The Option Investor Newsletter Tuesday 11-18-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Do You Hear Singing? Futures Markets: Metals rally, Treasuries Gain, Equities Fall Index Trader Wrap: Market Sentiment: Is The Top Behind Us? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-18-2003 High Low Volume Advance/Decline DJIA 9624.16 - 86.70 9750.46 9622.39 1.62 bln 1288/1850 NASDAQ 1881.75 - 27.90 1926.00 1881.75 1.86 bln 1183/1929 S&P 100 512.22 - 4.01 518.82 512.09 Totals 2471/3779 S&P 500 1034.15 - 9.48 1048.77 1034.00 W5000 10082.84 - 89.60 10227.18 10081.66 RUS 2000 521.68 - 4.53 531.39 521.58 DJ TRANS 2866.95 - 26.20 2915.34 2866.95 VIX 19.11 + 0.51 19.17 17.78 VXO (VIX-O)19.90 + 1.08 19.90 18.33 VXN 29.65 + 1.84 29.71 27.88 Total Volume 3,805M Total UpVol 1,060M Total DnVol 2,605M 52wk Highs 318 52wk Lows 32 TRIN 1.58 NAZTRIN 1.79 PUT/CALL 0.76 ************************************************************ Do You Hear Singing? Some traders claimed to be hearing the proverbial fat lady singing today but I am not convinced. There were numerous reasons for the drop but none of them were catastrophic. The markets simply need a breather and the opportunity to rotate into different sectors. While the four day Dow drop may seem like a disaster if you are long it is only a blip in the longer term trend. What does bother me is the weakness into the close and events on the horizon so grab those reading glasses and let's get started. Dow Chart Compx S&P Chart The morning economic reports were not very positive. The Chain Store Sales for last week fell -0.8% and gave back two thirds of the prior weeks gains. Overall the trend for the last two months has been very choppy with excuses the norm and sales weak. The Bank of Tokyo left the estimates for the month at +4.0% but they are going to have to hurry. Fortunately the Thanksgiving shopping is still ahead and there is a good chance there will be a rebound. Inflation is still at 40-year lows according to the Consumer Price Index, which was released this morning. The index was flat at +0.0% with the core rate only +0.2%. This raised the rate for the last twelve months to only +1.3% and only a tenth of a point from the +1.2% 40-year low in September. On the surface this frees the Fed from worrying about the inflation monster for at least another month. The bad news is that the real prices we pay were rising with beef prices at a 24 year high. The internal number that skewed the results was a -3.9% decline in energy prices. That offset some of the other gains but you can bet the Fed knows how to count and will be looking at the internal components. The home building market may be losing some of its luster according to the NAHB numbers for November which dropped to 69 from 72 in September. While this is still high it shows the pressure from the higher mortgage rates. The buyer traffic fell to 46 from 52 and was the largest drop of any component. CTX bucked the number today with a positive outlook and suggesting that the boom will last. They said that 2005 was looking very strong. This enthusiasm carried over into their stock price which jumped +2.08 to 101.38 on the outlook and a 2:1 stock split announcement. The Fed is apparently not worried about the creeping inflation and two Fed heads actually brought up the deflation potential again. There comments on deflation/inflation along with comments about being on the sidelines for some time were welcomed by bond traders. Bonds were bought to the relief of everyone but that did not help stocks. Strong earnings from Home Depot failed to help the markets out of their slump. HD credited tax check liquidity and several natural disasters as well as an overhaul of their stores for the strong sales in all sectors. Sales were up nearly +15% with earnings at 50 cents beating estimates by four cents. HD lost -50 cents on the day after trading up strongly at the open. The biggest factor dragging on the market was the various terror alerts and incidents. With Ramadan ending next Tuesday it is almost a sure thing there will be an escalation in events over the next week. The threats are coming fast and furious and most are directed at friendly Arab nations and the U.S. There was a strong rumor during the day that traders were moving to the sidelines due to the Bush trip to London. Even with security at the highest possible level it is still more risky than the same exposure in the U.S. Traders were worried that putting Bush at higher risk during the last week of Ramadan was too tempting a target for terrorists. This trip had been planned for 18 months so plenty of time for them to get their act together. Some of the biggest targets are the various oil fields and pipelines in Arab world. Saudi Arabia is said to be very concerned that their pipelines could be attacked as well as other critical points. Oil prices are rocketing as the worry filters through the markets. Oil finished over $32 today and a multi month high. The growing terror threat is also causing a run on the gold markets. Some say the Arabs are buying gold as insurance against an oil knockout. There is also the growing fighting in Iraq and a continuing flood of insurgents from other countries. Several military analysts are predicting a war with Syria soon. Evidently they are not cooperating with the U.S. and are harboring terrorists. Any U.S. attack on ANY other country in the region would seriously destabilize the region and weaken support among other Arab countries. I seriously doubt this is going to happen since the Iraq conflict is getting worse instead of better but the rumors are flying. Another challenge is the falling dollar. With the Euro at a two year high over the dollar it makes it more profitable to sell oil to Europe instead of the U.S. This means the prices we pay to offset the weaker dollar will be higher. Also, according to the money watchers the money flow into the U.S. markets from abroad has nearly stopped. The monthly average inflows into the bond market for the prior four months had been $39 billion. In October only $5 billion was invested in our bonds. This is the equivalent of a trickle. The same is said to be true of inflows into stocks. Overseas investors are becoming increasingly worried that the U.S. will not be able to fund the deficit, which could swell to $4 trillion according to some estimates, without selling massive amounts of debt over the next couple of years. They are also worried that the Fed is going to be forced to raise rates to combat inflation and that will stall the recovery and make the deficit worse. Add in soaring oil prices and terrorist threats of 100,000 American deaths in a coming attack and foreigners think the risk is too great. Foreign investors were also hit with trade sanctions against China and worries that the U.S. is becoming more protectionist. This was triggered when the U.S. imposed temporary "safeguard" trade sanctions against textile products from China on Tuesday. Under China's WTO accession agreement there was a provision for caps on imports if the flow of goods became unbalanced. U.S. manufacturers requested the sanction be imposed and that limits imports to 7.5% of last years levels. Much of China's textile exports are from state-owned firms subsidized further by state-owned banks. Profit is not a motive but employment of the population. Dumping of these products into the U.S. market harms U.S. manufacturers. The dollar hit a five month low against the Euro at $1.19 to buy 1 Euro. This 20% difference is well above the historical highs of 80 cents to the Euro and is causing havoc on the currency markets. George Soros is short the dollar and has been taking every chance possible to