NOV 17.50 LPX WW 0.25 153 17.25 21 2.1% 5.7% HON 30.61 NOV 30.00 HON WF 0.45 1354 29.55 21 2.2% 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ No Fear Among Investors On "All Hallows Eve" By Ray Cummins The major equity averages traded higher Friday with blue-chip shares closing "in the black" for a fifth consecutive session. The Dow Jones industrial average finished 14 points higher at 9,801, closing out its seventh month of gains in the last eight. The technology-laced NASDAQ Composite ended unchanged at 1,932 with profit-taking emerging in semiconductor, internet, and computer hardware issues. The broader Standard & Poor's 500 index ended 3 points higher at 1,050 on strength in retail, brokerage, managed care, and oil service shares. Activity was moderate with 1.4 billion shares swapped on the New York Stock Exchange and 1.8 billion shares crossed on the NASDAQ. Breadth was neutral with advancers outpacing decliners 5 to 4 on the Big Board while decliners narrowly outnumbered advancers on the technology exchange. Treasuries closed higher with the 10-year note up 11/32 to yield 4.29%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position or to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status AET 62.76 57.41 NOV 50 55 0.55 54.45 $0.55 Open MXIM 44.82 49.64 NOV 35 40 0.50 39.50 $0.50 Open PHS 54.50 59.50 NOV 45 47 0.30 47.20 $0.30 Open PIXR 71.56 68.77 NOV 60 65 0.70 64.30 $0.70 Open COH 31.43 35.47 NOV 27 30 0.35 29.65 $0.35 Open CYMI 44.99 45.66 NOV 35 40 0.65 39.35 $0.65 Open SAP 36.00 36.54 NOV 30 32 0.30 32.20 $0.30 Open ICOS 45.42 46.72 NOV 35 40 0.50 39.50 $0.50 Open SINA 42.00 38.65 NOV 30 35 0.45 34.55 $0.45 Open SMH 38.55 41.65 NOV 33 35 0.20 34.80 $0.20 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Sina Corporation (NASDAQ:SINA) is the new issue on the early exit "watch" list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CA 23.50 23.52 NOV 30 27 0.35 27.85 $0.35 Open MTG 53.79 51.31 NOV 65 60 0.55 60.55 $0.55 Open BJS 32.50 32.81 NOV 37 35 0.30 35.30 $0.30 Open CEPH 45.77 47.07 NOV 55 50 0.55 50.55 $0.55 Open HDI 47.26 47.41 NOV 55 50 0.50 50.50 $0.50 Open SEPR 26.98 26.62 NOV 35 32 0.25 32.75 $0.25 Open AMZN 54.51 54.43 NOV 65 60 0.50 60.50 $0.50 Open OEX 511.25 519.98 NOV 540 535 0.45 535.45 $0.45 Open MERQ 44.23 46.61 NOV 50 47 0.40 47.90 $0.40 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Mercury Interactive (NASDAQ:MERQ) rallied this week in conjunction with technology stocks but the resistance area near $48 is intact for now. Any further upside activity would be cause for an early exit in the bearish position. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status LLTC 40.77 42.61 NOV 35 37 2.20 37.20 0.30 Open CVTX 23.42 17.70 NOV 20 22 1.90 21.90 (1.60) Open? LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss CV Therapeutics (NASDAQ:CVTX) was crushed by investors on Friday after the U.S. Food and Drug Administration said it would grant conditional approval for the company's angina drug Ranexa, but also indicated that it wants "additional clinical information" before it issues final marketing clearance. The announcement was totally unexpected and based on the heavy-volume sell-off, there appears to be little hope of a rebound in the near-term. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status NPSP 25.45 26.33 NOV 35 30 4.40 30.40 0.60 Open CVC 18.70 20.20 NOV 22 20 2.20 20.30 0.10 Open? Cablevision (NYSE:CVC) is testing a recent resistance area near $20 and further upside activity would suggest an early exit in the position. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status XING 9.13 8.90 DEC 12 7 0.10 0.30 Open JNPR 16.63 18.00 NOV 19 14 (0.20) 1.00 Open? LRCX 24.38 28.75 DEC 30 20 0.15 1.30 Open? PHTN 32.40 29.51 JAN 40 25 0.00 2.00 Open? Juniper Networks (NASDAQ:JNPR), which cost slightly more to enter than expected, Lam Research (NASDAQ:LRCX), and Photon Dynamic (NASDAQ:PHTN) have all provided excellent profits for speculative traders. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status PRU 36.41 38.64 DEC-37C NOV-37C (0.20) 0.10 Open SCRI 20.52 26.78 FEB-22C DEC-25C 1.40 2.10 Open Sicor (NASDAQ:SCRI) was an interesting position, having offered a reasonable entry point only to gap higher on news of a potential merger. However, adept traders had ample time to make a bullish adjustment and the new (diagonal) position is reflected in the summary. The Microsoft (NASDAQ:MSFT) spread, which offered a number of profitable opportunities, has previously been closed. The Prudential (NYSE:PRU) position has a minimum "no-risk" gain of $0.20 with the issue above $37.50. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ZMH 55.52 63.81 DEC 55 55 5.20 9.00 Open? PCLN 30.45 28.18 NOV 30 30 4.90 5.00 Open ADVP 49.05 51.47 NOV 50 50 3.40 3.90 Open TM 59.45 58.02 NOV 60 60 3.40 3.25 Open Zimmer Holdings (NYSE:ZMH) was a big mover again this week, adding to its previous profits. Advance PCS (NASDAQ:ADVP) achieved gains in less than one week. The straddle in Engineered Support Systems (NASDAQ:EASI) has previously been closed, however the issue traded at a multi-year high Friday, allowing traders to take advantage of another profitable exit opportunity in the play. Triad Hospitals (NYSE:TRI) has been very volatile, but the straddle has yet to be profitable on a simultaneous order basis. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance, and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** BBY - Best Buy $58.31 *** Electronics Retailer! *** Best Buy Company (NYSE:BBY) is specialty retailer of consumer electronics, personal computers, entertainment software and appliances. Best Buy operates retail stores and commercial Websites under the brand names Best Buy, Media Play, On Cue, Sam Goody, Suncoast, Magnolia Hi-Fi and Future Shop. The firm operates three segments: Best Buy, Musicland and International. Best Buy is mainly a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. Their Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada. BBY - Best Buy Company $58.31 PLAY (conservative - bullish/credit spread): BUY PUT NOV-50.00 BBY-WJ OI=6521 ASK=$0.20 SELL PUT NOV-55.00 BBY-WK OI=5432 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$54.50 ***** CTX - Centex $97.50 *** Bullish Industry! *** Centex Corporation (NYSE:CTX) is a multi-industry company with operates in six principal business segments. Conventional Homes operations involve the construction and sale of single-family homes, town homes and low-rise condominiums, and the purchase and development of land. Investment Real Estate operations involve the acquisition, development and sale of land, and the development of industrial, office, retail and mixed-use projects. Financial Services operations involve the financing of homes, home equity and sub-prime lending, and the marketing of insurance coverage. Construction Products involves cement production and distribution, and the production, distribution and sale of gypsum wallboard, concrete, aggregates and recycled paperboard. Contracting and Construction Services involves the construction of buildings. Centex HomeTeam Services is involved in pest and termite control, lawn and landscape care, electronic security, alarm monitoring and homewiring services. CTX - Centex Corporation $97.50 PLAY (less conservative - bullish/credit spread): BUY PUT NOV-85.00 CTX-WQ OI=725 ASK=$0.30 SELL PUT NOV-90.00 CTX-WR OI=1447 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$89.40 ***** VSEA - Varian Semiconductor $48.40 *** Rally In Progress! *** Varian Semiconductor Equipment Associates (NASDAQ:VSEA) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. As a supplier of ion implantation systems, the company has shipped over 3,100 systems worldwide. The company's VIISta product line leverages single-wafer processing technology pioneered on its successful E200 and E500 lines of medium current implanters to the entire spectrum of energies and implant applications. Single wafer technology is differentiated from batch-type implanters by its processing capabilities, more precise angle control and more improved process yields, allowing processing of 200-millimeter or next-generation 300-millimeter wafers on the same tool. VSEA - Varian Semiconductor $48.40 PLAY (less