The Option Investor Newsletter Sunday 12-07-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Foundation Cracking? **YEAR END RENEWAL ADD** Futures Market: Dollar Tanks, Equities Ooze Index Trader Wrap: Doji Week Editor's Plays: Change of Target Market Sentiment: Considerable Period Ask the Analyst: Generating new trading ideas Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 12-05 WE 11-28 WE 11-23 WE 11-14 DOW 9862.68 + 80.22 9782.46 +153.93 9628.53 -140.15 - 41.11 Nasdaq 1937.82 - 22.44 1960.26 + 66.38 1893.88 - 36.38 - 40.48 S&P-100 523.51 + 2.77 520.74 + 8.97 511.77 - 7.24 - 1.69 S&P-500 1061.50 + 3.30 1058.20 + 22.92 1035.28 - 15.07 - 2.86 W5000 10352.60 + 0.38 10352.2 +253.34 10098.8 -145.78 - 45.10 RUT 539.01 - 7.50 546.51 + 20.58 525.93 - 7.03 - 10.00 TRAN 2910.58 - 10.65 2921.23 + 75.91 2845.32 - 82.32 - 51.65 VIX 17.09 + 0.79 16.30 - 2.68 18.98 + 2.04 + 0.01 VXO 17.34 + 0.63 16.71 - 3.18 19.89 + 2.26 + 0.07 VXN 27.05 + 1.44 25.61 - 3.47 29.08 + 2.92 + 0.96 TRIN 1.86 1.04 1.04 1.35 Put/Call 0.84 0.69 0.80 0.69 ****************************************************************** Foundation Cracking? by Jim Brown Signs of economic weakness reappear and sellers edged out buyers by slightly more than 2:1. However, while the markets took profits they still held their ground. Bonds soared as the fear of the Fed eased and yields hit new lows for the month. Is there a change in the wind? Dow Chart Dow Chart - Short Term Nasdaq Chart The big number out on Friday was of course the Jobs report and traders were expecting a big surprise. Unfortunately the surprise they got was not the one they expected. The official consensus was for an increase of +140,000 jobs and the whisper number was as high as +250,000. On CNBC Thursday night Kudlow was positively giddy about the potential for a 250K number and pressing all his guests to agree with him. This was only the culmination of a week of bullish comments by analysts and not an isolated incident. This set traders up for a disappointment as I discussed on Thursday night. That is exactly what they got. The actual number was for a gain of only +57,000 jobs. While it was still a gain and the fourth month of gains the market did not like it. How quickly traders can become spoiled when several consecutive reports show improvement. Even the upward revision from 126,000 to 137,000 for October failed to impress when the number for this month was only about 1/3 of the official estimates. It also did not help that September was revised down from 125,000 to only 99,000, a drop of -26,000 jobs. If you don't like this months numbers stick around they may change several times over the next three months. Despite the minor gain in jobs the actual number of unemployed dropped by -105,000 to 8.674 million. This dropped the rate of unemployment to 5.9% and an eight month low. How can this be? First the unemployment rate is actually derived from a different survey that is considered less accurate than the payroll survey. Encouraging? Also, it is a known fact that many workers are giving up on the job hunt when the benefits expire. Two income families decide to make it on one and the unemployed partner stays home to live on less or retire early. The unemployment rate did not go down because many people suddenly found jobs. The analysts were more disappointed about the +57K number because they thought with the ISM, GDP, Jobless Claims and the other stellar economic reports of late that they had a real chance to actually have a blowout. It takes +150,000 jobs per month just to breakeven with additions to the workforce. Workers coming out of school, immigrants and decisions by single income families to become dual income adds 150,000 people to the available workforce each month. We have been running at a negative job rate so long, several years in fact, that analysts felt all the stars had lined up in our favor to break the trend. When it weakened instead they immediately started grabbing for the silver lining. Temporary employment was up, the work week was longer, the productivity was exploding and so on. Yes, but most sectors showed decreases in jobs for the month with the exception of construction payrolls. Even financial services lost jobs as the mortgage refi industry implodes. Manufacturing jobs fell -17,000 for the month and wage growth only rose by one cent per hour. It has been decelerating for a year and could go negative soon. Not all the news was bad. This was the fourth consecutive month that jobs were created. While the gain in jobs was modest it is exactly what had been expected for the last year, slow jobs growth until the recovery had some history behind it. The only history we have is a blowout 3Q that was entirely due to the tax rebates and tax cuts. That put cash in consumers hands and they spent it. Once that cash was spent Oct and Nov have been retail wastelands. That does not mean the recovery stopped. It just means than the injection of speed we had in the 3Q has worn off and we are right back in the slow growth we have seen all year. This slow growth mode as evidenced from the jobs has one really strong benefit. The Fed is now likely on hold until the 1Q of 2005. Yes, 2005. The Fed funds futures were looking for a 50% chance of a 25 point rate hike in April before today. After today that chance has dropped to only 25%. With retail in the tank and airlines seeing a drop in bookings the Fed is not going to want to trip up the struggling recovery with a preemptive rate hike. The strong drop in jobs from the prior month actually gave the Fed a free pass for the 1Q. Since the economy is normally slow over the 2Q they should not be pressed to hike rates then either. 2004 is also an election year and hell would freeze over before they hike in the 3Q just before the election. That political gift to the democrats simply will not happen in a republican administration. That makes December the first free meeting and the Fed rarely hikes rates in December to spoil holiday sentiment. What this does mean is we can guarantee a rate hike, probably several, in the 1Q of 2005. I have said before that should Bush be reelected he will probably be riding the crest of the current liquidity wave and the results of the $165 billion in tax cuts/rebates in 1Q 2004. That wave will give the recovery legs that will race into the election but in 2005 he will cut those legs out from under the economy with large tax hike. He has to raise taxes once the economy is firing on all cylinders. Otherwise the country will be broke by 2008. Literally. Looks like I got ahead of myself but the main point is the Fed is likely on hold through 2004 with the only risk a minor hike in April. Want proof? Look at the drop in yields on the Ten Year note on Friday. It was the biggest one-day drop since Jan-2002. Ten Year Note Yield Chart Other good news included a jump in the Factory Orders by +2.2% in October, which was slightly better than consensus. The markets actually dismissed this news as well because they had expected more with the whisper number in the +3% range. Blowout numbers like the PMI last week have spoiled them to thinking that all future numbers will do the same and while the numbers today were good they were just not good enough for analysts. This was also an October number and yesterday's news. The markets were already looking weak on the Intel and Jet Blue news and the Jobs Report sealed the deal. They gapped down at the open but surprisingly enough not significantly. The Dow hit -40 and held at 9880 support. The Nasdaq took it harder due to Intel and gapped down -25 but also held. They held those levels despite negative internals until after 1:PM but the fear of darkness finally took hold with a major sell program supplying the push over the cliff. It was a short drop and the Dow came to rest on strong support at 9850, Nasdaq 1940. They spent the last hour fighting off all sellers but were only able to hold their ground and not gain any. The major problem was the Intel news. The chip sector had been at 52-week highs on Wednesday with the SOX at 535 but the Intel news coupled with the Nasdaq touch of 2000 combined to induce some serious profit taking. The SOX closed at 499 for a -6.5% drop in three days. This is very strong support and this support helped hold the Nasdaq at 1940. SOX Chart Also helping push the indexes lower were the retailers. Sears for instance has dropped nearly -$7 in three days (-12%) and there appears to be no letup in sight. FD joined the party with a -5.4% drop. The problem here is the weak retail sales and lack of any positive guidance for December. With more than 50% of chains missing estimates for November and many expressing concerns about December there are no bargain shoppers picking up these blue light stock specials. The Jet Blue warning rippled across the airline sector with all the minor carriers looking for a flat spot to land. JBLU lost -$5.52 (-17.59%) and that was on top of a -$6 slide in the prior three days. LUV was also cut on Thursday and they dropped another -6% to $15.50 from their $18.50 high earlier in the week. The majors dropped less but the entire sector was under pressure. The XAL broke support at 60 and appears headed lower. This should pressure the Transportation Index and that will continue to drag on the Dow. Airline Index Chart The Russell-2000 remained under pressure with another drop of -5.14 and a close at 539. This was the fourth consecutive day of declines but there is still room to fall. Real support is in the 520-526 range and I would not be surprised to see this tested next week. Funds are selling but not yet in volume. Russell 2000 Chart The fund scandal continues to weigh on the markets but the flight out of the Putman funds may have slowed. Putman said they had $32 billion in net outflows in November. The Strong funds had -$2 billion in outflows in November as the founder put the company up for sale. Despite these problems AMG Data said that over the last three months there was a net inflow to all equity funds of +$57 billion. The three-month period nearly equaled the record high in the 1Q of 2000 and the market top. Makes you wonder what is in store for us in the near future if the bullish money flow is back to bubble levels. About the only thing investors did not have to worry about on Friday was terrorists. The news services were nearly silent about weekend warnings and the talking heads were more concerned about the Jobs report than the terror reports. There were more bombings, one very serious, but the markets appeared to ignore them. Next week should be critical for the markets. We start a new round of economic reports with the Kansas City Fed Survey on Monday, FOMC Meeting and Richmond Fed Survey on Tuesday and PPI and Sentiment on Friday. There is also a sprinkling of other filler reports throughout the week. The focus will be the FOMC meeting although the outcome is assumed to be neutral. They will be looking for the deletion of the "considerable period" comment although it has already been discounted away. Should it stay there will be a strong relief rally as that would officially put the Fed on hold for the foreseeable future. If it disappears I think the markets will blip for a few minutes and then go back to business as usual. More important than the FOMC meeting is the critical support levels for last week. The Dow closed right above 9850 which is very critical support. This has been support all week and a failure of that level should see an immediate drop to 9750 with a risk to 9600-9650. This should not be a surprise to anyone who has been reading my recent articles. The 50 DMA is 9711 and that uptrend support has held since March. It will not hold forever but until it fails convincingly traders will continue to buy the dip at that level. The Nasdaq also closed at support for the week at 1940 and the 50 DMA at 1920 should provide a pause if 1940 fails. Worst case support for next week should be 1880-1890. This would be a major risk to the uptrend and a break below 1880 could set off a cascade sales event. I do not expect it next week. What I expect is an opening bounce on Monday and then more weakness before the week is out. I think the Dow will see 9700-9750 and then firm up as the dip buyers hit that test of the 50 DMA. In addition to the FOMC meeting and the various economic reports we should see some more earnings warnings so there will be no shortage of news to move the markets. The main thing investors should remember about the next three weeks is that they are NOT critical. We may see a Santa rally begin around the 15th or we may not. We could attempt a retest of 10,000 again or 9500. The odds are very good that we will go nowhere. There is a lot of bullish sentiment and the closer we get to the holidays the stronger it will get. There is also a lot of overhead supply so breaking through to new highs would be tough. This should mean we will remain range bound between now and year end. What "investors" should focus on is the expected drop in January. We will devote more commentary to that as we get closer. Over the last six years January has seen a drop from the highs of between -550 and -1050 points. This is due to hedge funds and portfolio managers waiting to take profits until the new year to push the tax consequences farther into the future. This is a recent trend and one that has accelerated as the consecutive string gets longer. Experienced investors have been able to play these trends profitably. We have devised our current year-end renewal special to allow readers to profit from this. Be sure to read about it below this commentary. For next week I would suggest only aggressive traders need apply. It is likely to be choppy and news driven. For conservative traders I would watch the Dow 50 DMA and use that as your entry point for any potential Santa Rally. That rally when it occurs tends to begin around the 15th and run into the end of the year. Be prepared for it but don't count on it. The huge profits by fund managers are just waiting to be harvested and the odds are good some funds will begin lightening the load soon and using any Santa rally to offset their sales. This is a good period to be conservative and get ready for 2004. If you have an IRA I would use the holidays to decide what stocks you want to buy on the January dip. I would use the rest of December to decide what stocks you want to sell before that dip begins. Plan your trades wisely and trade your plan. Enter Very Passively, Exit Very Aggressively! Jim Brown ***************************** 2003 Year End Renewal Special ***************************** With 2003 rapidly coming to a close the staff at Option Investor put their heads together and came up with the best year end renewal special ever. What better bonus could we give you than the potential to double or triple your money in 2004? Each Option Investor analyst picked their favorite stocks for 2004 out of our universe of 4500 and applied their technical and analytical skills to deciding how best to profit from them. These are not short term plays of a few days or a few weeks. These are long-term investments suitable for your regular accounts OR your IRA accounts. In many cases these positions could be held for all of 2004. Each analyst has provided an in-depth review of the technical and fundamental aspects of the stock and has suggested the best way to profit from it. Some will be straight stock ownership, some long term calls or puts and some with various combinations of strategies. Each analyst has prefaced their picks with their view of the market for 2004 and how their stock picks pertain to that view. We have a very rounded group and almost every market view is represented. You can be as bullish or bearish as you like and there will be opportunities in the strategies presented. We are calling these picks: The TOP 50 STOCKS for 2004 Special Investor Guide There are actually more than 50 stocks presented as there were so many profitable picks we added a few extra. As an additional bonus Jim has put together his TOP 20 LOTTERY PICKS FOR 2004 These are cheap options with great potential for achieving a profit of 200%, 300% or much more. Also included are options on stocks he feels are take over candidates in 2004. The Special Investor Guide will be provided on CD and will be mailed by priority mail to you before Christmas. Because we at Option Investor feel strongly that there will be a significant dip in January we have planned these strategies to capitalize on that dip. We want you to have plenty of time to review the stocks and strategies including the full color charts and graphs over the holidays. We want you to be prepared to take advantage of the January dip and start 2004 off from a profitable position. Don't miss out on this highly profitable renewal bonus. Contributors to this Special Investor Guide are: Jeff Bailey Jonathan Levinson Mike Parnos Nich Sheldon Jim Brown Linda Piazza Mark Phillips James Brown Additional Bonuses Every annual renewal subscriber will also receive: TWO 2004 Option Expiration Calendar Mousepads One for home and one for the office. Also available are the: 2004 Stock Traders Almanac Video on Successful Option Trading By James Bittman Don't hesitate to sign up for the annual renewal special today. TIMING IS CRITICAL In order to get your The TOP 50 STOCKS for 2004 Special Investor Guide before the holidays you MUST renew immediately. Do not miss out on these profitable opportunities! Click here to renew: https://secure.sungrp.com/04renewal/ We are not responsible for late delivery of the Special Investor Guide for renewals after December 20th. We will still send it Priority Mail but you will not receive it until three days after your subscription is received. ************** FUTURES MARKET ************** Dollar Tanks, Equities Ooze Jonathan Levinson The US Dollar Index set new bear market lows on Friday as equities took a controlled decline. Treasuries and precious metals rallied, completing a week that saw bearish candles printed for the US Dollar Index and equities, with bonds and precious metals the winners. 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 real damage started with a downside surprise in the non-farm payroll data, coming at 57,000 vs. expectations of 150,000 and a hisper number as much as 75,000 above that. Nothing stemmed the tide, and only round number support at 89 seemed to carry any weight. Precious metals advanced, the CRB fell fractionally to 257.56, but the move higher in treasuries was puzzling unless it was a defensive "flight to quality" of domestic money. Daily chart of February gold The bearish tilt to the daily cycle oscillators on February gold was undone by today's sharp advance, though it did nothing to invalidate the bearish rising wedge. The session high of 407.70 was a new high for the move, and the gold future contract managed to hold just below it for most of the afternoon. Support was again tested with a low of 400.50, and for the week a bullish break to new highs was printed. The HUI finished up 6.95 at 252.60, XAU up 2.01 at 111.33. Daily chart of the ten year note yield The yield rally in the ten year note came to a violent and unceremonious end on Friday as the ten year note was gapped higher on a breakaway move. The TNX dropped 15.4 bps to close at 4.215%, and unless there's a sudden, surprise selloff in bonds on Monday, the daily cycle upphase on the yield will turn back down. For the week, bonds printed a bullish reversal candle, and combined with the strength in gold and weakness in the dollar and equities, it looks like a defensive bid coming into bonds. Next week will tell the tale. Daily NQ candles The NQ led to the downside again on Friday, dropping to a low of 1405 and closing just north of it, underperforming its peers significantly. On the daily chart, this drop was insufficient to truncate the ongoing daily cycle upphase, and there's a good deal of support at 1400 with price confluence lined up on a Fibonacci retracement. Despite that, a number of trendline breaks occurred this week, none of them bullish, and given the extent of the bearish Macd divergence set up, a break below 1400 could have serious results for the majority of participants betting on higher prices from here. For the week, the NQ printed a bearish gravestone doji. 30 minute 20 day chart of the NQ The 30 minute NQ extended the bullish descending wedge discussed on Thursday night, briefly violating Fibonacci support at 1408 and bouncing from price confluence just above 1400. The fickle 300 minute stochastic gave a number of false buy signals as it drifted lower beneath its descending trendline, stopping just shy of oversold territory. This entire decline has been countertrend to the daily cycle upphase, and the refusal of that upphase to abort implies a potential upside break out of the descending wedge on the 30 minute chart. Resistance is at 1415-18, and if a break of that level sees the 300 stochastic turn up out of its downphase, the ensuing upphase could have some punch. For the past two weeks, the daily cycle upphase has complicated everything, forcing us to either ignore it or play the short side defensively from the Wednesday high. Support looms just below to 1392. Daily ES candles Like the NQ, the ES extended its daily cycle upphase this week, but finished far weaker than it started. The daily cycle upphase is looking long-in-the-tooth here, and a break of support at 1055 would confirm the downphase for which we've been waiting. Any upside move to a high below Wednesday's peak could confirm the turn, as would a failure from here, but for the moment it's simply too early to call an end to this upphase. As can be seen on the 30 minute chart below, the downphase has room to run, and so Monday will be a critical decision point from which to judge whether the daily cycle upphase will reassert itself, or whether it's indeed over. 20 day 30 minute chart of the ES Fibonacci support stemmed the selling on the 30 minute chart of the ES, with the ES closing lower by 7.75 at 1061.75. The long- awaited move below 1062 could a head and shoulders breakdown, and for Monday, a break below 1059 or above 1062 will be our first clue as to what the market has in store for us. By the same token, a break above 1067 could set up a retest of 1074 on a possible bull wedge breakout. Until the daily cycle upphase ends, we can expect another leg higher from the bottom of the 30 minute cycle downphase. Below 1055, however, the 10 day stochastic should turn back down, and bears should be able to relax for a change. 150-tick ES The 2 day chart of the ES highlights the neckline break at 1:20 PM, and the failure to retake that level. A short cycle upphase was nearing its end as of the close, and could portend another push lower on Monday morning. Daily YM candles Nothing to add on YM, except that its 47 point / .47% loss was the slimmest of its peers, and the neckline break on ES never occurred on YM. This looks like the result of defensive bids in the blue chips (to line up with the rally in bonds) as part of a flight to quality. 20 day 30 minute chart of the YM Equities and the dollar were weak for the week, but equities left us holding a big question mark for Monday. Either the selling will resume, or the dippers will pick up the ball and run it back up. The intermarket relationships, along with the sentiment readings and the rally in the VXO, look extremely bearish to me, with AAII reporting 14.1% bearish advisors in its latest survey – a strong contrarian sell signal. But cyclically, the markets are lined up for a directional move either higher or lower. Another burst of strong selling from here would imply significantly more selling to come, as it would abort the daily cycle upphase. A reversal higher would abort the 30 minute cycle downphase, and could imply a retest of the highs. My strategy for Monday morning will be watch the support and resistance lines, and seek to follow a range break. With this much ambiguity between the different timeframes, the stage is set for possibly violent swings, and I prefer to leave that to the scalpers. ******************** INDEX TRADER SUMMARY ******************** Doji Week Jonathan Levinson The Nasdaq hit 2000 and the only panic was from bulls to buy the top. The indices retreated shortly thereafter, and closed the week lower by 1.1% at 1937. On Friday, the Dow lost .7% or 68 points to close at 9862, the S&P 500 dropped 8.22 or .8% to close at 1061.50, and the Nasdaq lost 1.6% or 31 points. Year to date, the Dow is up 18.2%, the S&P 500 20.6% and the Nasdaq 45.1%. It was a week in which technical traders got whipsawed in both directions, and those with a bias in either direction were spared some of the false signals. Wednesday's high was not revisited, but the Thursday afternoon ramp job, fueled entirely by three nearly symmetrical buy programs in one hour, nearly did it. The selloff following INTC's earnings report took the futures back down afterhours, and Friday never came close to breaking above Thursday's close. Volatility printed a fresh set of lows up to Wednesday, with the VXO spending most of Monday and Wednesday below the 16 level. Sentiment was overwhelmingly bullish, even amongst many bears. It appeared to be an inevitability that the Dow would print 10,000 and the Nasdaq 2,000, and the selloff that followed the Naz 2K touch was as much from bearish relief as from bullish profit-taking. The VXO closed on Friday at 17.34, near a weeklong high, and the various support breaks no doubt awoke some bulls to the significant downside risks from these lofty heights. Nevertheless, the higher high on the Nasdaq muddied the weekly cycles somewhat, actually printing a buy signal but setting up a possible bearish oscillator divergence. The bulls used a great deal of firepower on Wednesday, and the bears only appeared to realize it after the INTC disappointment at Thursday's close. Weekly COMPX candles The drop on the weekly candle from a new high printed a gravestone doji for the week, portending further downside to come. This candle implies an abrupt rejection at the high and is a reversal signal. However, the close above last week's lows could result in either consolidation or further selling, and it will take a trendline break below 1930 confirmed by a failure below 1900 to suggest that we've indeed seen the top. We all know the bear wedge off the March lows by now, as well as the bearish divergences on the 10 week stochastic. This week's decline confirmed the sell signal on the weekly Macd, however, and this suggests that the Nasdaq is putting in a rolling top at current levels. A retest of the high would not be incompatible with that interpretation, and wedge resistance is now up at 2030. The oscillators suggest that such should not occur, and so next week promises to be enlightening as to the fate of this year's rally. Weekly INDU candles The Dow came close but did not reach 10,000. It was stronger than the COMPX for the decline from Wednesday, and on the weekly chart its Macd sell signal is not fully developed. The rise back to the highs left us with the same upward tilt on the 10 week stochastic as we saw on the COMPX, and we cannot rule out more upside for next week. Nevertheless, the stochastic is still diverging lower, and suggests a break of the lower rising wedge trendline. Daily OEX candles The daily chart of the OEX shows a rounding top at the current highs. If you squint, you can see the shooting star doji on Wednesday, one of the most bearish candles you'll see. The fact that the break above 525 resistance did not cause a short covering panic for longer than part of one session indicates the existence of serious overhead supply, and leaves bears breathing easier. But former resistance at 518-520 is now support and should give bears a run for their money. The daily cycle oscillator upphase, responsible for that upward twitch in the weekly stochastic above, still has room to run and could see a retest of the 528 highs. But the Macd histogram suggests that Wednesday may have been the top, and any further selling from here should be enough to turn the stochastic back down. If so, that would agree with the bearish divergences on the weekly cycles, and the ensuing downphase should do some damage. Provided that 528 does not get broken, that's what I expect to see. 20 day 30 minute chart of the OEX The 30 minute OEX shows the wedge break with Wednesday's outside reversal day, but the selling that has ensued is difficult to read. On the one hand, it could be a head and shoulders top, with a neckline at either 525 or 522. On the other, a bull flag with resistance 526, support 522. Above 526, I expect to see the 30 minute cycle oscillator reverse to an upphase, and 528 will be within sight. Below 522, the daily cycle upphase should abort, and the bulls will have a problem. Daily QQQ candles The Qubes never printed a higher high this week, a clear bearish divergence from the broader Nasdaq. Friday's close near the lows was ugly but did not break any of the rising trendline supports. A decisive break of 35 will be the first sign of trouble, but 34.30 is far more important, below which I expect to see the failure of the daily cycle upphase. Given the extent of the bearish oscillator divergences, the next downphase should pack an "I told you so" punch. Until then, however, the pullbacks in this daily cycle upphase look merely corrective. 20 day 30 minute chart of the QQQ My "corrective" comment is exemplified by the bull wedge interpretation on this 30 minute cycle downphase. However, a break below 34.75 could be construed as a neckline break, and again, we'll wait for a confirmation at 34.30 to be certain. The 30 minute cycle downphase should be good for another few hours of downside, but if it's merely sideways, we'll watch for a bull wedge breakout to the upside above the trendline at 35.20. ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** Change of Target With the explosion out of the gate on Monday we only got the chance to fill three of our expected four groups of DJX puts. If you were following the plan you should have filled in the 75, 60 and 55 cent range as each trigger was reached and have an average cost of 63 cents. While I expected 9900 to be touched I did not expect to spend most of the week over that level. Well, as they say the higher they are the farther they fall. Pardon my literary license. The original target was a retest of 9600. With the very strong week I am afraid we are going to have to revise that target. The 50 DMA is 9711 today and was only 9670 last week. This has been very strong sentiment support for the Dow since March. With the continued bullish undertones I do not see the 9600 level being tested unless we get a worsening of sentiment on some unexpected news event next week. With the potential Santa rally ahead many retail investors will gladly buy the dip at the 50 DMA. The new target will be Dow 9700. Exit all positions with a touch of that level. The one good thing the gap open on Monday did for us was to deflate the put premiums and knock off about 20% of the premium from the prior Friday. Your average cost should be 63 cents if you entered all the positions and the contract closed this Friday at 55 cents. A drop to 9700 should push the premium back over $1.00. An alternate exit method would be to set a limit order at $1.00 to capture an exit on any negative news that might not actually push the Dow to exactly 9700. Sudden spikes could push the premium to $1.00 only to see it retreat several minutes later. Exit all positions at Dow 9700 or a limit price of $1.00 whichever occurs first. DJX Chart ******************************** Play Recaps No open plays Powerball Ouch! The Nasdaq drop knocked 50% off our profit in just one week. Last week the portfolio profit was showing $1175 and this week it dropped -$650 to only $525. We were so close to a 100%. We need to hope for a Santa Rally now to inflate the calls for our target exit of Jan-5th. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Considerable Period - J. Brown Last week was an intriguing start to December. The headlines produced a roller coaster effect. The strong ISM numbers on Monday sent us soaring higher as most coasters do at the beginning of the ride before the dips begin. Profit taking, a negative investor reaction to Intel's mid-quarter conference call, a warning from JetBlue and a disappointing employment number left the NASDAQ lower on a week it touched 2000. The big news on Friday was of course the jobs report. Estimates had been for a gain of 140,000. October's report had been +126,000 and economists were excited to see month over month gains. Unfortunately, the November report was a disappointment with just 57,000 jobs gained. The good news was an upward revision to 137,000 for the October report but this was just old news by now, especially given the "whisper" number of +250,000 jobs in November. Overall unemployment dropped to 5.9% reaching an eight-month low but as many analysts pointed out this is not due to job growth. The most probable theory is drop off in the reportable figures. Thousands of workers who couldn't find a job have run out of unemployment benefits and could no longer be counted. The major focus next week will be the Federal Reserve meeting on Tuesday. The verdict on interest rates should be out at 2:15 PM ET on Tuesday afternoon. There has been much ado made about the term "considerable period" in the FOMC's previous statements regarding how long they plan to keep rates low. Since no one expects them to raise rates the real focus is on what they have to say regarding the current state of the economy and when they might lift rates in the future. In this weekend's wrap Jim gives a good argument on why we may not see a rate hike until the first quarter of 2005. Whether or not the words "considerable period" are in this Tuesday's comments it may be replaced by a new phrase suggesting that the Fed is in no rush to raise rates. As we have suggested in the past the market's gains are being tempered by investors taking profits near the highs. Most money managers are looking at their first profitable year since 1999. There is not a lot of desire to chase stocks higher when we're so close to the year-end. However, I will note that commercial traders have suddenly become bullish in the e-minis future contracts. Commercial traders, normally thought of as the "smart money", have reversed from being net short to net long. This can be viewed as a bullish sentiment indicator. I would not be surprised to see the markets dip again this week but there are a large number of stocks that have pulled right back to support. It's going to be another tug-of-war for direction. Keep an eye on retail stocks. They took a beating this last week and the massive snowstorm on the east coast, dumping 12 to 20 inches of snow this weekend, is not going to help their holiday sales. The other side of that coin should be a strong surge in online shopping. Good luck. We only have 18 shopping days left to Christmas day. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9942 52-week Low : 7197 Current : 9862 Moving Averages: (Simple) 10-dma: 9812 50-dma: 9711 200-dma: 9027 S&P 500 ($SPX) 52-week High: 1074 52-week Low : 768 Current : 1061 Moving Averages: (Simple) 10-dma: 1059 50-dma: 1043 200-dma: 971 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1406 Moving Averages: (Simple) 10-dma: 1418 50-dma: 1400 200-dma: 1239 ----------------------------------------------------------------- Insert broken record commentary here...the "fear" indices continue to show very little concern by investors as they trade near multi-year or all-time lows. Yet we have seen a slight up tick in the trend, but we've seen before. CBOE Market Volatility Index (VIX) = 17.09 +0.79 CBOE Mkt Volatility old VIX (VXO) = 17.34 +0.78 Nasdaq Volatility Index (VXN) = 27.05 +0.24 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.54 585,094 491,146 Equity Only 0.68 494,881 335,345 OEX 1.04 24,450 25,318 QQQ 7.06 13,620 96,175 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.8 + 0 Bull Confirmed NASDAQ-100 74.0 + 0 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 81.8 + 0 Bull Confirmed S&P 100 80.0 + 0 Bull Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.17 10-dma: 1.06 21-dma: 1.16 55-dma: 1.13 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 1161 1044 Decliners 1628 2012 New Highs 213 106 New Lows 10 12 Up Volume 435M 320M Down Vol. 999M 1299M Total Vol. 1468M 1643M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 12/02/03 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 Long and short interest continues to flat line from the commercial traders. Everyone seems to be waiting for the year to end before changing their bets. Small traders have grown slightly more optimistic. Commercials Long Short Net % Of OI 11/04/03 391,079 415,136 (24,057) (3.0%) 11/11/03 389,965 415,259 (25,294) (3.1%) 11/18/03 393,893 414,442 (20,549) (2.5%) 12/02/03 394,531 414,223 (19,692) (2.4%) 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 11/04/03 137,829 78,206 59,623 27.6% 11/11/03 136,072 74,249 61,823 29.4% 11/18/03 147,842 80,047 67,795 29.7% 12/02/03 154,788 85,776 69,012 28.7% 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 Wow! We're actually seeing some action here in the e-minis. Commercial traders have reversed from being net short to net long. This is bullish news. Small traders have added strongly to both their long and short positions and remain bullish as well. Commercials Long Short Net % Of OI 11/04/03 242,409 270,785 (28,376) ( 5.5%) 11/11/03 249,864 258,503 ( 8,639) ( 1.7%) 11/18/03 249,286 264,083 (14,797) ( 2.9%) 12/02/03 283,199 268,833 14,366 2.6% 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 11/04/03 135,525 63,006 72,519 36.5% 11/11/03 94,649 51,815 42,834 29.2% 11/18/03 95,119 61,975 33,144 21.1% 12/02/03 119,555 77,609 41,946 21.3% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Much like the large S&P contracts above, commercial traders have fallen asleep. There is very little change in positions. Meanwhile, small traders have reduced positions on both sides of the equation. Commercials Long Short Net % of OI 11/04/03 34,159 48,293 (14,134) (17.1%) 11/11/03 35,889 49,201 (13,312) (15.6%) 11/18/03 35,608 49,689 (14,081) (16.5%) 12/02/03 35,569 48,552 (12,983) (15.4%) 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 11/04/03 24,132 9,703 14,429 42.6% 11/11/03 26,212 10,730 15,482 41.9% 11/18/03 32,034 10,356 21,678 51.3% 12/02/03 21,594 9,429 12,165 39.2% 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 The same story appears to hold true for DJ futures. The overall trend is flat with commercials slightly bullish and small traders generally bearish. Commercials Long Short Net % of OI 11/04/03 21,756 11,903 9,853 29.3% 11/11/03 20,209 11,660 8,549 26.8% 11/18/03 20,746 11,080 9,666 30.4% 12/02/03 21,128 12,379 8,749 26.1% 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 11/04/03 5,099 9,160 (4,061) (28.5%) 11/11/03 6,105 8,201 (2,096) (14.7%) 11/18/03 5,655 8,607 (2,952) (20.7%) 12/02/03 6,667 9,302 (2,635) (16.