hammer it even more. The world events are simply adding to the pressure. Nikkei Chart The Nikkei rallied +110 points last night to near 9900 but the gain was minor compared to the -1500 points the index had lost from the October highs. The rebound on Tuesday may have only been a dead cat bounce or a small relief rally. The continuing global pressures could continue to press the Nikkei down to real support at 9500. Any decline like this overnight would put some serious pressure on our markets. Our markets do not need any more pressure. They are on the verge of cracking and need for those mysterious buyers who always seem appear at critical points to show up at the bell tomorrow. The Dow, Nasdaq and SPX all closed under their critical 50 day moving averages. This has provided support since March. The indexes only broke that support by a few points on a day where the Dow lost -86 points but it was a very negative day. It was not that bad in points lost but it appeared to be an acceleration of the recent down trend. The Dow has closed down for four consecutive days on good economic news. The total loss is only -220 points but that drop has put us right on the verge of breaking that strong support. The closing sentiment was negative and we closed on the lows of the day. The Dow at 9624 is well below the lofty levels near 9900 just three days ago. The Dow 10,000 hopes have been dashed and replaced with Dow 9500 fears. Looking at the charts tonight those fears could easily come true this week should the markets not be able to mount a rebound at tomorrows open. Helping depress the open already was late news of 47 currency traders being arrested in New York for scamming small investors. Details are very sketchy at 7:PM but there is plenty of film footage of handcuffed traders being loaded into FBI vans. The futures dropped substantially on the news and are now near their closing lows. There was also more mutual fund news after the close with claims that the founder of Strong Funds had been accused of front running his funds purchases. According to reports he bought large quantities of small cap stocks that his funds were going to buy and then resold them at a profit when the fund went into the market to buy stock. This came on top of news that the Janus International CEO had been terminated along with several managers for improper trades. It was also announced that investors withdrew another -$7 billion from Putman in the last week making more than $25 billion over the last three weeks. Putman's assets were down almost -10% and Calpers announced they were withdrawing another $1.2 billion in managed assets. With withdrawals coming in faster than deposits it is no wonder the equity markets are under pressure. Need more reasons for financials to be under pressure? FRE was under pressure after it was announced that Federal investigators are looking into investment transactions that were arranged by major investment banks like LEH, MWD, MER and Citibank. Apparently they structured temporary transactions to move profits off the FRE books so that FRE would not have to report windfall profits from derivative transactions. In one instance Citibank was said to have hidden $700 million in profits so that FRE could report earnings inline with estimates. Many of the banks earned fees in excess of $25 million a year for assisting in these transactions. In a week where all the news has been bad there was one highlight. Merrill Lynch upgraded GE to buy with a target of $33. Surprised? Merrill Lynch cut estimates on GE just last week from $1.65 to $1.60 for the year. With the upgrade the same analyst now believes GE will hit $1.85 earnings in 2005. His reason for the upgrade? The double-digit earnings growth from his lowered estimate last week. Duh! This analyst had a buy on GE from $57 all the way down to $22 when he went to neutral. GE was over $28 when he cut it last week and $27.50 when he upgraded it today. GE jumped to a high of $28.92 on the upgrade and declined to 28.50 at the close. Guess they had bought all the GE they wanted on the way down and needed to lighten the load some. Wednesday could be exciting. We do not have any major economic announcements but there is sure to be a flurry of news events to rile the markets. If the Dow can hold over 9600 we have a chance of pulling out of this slump. Just remaining flat could give the bargain hunters confidence and we could see a relief bounce. However, with Bush overseas, the end of Ramadan still a week away and breaking news on the continuing trading scandals we are not likely to breakout into a new bullish trend. We just need to consolidate peacefully and let time pass. The week before Thanksgiving has been bullish for the last 10 years but it is going to have to hurry to close this week in positive territory. Regardless of the market move tomorrow the overall market health is still strong. This is a normal profit taking event helped by the strong news flow. Unless the Dow breaks below 9000 the uptrend is still intact. Until the end of Ramadan next Tuesday I would not be in a hurry to buy the dips. Just look at it as research time and a future buying opportunity. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Metals rally, Treasuries Gain, Equities Fall Jonathan Levinson The HUI printed a new 7 year high, closing at 235.22, with gold and silver advancing, treasuries reversing earlier losses, and equities falling. The US Dollar Index fell to a new multiyear low. 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 chart says it all. I suspect that all eyes are on round number support at 90, but in the meantime commodities and precious metals made strong advances, with the CRB up 1.80 to close at 255.37. Crude, heating oil and silver led the charge, with crude futures closing higher by 4.88% at 33.28. Daily chart of December gold As I did yesterday, I've packed in a longer timeframe at the expense of clarity with 11 months' daily candles. December gold closed at 398.70, up 7.20, 20 cents below its high of the day. Silver added 11.7 cents to close at 5.34. Gold is looking quite bullish, pushing above the upper rising trendlines on the different rising formations on the daily chart. The breakouts in the HUI and XAU are particularly encouraging. I personally expect gold and silver to get sold (at first) in a severe correction, just as we saw at various points during 2002. I believe that a liquidity drain will hurt all assets, abd I've been noting that 390-410 is an important resistance level. That said, there's nothing bearish in the action of the tape, and different traders with different styles will play the current environment differently. I have sold part of my long position in this sector based on my nearterm outlook, but hold the remainder as it is the sector on which I am most bullish. Above the support levels at 384, 378 and 372, goldbugs are sitting pretty. Daily chart of the ten year note yield Treasuries had a weak open and traded lightly in the red for most of the session, reversing in the mid-afternoon just as the equity decline began to pick up steam. As we've been discussing, it's not inconceivable that the Fed, in its effort to keep rates low, will allow equities to fall in order to generate a defensive bid in bonds. This certainly appeared to be the case today, with a large open market operations drain and bonds trading inversely to equities. For the day, the TNX dropped 2.1 bps to close at 4.167%. Daily NQ candles There was plenty of excitement today in the various markets, and equities were no exception. So persistent has been the Fed's end-of-day stick-saves and repo jams, short covering frenzies and opex-week flagpole rallies that none expected the utter failure at the end of the cash session. The equity charts all sustained noteworthy technical damage, and only an immediate reversal can save bulls from what could be shaping up to be rout. The VXO added 1 to close at 19.82, adding to yesterday's big gains and signaling the first scent of fear in the markets. The NQ closed just off the bottom of 43.5 point day range The primary and secondary rising support lines have now been violated, with 1392 support failing decisively. The daily and weekly cycle oscillators are in gear to the downside, with the bear wedge target of 1300 now in play. Next support is at 1355, and could be tested on a weak open tomorrow. 30 minute 20 day chart of the NQ The 30 minute cycle upphase was sharp and weak. This oscillator is oversold but so far showing no signs of life. We are at levels that would normally portend a bounce, but the combination of those downphasing daily and weekly cycles has so far proven disastrous for dippers. A bounce to a lower high would fit the cycle picture, and 1392 support will now serve as resistance. Daily ES candles ES did not sustain the same damage as NQ, still within its rising trend above 1025-8. Nevertheless, the bearish oscillator divergences and bear wedge breakout are performing according to plan, and if the NQ is fulfilling its traditional leadership role, then we can expect a test of that lower rising trendline. The question is whether the 30 minute cycle will attract enough energy to overcome the longer term downphases currently in progress. It's still early to pronounce the end of the rally, but bears are so far off to a nice start. 20 day 30 minute chart of the ES The end of session selloff on ES was nowhere near as bad as that on the NQ, but the 300 minute stochastic is nevertheless in a bottoming zone. I expect to see support beginning at 1028, but if it fails, it should be a quick drop to 1016 on the way to the daily bear wedge target of 987. I believe the race for the exits in the NQ will ultimately weigh on the ES, and we'll continue to keep an eye on both contracts in the Futures Monitor. 150-tick ES The short cycle oscillators are in oversold territory on ES, but not overwhelmingly so. Depending on how the futures do overnight, we could see a continuation of today's move in the morning as the terminal push on the 30 minute cycle downphase. Daily YM candles Nothing to add on the YM. 9600 looks like short term support, with the higher low on the 300 minute stochastic (30 minute chart below) possibly setting up a bullish divergence. 20 day 30 minute chart of the YM On the one hand, intermarket conditions look unequivocally bearish for equities, with breakouts in oil and mining shares, gold and silver on the verge, and the US Dollar Index clinging by its fingernails. Bonds are advancing, though so far uninspiringly. It is a market that is becoming fearful, and equities are another bad day or two away from significant breakdowns. That said, it is op-ex week, the 30 minute cycle is bottomy, and the VXO has come a long way up off its lows. I believe that most are expecting a bounce, and such would be the least surprising outcome. That's either a bullish or a bearish observation, depending on your outlook, but for tomorrow, caution remains key. Chasing moves is dangerous to your account, and whatever you do, respect your stops. See you in the Futures Monitor! ************************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 ******************** Free markets don't like quotas The U.S. dollar suffered one of its biggest daily declines with the U.S. Dollar Index (dx00y) 90.28 -1.36% falling to a new 5- year low. There were probably more rumors or scenario's for the dollar's decline than there were buyers for the dollar, but if I were one scenario for the dollar's steep declines in today's session, it may well be the U.S. government's announced plans to curb Chinese textile imports, which ups the ante in a simmering trade war between the two countries. In what has slowly become a game of chess between China and the U.S. where the Chinese government said weeks ago that it would only approve government spending in 2004 on software products designed outside China under special circumstances, the U.S. has recently answered those policies by limiting imported steel and now textiles. The Commerce Department said it planned to set quotas limiting growth in Chinese textile imports to 7.5% a year. The move follows a sharp increase in shipments of Chinese clothing products over the past 14 months. U.S. Commerce Undersecretary Grant Aldonas said the surge in imports had been helped by government subsidies. "It's not just a question of a dramatic surge, but a heavily state-owned industry that's subsidized by state-owned banks," he said. The decision underlines Washington's determination to bring its spiraling trade deficit with China, which is forecasted to reach $120 billion this year, back under control. The U.S. government, and most likely the Bush administration ahead of an election year, fears the flood of Chinese imports is squeezing domestic manufacturers, forcing them to shed jobs. While many Republicans may blame the Clinton administration for free trade policies implemented years ago, the White House has been spurred by U.S. Industry lobby group to pressure Beijing to lift currency controls which keep the Chinese yuan artificially low against the dollar. But China has held firm, rebuffing persistent calls for it to alter its currency regime, as China has its own interests for a healthy economy at stake, where exports of manufactured goods are critical for the country's growth and job creation. US textile industry associations, which claim that 300,000 US textile jobs have disappeared since 2001, welcomed the prospect of import quotas. "Today's decision sends a strong signal to China that they should take immediate steps to cease their attempts to dominate international trade in textiles and apparel," said Cass Johnson, interim president of the American Textile Manufacturers Institute. The saber rattling by the U.S. government sent jitters through the equity markets as well as the dollar as the session progressed, where modest gains on the heels of upbeat earnings and raised guidance from Home Depot (NYSE:HD) $34.95 -1.46% vanished by session's end. In what has been seen as a "global economy" where markets should trade freely, currency manipulations and growing attempts to create trade barriers where quotas are placed on products, certainly appears to have investors moving to the sidelines. Late this afternoon, a look of disgust could be seen on the faces of Larry Kudlow and James Cramer, hosts of CNBC's Kudlow and Cramer, which in my opinion was different look than has been seen in recent months from two of bigger bulls on Wall Street. I can't remember Mr. Cramer's exact words, but they were pointed toward the dollar's decline and trade tariffs and quotas when he said foreign investors hate the thought of trade barriers, and when they sense it, they "sell everything." For many traders, the U.S. dollar is the starting point for how U.S. assets are viewed by foreign investors, and today's rather sharp drop in the dollar, was a warning signal we didn't want to ignore in today's trade. Gold was once again the major benefactor in a weaker dollar trade where December Gold futures (gc03z) $397.60 +1.66% gained $6.10 and currently trade higher still at $399.00 as Wednesday's session is underway. The equity side of the trade saw the AMEX Gold Bugs Index ($HUI.X) 235.22 +6.02% find another all time high, and now take out on a firmer trade, its point and figure chart bullish vertical count of 226.00. With