conservative - bullish/credit spread): BUY PUT NOV-40.00 UES-WH OI=242 ASK=$0.25 SELL PUT NOV-45.00 UES-WI OI=372 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$44.35 ***** EBAY - eBay Inc. $55.93 *** A "Reader's Request" Play *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. EBAY - eBay Inc. $55.93 PLAY (conservative - bearish/credit spread): BUY CALL NOV-65.00 XBA-KM OI=8068 ASK=$0.15 SELL CALL NOV-60.00 XBA-KL OI=22048 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$60.45 ***** FNM - Fannie Mae $71.69 *** $1.2 Billion Accounting Mistake *** Federal National Mortgage Association (NYSE:FNM), commonly known as Fannie Mae, is a company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to ensure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. Fannie Mae then purchases the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. FNM - Fannie Mae $71.69 PLAY (conservative - bearish/credit spread): BUY CALL NOV-80.00 FNM-KP OI=1081 ASK=$0.10 SELL CALL NOV-75.00 FNM-KO OI=11579 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$75.45 ***** KSS - Kohl's $56.07 *** In A Trading Range? *** Kohl's (NYSE:KSS) operates family-oriented, specialty department stores. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than traditional, full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Since 1992, the company has increased square footage an average of 22% per year, expanding from 79 stores located in the Midwest to a total of 420 stores with a presence in six regions. Of the 420 stores it operates, 116 are take-over locations, which facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. KSS - Kohl's $56.07 PLAY (conservative - bearish/credit spread): BUY CALL NOV-65.00 KSS-KM OI=254 ASK=$0.15 SELL CALL NOV-60.00 KSS-KL OI=4213 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$60.45 ***** NBIX - Neurocrine Biosciences $46.88 *** Earnings Speculation *** Neurocrine Biosciences (NASDAQ:NBIX) is a unique, product-based biopharmaceutical company focused on neurological and endocrine diseases and disorders. Their product candidates address some of the largest pharmaceutical markets in the world including insomnia, anxiety, depression, diabetes, multiple sclerosis, irritable bowel syndrome, eating disorders, pain, autoimmunity and certain female and male health disorders. The company has a large number of programs in various stages of research and clinical development, including a drug for the treatment of insomnia. The company's other products are altered peptide ligand, gonadotropin-releasing hormone antagonist, interleukin 4 fusion toxin and corticotropin-releasing factor. Quarterly earnings are due 11/4/03. NBIX - Neurocrine Biosciences $46.88 PLAY (conservative - bearish/credit spread): BUY CALL NOV-55.00 UOT-KK OI=1351 ASK=$0.20 SELL CALL NOV-50.00 UOT-KJ OI=2462 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$50.50 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** ICAI - InterActiveCorp $36.81 *** Range-Bound? *** InterActiveCorp (NASDAQ:ICAI), formerly known as USA Interactive, is a multi-brand interactive commerce company transacting firm worldwide via the Internet, television and the telephone. The company's portfolio of companies collectively enables direct-to -consumer transactions across many areas, including home shopping, ticketing, personals, travel, tele-services and local services. During 2002, InterActiveCorp completed two major transactions including the acquisition of a majority interest in Expedia.com, and the sale of its entertainment segments to Vivendi Universal Entertainment. The firm's business is organized into three major groups: Electronic Retailing; Information and Services, and Travel Services. ICAI - InterActiveCorp $36.81 PLAY (conservative - bearish/debit spread): BUY PUT NOV-42.50 QTH-WV OI=264 ASK=$6.00 SELL PUT NOV-40.00 QTH-WH OI=518 BID=$3.80 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$40.25 ***** QCOM - Qualcomm $47.49 *** Wireless Sector Leader! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $47.49 PLAY (conservative - bullish/debit spread): BUY CALL NOV-42.50 AAO-KV OI=3431 ASK=$5.30 SELL CALL NOV-45.00 AAO-KI OI=15293 BID=$3.10 INITIAL NET-DEBIT TARGET=$2.15-$2.20 POTENTIAL PROFIT(max)=14% B/E=$44.70 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** GPRO - Gen-Probe $26.77 *** On The Rebound! *** Gen-Probe (NASDAQ:GPRO) is a leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid testing products used for the clinical diagnosis of human diseases and for screening donated human blood. Using its patented NAT technology, Gen-Probe has received FDA approvals or clearances for over 60 products that detect a variety of infectious microorganisms, including those causing sexually transmitted diseases, tuberculosis, strep throat, pneumonia and fungal infections. Additionally, the company developed and manufactures the only FDA-approved blood screening assay for the simultaneous detection of HIV-1 and HCV, which is marketed by Chiron Corporation. Gen-Probe and Bayer Corporation have formed a collaboration to develop, manufacture and market nucleic acid diagnostic tests for certain viral organisms, and under the agreement Bayer has the right to distribute these tests. Gen-Probe has 20 years of nucleic acid detection research and product development experience, and its products are used daily in clinical laboratories and blood collection centers throughout the world. GPRO - Gen-Probe $26.77 PLAY (speculative - bullish/calendar spread): BUY CALL FEB-30.00 PSU-BF OI=580 ASK=$2.50 SELL CALL NOV-30.00 PSU-KF OI=1411 BID=$0.40 INITIAL NET DEBIT TARGET=$1.90-$2.00 INITIAL TARGET PROFIT=$0.65-$0.90 *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** DIGE - Digene $35.10 *** Earnings Play! *** Digene (NASDAQ:DIGE) develops, manufactures and sells proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. Quarterly earnings are due on 11/6/03. DIGE - Digene $35.10 PLAY (very speculative - neutral/debit straddle): BUY CALL NOV-35.00 QDG-KG OI=186 ASK=$2.40 BUY PUT NOV-35.00 QDG-WG OI=272 ASK=$2.30 INITIAL NET-DEBIT TARGET=$4.50-$4.60 INITIAL TARGET PROFIT=$1.35-$2.20 ***** PLCE - The Children's Place $30.10 *** Another Earnings Play! *** The Children's Place Retail Stores (NASDAQ:PLCE) is a specialty retailer of apparel and accessories for children from newborn to 12 years of age. The company designs, sources and markets its products under the proprietary The Children's Place brand name for sale exclusively in its stores and on its web-site. The Children's Place, babyPLACE, Place, The Place, TCP, and PLC are a few of its registered brands. The company operates over 600 stores in the United States and Canada, most of which are in and around major metropolitan areas. The Children's Place stores are established in major regional malls, strip centers, outlets and street stores. Quarterly earnings are due on 11/13/03. PLCE - The Children's Place $30.10 PLAY (very speculative - neutral/debit straddle): BUY CALL NOV-30.00 TUY-KF OI=671 ASK=$1.70 BUY PUT NOV-30.00 TUY-WF OI=177 ASK=$1.55 INITIAL NET-DEBIT TARGET=$3.00-$3.10 INITIAL TARGET PROFIT=$0.95-$1.65 ***** RMBS - Rambus $24.79 *** Ongoing Litigation Speculation! *** Rambus (NASDAQ:RMBS) is one of the world's leading providers of chip-to-chip interface products and services. The company's breakthrough technology and engineering expertise have helped leading chip and system companies to solve their challenging I/O problems and bring industry-leading products to market. Rambus' interface solutions can be found in numerous computing, consumer electronic and networking products. RMBS - Rambus $24.79 PLAY (very speculative - neutral/debit straddle): BUY CALL NOV-25.00 BNQ-KE OI=6390 ASK=$1.20 BUY PUT NOV-25.00 BNQ-WE OI=5189 ASK=$1.55 INITIAL NET-DEBIT TARGET=$2.50-$2.65 INITIAL TARGET PROFIT=$0.80-$1.35 ***** ************************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 *************************************************************** ************** MARKET POSTURE ************** So Ends Another Bullish Month for Wall Street To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/MP_110203.asp ********** 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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc