The Option Investor Newsletter Wednesday 12-03-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Have We Made A Market Top? Futures Wrap: Summit Party Index Trader Wrap: NASDAQ 2,000 wasn't purely psychological Traders Corner: Adapting To Change - Part II Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-03-2003 High Low Volume Advance/Decline DJIA 9873.42 + 19.78 9942.01 9851.42 1.65 bln 2168/ 694 NASDAQ 1960.25 - 19.82 2000.92 1960.13 1.80 bln 2041/1086 S&P 100 524.42 - 0.29 529.03 524.36 Totals 4209/1780 S&P 500 1064.73 - 1.89 1074.30 1064.63 RUS 2000 545.19 - 8.41 556.74 545.06 DJ TRANS 2939.51 + 3.15 2969.78 2936.48 VIX 16.63 + 0.36 16.68 15.77 VXO 16.41 - 0.12 16.41 15.84 VXN 27.34 + 0.62 27.34 26.25 Total Volume 4,364M Total UpVol 2,492M Total DnVol 2,492M 52wk Highs 898 52wk Lows 20 TRIN 1.10 PUT/CALL 0.71 ******************************************************************* Have We Made A Market Top? The day started off with a bang that pushed all major indices to new 520week highs and the Nasdaq and DOW past psychologically important hurdles of 2000 and 9900 respectively. Unfortunately the selling overtook the buying late in the session and the only major index to end in the green was the DOW due to the General Motors (GM) and Merck (MRK). The sharp turn around we witnessed today this makes me wonder if we have reached a market top. With all the talk about overbought, overvalued and "the market needs a rest" one would be crazy to not at least think it could be a short-term top. Only time will tell if we have reached this pinnacle but for me a market top would reveal itself very simply. I would need to see MACD make a lower low, below the 0 line as well as price make a lower low. Over at the DOW, you could almost here the champagne corks popping and the clear sparkling liquid flowing as the DOW made a daily high of 9942 breaching the all important psychological 9900 level. Unfortunately the party did not last for it was not able to hold on to those gains and closed at 9873. So was this a market top in the DOW also? We could repeat the same story here but with the caveat the DOW's MACD divergence is not as pronounced as it is in SPX. The champagne was not only flowing at the DOW by at the NASDAQ exchange also. For the first time in nearly two years the NASDAQ Composite broke above the 2,000 level, technically not an important number but psychologically very important. A lot of analysts are saying this level was breached because of continued strong economic data and positive comments made about technology bellwethers Oracle (ORCL) and Intel (INTC) but I think it is just a reflection of the underlying bid we have seen in the market lately. The NASDAQ actually reached 2001 at its intraday high, the highest level since mid-January 2002. Unfortunately the party did not last here either for the NAZ ended the day with a close of 1960, a 1.00% loss. Once again, have we witnessed a market top in the NASDAQ? The story on the NASDAQ is identical to the SPX with a market top revealing itself when the MACD and price both make lower lows. And once again only time will tell for we have been fooled before and one cannot discount the normally bullish time frame we are in. It was a good news day for those of you who hold General Motors shares. GM gapped up this morning when an analyst went on record that the company's pension plan is looking much better and it could raise its 2004 earnings guidance. Critical of the automaker's pension problems in the past, analyst Gary Lapidus said the company is likely to announce some "really good news" about the plan on a conference call Dec. 12. GM closed up 5.22%. The other stock that helped the DOW to close in the green was Merck's (MRK) whose share price closed up 2.66% after the company said it expects net income to be between $3.11 and $3.17 a share in 2004, up from between $2.90 and $2.95 this year. This forecast was based on higher sales of the osteoporosis pill Fosamax offsetting the loss of overseas sales of its No. 1 seller, the anticholesterol drug Zocor, due to expiration of foreign patents. Zocor loses U.S. patent protection in 2006 and is also up against stiff competition from two drugs, Lipitor and Crestor, often viewed as more powerful. Sector winners today were Morgan Stanley Cyclical Index ($CYC.X) + 0.43% and the Software index ($GSO.X) +0.29%, although there is an ominous head and shoulders forming on the GSO. Sector losers were the Disk Drive Index (DDX.X) -3.68%, Airline Index (XAL.X) -2.78% and the Home Builders -1.92%. Moving onto market internals we saw a mixed bag today with declining issues outnumbering advancers by a 17 to 15 margin on the NYSE and by a 20 to 11 score on the Nasdaq exchange. The volume of stocks moving lower was 782 million shares on the Big Board and 1,237 million shares on the Nasdaq, vs. higher volume of 608 million shares and 943 million shares, respectively. New highs to new lows painted a much healthier picture with NYSE new highs clocking in at 472 to new lows of 8 and on the NAZ new highs were 299 to 10 new lows. The SEC has tentatively approved new rules for mutual-fund trades that would require all buy or sell mutual funds orders to be received at the company by 4:00ET PM in hopes this firm 4:00 closing will eliminate the potential for illegal late-trading. SEC chairman, William Donaldson says these new rules "will go a long way toward restoring investor confidence in these important investment vehicles." On the global front, China has surpassed Japan as the No. 2 petroleum user after the U.S. China oil imports for the first 10 months of 2003 are up 30% from the year-earlier period and are expected to double to some four million barrels a day by 2010. Some say China, which doesn't have large oil fields, might start competing with the U.S. for influence in the Middle East and trade weapons technology to terrorist states. On the other hand others think China will realize it has a vital interest in keeping the region stable. On the economic front, the ISM index of nonmanufacturing business fell to 60.1 in November from 64.7 in October, indicating that the service sector is still growing, but at a slower pace than it has been. This was the eighth consecutive month of growth in the sector; any number above 50 indicates growth. Meanwhile, U.S. workers were much more productive in the third quarter than previously thought, for nonfarm business productivity, a measure of the amount an employee produces per hour, grew at a seasonally adjusted annual rate of 9.4%, the strongest showing since the second quarter of 1983. On a year- over-year basis, the increase of 5% was the fastest rate in 53 years. The dollar failed to get a lift from upwardly revised US productivity number and remained soft after the release of weaker-than-expected service sector data. It weakened against most of other currencies hitting fresh lows against the euro for the fourth consecutive session. The 10-year Treasury note stood at 98 24/32, down 6/32 to yield 4.41%. The 30-year bond fell 12/32 to 102 27/32, yielding 5.18%. The five-year note was down 3/32 to 99 23/32, yielding 3.43%, while the three-year note was off 2/32 to 100 2/32, yielding 2.60%. The two-year note was down 1/32 to 99 19/32 to yield 2.08%. The only economic report out tomorrow is the weekly 8:30 release of initial claims where the market is looking for a slight increase to 354K from a prior of 351K. Jane Fox ************ FUTURES WRAP ************ Summit Party Jonathan Levinson Nasdaq bulls printed The Number, held it for awhile, and then tried to tip-toe out the back door. The trip to a lower low from a high above yesterday's high was a key outside reversal, which would generally portend more selling to follow tomorrow. Bonds fell, while precious metals moved sideways. Equity futures sold off until after the cash close. 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 At least the US Dollar Index didn't fall much further, resting at 89.47 as of this writing. The move bottomed overnight at 89.30, but despite the most bullish productivity numbers in 20 years, could do no more than twitch on the canvas. Gold and silver moved sideways, and the CRB rose on 1.01 to close at 257.75 on strength in natural gas, sugar and cocoa futures. Daily chart of December gold December gold put in a higher low and lower high, building energy with an inside day but closing in positive territory just below the high of the day, up .90 at 405.50. The daily cycle upphase continues to trend in overbought, and the best news for goldbugs was that both the metal and mining shares firmed up on the sharp afternoon selloff in the broader equity indices. Support moved up to 400 on this leg of the upphase. The XAU dropped .08 to close at 112.21, and the HUI lost 2.33 to close at 254.51. Daily chart of the ten year note yield Ten year notes got sold today in a resumption of the current daily trend, the yield rising 3 basis points to 4.41%. Trendline resistance went unchallenged while support held. The upphase continues, and triple top resistance just south of 4.5% is clearly the level to beat. The weakness in bonds correlated well to both the falling dollar and the 2.5B net drain from the Fed via its open market operations today. Daily NQ candles The NQ dropped 17.50 today or 1.22%, touching a high at 1453 but finishing at 1418 in a sudden "beer goggle realization" reversal. The failure to regain the rising wedge trendline seemed to dawn on all participants simultaneously, and the NQ broke sharply in a move better assessed on the 30 minute chart below. As noted in the Futures Monitor, little technical damage was done to the daily cycle upphase, but we had the Nasdaq print 2000 without confirmation of a higher high from the futures, and a close at the lows in a key outside reversal with a gravestone doji print on the daily candle. While the interminable uptrend on the chart is still intact, it was a good day for bears. 30 minute 20 day chart of the NQ Amazingly, Maria was talking down what was clearly a significant break on the 30 minute chart. The rising wedge support line was broken with authority, confirming a doozy of a bearish Macd divergence and a smaller but respectable stochastic divergence. Support at 1415 and 1400 are the next levels to watch on the way to a downside bear wedge target of 1358. Daily ES candles Most bearish of all was the lack of movement in the VXO as intraday support was obliterated, again given voice by CNBC's anchors. The ES dropped 2 to close at 1065, going out on a gravestone doji after being rejected at a new 52 week high. The clear leadership to the downside on the NQ should have ES and YM bulls nervous. However, the daily uptrend is still intact, as are the daily oscillator upphases. Whether Nasdaq 2K proves to have been the top of the bear market rally of 2003 will only be known once it's in the rearview mirror. Until 1040 gets taken out, it will just be another routine pullback in the rising daily bear wedge. 20 day 30 minute chart of the ES The 30 minute ES shows the same beating that was wrought on the NQ despite the ES' stronger close. 1064 is first obvious support, and the strong resistance at 1060-65 is now support on the way down. The bearish oscillator divergences and ongoing cycle downphases from overbought territory have me expecting further downside tomorrow, but the short cycle oscillators on the following 150-tick chart show that a bounce from current support at 1064 is the first order of business. Either those shorter cycle oscillators will begin trending in oversold territory, or, more likely, we'll get a bounce either tonight or tomorrow morning up to a lower high, followed by a fresh short cycle downphase to resume the 30 minute cycle downphase, resulting in new lows at or below 1060. In other words, I expect a small bounce to a lower high, followed by a deeper drop. 150-tick ES Daily YM candles The YM actually advanced today, gaining 20 points or .20%, the leader of the pack. It too failed beneath wedge resistance, but needs to break 9840 before bears can relax. The daily cycle upphase is so far solid, and on this timeframe, 9840 should hold. If the other indices continue to slide, however, then I don't expect the YM to stand tall for long. 20 day 30 minute chart of the YM It was a confusing day, but an exciting one to trade. Once again, the VXO kept bears secure in the knowledge that, at least in the short term, the bull frenzy was unsustainable. The dollar weakness should be taking a larger toll on equities, and so long as bonds and the dollar remain weak together, I'll expect equities to follow suit. However, it's very early for bears to be congratulating themselves, and until those daily charts begin to look bearish, they'll have to continue to expect dips to be bought. Once the 10 day stochastic is on a sell signal though, it will be an entirely different story. See you in the Futures Monitor! ******************** INDEX TRADER SUMMARY ******************** NASDAQ 2,000 wasn't purely psychological No one in their right mind would sell stocks just because the NASDAQ Composite (COMPX) 1,960 -1% traded 2,000. Would they? I sure has heck wouldn't have thought such a trade would have triggered an intra-day reversal that saw the NASDAQ Composite (COMPX) kiss the 2,000 level with a session high trade of 2,000.92, eventually see nearly a 40-point reversal take place in the matter of 3 hours and 20 minutes. But that's exactly what happened today. I feel somewhat depressed, as I didn't see it coming, and intra- day reversal that took place just after the NASDAQ Composite (COMPX) traded 2,000, now sets the stage for a decline back to the WEEKLY/MONTHLY pivots, but view WEEKLY S1s and the formidable support levels. WEEKLY/MONTHLY Pivot Matrix - $COMPX, $NYA.X, $TRAN I've never placed the NASDAQ Composite ($COMPX), NYSE Composite ($NYA.X) 6,142.72 +0.05%, or the Dow Transportation Average ($TRAN) 2,939.51 +0.1% in a pivot analysis matrix, and perhaps I wish I had. I'd love to try and track every major index/sector in the matrix in each night's wrap, but time constraints simply don't allow. However, using the basic formula from a prior Ask the Analyst column on January 19, 2003 http://www.OptionInvestor.com/ask/ask_011903_1.asp I, and most likely you the trader/investor would have appreciated some observation that the NASDAQ Comp's WEEKLY R2, where the WEEKLY R2 can often be the upper-end of a weekly range and mark a point for