the $HUI.X breaking to new highs and exceeding its bullish vertical count, I'm going to use the fitted retracement technique to establish further upside bullish target levels. AMEX Gold Bugs Index ($HUI.X) - Daily Intervals As noted in prior commentary, bullish vertical count may be achieved, and may not be achieved. Often times they are achieved and even exceeded like we see taking place in the $HUI.X. It now becomes a more difficult task to assess risk/reward, but I've tried to use the "fitted retracement technique" of taking retracement from a relative low, and then trying to fit the retracement bracket so that it makes sense with how the $HUI.X has traded in recent sessions. I wanted to at least try and honor the bullish vertical count of 226.00 in the newly added PINK retracement, and I do like the way the 19.1% retracement of 201.57 and 38.2% retracement at 216.67 may have been viewed as levels of pullback support the past two weeks. Gold bugs may "know" that they look for further dollar weakness to extend the impressive rally in gold stocks, so lets take a look at our U.S. Dollar Index (dx00y) where we track this index in our WEEKLY/MONTHLY pivot analysis matrix. U.S. Dollar Index (dx00y) Chart - Daily Intervals The $dx00y shows the dollar breaking SHARPLY to new lows and below a support zone. Just as it can be difficult to tell where a stock can run to on the upside when extreme buying is present, its equally difficult to tell where a level of support is when a stock or security is breaking to multi-year lows. The current bearish vertical count for the U.S. Dollar Index (dx00y) using a 0.50-point box scale is 83.50, and the above chart using WEEKLY/MONTHLY pivot analysis retracement gives a near-term zone of support at 89.80-89.94. A trader in gold stocks may equate such a decline to 89.90 in the U.S. Dollar Index (dx00y), with the AMEX Gold Bugs Index ($HUI.X) at 250.42. Is a trade war between the U.S. and China the reason for today's weakness in equities? To tell the truth, I wasn't aware of today's news of textile import curbs being potentially responsible for the dollars steep slide, but thought it might be prudent to initiate a bearish trade in the broader S&P 500 Index (SPX.X) 1,034.15 -0.9% in today's Market Monitor, and 01:00 PM EST update, when the SPX was trading at unchanged levels. Let's quickly take a look at the pivot analysis matrix where today's trade did see the NDX 1,364.70 -2.08%, QQQ $33.88 -2.3% and BIX 325.51 -1.11% see trade at their WEEKLY S2s for the first time this week. In the MONTHLY Pivot Matrix, the SPY $103.82 -1.05% traded its MONTHLY Pivot for the first time this month. Tomorrow morning I will be closely monitoring the U.S. Dollar Index (dx00y) after it traded its WEEKLY S1 for the first time this week and foreign market's response to today's dollar slide. While a weaker dollar is seen as beneficial for U.S.-based company's that compete against other foreign products abroad, that benefit could be eliminated if a global trade war is in the making, where quotas and tariffs are placed on imported products by various countries. Pivot Analysis Matrix - Tonight we see some more formidable and correlative resistance showing up at the WEEKLY Pivots and DAILY R2's for tomorrow. After profiling a bearish trade in the SPX with a stop above 1,055, I think that stop may be well placed based on what I see in the matrix at this point. It is notable that the S&P 100 Index (OEX.X) 512.22 -0.77%, which traded its WEEKLY S2 yesterday, did not see a trade at that level today (session low was 512.09, so there is obviously some type of formidable buying still at that level) and may certainly hint that institutional computers were going to wait for a reaction out of foreign markets in Wednesday's trade. In last night's Index Trader Wrap, I had not planned on looking for a bearish trade in today's session, unless we saw a bounce further higher to the WEEKLY R1s. However, I was also not looking for the dollar to get hit like it did, and felt it was worth the risk to take a bearish trade this afternoon, just in case foreign markets found substantial selling before U.S. markets open for trading tomorrow. As I type, I've just updated tonight's Market Monitor and note Japan's Nikkei-225 ($NIKK) 9,714.06 -1.85% opened lower and in early trade has seen a session low of 9,691.19 and session high of 9,804.70. As it relates to today's 01:00 PM EST intra-day update, this action would have the $NIKK's point and figure chart unchanged from yesterday's trade. In the above MONTHLY Pivot matrix, I've PINK squared the MONTHLY S1s in the major indices, which aside from the BIX.X (mostly regional banks) may be vulnerable to those levels should the WEEKLY R2s not hold support. S&P 500 Index (SPX.X) Chart - Daily Interval I would certainly consider a bearish trade in the SPX as being EARLY as the SPX still holds above a key support level at the MONTHLY Pivot (1,033.49) and WEEKLY S2 (1,032.30), but the dollar's weakness had me wondering what type of lower trade might be found overnight in foreign markets. It is difficult, if not impossible to forecast price action based on oscillators, but with MACD still trending lower towards zero, a break below SPX 1,032 may have the SPX falling quickly to 1,020. Today's trade saw a net loss of 3 stocks to point and figure sell signals in the S&P 500 Bullish % ($BPSPX). This has the bullish % slipping to 79.2%, but still reading "bull confirmed" status. S&P 100 Index (OEX.X) Chart - Daily Intervals While the broader SPX may benefit from correlative MONTHLY Pivot and WEEKLY S2 support, the OEX looks to have WEEKLY S2 as the only level of support standing between tonight's close and an upward trend from the August relative low, which at this point has not yet been tested. If the current upward trend and correlative MONTHLY 61.8% retracement are violated to the downside, then the OEX further vulnerable to 504, where I would be alert to a rebound, but would then view the 521 area as becoming more formidable resistance as an equal high of 525 was found, and a lower low if 505.98 were also violated. Today's trade saw no net change in the S&P 100 Bullish % ($BPOEX). Still "bull correction" status at 79%. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals It has been a general observation that technology stocks along with Asian markets had been leading the bullish advance since March. Today's violation of the WEEKLY S2 and close below the $34.13 level in the QQQ is the lowest close in the QQQ since late September. Near-term support is viewed as $33.67, but the more volatile QQQ may be further vulnerable to its MONTHLY S1 of $33.11, where I would fully expect some type of bounce back higher. Today's trade saw a net loss of 2 stocks to point and figure sell signals in the NASDAQ-100 Bullish % ($BPNDX) and has this bullish % falling to 68%. Still "bear confirmed." Dow Industrials (INDU) Chart - Daily Interval Despite the weaker dollar, 25 components traded lower compared to 5 gainers. While INDU looks near-term oversold, INDU also looks further vulnerable to 9,500 if 9,600 violated tomorrow. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 80%. 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 **************** Is The Top Behind Us? - J. Brown The major U.S. stock indices (DJIA, S&P 500, and the NASDAQ Composite) have all broken their rising simple 50-dma's. This is certainly a bearish technical development and given the rise in the volatility indices one begins to wonder if the markets have finally put in a short-term top. Market internals were bearish as the DJIA and NASDAQ closed lower for their fourth decline in a row. Decliners out paced advancing stocks 17 to 11 on the NYSE and 15 to 14 on the NASDAQ. The Big Board saw most of the selling with down volume twice as strong as up volume. Only four of the 30 Dow Jones Industrial components closed in the green. Yesterday's late day bounce appeared to have "buy the dip" written all over it but the follow through failed to appear Tuesday morning. Making headlines were growing concerns over the U.S. dollar, which is trading near its lows against the Japanese yen and the euro. The weak dollar is fueling the rise in gold and the shiny metal is trading above the $400 mark in after hours tonight. Looking at the technical indicators below (in the sentiment) traders will notice that the short-term 5-dma on the ARMS index or TRIN is fast approaching the 1.50 level. Typically readings over 1.50 tend to be bullish buy signals but last time the 5-dma hit the 1.65 mark before the markets turned. Plus, these TRIN signals tend to be a little early. It sounds like we have farther to fall. Levels to watch involve the 1020 area on the SPX, the 1840-1850 area on the NASDAQ, and the 9500 mark on the DJIA. A breakdown below these support levels could denote a possible trend change and not just profit taking. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9903 52-week Low : 7197 Current : 9624 Moving Averages: (Simple) 10-dma: 9777 50-dma: 9644 200-dma: 8924 S&P 500 ($SPX) 52-week High: 1063 52-week Low : 768 Current : 1034 Moving Averages: (Simple) 10-dma: 1050 50-dma: 1035 200-dma: 958 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1364 Moving Averages: (Simple) 10-dma: 1417 50-dma: 1389 200-dma: 1213 ----------------------------------------------------------------- We are finally beginning to see the volatility indices react and the market top could now be behind us. The question now is will the selling continue? CBOE Market Volatility Index (VIX) = 19.11 +0.51 CBOE Mkt Volatility old VIX (VXO) = 19.90 +1.08 Nasdaq Volatility Index (VXN) = 29.65 +1.84 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 745,954 565,047 Equity Only 0.63 568,928 355,730 OEX 0.87 49,631 43,197 QQQ 0.84 45,598 38,306 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 72.9 - 1 Bull Confirmed NASDAQ-100 68.0 - 4 Bear Confirmed Dow Indust. 80.0 + 0 Bull Correction S&P 500 79.2 - 2 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: 1.46 10-dma: 1.29 21-dma: 1.20 55-dma: 1.14 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 1133 1410 Decliners 1701 1570 New Highs 167 166 New Lows 21 28 Up Volume 501M 521M Down Vol. 1091M 634M Total Vol. 1602M 1173M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 11/11/03 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 Commercial traders continue to stall on making any big bets. They remain slightly net short in the big S&P contracts. We see the same hesitation in the small traders with little overall change. Commercials Long Short Net % Of OI 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%) 11/11/03 389,965 415,259 (25,294) (3.1%) 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 10/21/03 136,643 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% 11/11/03 136,072 74,249 61,823 29.4% 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... now we are seeing some action in the e-minis. Commercial traders have eliminated 12K short contracts and upped their longs by 7K. This has narrowed the gap but they remain net short. Small Traders have made big changes and reduced a big chunk (40K) of their long positions and 12K of their shorts but they remain net long. Commercials Long Short Net % Of OI 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%) 11/11/03 249,864 258,503 ( 8,639) ( 1.7%) 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 10/21/03 168,236 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% 11/11/03 94,649 51,815 42,834 29.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Unfortunately we still don't see any big changes in the NDX futures from the Commercial traders. They have slowly been upping their short positions, which is bearish for the tech-heavy NDX. Meanwhile small traders are at their most bullish in four weeks. Sounds like a potential top. Commercials Long Short Net % of OI 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%) 11/11/03 35,889 49,201 (13,312) (15.6%) 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 10/21/03 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% 11/11/03 26,212 10,730 15,482 41.9% 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 Commercials still aren't making big bets in the INDU futures and remain net long. Small traders are hedging their bets a bit by upping their longs and reducing their shorts by about 1,000 contracts each. Commercials Long Short Net % of OI 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% 11/11/03 20,209 11,660 8,549 26.8% 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 10/21/03 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%) 11/11/03 6,105 8,201 (2,096) (14.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Tuesday 11-18-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: JCI Dropped Puts: None Call Play Updates: APA, DGX, MME, PGR New Calls Plays: None Put Play Updates: AVID, AZO, AMGN, MDC, NFLX New Put Plays: GDW, MXIM **************** 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: ***** Johnson Controls - JCI - cls: 104.64 chg: -0.88 stop: 104.99 The daily chart looks a little worse than it really is. Yesterday shares of JCI show an intraday low close to $103 but upon closer inspection it looks much more like a bad tick. Unfortunately, bad tick or not, it's a moot point. Shares of JCI succumbed to the market wide profit taking on Monday and hit our stop at 104.99. That was enough to close our play and Tuesday's session merely confirmed it. Bullish traders may want to keep JCI on their watch list as the 100-102 area might be strong enough support to stop the descent and give buyers another entry. Picked on October 30 at $107.07 Change since picked: - 2.43 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 432 thousand Chart = PUTS: ***** None ************************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: 71.34 change: -0.16 stop: 70.00 Profit taking continued on Wall Street this week and in light of the weakness in the rest of the market, our APA play has held up rather well. We were expecting some potential weakness near the $73 level as the highs from early October were tested. Unfortunately we didn't quite get there, as the highs from last Friday were all the bulls could muster. APA has now pulled back a bit and is attempting to build a new base just above $71, with the 10-dma ($70.71) rising to provide additional support. Dips near that area can be used for new entries ahead of a renewed push towards $73. So long as energy prices continue to push higher, APA should do the same. If the bulls can get through that $73 level, then we can turn our focus to the potential for APA to rally towards the top of its rising channel, now above $76. Maintain stops at $70, which should be below solid support now. Picked on November 2nd at $69.72 Change since picked: +1.62 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 1.29 mln Chart = --- Quest Diagnostics - DGX - close: 70.54 change: -0.79 stop: 67.50 The third consecutive day of profit taking in the broad market finally took its toll on our DGX play, with the stock weakening slightly and pulling back towards the $70 level. Based on the breakout of the bull flag pattern last week, the stock should be able to continue upwards the same distance as the rally that preceded that consolidation pattern. The initial move was from $60-68, so the breakout over $68 has upside potential to the $76 area. That lines up nicely with our initial target of $75 and that seems a good place to harvest some gains. Look for a rebound from the $69.50-70.00 area to provide for new entries. Note that our stop is now at $67.50, which is below both the 10- dma ($68.25) and the 20-dma ($67.78), both of which should reinforce strong support near $68. With today's reversal from the upper Bollinger band (which is likely to provide near-term resistance), momentum entries do not seem favorable at this time. Picked on November 13th at $69.46 Change since picked: +1.08 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 875 K Chart = --- Mid Atlantic Medical - MME - cls: 57.20 chng: -0.65 stop: 55.55 After 2 days of being rejected from the $58 resistance level, it looked like MME might actually manage a breakout over that level this morning. But the opening strength vanished faster than ice on a hot griddle and the stock spent the remainder of the day gradually working its way lower. Of course, it didn't help that UNH (connected to MME through the pending merger) was once again turned back at the $50 mark, causing that stock to trend lower throughout the day. Traders still looking for an entry into the play can consider a dip and rebound from the area of last week's gap ($56.65-57.00) as the best possibility, but only if UNH holds above its 200-dma ($48.34). The upside target for the play is still for a test of the $60-61 resistance area, at which point it would be prudent to harvest some gains. Maintain stops at $55.55, just under the lows from early last week. Picked on November 11th at $56.65 Change since picked: +0.55 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 713 K Chart = --- Progressive - PGR - close: 77.63 chg: -0.80 stop: 74.99 It should not be any surprise to see some profit taking in PGR with both the DJIA and the NASDAQ composite down four days in a row. Actually, bullish traders might see the recent weakness in shares of PGR as a potential entry point. The pullback has thus far been mild and any bounce above the $76 mark is a potential entry, although we'd prefer to see the $77 level hold as new support. We're going to keep our stop loss at 74.99. Picked on November 07 at $76.25 Change since picked: + 1.38 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 654 thousand Chart = ************** NEW CALL PLAYS ************** 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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Avid Technology - AVID - cls: 48.40 chg: -0.69 stop: 51.26 The consolidating trend in shares of AVID continues but the stock has not yet given up its support level at the $48 mark. Instead we've seen selling pressure push its highs lower and lower and the last two days have both produced failed rallies at the $50 level. The skeptic inside us paused to wonder...why isn't AVID weaker with the markets down four days in a row? That's a good question and we don't have an answer except that the tug-of-war between buyers and sellers is about to climax as the stock coils tighter into its wedge-pattern. More aggressive traders can use the failed rallies at round-number support-resistance at $50 to initiate new positions but more conservative types may want to wait for that $48 level to crack first. No change in our stop loss. Picked on November 16 at $48.45 Change since picked: - 0.05 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 637 thousand Chart = --- AutoZone, Inc. - AZO - close: 91.10 change: +0.22 stop: 94.00*new* For a few days, it wasn't clear if AZO would head lower or swiftly retrace its decline from above the century mark. When the stock rolled back over from the $93.50 area, the tide was clearly shifting in favor of the bears, but here we see buyers staunchly defending support near $91, just above the 11/10 low. So here we are still unclear on whether the bulls or bears will emerge victorious, but the goal lines have narrowed somewhat. Ideally, we'll see AZO break below last week's low ($90.44) and continue down towards our $86-87 target. Aggressive traders can use that break as an entry for a quick move down to that target. Alternatively, a failed rebound below $93 can be used for new entries as well, as the 10-dma ($92.98) crosses below the 50-dma ($93.10) to reinforce that resistance. If AZO is going to continue down as we expect, then our new stop at $94 should not be threatened. Picked on November 9th at $93.30 Change since picked: -2.20 Earnings Date 12/22/04 (unconfirmed) Average Daily Volume = 1.13 mln Chart = --- Amgen Inc - AMGN - close: 58.84 chg: -1.10 stop: 61.01 Ah...nothing like a little excitement to your blood pumping. Shares of AMGN bucked the overall market trend on Monday to close just under the $60 level as investors reacted to the positive phase III trial news for its kidney-disease related bone loss drug. That bounce continued today but shares were rebuked at the declining 21-dma and rolled over to close near their lows for the session. Coincidentally, the BTK biotech index closed near its lows for the session and was a leading sector to the downside. From the looks of it the BTK is poised to continue the slide, which probably makes today's failed rally in AMGN a tempting entry point. No change to our stop loss. Picked on November 09 at $59.95 Change since picked: - 1.11 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 8.8 million Chart = --- M.D.C. Holdings - MDC - close: 64.46 change: +0.56 stop: 67.00 Investors have had a hard time deciding what to do with Housing stocks this week, with a failed selloff yesterday and a failed rebound today. Shares of MDC satisfied our entry trigger yesterday morning with the initial dip below $64 and things looked encouraging with the close just below that mark ($63.90). But the bulls came out swinging today, sending the stock well over $65 by midday before the strength faded and the stock gave back the bulk of its intraday gains. Those two doji candlesticks (the first bullish and the second bearish) certainly give the impression of indecision. Overall, MDC still looks weak and now that our trigger has been satisfied, we have a couple ways to proceed. Failed rebounds below the $66 level look viable for new entries, especially with price being turned back by the 30-dma ($65.61) today and the 10-dma ($66.05) having now crossed below the 20-dma ($66.49). Alternatively another break below the $64 level can be used for aggressive entries, although we'll need to be cautious of another bounce from the vicinity of $62.50 like yesterday. Maintain stops at $67, just above last week's highs. Picked on November 16th at $64.55 Change since picked: -0.09 Earnings Date 1/8/04 (unconfirmed) Average Daily Volume = 233 K Chart = --- Netflix Inc - NFLX - close: 46.57 change: +1.91 stop: 49.50 Almost right on cue shares of NFLX have bounced from their simple 50-dma near the $45 level. We mentioned that this was one of the first obstacles (support) that bears would have to conquer. The combination of potentially eager bulls buying technical support or bears merely covering for a profit helped NFLX buck the overall trend in the markets today but it should make traders pause. The declining 10-dma, which is approaching 48.50, should act as new overhead resistance. Aggressive players, coincidentally the only type of players that should be trading NFLX these days, can use a failed rally under the 10-dma as a new entry point for bearish positions. We did lower our stop yesterday to 49.50 but if you can stand the heat then bumping it up to 50.01 is probably a better stop. Considering that NFLX has been down three days in a row today could just be an oversold bounce. Trade