The Option Investor Newsletter Thursday 11-13-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Easy as Dell, Oops! Futures Markets: Supercalifragilisticexpialidocious Index Trader Wrap: Markets were unmoved by the close Market Sentiment: Holding Gains Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-13-2003 High Low Volume Advance/Decline DJIA 9837.94 - 10.90 9852.90 9792.01 1.63 bln 1725/1388 NASDAQ 1967.35 - 5.80 1970.40 1956.41 1.80 bln 1515/1571 S&P 100 522.99 - 1.20 524.19 520.86 Totals 3240/2959 S&P 500 1058.41 - 0.12 1059.62 1052.96 W5000 10329.90 + 2.90 10341.08 10281.26 RUS 2000 541.20 + 0.54 542.39 537.81 DJ TRANS 2948.45 - 4.80 2954.12 2935.58 VIX 16.45 - 0.30 17.13 16.45 VXO VIX-O 16.84 - 0.15 17.67 16.62 VXN 25.42 - 0.13 26.01 25.24 Total Volume 3,700M Total UpVol 1,701M Total DnVol 1,952M 52wk Highs 649 52wk Lows 20 TRIN 1.26 NAZTRIN 1.27 PUT/CALL 0.76 ************************************************************ Easy as Dell, Oops! At 3:20 the markets were rallying in advance of Dell's earnings due out after the close and everyone was setting up their end of day strategy. Suddenly the news was accidentally released and the market went crazy. Stops were run to the upside and the downside as everyone scrambled to enter/exit/protect trades. After about 10 min the news was completely disseminated and the urgency was over. That bout of volatility was the highlight of the day. Dow Chart Nasdaq Chart The morning started with some bullishness after the Jobless Claims posted another week well away from the 400K level. The claims for this week were only 366,000 and the claims from last week were only revised up the normal 5000 to 353,000. It appears the big drop from last week is going to stick and the pace of layoffs is slowing. Continuing claims rose slightly but the trend is still down. This is a major change in the employment picture but we still need to see a consistent drop below 350,000 to indicate a stabilizing labor market. Import prices rose only +0.1% and less than expected. Export prices rose +0.3% due to higher agricultural prices. Beef and grains are soaring on the world market due to Canada's mad cow problem and droughts in crop belts around the world. The International Trade numbers showed a greater than expected deficit of -$41.3 billion. Were it not for a large jump in exports the numbers would have been much worse. We imported $127 billion and exported $86 billion. Each was an increase of about +3.7%. This would indicate the global economy is improving although slowly. A more negative tone was set by the Mortgage Application Survey for last week, which at 626.0 was at a 52-week low. Purchase applications fell -7.1% and refi applications fell -10.1%. This was a substantial drop and shows what we have been afraid of for months. The initial rise in rates caused a flurry of activity in October as those laggards who had been putting off taking the plunge were pushed into action. Now that activity is waning as the rates appear to be ready to start that long climb. Two Fed heads, Moskow and Poole, said today that they do not see any rate hike soon but the perception by the consumer is higher rates ahead. The biggest negative for the morning was an earnings miss by Dow component Wal-Mart. The king of the category killers said increased competition, apparel write downs and too big a focus on sale items cut their margins and lowered profits. Considering the term competition is normally used against WMT with the adjective unfair in front of it the turn about is amazing. Also, WMT said that customers were focusing on the sale items and not the broader range of merchandise. This confirms the adage that you can sell anything if you lower the price enough. Unfortunately you cannot make a fat profit on the transaction. Not only did the normally bulletproof WMT miss earnings but they said consumers were remaining cautious. This was the major hiccup. If WMT consumers, the most price conscious shoppers in the worlds most competitive store, are holding back on purchases because they are cautious then the entire consumer driven recovery is in question. If these consumers are hoarding cash then this is the broadest indicator of sentiment available. WMT also said inventory levels were higher than normal but manageable. This was another negative to analysts. If WMT thinks inventory levels are too high going into the holiday shopping season then the outlook for that season may be too high. WMT lost -2.44 (-4.2%) on the news and wiped out all the economic bullishness before the open. Traders were unable to recover from the initial weakness until late in the afternoon. The Nasdaq failed to capitalize on the AMAT earnings after the close on Wednesday. They beat the street by a penny and said order growth for the 4Q was up +20%. AMAT dropped -70 cents and the SOX lost -5.32. The culprit was the -16% drop in sales, a falling gross margin and insider selling. While AMAT was pounding the drum on the future traders were looking at the past and what could be seen by some as an expensive stock price. In reality it was just a sell the news event once again. The SOX had just hit 531 and very near a new 52-week high and had plenty of expectations already priced in. We also saw on Wednesday that the Gartner Group had predicted +20% chip growth in 2004 and $210 billion in revenue for the chip sector. With this bullish data pushing the chip sector up the negatives in the AMAT report produced some disappointment. This same scenario could be seen today when Dell announced earnings that were inline with estimates. Sales in all sectors were up strongly with their printer business up +80%, servers +30% and so on. The stock fell in after hours after Dell said that although revenue would be up +25% in the 4Q earnings would not rise as much. The CFO continued to say that sales to consumers were good but that business spending had only stabilized. This has been the complaint from every major tech stock that business buying has not increase materially but has only ceased dropping and has stabilized. Nasdaq futures were down -5.50 in after hours after the Dell conference call. Tomorrow we have a Greenspan speech in Washington and all eyes will be glued to his every word. Today we heard from Poole that he saw rates remaining at the current level beyond March. This was an effort to head off the rising bet that the Fed would hike at the March meeting if not before, well before. Moskow also chimed in with a "Fed can remain accommodative" for some time comment. Of course it was quickly pointed out that the Fed could see itself as accommodative even after several rate hikes. The current rate is several points below the historical average. There was no shortage of buyers for the $16 billion in 5-yr notes on Wednesday and the $17 billion in 10-yr notes today. There was also significant buying in bonds and the 10-yr note yield fell -1.41 or -3.19% to 42.71 today. 92% of the S&P companies have announced earnings for the 3Q and the results are very strong with earnings growth at +20.7% from the 3Q-2002. This was the second strongest quarter in recent memory with Q2-2000 the strongest at +21.6% growth. The 4Q earnings are also expected to be strong but Chuck Hill at First Call said the comparisons stop there. The growth for Q1-2004 is up for grabs considering the much stronger 2003 comparisons. The Q3 growth was funded by the tax cuts, mortgage refi boom and the low interest rates. Q1 will see another boost from the tax checks but the other two factors have slipped into the historical mode. The mutual fund scandal saw its first settlement today with Putman settling with the SEC and agreeing to make some major changes in the way it does business and by paying some yet to be determined penalty. MMC, the parent of Putman, saw a sharp spike in price on the news. Unfortunately it was short lived because the biggest threat is the state probes headed by NY AG Spitzer. He is still on the attack and issuing new probes into still more funds and is planning on criminal charges. GE, INTC and MSFT saw further weakness today and it appeared the funds were still liquidating positions. IBM was the only major big cap tech to keep its gains from yesterday when IBM and GE helped push the indexes higher by making bullish comments at the IBM conference. GE traded 25 million shares, which is about 25% more than the average daily volume. The volume in the market was not heavy with only 3.7 billion across all markets. Despite the lighter than average volume and the decline in the averages the internals were still strong. New 52-week highs were 696 compared to 590 on Wednesday when the indexes were strongly bullish. Advancing/declining volume was even. The Dow held on to the majority of its gains from Wednesday and is poised to move higher. It held above support at 9800 and showed very little profit taking. Considering the strong gains on Wednesday this was a win for the bulls. If you took out the WMT loss the Dow would have finished in positive territory around 9850. Tomorrow the bullish trend could easily return. The Nasdaq tried three times to rally back to positive territory and finished only 34 points from N2K. It may have been a negative day for the indexes but it was a positive day for the markets. I told you on Tuesday to watch the internals for the real trend and we saw 5:1 advancing to declining volume on Wednesday. Very strong. Continue to watch the internals to see if any weakness on Friday is just a dip, like today, or the real thing. Friday we have several important economic events. We have the PPI, Retail Sales, Industrial Production and Michigan Sentiment. Considering how positive the economics for the last couple weeks have been the bar may be very high for these reports. The consensus estimates are for little gain in the surveys but the whisper numbers could be much higher. Unless there is a real disaster I predict they will be ignored and the bulls will continue to buy the dips. That is the current trend. Buy the dips not buy the tops. Each time we near the prior highs the bids evaporate and we go back down again. Despite the strong internals the market still feels heavy. This is giving the bears hope and helping to push it higher every time they are forced to cover their shorts. One thing I noticed today was a rotation into drug stocks. This could be a leading indicator of some tech weakness ahead. Drugs have literally been killed over the last year while techs have been climbing. When institutional investors decide techs are overblown they tend to rotate into drug stocks for safety until the techs correct. This was the second day that drugs have rallied and PFE, MRK, LLY, etc all rallied strongly. PFE jumped +1.05 on 2.5 times its normal volume. PFE was helped by some news that Lipitor slowed the buildup of plaque in arteries. This is the kind of news that is typically used as an excuse for the rotation but a quick look at a few drug company charts shows the uptick started several days ago. Watch the drugs for strength, the techs for weakness and the internals for direction. There was also a warning that was picked up by only a few news outlets after the close. According to the reports someone named Al-Hijazi and claiming to be a commander close to Osama is warning that a huge attack against the U.S. is going to kill as many as 100,000 and will be launched during Ramadan. A different report said the attack would be before the Solar eclipse on November 23rd. While I seriously doubt this will come to pass it may create a cloud over any Friday gains. Investors may not want to be long over the weekend. As long as the Dow continues to hover just below 9900 we are always in striking distance of Dow 10,000 and the unofficial target for some profit taking. Nasdaq 2000 is also close and could easily be touched first. One of the reasons we may be having trouble moving higher is the nearness to those levels. If the entire professional trading community is planning on selling there then we could be seeing front running of those levels. The bulls are buying the dips but not the tops and that leaves us stuck in the range until the deadlock is broken. If you need proof that the sentiment is still off the scale bullish you need only look at the VXO which closed at 16.84 and another five year low today. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Supercalifragilisticexpialidocious Jonathan Levinson That, evidently, is how the market feels, with the OEX volatility index hitting a new multiyear low at 16.62 after Farmer in the... reported its earnings inline during the cash session. Bonds rallied, gold and silver held their gains, and the US Dollar Index got dropped like a bad habit, again. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. 10 minute chart of the US Dollar Index The Dollar carnage continued, with a fairly steady continuation to yesterday's selloff taking the US Dollar Index to a new low for the move to just above 91.50. The CRB hit new multiyear highs, closing at its high of the day, while gold, the HUI and XAU corrected a small part of yesterday's considerable gains. Daily chart of December gold December gold and silver dropped a mere 30 cents, silver .036 or 67%, with the yellow metal closing at 394.70. Again, the strength is confirmed by the run in the CRB, which added 1.87 to close at its day high of 255, led by cocoa, heating oil, coffee and crude oil futures. Dec gold is back on a buy signal, but the oscillators at current levels are at lower highs, which would set up a massive bearish divergence if the price does not hold current levels long enough to let the oscillators catch up. This is an esoteric point of caution here, but I continue to feel, as I did 10 points below, that this remains a dangerous area for new longs. Higher highs are clearly possible, but, as with the NQ, ES and YM, gold feels closer to a nearterm top than to a bottom. For those who bought near the lows this year or last, that's of minor concern. Daily chart of the ten year note yield The ten year yield got soaked today as buyers rushed into bonds, with the TNX dropping 14.1 bps to land with a lifeless "thud" on the lower pennant trendline. As reported in the Futures Monitor, the ten year treasury auction generated a 1.9 bid-to-cover ratio. I don't see any of this as reflecting well on the lack of selling in equities. Through all this, the VXO hit a new multiyear low. Either the different markets are more bifurcated than usual, or it's Fed or other such intervention money buying everything together and sinking the dollar in the process. Daily NQ candles The NQ dropped 2.50 today, the ES added .25 and the YM lost 9 points. But volatility collapsed, with the VXO setting a new multiyear low at 16.62, closing at 16.84. Volatility collapsed when the indices reversed midway into a synchronous downphase across the intraday, daily and weekly oscillators. This was a setup for which we've been waiting days and possibly weeks, and the buying was absolutely inexplicable. Perhaps the lack of a downside surprise from Farmer-in-the... got leaked, prompting the early release of its report. Who knows. Either way, the sell signals and bearish divergences remain intact on the daily chart, with 1460 and 1425 the key range levels to watch. Nothing has changed since yesterday in this timeframe, but an up-day tomorrow could give us a fresh buy signal on the daily. The bulls appear to be as complacent and oblivious as I have ever seen them. 30 minute 20 day chart of the NQ In yet another marvel of the "What me worry?" rally since March, a picture-perfect setup aborted early, with 1432 fibonacci support providing sufficient support from which to launch a bounce, culminating in a spike high on the early earnings from... you know. The bounce retraced but did not reverse, and that was enough to kick off a fresh upphase on the 30 minute cycle oscillators. A revising to 1460 or beyond could occur from this setup, reversing the daily downphase in the process and potentially causing that longer, key cycle oscillator to begin trending in overbought. As unlikely as that appears, particularly given the bargain-basement-markdown levels on the VXO, truly anything is possible. First sign of trouble will be a break above 1450, and if 1460 falls, I expect a short covering/ momentum breakout rally. Daily ES candles The ES gave us a bullish candle on its .25 point gain. As with the NQ, the daily remains on a sell signal and in a so-far brief, sideways downphase. The upper wedge resistance at 1062 is key in preserving this downphase intact, and a break above could confuse the picture considerably. 20 day 30 minute chart of the ES We see the same early upphase kicked off on the 30 minute ES. 1066 is the key, last-ditch resistance on this timeframe. I don't see the ES getting far from here, but nothing would surprise me at this point. The upphase here appears to be news- related, a fast-forward of what would normally have taken place after the bell. But if it doesn't abort at or near current levels, certainly before 1066, then it will be back to the drawing board. The same setup we had last night will be with us at that level, when the 30 minute cycle oscillator once again tops, with the daily and weekly already on sell signals. 150-tick ES The surprise ramp kicked off at 2:30PM, and culminated in the DELL engulfing printed at 3:20ish. Daily YM candles Same setup on the YM. Last Friday's highs should not be exceeded under my current analysis. 20 day 30 minute chart of the YM There's little to say about a session like we had today. The VXO is at levels that utterly indict the current pricing of equities and equity options, and place the risk for bulls somewhere north of the stratosphere. The only scenario under which such would not be the case would be if the bear market were over and a new bull market were upon us, which I do not believe. I note that the VXO is lower than it was at the March 2000 peak. Traders should continue to trade what they see, and not hesitate to get stopped out of positions that go against them, in either direction and for whatever reason. At the same time, moves such as occurred with DELL's release are unforeseeable, and my heart goes out to traders stopped out on what was a one or two candle move. The message here: Trade Safe, whatever your bias or position, as there's great risk in this low-volatility environment. ************************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 ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Markets were unmoved by the close A negative reaction to retailing giant Wal-Mart's (NYSE:WMT) $55.52 -4.2% quarterly earnings set a negative tone in the early part of today's session, and while traders and investors observed a larger than forecasted September trade balance and weekly jobless claims of 366,000 as not representing overly bullish economic reports, the major indices finished relatively unchanged, as if it was worth the wait to see what tomorrow's economic data says about the past, but also the future. The one economic report due out tomorrow that I want to quickly touch on is the retail sales data for October. Something a trader may want to think about ahead of those numbers is that it has now been widely reported that recent weather patterns have been abnormally warm, and in the retail industry, that isn't good for getting shoppers to the stores and malls. Cooler weather is a retailer's best friend as consumers coming down with a case of cabin fever of take a trip to the local department store or shopping mall to stretch their legs, maybe their pocket books, to see what's on sale. It would be my thinking that regardless of what economists are estimating, most investors/traders are going to look at the retail numbers and give them a little slack as if to think the ex-auto's for October aren't necessarily going to be a good read on the consumer, but greater focus will probably be given to the retail sales number that include auto sales, which in my estimates would be a larger ticket item, where a consumer doesn't go buy an automobile just because they have a case of cabin fever. Current forecasts for tomorrow's retail sales have economists' looking for October total retail sales to be down -0.2%, while forecasts for October retail sales (ex-auto) are forecasted to have risen +0.2%. So.... my thinking is that the market may put greater focus on the autos, and if my math is correct, based on economists' forecast, the "inline" number would be for auto sales to have declined 0.4% in October. Also due out tomorrow, is October PPI (forecasted +0.2%) and core PPI (forecasted +0.1%), which is hardly inflationary. Industrial production for October (forecasted +0.4%) and capacity utilization (forecasted 75%) are also due out before the opening bell. During market hours, at 09:45 AM EST, we'll get a look at the University of Michigan's November Sentiment, where economists' look for the sentiment survey to improve to 91.3 from October's 89.6 reading. Here's a quick look at the pivot matrix for tomorrow, and I am very hesitant to try and call a market direction right now, as I sense a great deal of pressure building, where I can only suggest support at the WEEKLY S1s and resistance at the WEEKLY R1s. After viewing some of today's post market close comments in the futures monitor at OptionInvestor.com, I get the impression that bears hold a high degree of confidence that the markets are at their top. As many of you know, I dislike trying to call tops when we're at highs were there is little overhead supply to keep things in check. While the major indices look very overbought, I dare say they look very strong. When bears are saying "bring it on!" and "bulls have until tomorrow" to prove their worth after proving they can push the indices to new 52-week highs, I must say I sense a GREAT deal of bearish complacency. Pivot Analysis Matrix Resistance does look formidable at the WEEKLY R1s, and while there was bearish chatter that the U.S. Government can't possibly be being truthful with their economic reports, bulls have yet to cave in to such talk. I've highlighted in PINK, those levels I deem rather IMPORTANT support and resistance levels. While these levels may seem "broad" a quick percentage calculation of the SPX's MONTHLY Pivot and MONTHLY R1, where neither level has been traded, is a modest 3.6% range in a grander scope of things. Equity sectors finished today's session mixed, with healthcare, drugs, oil service and biotechs all posting gains greater than 1.5%. Only the retailers as depicted by the S&P Retail Index (RLX.X) 382.83 -1.18% and the Semiconductor Index (SOX.X) 525.70 -1% posted losses of 1% or more. With a sector bellwether and heavyweight like Wal-Mart (WMT) falling 4.2%, the retailing sector held rather firm. NYSE Composite Index ($NYA.X) - Monthly Intervals The NYSE Composite ($NYA.X) closed above the 6,000 level today and now approached the 6,135 level, which would be a 61.8% retracement of decline from an all-time high. A 50% to 61.8% retracement often finds formidable resistance, where a pullback is expected for gains to be digested. Solid support should be found back near 5,500. Bullish traders will exercise caution in their accounts here. While I have my bearish thoughts at these more lofty bullish risk levels, I'm not confident enough to shout, "bring it on." Not yet. S&P 500 Index Chart - Daily Intervals I was more willing to protect modest gains in a bullish trade today, the see them fall to the wayside. I would have rather been LONG into today's close than short. While bears talk of a top, its difficult to say what could happen should they capitulate. Dow Industrials Chart - Daily Interval I still would view the INDU bullish above 9,700, with my most bullish target being 10,000 at this point. Things that could get me more bullish would be capacity utilization above 77%. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals I tried to give the QQQ a bullish chance today, but raised a protective stop too tight. Still, I'm not overly upset with even a modest profit. Then tried to turn DAY TRADE bearish, but was taken out for small loss. I did NOT want to hold a bearish trade overnight. While the recent reversal back lower to "bear confirmed" at these high levels of bullish % have me VERY cautious from the bullish side in the QQQ, I know all too well the HUGE short position on the QQQ, and with limited overhead supply to keep things remotely in check if bears cave in and capitulate on an upward move, I didn't want to risk a gap higher open with the bulk of tomorrow's economic data due out before the bell. Trade small positions would be my most worthy advice. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** Holding Gains - J. Brown The major averages may have closed in the red today but losses were mild and after yesterday's big rally investors shouldn't complain. Considering that Wal-Mart, the biggest retailer on the planet (and Dow component), missed earnings by a penny bulls should count themselves lucky that the DJIA only dropped 10 points. The market's strength today really was the big story. WMT said that shoppers continued to be cautious which is not what investors or Wall Street wants to hear. For the last few weeks we've heard nothing but how strong this coming holiday shopping season was likely to be. Now WMT is casting a big shadow over those expectations. This morning's economic reports and initial jobless claims were a non-event. Jobless claims came in low as expected and marked another week under the pivotal 400,000 level. Tomorrow could be a big day with the PPI, retail sales (likely to be anti- climatic), industrial production and utilization numbers and the Michigan Sentiment report. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9903 52-week Low : 7197 Current : 9837 Moving Averages: (Simple) 10-dma: 9816 50-dma: 9634 200-dma: 8899 S&P 500 ($SPX) 52-week High: 1062 52-week Low : 768 Current : 1058 Moving Averages: (Simple) 10-dma: 1053 50-dma: 1034 200-dma: 955 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1439 Moving Averages: (Simple) 10-dma: 1430 50-dma: 1388 200-dma: 1207 ----------------------------------------------------------------- Wow! We have a new closing low for VXO (old VIX) at 16.84. The VIX hasn't been this low in years. Of course there is nothing to stop it from dropping lower and that may be the case as the markets hover near one-year highs. This remains a growing storm cloud for the bulls. CBOE Market Volatility Index (VIX) = 16.47 -0.28 CBOE Mkt Volatility old VIX (VXO) = 16.84 -0.15 Nasdaq Volatility Index (VXN) = 25.45 -0.10 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.78 721,852 560,283 Equity Only 0.63 609,893 383,694 OEX 0.73 25,410 18,445 QQQ 1.34 28,087 37,747 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.4 + 0 Bull Confirmed NASDAQ-100 71.0 + 0 Bear Confirmed Dow Indust. 83.3 + 0 Bull Correction S&P 500 80.8 + 0 Bull Confirmed S&P 100 81.0 + 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: 1.07 10-dma: 1.09 21-dma: 1.10 55-dma: 1.10 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 1590 1516 Decliners 1227 1539 New Highs 278 268 New Lows 14 15 Up Volume 827M 850M Down Vol. 813M 976M Total Vol. 1662M 1840M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 11/04/03 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 10/14/03 391,972 410,299 (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%) 11/04/03 391,079 415,136 (24,057) (3.0%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 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% 11/04/03 137,829 78,206 59,623 27.6% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 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 10/14/03 221,897 233,066 (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%) 11/04/03 242,409 270,785 (28,376) ( 5.5%) 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 10/14/03 161,208 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% 11/04/03 135,525 63,006 72,519 36.5% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 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 10/14/03 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%) 11/04/03 34,159 48,293 (14,134) (17.1%) 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 10/14/03 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% 11/04/03 24,132 9,703 14,429 42.6% 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 10/14/03 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% 11/04/03 21,756 11,903 9,853 29.3% 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 10/14/03 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%) 11/04/03 5,099 9,160 (4,061) (28.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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. 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The Option Investor Newsletter Thursday 11-13-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: JBLU, PCAR Call Play Updates: APA, JCI, JBLU, MME, PGR, VRTS New Calls Plays: DGX Put Play Updates: ATH, AMGN, AZO New Put Plays: NFLX **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** JetBlue Airways - JBLU - cls: 55.25 chg: +1.95 stop: 55.26 Ouch! Much like the bounce in the biotech sector the airlines have soared higher as well and erasing most of their losses from earlier in the week. JBLU did more than that. It exceeded its early week losses and broke back above its simple 10-dma and the round-number support/resistance level at $55. Shares traded above our stop at $55.26 so we're closing the play after coming so close to our target near $50.00. This may be just an oversold bounce but there are so many fans for this airline/stock that it can be tough playing the downside. Picked on November 02 at $57.67 Change since picked: - 2.42 Earnings Date 10/23/03 (confirmed) Average Daily Volume: 1.5 million Chart = --- PACCAR - PCAR - close: 78.32 chg: +2.97 stop: 78.01 Bulls refuse to let bears have anything easy these days. PCAR had clearly been consolidating into a wedge for the last couple of months. It clearly broke down into a bearish sell signal on its P&F and daily charts and on rising volume. We suspected the stock was overdue for a bounce after several days of declines and that's what we got on Wednesday but the bounce was not excessive. Yet this morning PCAR received an upgrade from Prudential who raised their rating from "under weight" (a.k.a. sell) to "over weight" (buy) and slapped an $87 price target on the stock. PCAR popped higher at the open and quickly traded above our stop loss at 78.01. Fortunately, for any bears still in the play the gains were limited by the stock's simple 50-dma but it's unclear if this technical resistance will hold. We will close the play but keep an eye on it for any roll over. Picked on November 10 at $74.99 Change since picked: + 3.33 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 899 thousand Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Apache Corp. - APA - close: 71.67 change: +0.72 stop: 69.25*new* Just as we were beginning to wonder if our APA play was ever going to straighten up and fly right, the stock broke out nicely on Wednesday, scaling the resistance that had been holding it back for nearly a month. Proving it wasn't just a fluke, the stock build on those gains today, almost reaching the $72 level before relaxing slightly into the close. It looks like we're finally headed to that first objective near $73 and conservative traders that bought the dip may want to harvest some gains near that level. A pullback and rebound from above the $70.50 level (old resistance becomes support) can be used for new entries. We're tightening our stop to $69.25 tonight, just below the 50- dma ($69.35). If this rally attempt has any legs at all, then the 50-dma should not be revisited in the near-term. If APA is capable of clearing $73 resistance, then we'll turn our eyes towards that aggressive $76 target near the top of the long-term rising channel. Picked on November 2nd at $69.72 Change since picked: +1.95 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 1.32 mln Chart = --- Johnson Controls - JCI - cls: 108.02 chg: +0.01 stop: 104.99 There it goes. We asked for a bounce from the $105 region and Wednesday's session delivered. Shares of JCI shot up very quickly at the open and then slowly drifted higher. Unfortunately the rally stalled today and the stock traded in a very narrow range (that's getting to be a habit) at the $108 level. The bounce does look like an entry point for new bullish plays but our gut is still a little cautious. We're leaving our stop at $104.99. Picked on October 30 at $107.07 Change since picked: + 0.95 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 432 thousand Chart = --- Jabil Circuit - JBL - close: 30.24 chg: -0.21 stop: 27.99 As you can see in JBL's chart the stock bounced with just about everything else on Wednesday and volume was decent. Oddly you'll also notice that the opening price for JBL was $29.51 this morning but that proved to be the low of the day and the $30 level held as support in the afternoon slide. JBL appears to still be consolidating so traders still looking for entry points can probably take their time judging one. Keep an eye on the SOX, which was one of the worst performers today. Additional selling in the chip sector will hit JBL. Picked on November 04 at $30.11 Change since picked: + 0.13 Earnings Date 09/18/03 (confirmed) Average Daily Volume: 1.4 million Chart = --- Mid Atlantic Med. - MME - cls: 57.68 chng: +0.38 stp: 55.55*new* When we initiated coverage of MME, we had no illusions of a sharp rally higher, just a steady recovery off of strong support. So far, we haven't been disappointed, with the stock gaining ground on each of the past two days, gradually working its way back towards known resistance in the $60-61 area. Recall that MME is set to be acquired by UNH and with the two stocks now linked at the hip, clearly UNH's rebound off the $48 support level is having the desired effect. If still looking for an entry into the play, we'd prefer a slight pullback near $57. But entering on further strength could be an effective strategy, if it is accompanied by UNH pushing through the $50 level. Note that our stop rises to $55.55 tonight, which is just below last Friday's intraday low. Picked on November 11th at $56.65 Change since picked: +1.03 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 701 K Chart = --- Progressive - PGR - close: 76.28 chg: +0.39 stop: 72.75 It's been a week and shares of PGR have essentially gone nowhere. That's not necessarily bad as it missed the early selling in the markets this week but it also failed to truly rally on Wednesday. Momentum traders might want to take a closer look at today's close over the $76.25 mark, which has been resistance. Maybe tomorrow we'll see some follow through. Take note, PGR's slow movement makes November options a dangerous play as time premium will erode super quick next week. Picked on November 07 at $76.25 Change since picked: + 0.03 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 654 thousand Chart = --- Veritas Software -VRTS - cls: 38.10 chng: -0.33 stop: 35.90 Every time we start to get nervous about a pullback in VRTS, the bulls come in, buy the dip and mitigate our concerns. Just as we speculated might happen, Tuesday's completion of a 2-day decline proved to be an entry point that the bulls pounced on first thing yesterday morning, driving the stock back over $38. Isn't it interesting how the pattern of a couple weeks ago repeated itself so neatly? There's the possibility that VRTS will need to consolidate a bit more before mounting a serious challenge on resistance at $40, and intraday dips and rebounds above the 20- dma ($36.62) can be used for new entries in the meantime. With the 30-dma now creeping over $36, our $35.90 stop should be safe unless there is a marked change of sentiment. With the proximity of known resistance at $40, we still are not advocating new breakout entries, preferring to enter on the brief and occasional pullbacks. Picked on October 28th at $37.27 Change since picked: +0.83 Earnings Date 1/21/04 (unconfirmed) Average Daily Volume = 6.16 mln Chart = ************** NEW CALL PLAYS ************** Quest Diagnostics - DGX - close: 69.46 change: +1.33 stop: 65.50 Company Description: Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Why we like it: Following a big plunge from the $85 level over a year ago, shares of DGX have been trading in a broad range between $50-70 with the bulls appearing to be gaining the upper hand in recent months. Their conviction was rewarded last month, when the stock surged sharply higher in the wake of better than expected earnings and the announcement that the company would begin paying a dividend. After the initial surge to $69, the stock has been consolidating above $65. After just kissing the 20-dma (now $66.34) on Monday, the stock has once again launched on a strong bullish run and came to rest just below that pivotal $70 level today. The impetus for this week's bullish move appears to have been the announcement of a new CEO, with the current CEO continuing on as the Chairman of the Board. Technically, we can consider today's move to be a breakout, as DGX ended at its best level since July of 2002. The stock is already on a PnF Buy signal with a bullish price target of $79 and if it can trade $70, then we'll have yet another Buy signal to bolster the bulls' case. Once above $70, the first significant resistance level appears to be $75, so that will be our initial target, with $79 being our ultimate upside objective. Let's use a trigger at $70, with momentum entries above that level being the first choice for entry. Traders willing to wait for a subsequent pullback before entry will want to enter on a rebound from the $67.50-68.00 area as old resistance is shown to be new support. Based on the way the stock rebounded from just above the 20-dma earlier this week, we're expecting to see continued support at that average on a deeper pullback. Place stops initially at $65.50, below the 20- dma and just below Monday'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. But with November options expiring next Friday, using the December 70 strike would be a better choice. 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 look all the way out to the January 75 Call. ! Alert - November options expire next week! BUY CALL NOV-70 DGX-KN OI=1837 at $0.90 SL=0.40 BUY CALL DEC-70 DGX-LN OI= 909 at $2.20 SL=1.00 BUY CALL DEC-75 DGX-LO OI= 351 at $0.65 SL=0.30 BUY CALL JAN-75 DGX-AO OI= 162 at $1.05 SL=0.50 Annotated Chart of DGX: Picked on November 13th at $69.46 Change since picked: +0.00 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 864 K Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Anthem, Inc. - ATH - close: 68.21 change: +1.30 stop: 69.50 Did we just get hit by another bear trap? Shares of ATH gave us the classic breakdown below strong support, with the PnF chart on a strong Sell signal and below bullish support and the trade at $65 looked like just the sign of weakness we had been waiting for. But after testing $65 as support for three days in a row, the stock shot higher yesterday and continued that rebound today, coming to rest above $68, near the high of the day. This is near the upper end of what we thought would be strong resistance and we now have the very real possibility that the bulls will run right through our $69.50 stop on Friday. A rollover near current levels can still be used for aggressive entries, but we'd now prefer to wait for more concrete signs of renewed weakness, ideally with price falling back under $66. More conservative traders may even want to wait for a drop under $64.75, Wednesday's intraday low, before playing. Picked on November 6th at $67.22 Change since picked: +0.99 Earnings Date 1/26/04 (unconfirmed) Average Daily Volume = 1.64 mln Chart = --- Amgen Inc - AMGN - close: 59.95 chg: -0.33 stop: 61.51 *new* Traders will notice that the BTK biotech index has recouped most of its Monday-Tuesday losses with a big two-day bounce. Fortunately, shares of AMGN did not participate in today's follow through in the BTK. We are a little surprised that AMGN closed over the $60 level on Wednesday but we're encouraged to see it slip lower again. As of this moment we're right where we started at $59.95. The short-term trend of lower highs is still in effect. Should AMGN break this trend we don't want to be short. Thus we're lowering our stop loss to $61.51 to keep our risk at a minimum. Traders looking for new bearish entries may want to wait for a drop back through the $59.00 mark. Picked on November 09 at $59.95 Change since picked: - 0.00 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 8.8 million Chart = --- AutoZone, Inc. - AZO - close: 93.14 change: -0.49 stop: 96.25 The precipitous decline in AZO appears to have come to an end for now, yet the rebound of the $90 level appears to have run out of steam as well. That leaves us on the fence as to what to expect from the stock going forward. There should now be strong resistance in the $94-95 area, but the rebound earlier this week shows us that there's clear support near $90. Daily Stochastics are just beginning to recover out of oversold territory, and ideally they'll push up near overbought and tip over as price meanders sideways. A rollover in the oscillator, with price action weakening below resistance will be the next viable setup for a bearish entry. With know support at $90 and our target in the $86-87 area, we do not want to consider entries on a breakdown move. Sell into waning strength or let it go. Maintain stops at $96.25. Picked on November 9th at $93.30 Change since picked: -0.16 Earnings Date 12/22/04 (unconfirmed) Average Daily Volume = 1.10 mln Chart = ************* NEW PUT PLAYS ************* Netflix Inc - NFLX - close: 48.50 change: -1.79 stop: Company Description: Launched in 1998, Netflix is the world's largest online movie rental service, providing more than one million subscribers with access to a comprehensive library of more than 15,000 DVD titles. For $19.95 a month, Netflix subscribers can rent as many DVDs as they want, with three movies out at a time, and keep them for as long as they like. There are no due dates and no late fees. DVDs are delivered directly to the subscriber's address by first-class mail from shipping centers throughout the United States. Netflix can reach more than seventy percent of its subscribers with generally overnight delivery. The Company also provides background information on DVD releases, including critic reviews, member reviews and ratings and personalized movie recommendations. (source: company press release) Why We Like It: It's really hard to find any bad news on NFLX. Everyone I know loves the service. Obviously investors do to. Shares of NFLX have gone from $5 to $60 (+1100 percent) in just about a year's time. Granted earnings are doing great and expected to keep on doing great but there appears to be some room for more profit taking. The stock got hammered on Nov. 6th with a big volume surge of selling without any discernible catalyst. The selling continued the next day, again on extremely high volume, before finding support above the $45 level. Yesterday's market bounce took it back to the $50 mark but today's action looks like a failed rally. Actually it looks like the bearish reversal candlestick pattern labeled "dark cloud cover". We're going to be aggressive and suggest put plays at current level but with a very tight stop over the recent highs at $51.01. Traders might want to wait and see some follow through (like a move under $48.00) before initiating any new positions. There is obvious support at $45 and its simple 50-dma but NFLX could hit $40 if the profit taking picks up speed. Traders should note that this is an aggressive play and not for everyone. NFLX typically carries an EXTREMELY high amount of short-interest and when they cover it gets painful. The need for good stop loss is important. Plus, after such a strong rise from its IPO price less than two years ago there is the remote risk of a stock split announcement. Suggested Options: We like the December 50's but the 45's could work for the speculating trader. BUY PUT DEC 50.00 QNQ-XJ OI=1092 at $5.20 SL=3.00 BUY PUT DEC 47.50 QNQ-XS OI= 648 at $3.90 SL=2.00 BUY PUT DEC 45.00 QNQ-XI OI=1452 at $2.80 SL=1.45 Annotated chart: Picked on November 13 at $48.50 Change since picked: - 0.00 Earnings Date 10/15/03 (confirmed) Average Daily Volume: 1.7 million 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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 11-13-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - DGX Traders Corner: Hear The Music? Baby, Let's Shake A Tailfeather Traders Corner: Divergence Makes It Taste Better ********************** PLAY OF THE DAY - CALL ********************** Quest Diagnostics - DGX - close: 69.46 change: +1.33 stop: 65.50 Company Description: Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Why we like it: Following a big plunge from the $85 level over a year ago, shares of DGX have been trading in a broad range between $50-70 with the bulls appearing to be gaining the upper hand in recent months. Their conviction was rewarded last month, when the stock surged sharply higher in the wake of better than expected earnings and the announcement that the company would begin paying a dividend. After the initial surge to $69, the stock has been consolidating above $65. After just kissing the 20-dma (now $66.34) on Monday, the stock has once again launched on a strong bullish run and came to rest just below that pivotal $70 level today. The impetus for this week's bullish move appears to have been the announcement of a new CEO, with the current CEO continuing on as the Chairman of the Board. Technically, we can consider today's move to be a breakout, as DGX ended at its best level since July of 2002. The stock is already on a PnF Buy signal with a bullish price target of $79 and if it can trade $70, then we'll have yet another Buy signal to bolster the bulls' case. Once above $70, the first significant resistance level appears to be $75, so that will be our initial target, with $79 being our ultimate upside objective. Let's use a trigger at $70, with momentum entries above that level being the first choice for entry. Traders willing to wait for a subsequent pullback before entry will want to enter on a rebound from the $67.50-68.00 area as old resistance is shown to be new support. Based on the way the stock rebounded from just above the 20-dma earlier this week, we're expecting to see continued support at that average on a deeper pullback. Place stops initially at $65.50, below the 20- dma and just below Monday'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. But with November options expiring next Friday, using the December 70 strike would be a better choice. 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 look all the way out to the January 75 Call. ! Alert - November options expire next week! BUY CALL NOV-70 DGX-KN OI=1837 at $0.90 SL=0.40 BUY CALL DEC-70 DGX-LN OI= 909 at $2.20 SL=1.00 BUY CALL DEC-75 DGX-LO OI= 351 at $0.65 SL=0.30 BUY CALL JAN-75 DGX-AO OI= 162 at $1.05 SL=0.50 Annotated Chart of DGX: Picked on November 13th at $69.46 Change since picked: +0.00 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 864 K Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Hear The Music? Baby, Let's Shake A Tailfeather By Mike Parnos, Investing With Attitude The BP Boogie has generated a lot of interest among CPTI students. It's not a tango, a rumba, mambo or even the hokey pokey, but our readership of movers and shakers wants to start shaking and moving – without having to visit a chiropractor when it's over. It warms the cockles of my heart (yes, we all have cockles that need warming) to see enthusiasm and a willingness to absorb knowledge. Well, let's put it to the test Hear Ye, Hear Ye! I received a suggestion about renaming the BP Boogie and it makes a lot of sense. From now on, since we use both bull put spreads and bear call spreads, we'll call it the CS (Credit Spread) Boogie. Before We Step Onto The Dancefloor – A Strategy Overview In Sunday's (November 11th) column I described the CS Boogie strategy. We're essentially creating a spread and taking in premium. We're holding onto the spread until either: 1. Expiration when the entire spread will expire worthless, or 2. We have to make an adjustment of closing out the original spread and re-establishing another credit spread, trading twice as many contracts 3. We will repeat the process as many times as necessary until expiration when, hopefully, the options of the spread in existence will expire worthless and we'll keep the premium taken in. Here We Go I know I said we prefer a trending market, but for educational purposes, I'm going against the prevailing uptrend and put on the initial CS Boogie with a bear call spread. I do this with anticipation of possibly having to close out the bear call spread if/when the current uptrend continues. For our "hypothetical" example, we'll start out small – with only two contracts. With the CS Boogie, you'll be surprised how to see much you can make trading a small number of contracts. The Trade With the OEX trading at $522.99, we're going to: Sell two contracts December OEX 520 calls @ $11.20 ($2,240) Buy two contracts December OEX 535 calls @ $4.50 ($900) Total credit and potential maximum profit: $6.70 ($1,340) Our exposure (risk) is $8.30. ($1,660) What If . . . If the OEX finishes below $520, both the short December 520 calls and the long December 535 calls will expire worthless. We'll keep the $6.70 ($1,340) and go on our merry and profitable way. If the OEX moves us, we're going to wait until it costs $13.40 to close out the bear call spread. Then, we're going to close it out and find a bull put spread. This new bull put spread will be out of the money and we will trade a sufficient number of contracts to enable us to replenish the $13.40 we just spent to close out the original bear call spread. We may have to widen the spread from 15 to 20 points to generate the appropriate amount of premium. Here is the part that will require additional maintenance. That's why we started with just two contracts. We'll have to monitor the trade, but, unless it goes dramatically in the wrong direction, the CS Boogie is a "hands off" kind of trade. We'll still go on our profitable way, it's just a slightly more scenic journey. A Correction In last Sunday's column I wrote that with the OEX there is no risk of assignment. Well, it was brought to my attention that it is technically possible for an OEX option to be exercised. However, if the rules of the strategy are followed, there is virtually NO chance. Why? Because the only time you're really in jeopardy of an exercise is if the option is deep in the money with little or no time value remaining. By The Way I made a few errors in the Sunday (11/9/03) column's explanation of the CS Boogie. I corrected things in a special Monday (11/10/03) column. I've requested that OptionInvestor's crack technical staff make the necessary corrections to the Sunday column. Therefore, the entire (correct) explanation of the CS Boogie strategy should (in the hopefully immediate future) be able to be found there. If anything is unclear, don't hesitate to send me your questions. _________________________________________________________________ NOVEMBER POSITIONS Position #1 – SPX Iron Condor – Trading @ 1058.41 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 two weeks left, anything can happen. A pullback would be nice. Position #2 – AFCI Iron Condor – Position closed for $700 loss. Que sera, sera. Position #3 – OEX Iron Condor (By Request) – 522.99 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 - $128.85 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 @ $35.77 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 @ $522.99 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. QQQ ITM Strangle – Ongoing Long Term -- $35.77 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, but, again, a pullback would be nice. _____________________________________________________________ Two cannibals are eating a clown . . . One says to the other, "Does this taste funny to you?" _____________________________________________________________ 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 ************** Divergence Makes It Taste Better by Mark Phillips mphillips@OptionInvestor.com I've been playing with that title for weeks now and just can't quite seem to get it right. I was hoping to come up with a witty play on the old TV ad about cheese making everything taste better. Being an unqualified cheese-lover myself, I always liked that slogan. But I digress. I want to talk about technical analysis today, as a welcome respite from the weightier topics I've been droning on about over the past couple weeks. But first a bit of background. When I first entered the Financial markets, I approached them with the same diligence and approach that served me so well in the engineering world. Namely, everything in the physical world can be described and defined in terms of some mathematical equation and all we have to do to achieve Nirvana is find that ultimate perfect mathematical alchemy. Clearly, more than a decade in the real world of engineering challenges, successes and defeats had not dulled my sense of naivete! So off I went, purchasing the tools I would need for my new enterprise, a new computer, several charting programs that promised to hold the key to perpetual winning trades, a data service, innumerable books on Technical Analysis from the likes of Jack Schwager, John Murphy and Martin Pring. Surely all the wisdom of the ages and the secret to plucking money out of the market would be contained within my new acquisitions. All I had to do was find the nuggets and meld them together into a trading strategy. I started first with the computer programs, as it seemed the logical point to begin. Afterall, I was an engineer who worked constantly with computers, and hadn't found the computer program I couldn't lick, WITHOUT reading the manual. How's that for foolish arrogance! It didn't take long to figure out that I had entered a world with its own language, and I needed a dictionary in a big way. Each program had numerous ways of displaying price charts, each with its own unique advantages, and literally hundreds of technical indicators, all of which could be reprogrammed, modified and combined into the "perfect trading system". For an engineer this was the "cat's meow"! So I did what any self-respecting engineer would do, I diligently read and reread all my new books, and actually read the manuals for the computer programs. Gradually I came to understand what I had my hands on, and how to use it. Terms like Stochastics, RSI, MACD, Bollinger Bands, and On Balance Volume were no longer foreign concepts and actually began to make sense to me, and what I discovered was that while there were literally hundreds of indicators available, I could only use a few at a time. I might be able to put 35 technical studies on a chart, but there is no way to make sense of the resulting jumble of criss-crossing squiggles on the page, much less use them to determine a logical and well considered plan of action for trading. Besides, I quickly found that it is possible to put enough indicators on a chart that you get strong signals both to the long and short side -- at the same time!! After innumerable instances of that you can imagine I spent a fair amount of time scratching the old noodle! So now I needed a way to boil all my newfound knowledge down to the 2 or 3 "magic" indicators that would make successful trading as easy as rolling off a log. I really liked the patterns I saw from oscillators like Stochastics, Momentum, MACD and RSI, but there were dozens of these oscillators. They all painted a similar picture; some were more responsive, while others were more consistently accurate. I needed to choose 2 or 3, learn how to use them and apply them consistently. I finally settled on Stochastics and RSI, but the long list of losing trades told me there was still something missing. I went back to my Technical Analysis books and began searching for some nugget of wisdom that I had somehow overlooked. Perhaps there was something I had missed that would point me towards the oscillators that were "the best". Ah, there's that naivete again! But I did find something that caught my attention as potentially significant. Periodically the term 'Divergence' would pop up with an accompanying