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Generating new trading ideas Can you give me some guidance in scanning for short-term (five to ten day) trade possibilities? How do you come up with your ideas? While I've been spending more time trying to cover the indices in the Market Monitor at OptionInvestor.com and haven't had the opportunity to profile as many individual stocks trades, there are several ways I generate trading ideas. Since I don't have a lot of time to really poor through the fundamentals of a company, and I do believe fundamentals are important, one great way to generate a list of investment/trading ideas is to simply listen to a reputable investment show. For instance, tonight, while I was updating the Pivot Analysis Matrix for this week's trade, I was listening to CNBC's Luis Rukeyser program, where the show's featured guest was Lawrence Auriana. You may recognize his name as he and his partner Hans Utsch, have managed the Federated Kaufmann fund (KAUFX) since 1986. In tonight's (Friday's) show, guest host Maria Bartiromo asked Mr. Auriana what his favorite top 4 picks were right now. Now, I'm figuring that Mr. Auriana and his partner, along with a their staff of analysts spend quite a bit of time poring over a company's financials. In fact, Mr. Auriana said the Kaufmann Fund doesn't invest in a company without first meeting with a company's management, and visiting various business locations. While Mr. Auriana admits there will always be the occasional unpleasant "surprise" that even his analysis or research on one of their holding was unable to uncover, I figure Mr. Auriana's shop is probably on top of things, and may have a better idea than I of a company's fundamentals, the either he, or his mutual fund owns. With that said, I'll listed to an investment manager, and if what he says makes sense, and sounds interesting, here's what I'll do. The first thing I'll do is pull up a point and figure chart of the stock. The second thing I'll do is calculate the bullish vertical count (the bearish count if the analysts says he/she is shorting it), and see if the current level of trade, compared to the vertical count and technicals makes sense for the stock to go on my "watch list." If a stock does look/sound interesting, and the supply/demand chart (point and figure chart) looks to CONFIRM what the analysts said, then I begin the process of establishing action points. Where the third step is to identify a PULLBACK level to buy the stock, but also a BREAKOUT level to buy the stock, if demand for the stock's shares is simply too strong that the stock doesn't pull in to my entry point. Once these two levels are identified, I will set both the downside alert (pullback) and upside alert (breakout trigger) on my QCharts trading software. The four stocks Mr. Auriana said he likes from the buy side (and explained each one briefly as to why) were Advanced Auto Parts (NYSE:AAP) $80.72, Central European Media (NASDAQ:CETV) $16.30 +0.74%, Orthofix Intl. (NASDAQ:OFIX) $42.71 -2.44% and Dyax Corp. (NASDAQ:DYAX) $6.19 +0.97%. I should note that Mr. Auriana said some stocks in his mutual fund have been held for over 8 years. While this is truly a longer-term investment style of management, later on I'm going to get you in the mindset of how these fund managers buy stocks. I'm going to quickly run through my thinking on both of the above stocks, by simply looking at a point and figure chart. I'm not going to show the charts here, as I've come up with a very interesting observation yet to come, but you can follow along by going to www.stockcharts.com and pull up FREE point and figure charts as it relates to these four stocks. Advanced Auto Parts (NYSE:AAP) $80.72 : AAP's point and figure chart has been BULLISH since April (red 4 on PnF chart) when the stock broke above its longer-term bearish resistance trend at $49.00. After giving a double bottom sell signal in June (red 6 on a PnF chart) at 58, the stock slipped lower to $57, but in early July (red 7) gave a triple top buy signal at $63.00, where the column of X from $58 to $69 built the current bullish vertical count to $94.00. Hmmm... in October (red A) the stock generated the bullish triangle pattern when it traded $75.00. This stock certainly looks bullish. Just for fun, I like to then go to my Qcharts trade station, and use the technique we've taught where I take the retracement tool, anchor at a low (how about the March low at $36.99, and then take the other end of retracement (100%) and attach it to the bullish vertical count target of $94.00. Hmmm.... look at that! I've got to show you this. Advanced Auto Parts (NYSE:AAP) Chart - Daily Intervals Hmmm... this unconventional use of retracement where we anchor the bottom and attach to the bullish vertical count does show some tie to AAP's bar chart 38.2%, 50% and recent 80.9% retracement. See that little dip back under the 38.2% retracement? That's the double-bottom sell signal on the PnF chart. There's an old PnF saying that "the first sell signal in the upward trend is a buying opportunity." What should we have been doing after that double bottom sell signal? How about setting an upside alert at $63 for the triple-top buy signal? I'm setting two alerts on my QCharts trading software. One will actually be set for a pullback alert at $78.00, I want to be alert at that level (Monday, maybe a week from now), and the other alert will be set at a new 52-week high trade of $83.65. If the stock is going to $94.00, which is the BETTER entry point? We'll ask Mr. Auriana that question in a moment, as I'm going to try and show you how Mr. Auriana buys stocks. There, that was pretty quick. I'd also slap a quick retracement bracket on this chart from that little "sell signal" low of $56.80 and attack the upper end to $94.00 (see the $80.00 support at 61.8% retracement?) and using the same lower anchor point of $56.80, use the "fitted retracement" technique you learned in the July 6, 2003 Ask the Analyst column "Fibonacci retracement. Fit it or stack it!" and by performing a "fit" on AAP, I come up with a 100% retracement at $89.40, where the 80.9% ties wonderfully to Wednesday's close, the 61.8% matches nicely with that little gap lower to $76.94, where the gap lower stopped dead in its tracks as if some "level" were being traded as support. This one sure looks good. Central European Media (NASDAQ:CETV) $16.30 : This is the Kaufmann fund's largest small cap holding. Bullish vertical count is $11.75. Stop... not interested at this point. Make no mistake, this stock looks like a bull in a china closet, but tough to assess a bullish target. Goodness me, look at that spread-triple top last December at $5.50. Stock recently gave another triple-top at $17.50, traded $18.50, but is now pulling back. I'll bet you dimes-to-doughnuts Mr. Auriana is a buyer at $15.50 though. More on this thought in a minute. Orthofix Intl. (NASDAQ:OFIX) $42.71 : Hey, a bullish vertical count of $61.00. I'm interested, but need to do some work with