carefully! Picked on November 13 at $48.50 Change since picked: - 1.93 Earnings Date 10/15/03 (confirmed) Average Daily Volume: 1.7 million Chart = ************* NEW PUT PLAYS ************* Golden West Financial - GDW - cls: 99.54 chg: -0.46 stop: 102.26 Company Description: Headquartered in Oakland, California, Golden West is one of the nation's largest financial institutions with assets of over $75 billion as of October 31, 2003. Currently operating 476 savings and lending offices in 38 states under the World name, the Company has one of the most extensive thrift branch systems in the country. (source: company press release) Why We Like It: Yesterday the DJIA and the NASDAQ tested their respective 50- dma's and bounced. That bounce was short-lived as the selling renewed today with both major market indices closing under technical support and suggesting more selling is on the way. That selling was echoed in the BIX and BKX banking indices, which have both begun to lose momentum. We feel that loss of momentum is also appearing in shares of GDW and it could be ready to pick up speed. There is no doubt that GDW has been one of the banking sector's biggest performers. Shares have been in a virtual non-stop rally from spring with occasional dips to its own 50-dma. Well now the stock is carrying a big sign that says, "I'm still available for profit taking." A pull back to its 50-dma would put it near the $95 mark, which is our first target. There is some short-term support near $97 but if the markets began to fall even faster then we doubt $97 will hold. Today's close under the round- number support-resistance marker at $100 is certainly bearish and looks like a decent entry point for new positions. We're going to start the play with a stop loss at $102.26. Take note...there is the potential risk that GDW could surprise us with a split announcement. The company last announced a 3- for-1 split on Nov. 2nd, 1999 when shares were trading near $114. We do feel it's a very high risk for our short-term trade but it does exist and a good reason to use a stop loss. Suggested Options: Stocks tend to fall faster than they rise so we like the December puts but longer-term traders can mull over the February '04 strikes. BUY PUT DEC 95 GDW-XS OI= 75 at $0.95 SL= -- BUY PUT DEC 100 GDW-XT OI= 47 at $2.75 SL=1.40 BUY PUT DEC 105 GDW-XA OI= 0 at $6.10 SL=4.25 Annotated Chart: Picked on November 18 at $99.54 Change since picked: - 0.00 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 608 thousand Chart = --- Maxim Int. Prod. - MXIM - close: 49.89 change: -1.24 stop: 52.30 Company Description: MXIM designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high- frequency design processes and capabilities that can be used in custom design. MXIM's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Why we like it: After leading the NASDAQ higher these past several months, the Semiconductor index (SOX.X) was way overdue for some serious profit taking as of last week and it got kicked off on Thursday. Last week's highs near $530 were a logical place for it to get started, being strong resistance from 2001-2002, but we needed to see more than a 2-day decline to have some conviction that this downward move might actually have some life in it. The SOX has now broken back inside its 9-month ascending channel and it looks like a retest of the bottom of the channel (currently $462) is in order. That ought to give us sufficient downside for a nice bearish play if we can find a stock that is trading similarly, don't you think? MXIM looks like a viable candidate, as the stock broke near-term support at $50 today, closed back inside its own ascending channel that it had broken above a couple weeks ago. This looks like the beginning of a solid bearish move that ought to take the stock back to strong support in the $45-46 area. Note that the midline of the stock's multi-month channel is currently just below $46 and the 50-dma is at $45.40. That would certainly hint that this level is a likely near-term target. Note that this is an aggressive play, with the PnF chart still on a Buy signal, although currently in a column of O's. Note also that the first solid support on the PnF chart is also at the $45- 46 area. Maybe we're onto something here. On the way down, MXIM will likely find near-term support at the 20-dma ($49.31) and the 30-dma ($47.85). Initially we were going to use the $50 level as a trigger, but since the stock closed below that mark today, we'll consider it already triggered and seek entries accordingly. Momentum entries can be taken on a break below today's intraday low of $49.83, while traders looking to get in on a failed bounce can target a rollover from between the top of the channel ($50.90) and the 10-dma ($51.32). Due to the aggressive nature of the play, we're going to use a tight stoop at $52.30, just over yesterday's intraday high. Suggested Options: Aggressive short-term traders can use the December 45 Put, while those with a more conservative approach will want to use the December 50 put. Our preferred option is the December 50 strike, which gives a nice balance due to being at the money and having plenty of time until expiration. ! Alert - November options expire this week! BUY PUT DEC-50 XIQ-XJ OI=1133 at $2.55 SL=1.25 BUY PUT DEC-45 XIQ-XI OI=1218 at $0.85 SL=0.40 BUY PUT JAN-45 XIQ-MI OI=1823 at $1.50 SL=0.75 Annotated Chart of MXIM: Picked on November 18th at $49.89 Change since picked: +0.00 Earnings Date 1/27/04 (unconfirmed) Average Daily Volume = 6.43 mln 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 Tuesday 11-18-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Put - GDW Traders Corner: Sliding Down a Slippery Slope ********************* PLAY OF THE DAY - PUT ********************* Golden West Financial - GDW - cls: 99.54 chg: -0.46 stop: 102.26 Company Description: Headquartered in Oakland, California, Golden West is one of the nation's largest financial institutions with assets of over $75 billion as of October 31, 2003. Currently operating 476 savings and lending offices in 38 states under the World name, the Company has one of the most extensive thrift branch systems in the country. (source: company press release) Why We Like It: Yesterday the DJIA and the NASDAQ tested their respective 50- dma's and bounced. That bounce was short-lived as the selling renewed today with both major market indices closing under technical support and suggesting more selling is on the way. That selling was echoed in the BIX and BKX banking indices, which have both begun to lose momentum. We feel that loss of momentum is also appearing in shares of GDW and it could be ready to pick up speed. There is no doubt that GDW has been one of the banking sector's biggest performers. Shares have been in a virtual non-stop rally from spring with occasional dips to its own 50-dma. Well now the stock is carrying a big sign that says, "I'm still available for profit taking." A pull back to its 50-dma would put it near the $95 mark, which is our first target. There is some short-term support near $97 but if the markets began to fall even faster then we doubt $97 will hold. Today's close under the round- number support-resistance marker at $100 is certainly bearish and looks like a decent entry point for new positions. We're going to start the play with a stop loss at $102.26. Take note...there is the potential risk that GDW could surprise us with a split announcement. The company last announced a 3- for-1 split on Nov. 2nd, 1999 when shares were trading near $114. We do feel it's a very high risk for our short-term trade but it does exist and a good reason to use a stop loss. Suggested Options: Stocks tend to fall