institutional selling to provide liquidity to market participants, was also very close to the 2,000 level, where we could have been alert to some resistance. One reason I wanted to also add the Dow Transportation Average ($TRAN) to a WEEKLY/MONTHLY matrix, is that in early November we saw the $TRAN see an intra-day test of a psychologically round 3,000 level on November 7th, and then trade back eventually see the TRAN trade back to as low as 2,837.42 by November 21 (10 trading sessions later). While the above table of WEEKLY/MONTHLY pivots is for current WEEK of trade and the month of December, I did go back and check levels for the TRAN for the week of November 3-7. That week, when the TRAN tested 3,000, its WEEKLY R2 was 3,008.54 and MONTHLY R1 was 3,011.24, so it would appear the PSYCHOLOGY was at play. However, the pullback low of 2,837.42 found technical support at a rising 50-day SMA, a MONTHLY Pivot of 2,743.81 and base of an upward trending regression channel. As such, a focus of tonight's wrap will be the MONTHLY Pivots, and 50-day SMA's as levels of pullback support. Where investment theory that Transports will often lead a market move will also have us following up on the TRAN chart shown in prior wraps, where I feel the 50-day SMA and correlative WEEKLY S1 of 2,864 become key levels of intermediate-term support for the $TRAN. In today's 01:00 PM EST intra-day update I posted the follow chart of the NASDAQ Composite (COMPX), where this chart was captured right at the 01:00 PM EST strike. I showed the chart with a conventional retracement overlaid from the early January 2002 relative high of 2,098.99 and early October 2002 low of 1,108.50. NASDAQ Composite Chart - Weekly Intervals Based on conventional retracement, I do feel a December/January "Santa Claus" rally is still at hand, with the major test being that the COMPX show support at 1,909.71. I'll quickly note that a decline from 2,000 to 1,909 would represent a rather modest 4.5% decline. Here's a quick look at the NASDAQ Composite (COMPX), but this time with WEEKLY and MONTHLY Pivot retracement overlaid, where here too we may seem some correlation this week with 1,909, in the WEEKLY retracement. NASDAQ Composite ($COMPX) Chart - Daily Intervals Let me first say that I am NOT as convinced that institutional computers would be trading pivot levels in the NASDAQ Composite, but what the above chart does do is get our minds in a similar perspective as the SPX and NDX, where these baskets of stocks (SPX/NDX) will be bought and sold by institutional computers and greatly influence price direction. In today's futures monitor, both Jim Brown and Keene Little (other analysts may have said something similar, but I saw Keene's message per one of Jim's earlier notes) commented at around 12:00 that NH/NL breadth was rather weak considering the major indices making new highs. This may have been one of the more telling comments that bullish leadership just wasn't what it should be. I quickly posted our NH/NL breadth measurements taken each day. What I've also done in the above chart is post some various dates and NH/NL breadth for the NASDAQ Composite. While I don't chart/tally the daily results until the close, at the very top we can wee how Monday (453:10) was quite strong and matched a similar 11/07/03 (452:13) NH/NL breadth reading. However, yesterday's NH/NL breadth (411:10) tapered off a bit, and I'm impressed that Jim and Keene (maybe others) noticed some suspicious lack of bullish leadership mid-way through the session. While these HIGH marks (in BLUE) give some relative high trade benchmarks to the NASDAQ Composite, note in RED the recent two relative low marks I've made for 10/24/03 and 11/21/03. While these are single day observations, where it took the "weakest" NH/NL breadth, I will want to track the very short-term 5-day average ratio of breadth in coming sessions, which I will want to compare to the recent little consolidation low from 11/18/03 to 11/21/03, where the 5-day ratio on 11/21/03 was 85.7%. This may be helpful should at some point we see the COMPX or QQQ/NDX for that matter, consolidate a low around the 1,925-1,930 zone of support. Since we're on the subject of market internals, the very broad NASDAQ Composite Bullish % ($BPCOMPQ) saw a net loss of 0.01%, or roughly 3 stock to point and figure sell signals in today's trade. This very broad indicator of market internals is still "bull confirmed" at 72.58%. This bullish % indicator reached a high of 77.41% back on September 19, 2003, when the NASDAQ Composite was trading.... Hmmmm... 1,909. Now I'm thinking... BE ALERT for SIMILAR TRADE to that found JUST AFTER 09/19/03. We might look for a continuation lower TOMORROW to the WEEKLY/MONTHLY Pivot, then a BOUNCE back on Intel's mid- quarter update to about COMPX 1,980. But here is where I think the Transports then come into play. Dow Transportation Average (TRAN) - Daily Intervals MACD on the daily interval chart just crossed above its Signal today and for that to remain bullish, I could see how the TRAN really needs to hold above its 21-day SMA and the 2,925 level in our retracement. This could be tough, but a very good test for strength near-term as Stochastics are overbought (just like the major indices) and in the past have seen the TRAN take a breather. The BIG question is how much of a breather. It is my thinking that the TRAN can not fall below its recent relative lows of 2,838, without the TRAN as a sector signaling more meaningful weakness as this would then have the TRAN making a lower high, but more importantly, a lower low. Don't think there aren't some transportation related stock in the NASDAQ. Knight Transport (NASDAQ:KNGT) $24.00 +1.95% has traded back from its September highs of $28.00 and in mid-November slipped below its 200-day SMA of $24.22, where the 200-day SMA is currently rising at $24.47, but finds the 50-day SMA providing resistance in recent weeks and currently trends lower at $25.09. While KNGT is not a component of the TRAN, ALEX, JBHT, NWAC, ROAD, USFC and YELL are. Dow Industrials (INDU) Chart - Daily Intervals A lot of bears were growling in the bear's den, I mean the futures monitor, once the INDU fell back below the 9,900 level. While a bull isn't necessarily laughing at the close, I still think the first sign of softening would be a decline back below 9,832. Still, it was General Motors (NYSE:GM) $45.54 +5.2% and Merch (NYSE:MRK) $43.63 +3.56% doing the bulk of today's work for bulls. Procter & Gamble (NYSE:PG) $96.81 -0.12% didn't come close to the psychological $100.00 level. S&P 500 Index (SPX.X) Chart - Daily Intervals I was more focused on the SPX today and noting how the futures were finding steady resistance at the 1,073.30 level that I was for NASDAQ Composite 2000.00. There was a flurry of computer buy programs today, which considering the number of buy programs on the 5-minute time interval, just didn't have much impact on the SPX itself. What the steady resistance in the futures has me thinking is there was some BIG hedging taking place, where futures were being sold against stock bought. This evening on CNBC, I heard James Cramer mentioning that some of his contacts said there were some institutional hedges being initiated. This can create some near-term resistance, but will give importance to 1,051.20 as a more significant level of support. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals The QQQ really shows some "leading weakness" as it relates to the WEEKLY Pivot levels, and perhaps the lack of "bullish leadership" as it is the only major index to not have been able to take out its early November highs. I would be looking for a bullish entry on the QQQ as outlined in the chart ahead of the Intel mid- quarter update. Other index traders SPX/OEX/INDU will want to monitor the currently weaker QQQ for support at its WEEKLY/MONTLY levels first, and if QQQ breaks below, then SPX/OEX/INDU traders begin to plan for tests of WEEKLY/MONTHLY levels. I will post the Pivot Matrix with DAILY Levels in tonight's Market Monitor and in tomorrow morning's 09:00 Update. 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 ************************************************************** ************** TRADERS CORNER ************** Adapting To Change - Part II by Mark Phillips mphillips@OptionInvestor.com Two weeks ago, I spent all the time we had together expounding on why I believe the ES has essentially become untradable, at least using the methods I was using successfully earlier this year. It's not that winning trades don't materialize. It is that they come along far too infrequently in relation to the bad trades that setup several times per week. When I put together the trading plan I use in the futures market earlier this year, it was predicated on being able to win roughly half my trades, but with the understanding that I would only risk 3-4 points to my initial stop on an ES trade, while targeting a gain of 10 points. Doing the math, we can see that even if half my trades are 4 point losers, I'll still win over the long run. The problem comes in when the ratio of winners to losers approaches 1:3 or even 1:4. If you've been trading the e-mini these past few months, you know that there are weeks when ANY method of trying to capture a piece of the intraday trend results in multiple failed trades. Lose 2 points here, 4 points there and pretty soon the losses start to add up. Again, it is a matter of the ratio of winners to losers. We all know what the problem is – - markets that are far choppier and less trend-prone than any of us have ever seen on an intraday basis. The question is what to do about it. As I pointed out 2 weeks ago, there are a few choices we can consider: 1. Try to retool the technical approach we're using to find 2. something that is capable of handling the choppy conditions 3. we're currently faced with. 2. Select a different market to trade - one that appears to be more willing to trend on an intraday basis, preferably in a smooth, rather than choppy manner. 4. Become far more selective in the trades chosen and only take 5. the ones that look too good to pass up. I've spent an inordinate amount of time over the past several months, using different combinations of oscillators, moving averages, and volume studies. I've done way too much analysis each evening trying to "outguess" the market for the next day and drawn so many lines on my charts, I can hardly see the price action. The net result is that I have come to the conclusion that simple is best. The more indicators and technical studies applied to a chart, the more liable we are to develop "analysis paralysis" and be unable to make a decision. So after all the effort expended, I've come right back to using my trusty Stochastics for trade entries. And I've spent enough time tinkering with this indicator that I've determined the optimum settings for my use. For intraday (5/10-minute) charts, the (10,5,3) setting seems to be the best blend of responsiveness and smooth behavior. Next up is the issue of perhaps using a different trading vehicle. There are a few other choices in the futures arena. In the equity world, in addition to the ES, we have the Dow e-mini (YM) and the NASDAQ e-mini (NQ). And for those of you that want to play in a different world altogether, there are the bond futures, ZN for the 10-year and ZB for the 30-year. There are times when the bond futures have trended very nicely in recent months, but the past several weeks are not among them. Not only that, but I've found that for whatever reason, they trade very poorly with respect to buy and sell signals on the Stochastics. In terms of the YM and NQ, I've made some interesting, albeit qualitative not quantitative, observations. The YM appears to trade in sync with the ES, subject to the same spiky action that has made the ES so difficult to trade. There are two problems that come out of this behavior - stops are harder to hold and the Stochastics don't give the nice smooth characteristics we'd all like to see. That said, the YM is a better behaved market right now than the ES. But I think the NQ trumps both the ES and the YM on a couple of counts. First is the fact that the NQ seems to be a "smoother" market, which is probably due to less big money players jerking it around at the expense of us little guys. Let's face it -- the big money still prefers the S&P. The other advantage of the NQ is that initial margin requirements are less and stops can be kept tighter in terms of actual dollars at risk. That 3-4 point initial stop in the ES equates to an initial risk of $150-200 per contract. I've found that a 5-6 point initial stop in the NQ will normally serve quite well. That equates to an initial risk of $100-120, as one point of movement in the NQ is equal to $20. So let's recap. I've decided that no matter what a given market is doing, it is best to have a simple set of tools to work with, preferably ones that we understand quite well. That keeps me focused on the Stochastics, which I'm using on the 5/10 minute charts. One important transition I've been able to make is to move over from the ES to the NQ for my intraday trading. While I've been able to reduce my risk on a per-contract basis, there's a downside that comes with trading this market. One point equates to only $20, as opposed to the ES where one point equates to $50. That means that point-for-point, the ES gives me 2.5 times the bang for the buck as the NQ. It is that greater leverage that initially drew me to the ES earlier this year. The problem is that leverage cuts both ways and when there are more losing than winning trades due to an anomaly in the chosen market, that additional leverage works against us. Will I ever return to the ES and when? Absolutely and I think that event will be closely associated with the VIX/VXO getting out of this multi-year low territory. Once these volatility measures get back up into the 22-25 (preferably higher) range, then I think it is safe to say that we'll be seeing intraday trends in the ES that span more than 5-7 points total. In the meantime, I'll stick with the NQ, for its inherent advantages right now. Now that we've gone through all of the verbiage of why I've made this switch, I want to take a look at a couple charts from today to hopefully demonstrate what is a high-odds trade that I want to take and what is a mediocre one that I'm better off avoiding. 5/10- Minute Chart Montage of the NQ - #1 The first potential trade setup we had this morning is denoted by the "S1" notation on both the 5 and 10 minute charts. If we are just using the 5 minute chart, we might be tempted to take the trade, but by the time we get in, the NQ is already bottoming and turning around. Shades of the ES, wouldn't you agree? The clue that this isn't a high-odds entry is the fact that the 10-minute Stochastics hasn't reached overbought before tipping over. This indicates a lack of energy built up for the expected decline. Next up is the potential long noted as L1. This one has even less going for it, as neither the 5 or 10-minute Stochastics entered oversold territory, telling us once again that there just isn't enough energy in the market to make for the powerful type of move that we prefer to target. The best course of action is simply to leave it alone and wait for a better entry point. 5/10- Minute Chart Montage of the NQ - #2 Now here we're starting to find something interesting. Look at the circles noted as S2 and you can see both timeframes had registered overbought readings and are in the process of reversing down. The circle with the S2a notation shows where the 5-minute chart was first giving a sell signal, but it was too early to be acted upon, as the 10-minute Stochastics are still solidly wedged in overbought territory, not yet giving us any sign of weakness. However, once the 10-minute Stochastics drop out of overbought, then the next bearish cross on the 5-minute Stochastics give us our high odds bearish entry point. There's enough energy stored up in this market to make it worthwhile. Note that the fact that the S2 crossover on the 5-minute chart is not dropping out of overbought is not a problem, as the 10-minute chart shows us that stored energy we desire is present. Additionally, with the 5- minute Stochastics unable to get back into overbought like in the S2a instance, it gives a clear indication of a weakening market. 5/10- Minute Chart Montage of the NQ - #3 Finally, we can take a look just a bit later in the day and see where there is a second opportunity to get aboard before the downtrend really gets moving. The 10-minute chart shows the clear Sell bias going into the final two hours. Our initial entry signal is shown on the 5-minute chart just before 10am (all times are Pacific Time), but we got another chance shortly after 11am as the 5-minute Stochastics once again roll over from below overbought (showing continued weakness) as the downmove really gets underway into the close. Peak to trough, the NQ gave up nearly 30 points in almost a straight line. That's the kind of a trend move where it is possible to take a nice chunk of profit out of the middle without going blind chasing 2-3 point scalp moves. Take a look at the same timeframe on the ES and the YM today and decide for yourself which market appears the most tradable right now. We could look at oodles of examples, comparing the ES to the YM to the NQ, but space and time limitations are against me in that regard. Besides, if you're like me, you'll gain a better feel for the differences if you bring up the charts yourself and see the reality of the inherent pros and cons of the different e- mini contracts. Hopefully my descriptions above help to explain why I've made the move to the NQ and I hope I've shown in a clear enough manner what constitutes a solid entry that is likely to have some real potential and what constitutes a mediocre trade that is likely to continue chopping our accounts to pieces. Questions are always welcome! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* 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. 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The Option Investor Newsletter Wednesday 12-03-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: KSS, NUE Dropped Calls: BBY, SNDK Dropped Puts: None Play of the Day: Put - NUE Spreads, Combinations & Premium-Selling Plays: Stocks End Mixed After Reaching 2003 Highs Watch List: A Stocking of Four-Lettered Stocks Updated on the site tonight: Market Posture: Traders sell-off stocks into the close ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** Kohl's (KSS), put play. old stop: 50.25 new stop: 48.60 --- Nucor (NUE), put play. Play has been triggered. old stop: 56.00 new stop: 54.51 ************* DROPPED CALLS ************* Best Buy Co - BBY - close: 57.42 chg: -1.10 stop: 57.95 Retail leader Wal-Mart (WMT) has been falling fast and on big volume the last few days and investors are taking the hint. Plenty of retail stocks have also been hit by profit taking, not the least of which is BBY. Yesterday we said that odds were good we'd be stopped out today at $57.95 and that's exactly what happened. The question now is will BBY hold at support near $55 and its simple 50-dma? The answer might be no. Looking at the daily chart BBY has a habit of piercing the 50-dma for a day or two before rebounding. Picked on November 25 at $60.36 Change since picked: - 2.94 Earnings Date 12/17/03 (unconfirmed) Average Daily Volume: 3.6 million Chart = --- Sandisk Corp. - SNDK - close: 71.90 change: -6.31 stop: 75.50 This is a very good example of why it's crucial to play with stop losses. SNDK had some news recently about opening a new plant but there is no discernible catalyst for today's painful sell- off. The stock actually opened higher and then slowly began to trade down. Then the sell-off became a full-fledged route. Shares closed near their low for the day and this is bad news for tomorrow. The stock does have some support at $70 but today's high-volume drop is compounded with the new P&F sell signal. We'll be curious to know if there isn't some news after the bell or tomorrow to explain the sudden drop. Picked on November 30th at $80.82 Change since picked: -8.92 Earnings Date 1/14/04 (unconfirmed) Average Daily Volume = 3.63 mln Chart = ************ DROPPED 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 OF THE DAY - PUT ********************* Nucor Corporation - NUE - close: 52.66 change: -4.01 stop: 56.00 -Company Description- Nucor Corporation manufactures and sells steel products, including hot-rolled steel, cold-rolled steel, cold-finished steel, steel joists and joist girders, steel deck and steel fasteners. The company produces its rolled sheet steel to satisfy customer orders, while other products are manufactured in standard sizes and inventories are maintained. While the rolled steel products are sold primarily to steel service centers, fabricators and manufacturers throughout the United States, steel fasteners are sold to distributors and manufacturers. Steel joists , joist girders and steel deck are primarily sold to general contractors and fabricators in the United States. - Most Recent Update (Tuesday, Dec. 02, 2003) - Shares of the steel stocks have been trading strongly in recent months, helped in part by the tariffs imposed on foreign steel manufacturers. It appears that tailwind is about to be removed though as the Bush administration is now looking at lifting those tariffs this week, 16 months ahead of schedule. While there was a news report out yesterday indicating that the premature end to the protective action is unlikely to hurt U.S. steelmakers, investors apparently had a change of heart today, helped along by some notable downgrades in the sector this morning. Before the open, McDonald Investments cut their rating on NUE (the largest domestic steel producer) from Buy to Hold this morning, citing concerns about the company being able to pass along higher scrap metal costs to customers. Whether the catalyst was the downgrade or concerns over the end of the tariffs on foreign producers, the stock got hit very hard on Tuesday, losing more than 7% on volume that more than tripled the ADV. NUE has been trading in an increasingly volatile manner for the past several weeks, building an expanding wedge pattern that hints of future price weakness. Today's slide dropped the stock to the lower bound of that pattern, also right at horizontal support near $52.60. Should that support fail, NUE should have downside potential to the $47-48 area, which is right at the 200-dma ($47.06), as well as the top of the 10/03 gap. We'll use a $52.50 trigger for the play and aggressive traders can enter on the initial break below that level. There's the potential for a near- term bounce from the 50-dma ($51.49), which is right at historical resistance-turned support. So the more conservative entry strategy would be to look for a rebound off that support level to roll over from new resistance in the $53-54 area. Due to the recent volatility, we're starting coverage with a wide stop at $56, just over today's opening high. Our recommended profit target will be for a drop into the $47-48 area. - Play of the Day Comments - Right on cue...shares of NUE traded down through our trigger at $52.50, bounced from $52 and proceeded to roll over again. The close under $52.00 is encouraging. Optimists will point out that NUE has not yet broken its simple 50-dma but if the markets continue to slip NUE is likely to lead the way again. Volume on today's decline was almost 3 times the normal. - Suggested Options - Aggressive short-term traders can use the December 50 Put, while those with a more conservative approach will want to use the January 50 put. Our preferred option is the January 50 strike, which has ample time until expiration. BUY PUT DEC-55 NUE-XK OI=137 at $3.70 SL=1.85 BUY PUT DEC-50 NUE-XJ OI=396 at $0.90 SL=0.45 BUY PUT JAN-50*NUE-MJ OI=531 at $1.80 SL=0.90 Annotated Chart: Picked on December 2nd at $52.66 Change since picked: -0.81 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 655 K 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Stocks End Mixed After Reaching 2003 Highs By Ray Cummins The major U.S. equity averages surged to their highest levels in 18 months Wednesday, but the rally eventually faded as traders booked profits in the wake of the recent bullish activity. The Dow Jones Industrials Average ended 19 points higher at 9,873 on strength in General Motors (NYSE:GM), which hit a 52-week high a day after the firm reported a sharp increase in U.S. auto sales during November. The NASDAQ Composite index finished 19 points lower at 1,960 after eclipsing the 2000 mark for the first time since mid-January 2002. The S&P 500 index fell 1 point to 1,064 with pharmaceutical and brokerage shares seeing limited buying pressure while gold and oil services stocks fell. On the NYSE, decliners barely outpaced advancers on volume of 1.4 billion shares. The technology exchange was more bearish with losers pummeling winners by almost 2 to 1 as 2.2 billion shares changed hands. The bond market backpedaled from earlier gains to finish lower, with the yield on the 10-year Treasury closing at 4.41%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 12/02/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AMAT DEC 22 22.05 24.06 0.45 4.81% 2.04% EYE DEC 20 19.65 24.10 0.35 5.21% 1.78% ICOS DEC 35 34.55 45.40 0.45 3.81% 1.30% NVLS DEC 40 39.20 43.44 0.80 4.65% 2.04% PHTN DEC 35 34.25 40.96 0.75 5.41% 2.19% PMCS DEC 17 17.10 20.38 0.40 6.88% 2.34% ANPI DEC 40 39.05 50.91 0.95 7.86% 2.43% APPX DEC 25 24.55 38.58 0.45 6.28% 1.83% EASI DEC 42 42.68 56.38 0.70 4.74% 1.64% GPRO DEC 25 24.65 34.16 0.35 4.88% 1.42% INSP DEC 22 21.85 25.65 0.65 8.33% 2.97% MGAM DEC 35 34.60 39.53 0.40 4.33% 1.16% NEM DEC 42 41.60 50.00 0.90 5.61% 2.16% NVLS DEC 37 36.95 43.44 0.55 4.49% 1.49% PHS DEC 50 49.40 67.00 0.60 3.91% 1.21% UTSI DEC 30 29.65 38.04 0.35 3.83% 1.18% APPX DEC 30 29.50 38.58 0.50 7.22% 1.69% BRCM DEC 32 32.10 36.51 0.40 4.65% 1.25% EASI DEC 46 46.08 56.38 0.55 4.75% 1.19% GPRO DEC 30 29.60 34.16 0.40 5.21% 1.35% PHTN DEC 35 34.60 40.96 0.40 4.79% 1.16% There are few issues on the "watch" list, however traders are always encouraged to close any suspect positions in the interest of capital preservation. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield IACI DEC 37 35.90 32.06 0.40 3.22% 1.11% WEBX DEC 25 25.30 19.60 0.30 5.79% 1.19% MERQ DEC 50 50.40 47.14 0.40 3.21% 0.79% SEPR DEC 27 27.75 25.82 0.25 5.36% 0.90% TTWO DEC 40 40.40 31.67 0.40 5.84% 0.99% CVTX DEC 25 25.40 17.71 0.40 13.63% 1.57% TTWO DEC 37 37.95 31.67 0.45 6.65% 1.19% Mercury Interactive (NASDAQ:MERQ) remains on the "watch" list. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status KLAC 60.08 58.83 DEC 50 55 0.75 54.25 0.75 Open MIK 50.55 47.51 DEC 43 45 0.30 44.70 0.30 Open SMH 44.65 43.75 DEC 38 40 0.25 39.75 0.25 Open BRCM 34.62 36.51 DEC 28 30 0.25 29.75 0.25 Open BRL 81.14 84.73 DEC 70 75 0.50 74.50 0.50 Open TOL 38.27 42.25 DEC 30 35 0.55 34.45 0.55 Open TARO 68.59 72.11 DEC 60 65 0.45 64.55 0.45 Open TECD 36.13 37.29 DEC 30 35 0.60 34.40 0.60 Open Michael's (NYSE:MIK) remains an issue to "watch" as it recovers from a recent test of the 50-dma. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status NE 33.79 34.64 DEC 37 35 0.40 35.40 0.40 Open HDI 45.17 46.71 DEC 50 47 0.25 47.75 0.25 Open SYMC 30.17 32.98 DEC 35 32 0.40 32.90 (0.08) Closed AMGN 58.14 58.89 DEC 65 60 0.65 60.65 0.65 Open SNPS 29.57 31.00 DEC 35 32 0.25 32.75 0.25 Open Symantec (NASDAQ:SYMC) has been closed to limit potential losses. All of the remaining bearish plays in the portfolio are on the "watch" list due to the recent rally. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** BRCM - Broadcom $36.02 *** Networking Sector Favorite! *** Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated silicon solutions that enable broadband communications and the networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for all broadband communications markets. Their diverse product portfolio includes solutions for digital cable and satellite set-top boxes; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network processors; and SystemI/O(TM) server solutions. BRCM - Broadcom $36.02 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 32.5 RCQ XZ 5167 0.25 32.25 4.3% 0.8% * SELL PUT DEC 35 RCQ XG 3865 0.80 34.20 10.7% 2.3% ************** EASI - Engineered Support Systems $56.60 *** All-Time High! *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont) and Engineered Specialty Plastics. EASI - Engineered Support Systems $56.60 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 50 UFE XJ 320 0.55 49.45 6.3% 1.1% * SELL PUT DEC 55 UFE XK 326 2.00 53.00 16.5% 3.8% ************** FCS - Fairchild Semiconductor $25.51 *** Entry Point? *** Fairchild Semiconductor (NYSE:FCS) is a leading global supplier of high performance products for multiple end markets. With a focus on developing leading edge power and interface solutions to enable the electronics of today and tomorrow, Fairchild's components are used in computing, communications, consumer, industrial and automotive applications. Fairchild's employees design, manufacture and market power, analog & mixed signal, interface, logic, and optoelectronics products from its company headquarters in South Portland, Maine, USA and numerous locations around the world. FCS - Fairchild Semiconductor $25.51 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 22.5 FCS XX 3635 0.25 22.25 6.4% 1.1% * SELL PUT DEC 25 FCS XE 252 0.75 24.25 13.7% 3.1% ************** KMRT - Kmart Corporation $32.74 *** Strong Sector! *** Kmart Corporation (NASDAQ:KMRT) is a discount retailer and a general merchandise retailer. The firm operates in the general merchandise retailing industry through 1,829 Kmart discount stores with locations in all 50 states, Puerto Rico, the United States Virgin Islands and Guam, as of January 29, 2003, and through its e-commerce shopping site, www.kmart.com. In May 2003, the company emerged from Chapter 11 protection. KMRT - Kmart Corporation $32.74 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 30 KTQ XF 6327 0.50 29.50 8.8% 1.7% * SELL PUT JAN 30 KTQ MF 144 1.15 28.85 6.8% 4.0% ************** MICC - Millicom Cellular $75.40 *** Telecom Giant! *** Millicom International Cellular S.A. (NASDAQ:MICC) is a global telecommunications investor with cellular operations in Asia, Latin America and Africa. The company has a number of cellular operations and licenses in countries around the world and the group's cellular operations have a combined population under license of over 500 million people. In addition, MIC operates a GSM clearing house, provides high-speed wireless data services in various countries and has a licenses to develop high speed wireless data services in other areas. MIC also has a major interest in Tele2 AB, an alternative pan-European telecom firm offering fixed and mobile telephony, data network and Internet services. MICC - Millicom Cellular $75.40 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 65 CQD XM 255 0.65 64.35 6.1% 1.0% * SELL PUT DEC 70 CQD XN 176 1.40 68.60 10.2% 2.0% ************** ONXX - Onyx Pharmaceuticals $28.31 *** Pure Premium-Selling! *** Onyx Pharmaceuticals (NASDAQ:ONXX) is engaged in the discovery and development of novel cancer therapies utilizing two primary technology platforms, small molecules that inhibit the proteins involved in excess growth signaling, and therapeutic viruses that selectively replicate in cells with cancer-causing genetic mutations. The firm is developing a new small molecule compound, BAY 43-9006, in collaboration with Bayer Pharmaceuticals. Using its proprietary virus technology, the company is also developing ONYX-411, a second-generation product that targets cancers with abnormal function of the retinoblastoma tumor-suppressor gene, and is developing Armed Therapeutic Virus products. ONXX - Onyx Pharmaceuticals $28.31 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 25 OIQ XE 1282 0.35 24.65 8.0% 1.4% * SELL PUT JAN 22.5 OIQ MX 0 0.45 22.05 5.0% 2.0% SELL PUT JAN 25 OIQ ME 305 0.90 24.10 6.8% 3.7% ************** RMBS - Rambus $29.70 *** New Trading Range? *** Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip" interface solutions that enhance the performance and effectiveness of its client's chip and system products. These solutions include multiple chip-to-chip interface products, which can be grouped into two categories: memory interfaces and logic interfaces. Rambus' memory interface products provide an interface between memory chips and logic chips. In addition, the firm's logic interface products provide an interface between two logic chips. Rambus has two major memory interface products: Rambus dynamic random access memory and Yellowstone. Additionally, it offers a logic interface product for high-speed serial chip-to-chip communications between logic chips in a range of computing, networking and communications applications. RMBS - Rambus $29.70 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 25 BNQ XE 9873 0.40 24.60 10.0% 1.6% * SELL PUT JAN 20 BNQ MD 7909 0.45 19.55 4.8% 2.3% SELL PUT JAN 22.5 BNQ MX 3396 0.85 21.65 8.5% 3.9% ************** TELK - Telik $21.85 *** New Drug Speculation! *** Telik (NASDAQ:TELK) is a biopharmaceutical company working to discover, develop and commercialize small-molecule drugs to treat serious diseases, including cancer and diabetes. Telik's most advanced product development programs include TLK286, which it expects to enter a Phase III registration trial beginning in the 1st-quarter 2003; TLK199, which is in a Phase I-IIa trial, and TLK19781, which is in pre-clinical safety studies. TLK286 is a small-molecule tumor-activated cancer drug that the company is evaluating initially to treat cancers that are resistant to standard chemotherapy drugs. TLK199 is a small-molecule bone marrow stimulant being developed for the treatment of blood disorders associated with low white blood cell levels. TLK19781 is a proprietary, orally active small-molecule insulin receptor activator for the potential treatment of Type II diabetes and other conditions related to insulin resistance. TELK - Telik $21.85 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 20 ZUL XD 66 0.25 19.75 6.7% 1.3% * SELL PUT JAN 17.5 ZUL MW 10 0.30 17.20 4.3% 1.7% SELL PUT JAN 20 ZUL MD 30 0.95 19.05 8.2% 5.0% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** HAR - Harman International $143.81 *** 2-for-1 Split Coming! *** Harman International Industries (NYSE:HAR) designs, manufactures and markets high-fidelity audio products and electronic systems for the consumer and professional markets. The Consumer Systems Group has operating segments that design, manufacture and market audio and electronic systems for vehicle, home audio, video and computer applications. The Professional Group designs, makes and markets loudspeakers and electronics used by audio professionals in concert halls, stadiums, airports and other buildings and also recording, broadcast, cinema and music reproduction applications. The company's Consumer Systems Group designs, manufactures and markets loudspeakers and audio, video and electronic products systems for home, vehicle and computer applications. HAR - Harman International $143.81 PLAY (conservative - bullish/credit spread): BUY PUT DEC-125.00 HAR-XE OI=168 ASK=$0.70 SELL PUT DEC-130.00 HAR-XF OI=57 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$129.60 ************** SCHN - Schnitzer Steel $49.98 *** Steel Sector Leader! *** Schnitzer Steel Industries (NASDAQ:SCHN) collects, processes and recycles metals by operating a metals recycling business in the United States. The company also owns a chain of self-service auto parts stores in the United States, operating under the name of Pick-N-Pull, and is also a maker of finished steel products at its technologically advanced steel mini-mill. As a result of its vertically integrated business, Schnitzer is able to transform obsolete or wrecked auto bodies and other unprocessed metals into finished steel products. In addition, it is a partner in joint ventures that are either in the metals recycling business or are suppliers of unprocessed metals. The company owns interests in five joint ventures that are engaged in buying, processing and selling primarily ferrous metal. Another joint venture is an industrial plant demolition contractor that dismantles industrial plants, performs environmental remediation and sells recovered metals and machinery. SCHN - Schnitzer Steel $49.98 PLAY (less conservative - bullish/credit spread): BUY PUT DEC-40.00 SQQ-XH OI=364 ASK=$0.25 SELL PUT DEC-45.00 SQQ-XI OI=588 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$44.45 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** CERN - Cerner $42.20 *** Premium-Selling Only! *** Cerner (NASDAQ:CERN) designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. The firm's solutions give end users secure access to clinical, administrative and other financial data in real-time. Consumers retrieve appropriate care information and educational resources via the Internet. The firm implements these solutions as stand-alone, combined or enterprise wide systems. Cerner solutions can be managed by the company's clients or via an application outsourcing/hosting model. Cerner provides hosted solutions from its data center in Lee's Summit, Missouri. CERN - Cerner $42.20 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 50 CQN LJ 428 0.30 50.30 6.1% 0.6% * SELL CALL DEC 45 CQN LI 1358 1.50 46.50 18.3% 3.2% ************** CVTX - CV Therapeutics $17.56 *** Ranexa Review Speculation! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on the discovery, development and commercialization of new small molecule drugs for the treatment of cardiovascular diseases. The company's New Drug Application (NDA) for Ranexa (ranolazine) for the treatment of chronic angina has been filed at the U.S. FDA. Tecadenoson (CVT-510), an A1-adenosine receptor agonist, is being developed for the potential reduction of rapid heart rate during atrial arrhythmias. CVT-3146, an A2A-adenosine receptor agonist, is being developed for the potential use as a pharmacologic agent in cardiac perfusion imaging studies. Adentri, an A1-adenosine receptor antagonist, is being developed by the company's partner, Biogen, for the potential treatment of acute and chronic congestive heart failure. CVTX also has several research and preclinical development programs designed to bring additional drug candidates into human clinical testing. CVTX - CV Therapeutics $17.56 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 25 UXC LE 10708 0.45 25.45 21.6% 1.8% * SELL CALL DEC 22.5 UXC LX 8406 0.80 23.30 35.3% 3.4% ************** HYSL - Hyperion Solutions $32.53 *** Trading Range? *** Hyperion Solutions (NASDAQ:HSYL) is a provider of unique business performance management software that enables companies to translate strategies into plans, monitor execution and provide insight to manage and improve financial and operational performance. The company's applications, along with its development and deployment platform, enable business performance management across a variety of functional and operational areas beyond the finance areas of the business. The company also offers support and services from offices in 20 countries and works with over 330 partners to provide solutions to more than 6,000 customer organizations worldwide. HYSL - Hyperion Solutions $32.53 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 35 WQE LG 132 0.40 35.40 6.9% 1.1% * SELL CALL JAN 35 WQE AG 0 0.90 35.90 5.3% 2.5% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** AMZN - Amazon.com $51.51 *** Consolidation Underway *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN - Amazon.com $51.51 PLAY (less conservative - bearish/credit spread): BUY CALL DEC-60.00 ZQN-LL OI=5775 ASK=$0.10 SELL CALL DEC-55.00 ZQN-LK OI=11807 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$55.55 ************** ERTS - Electronic Arts $42.27 *** The Sell-Off Continues! *** Electronic Arts (NASDAQ:ERTS), headquartered in Redwood City, California, is the world's leading interactive entertainment software company. The firm develops, publishes and distributes software worldwide for the Internet, personal computers and video game systems. Electronic Arts markets its products under four brand names: EA SPORTS, EA GAMES, EA SPORTS BIG and EA.COM. ERTS - Electronic Arts $42.27 PLAY (less conservative - bearish/credit spread): BUY CALL DEC-47.50 EZQ-LW OI=4111 ASK=$0.25 SELL CALL DEC-45.00 EZQ-LI OI=9999 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$45.25 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** A Stocking of Four-Lettered Stocks Electronic Arts - ERTS - close: 42.27 change: -1.63 WHAT TO WATCH: ERTS just hasn't been the same after breaking under its 50-dma prior to its 2-for-1 split. Now shares have built new overhead resistance at $45.00 and seem intent on testing support between 37.50 and 40.00 with its 200-dma at 38.79. Today's drop was on very big volume of 16 million shares versus the 2.4 million average. That usually spells trouble. Another failed rally at $44 or a move through today's low could be entry points for bearish positions. Chart= --- KLA-Tencor - KLAC - close: 58.26 change: -0.57 WHAT TO WATCH: KLAC escaped the heaviest selling on Wednesday but from the looks of it technology stocks may have to fight off the bears again tomorrow. Shares of KLAC hit $60 and began to roll over. No coincidence the NASDAQ hit 2000 and rolled over. Volume was pretty strong today for KLAC and that smells like distribution (a.k.a. people getting out). It would not surprise us to see KLAC retest the $55.00 level. Chart= --- Intuit Inc - INTU - close: 50.13 change: +0.38 WHAT TO WATCH: The GSO software sector was probably the strongest group for the majority of the day but the afternoon sell off hit tech stocks pretty hart. INTU is a software stock that managed to close in the green. The bad news is shares performed yet another failed rally at resistance of $51.00. A move under $49.00 could set up for a retest of its 200-dma near $45.00. Chart= --- Dollar Tree Stores - DLTR - close: 30.85 change: -0.65 WHAT TO WATCH: One niche that has been under performing the markets recently has been the dollar value stores. Stocks like DLTR, FDO, DG, and NDN all look terrible. Traders might want to consider using a trigger under DLTR's 200-dma or round-number support at $30.00. Should these support levels break the next test is likely to be $27.50 and then $25.00. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- BBBY $42.35 -0.16 - There isn't a lot of room to play here but BBBY is forming a very big wedge with overhead resistance near 43.50-44.00 and the bottom of the rising wedge at its 200-dma. After today's move it may be time for a test of the 200-dma again. TECD $36.81 -0.48 - Keep an eye on TECD. A pull back and bounce from the $35.00 mark might be a decent bullish entry point. ************** MARKET POSTURE ************** Traders sell-off stocks into the close To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/mp_120303.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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