chart or two, but it seemed rather subjective to me. Then I stumbled across a book by William Blau titled "Momentum, Direction and Divergence". Inside the dust jacket, I noted that Mr. Blau was an electrical engineer -- the concept can't be all bad. So I figured, if divergence is important enough to be listed in the title of a technical analysis book written by a fellow engineer, there must be something to it, right? Well, after reading the book, I have to report that I didn't find the holy grail, BUT it did convince me that I needed to learn more about the concept, believing that it was one of the final obstacles standing between me and trading success. After considerable study, and endless hours of staring at and manipulating charts and technical studies, the fog began to clear and I could see the fruits of my labors. Divergence is a subjective tool, requiring some interpretation, which is probably why it took so long to sink into my thick skull. Once the light went on, the pieces began to fall into place almost by themselves. I finally settled on two oscillators, Stochastics and RSI, and determined to use them as the basis for my technical trading decisions, specifically when they both gave me a strong divergence signal. Now that you've learned more about my journey than you probably cared to know, would you like to see what I learned? Sorry, that was a trick question, as that's where we're headed anyways. I'm not going to go into the details of any specific oscillator, as that information can be found any introductory Technical Analysis textbook. We want to focus our energy on the more subtle (and very useful) topic of divergence. Let's start with a basic description of what Divergence is. Divergence consists of higher highs (or lower lows) on the price chart that are not matched by higher highs (or lower lows) on the oscillator. It can be viewed the other direction as well. Divergence also consists of higher highs (or lower lows) on the oscillator that are not matched by higher highs (or lower lows) on the price chart. I've found that when I talk about divergence, I need to be very clear to avoid confusion. You see there are actually four specific cases that can occur -- 2 bearish and 2 bullish. I've shown them in a numbered list for those of you that are similarly analytical. 1. Higher highs in price, but the oscillator only paints equal or lower highs. This is bearish, as it shows insufficient buying interest to get the oscillator as deep into overbought territory as on the prior upward thrust, even though price was able to reach a higher high. The analogy I like to use to explain what is physically going on is the stretching of a spring. More force (price strength) has been applied to stretching the spring (oscillator) to the upside, but for some reason it was insufficient to produce greater deformation of the spring than on the last attempt. 2. Higher highs in the oscillator, but only equal or lower highs in price. Counter-intuitive as it may seem, this is also bearish, as even though the oscillator probed deeper into overbought (more buying pressure exerted), it wasn't good enough to get price to new highs. This is the equivalent of applying less force to the spring, but having it actually stretch further than on the last attempt. 3. Lower lows in price, but equal or higher lows in the oscillator. This is the inverse of what we see in case #1, giving us bullish divergence, with the drop to new price lows unable to pressure the oscillator deeper into the oversold region. As I'm sure you can see, we've leaned harder on the spring, but we haven't been able to compress it quite as far as on the last attempt. 4. Lower lows in the oscillator, but with price holding at equal or higher lows. This is the other bullish case, where the drop in price has taken less energy (price movement) to accomplish. That would seem to imply weakness, but with the spring compressed further than on the last attempt and less force needed to accomplish it, when a portion of that downward force is removed, it tends to spring back harder to the upside. What this Divergence tells us is best described with annotated charts, so for clarity, let's look at a couple of examples. To keep the charts as uncluttered as possible, I will only use the Stochastics oscillator in these examples. But bear in mind that divergence can be used with any oscillator that bounces between overbought and oversold extremes. One other note about our examples. I've deliberately used some old charts so that we can keep our attention focused on the principle of divergence, not on how we can apply what is shown on these charts to go out tomorrow and place a trade. You know how the saying goes..."Give a man a fish and feed him for a day. Teach him how to fish and feed him for a lifetime." Ladies, please don't take offense -- I'm just repeating it how I heard it. Weekly Chart of the NASDAQ-100 Trust (QQQ): 2001-2002 See how the price rebound off the September 2001 lows topped out significantly below the highs from the middle of 2001? When those Stochastics tipped over and dropped out of overbought, the QQQ's fate was sealed, with a solid dose of bearish divergence. You should be able to see how this matches the verbal description of Case #2 Bearish Divergence above. Moving out a bit further along the past timeline gives us divergence going the other direction. Weekly Chart of the NASDAQ-100 Trust (QQQ): Late 2002 Last October, the QQQ was drilling down to new multi-year lows, but the Stochastic oscillator was not confirming that price weakness. Note how Stochastics put in a higher low to go with the lower price low, and we have bullish divergence matching case #3. See how easy it is? We find the divergence and then wait for a move out of oversold territory to take that position trade. Alright, one more QQQ example, this time from the more recent past. Weekly Chart of the NASDAQ-100 Trust (QQQ): 2002-2003 This is actually case #4 Bullish Divergence, but it is not as clear cut since the Stochastics lows are roughly equal. But this is the divergence setup that resulted in the rise that has taken the QQQ to its current level near $35. I wouldn't say that a position would have necessarily been held through all the volatility of the past several months, but it certainly would have been possible to take a chunk out of the middle of that move. I know I said we weren't going to look at any current charts, but I can't resist throwing this one up, as I think it is the real BIG PICTURE for the next few months. We're seeing some pretty powerful divergence on the monthly chart of the S&P 500 and we'd have to be pretty foolish to ignore what it's telling us. Since you're all experts on divergence by now, I'm betting you can all see what is setting up with those lower price highs and much higher oscillator highs relative to the top in early 2002. Monthly Chart of the S&P 500 ($SPX) Unless the SPX can break out above the 1170 area prior to the monthly Stochastics rolling down out of overbought territory, we're looking at a very nice setup for a longer-term downside trade, kicking off potentially early next year. While Divergence is not the magic indicator that I have searched long and hard for (like all the rest, it is sometimes early, late or simply wrong), but it does something very valuable for us. It allows us to more accurately interpret the signals on our charts without having to add a plethora of technical studies that simply clutter the charts and make them harder to read. While Divergence doesn't always pan out the way we expect, when it is right, the moves it forecasts can be significant. Through the use of a couple oscillators and drawing some simple trendlines, we can uncover some truly amazing trading opportunities. So now that you know the basics, grab your favorite charting program and start drawing some trendlines on your favorite oscillators. There's no telling what little gems you may uncover. Best Trading Wishes! Mark ************************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. 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