faster than they rise so we like the December puts but longer-term traders can mull over the February '04 strikes. BUY PUT DEC 95 GDW-XS OI= 75 at $0.95 SL= -- BUY PUT DEC 100 GDW-XT OI= 47 at $2.75 SL=1.40 BUY PUT DEC 105 GDW-XA OI= 0 at $6.10 SL=4.25 Annotated Chart: Picked on November 18 at $99.54 Change since picked: - 0.00 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 608 thousand 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 ************** Sliding Down a Slippery Slope By Linda Piazza Bollinger bands, envelopes, channels: whatever your preference, catching moves from one boundary to another can be profitable. What about those times when prices slide along a band or envelope instead of rebounding toward the opposite side? No one wants to be stuck on the wrong side of a trade while prices slide along a slippery slope. OEX 30-Minute Chart with 1.35% Envelope Surrounding a 21-pma Is there a way to identify those times when prices will likely slide rather than rebound? What affects the rate at which prices rebound? One possibility appears obvious: the slope of the envelope, channel, or band at the time price hits it. To test that thesis, I used a 1.35% envelope surrounding a 30- minute 21-pma on the OEX. I gathered data for each first touch of that outer envelope for a year, beginning in October, 2002 and continuing through the end of September, 2003. I calculated slope as a change in envelope value (y) divided by a change in time (x). The y-portion of the slope was the difference between the value of the touched envelope one bar before the touch and at the time of the touch. I divided that result by the time span. That established a slope with a price per minute label. Determining the strength of the rebound proved more difficult, but for this test, I used the number of 30-minute bars between a first touch of the outer envelope and the next touch of the central 21-pma as the most objective and easily calculated measure. Interestingly, the year’s data resulted in an even number of data collection points for the upper and lower envelope boundaries: 48 for each. The average number of 30-minute bars between the first outer envelope touch and the next central average touch calculated to be 11.83 bars, almost six hours. Separating touches of the upper envelope boundary from the lower boundary demonstrated some differences. Touches of the lower envelope boundary resulted in an average rebound of 10.79 bars’ duration. Touches of the upper envelope boundary resulted in an average rebound of 12.88 bars’ duration. While it may prove helpful to know how many 30-minute bars it might usually take the OEX to rebound to the central average, that wasn’t the subject of this inquiry. This test hoped to pinpoint the impact of the envelope's slope on the quickness of the rebound. If I’d had any expectations previous to the test, I would have expected prices to rebound most sharply when slope approached zero (the envelope band was horizontal) and prices to slide if the channel sloped at the time of the touch. I would have expected the data to show a critical point at which the slope would be too steep, and a rebound would also tend to occur. Using a scatter chart to display all 96 data points revealed a different-than-expected concentration. If my original assumptions had been correct, the scatter chart would have been shaped like an elongated eye mask, with data points pinched in as they concentrated at a low number of rebound bars (quick rebound) for a slope near zero, widening on either side of zero, and then pinching in again as slope moved farther away from zero in either direction. Instead, the shape was vaguely like that of megaphone, concentrating near 10 when slope was most negative and widening as slope grew most positive. Scatter Chart Showing All Data Points: An analysis of this chart reveals that when the envelope sloped down (negative slope), rebounds gathered fairly reliably near 10. When the envelope sloped up (positive slope), rebounds scattered more widely. No correspondence could be found between slope and the strength of the rebound, at least when the slope was positive. No concentration of data points pinched together near zero, depicting quick rebounds. Because rebounds concentrated differently when slope registered negative values than when it registered positive values, the next question to be asked was whether rebounds concentrated differently after hitting the upper and lower envelope boundaries. A scatter chart of data points collected during the 48 touches of the lower envelope demonstrated some of the same patterns seen in the chart of all data points. When slope registered negative values, data points tended to collect near the calculated 10.79 average for touches of the lower envelope boundary. When slope registered positive values, data points scattered more widely. Scatter Chart Showing Touches of the Lower Envelope: In contrast to the pattern seen on the previous chart, the scatter chart depicting the 48 touches of the upper envelope showed no discernable pattern. These data points scattered widely with no particular concentration. Scatter Chart Showing Touches of the Upper Envelope: After examining the charts depicting lower and upper envelope touches, I concluded that when the envelope slanted down (negative slope) and prices touched the lower boundary, rebounds tended to be faster. Thinking about that tendency in relationship to the bullishness that characterized some periods of this year, I wondered if the quick rebounds off the lower envelope boundary owed more to that bullishness than to anything relating to the slope of the envelope. To test that thesis, I divided the year’s data points into four quarters: Q4 2002, Q1 2003, Q2 2003, and Q3 2003. Q4 2002 showed a heavy concentration of data points near and below 10, showing relatively quick rebounds from both upper and lower boundaries. Scatter Chart Showing Q4 2002: A volatile quarter, Q4 2002 produced numerous touches of both the upper and lower envelope boundaries, with prices dropping quickly early in the quarter and then climbing steeply after that drop. OEX Daily Chart of Q4 2002 Because the values on the Q4 2002 scatter chart proved similar as slope varied from -2 to +2, the quick rebounds did not seem dependent on the slope or on whether the upper or lower envelope was touched, but rather seemed a product of the volatility of the markets. Other quarters backed up this observation. For example, many traders commented on the range-bound trading in Q3 2003. This quarter produced fewer touches of the envelopes, so fewer data points. This quarter also produced the most widely scattered data points. Scatter Chart of Q3 2003: In summary, although the various scatter charts of all data points across the entire year showed some correlation between quick rebounds and touches of the lower envelope boundary when the envelope sloped down, that result appeared to be due to Q4 2002's results, varying widely from quarter to quarter. The inevitable conclusion was an obvious one. When markets are volatile, they rebound from outer envelope boundaries more quickly. Unfortunately, instead of slope-dependent results, this test revealed volatility-dependent results. It may therefore be dangerous to draw too many conclusions about likely price action based on whether an envelope, Bollinger band, or channel slopes up or down, as many of us are prone to do. That’s the bad news. The good news? We don't have to spend a whole lot of time diligently calculating slopes during fast-moving markets. ************************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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