retracement. Look at that spread triple-top buy signal at $37.00! Oh yes... I took a retracement from $23.69 (the March 24 relative low) and place top at $61.00. I can see OFIX at $61. Look at the way the bar chart ties in with 19.1% retracement of $30.83 (August pullback)and 38.2% $38.00 (October relative high). Setting downside alert at $40.00 (21-day and 50-day SMA $39 and $38) and upside alert at $45.50 (new 52-week high). Dyax Corporation (NASDAQ:DYAX) $6.19 : Oh my! Stock gave a triple-top buy signal and broke above its longer-term bearish resistance trend at $4.50 in early September (red 9) and ran to $7.50, pulled back to $5.00, ran back up to $7.50, and now pulled all the way back to $4.50 (gave a double bottom sell signal at $4.75, fell another 25 cents to $4.50 (the first sell signal in the upward trend was $4.75) came close to testing its bullish support trend (first test of bullish support can be painful for the bears as institutions are often lurking nearby) and has now reversed up 4-boxes to $6.00. If the stock trades $8.00, then that's a triple-top buy signal and would then have a bullish vertical count of $16.00 being construction. Oooooo... very tight consolidation in the bar chart and hugging that 50-day SMA as support. Upside alert at $6.30 for a partial position (no bullish count at this point) and pullback alert at $4.75, which would have the stock's PnF chart sitting right on the bullish support trend. Wow! The MARKET seems to agree with 4 of Mr. Auriana's "top picks." Now lets have some fun, but also try and learn just how Mr. Auriana and most fund managers buy stocks. Check this out! I was looking for some info on Mr. Auriana, and found a bunch of inside trades he was making on a stock. Aha! He's dumping one of the stocks he mentioned tonight, while pumping it on Luis Rukeyser's program! Gulp! No he isn't, he's been buying Mediware Information Systems (NASDAQ:MEDW) $15.96 since January 31, 2001! Check this insider trading report out, which I found at Yahoo! Finance. http://biz.yahoo.com/t/09/44.html Now... let's look at a PnF chart of MEDW, and try to see if we can't figure out just how Mr. Auriana builds a position. MEDIWARE Information Systems (MEDW) - $0.25 & $0.50 box If there was ever a perfect example of how in institutional investor builds a position, and even "builds a chart" on a stock, then Mr. Auriana's SEC filings where I've circles his various bullish entry points is that example. I really mucked the chart up, but look at all the triple-top buy signals on this chart, starting back in September of 2000 at $3.50 per share when MEDW also broke above its bearish resistance trend. Maybe Mr. Auriana only buys stocks above trend? While he missed two triple-top buy signal entry points, he made his first purchase at $5.88 (per the filings) on January 31, 2002. Then, Mr. Auriana, who is a MEDW director, exercised options worth 5,000 shares on June 28, 2002, after the stock had pulled back to $7.00. Hmmmm, that sell signal at $6.50 negated the prior bullish vertical count of $9.25 (Oh... stock already achieved the bullish vertical count when it traded $9.50) but what that first sell signal in the upward trend probably did is shake out some weak holders (that's OK, just recognize what happened) and then allowed for a new bullish vertical count (X's from $7.00 to $11.00) to then have MEDW's PnF chart building a new count to $20.50. Shoot! Mr. Auriana missed another triple-top buy signal at $9.00. Oh well... wait for the pullback, then pick up another 15,000, where on three consecutive days, Mr. Auriana buys 5,000 each day. What probably took place this day is some type of crossing of shares. Mr. Auriana's trader on the phone, with another trader, whose client is a seller. Mr. Auriana probably knows better than anyone where the stock is headed and becomes a more aggressive buyer. He may also have wanted to "build the chart" and keep it looking bullish. Hmmmm... February 3rd rolls around and evidently supply (O's on a PnF chart) of stock begins to dry up, and Mr. Auriana snaps up another 5,000. Do you think Mr. Auriana knows something? Shoot! Mr. Auriana missed another triple-top buy signal at $11.50. Well, I guess not, he was loading the boat in late January and early February at lower price levels. Now what is he doing? On October 28th, Mr. Auriana is back at it again. Takes down another 5,000 shares between $14.00 and $14.10. Do you kind of see how Mr. Auriana seems to be "working" the stock higher, buying on pullback, while perhaps at times, when stock price was much lower, where SMART MONEY knew of an eventual outcome, was willing to take partial positions, but get some exposure to the stock early in the game? Now... how crazy is it to actually anchor the base of a retracement bracket to the bottom of a stock's bar chart, and attach the upper end to the bullish vertical count? While the following bar char of MEDW is shown with weekly interval bars, a swing trader could also think of the bars as daily interval bars. With MEDW trading a new 52-week high today, where's upside resistance and where's support? If Mr. Auriana remains bullish on the stock, where is he most likely to be a buyer? Do you see where were going? We're trying to get inside the mind of Mr. Auriana, an institutional money manager, figure out what he has been doing, and more importantly, try to figure out what he IS GOING TO BE DOING if he's still bullish the stock, and we would want to try and join him. He's been "right" so far. MEDIWARE Information Systems (MEDW) - Weekly Intervals I've really like looking at a stocks chart on both a point and figure basis and bar chart. I've pointed to the often-times powerful and high probability bullish patterns of the point and figure chart known as the triple-top buy signal. Those weekly bars show some 10% moves taking place in a single week! If you were a market maker in the stock, how is your inventory looking with the stock at a 52-week high? You're probably a little light in inventory, and having to short to the market to provide liquidity. Where are YOU and perhaps Mr. Auriana going to be battling for stock? Where to you think an everyday investor/trader like you and I might be looking to pick up some shares of MEDW with a current upside target of $16.75? While MEDW is a thinly traded stock (only 139,000 shares this week) and may not be the best type of stock to try and trade, I thought by showing you how Mr. Auriana, an institutional investor, buys a stock, and how we can match his buying from the SEC filings to how the stock was trading, what kinds of signals it was giving, and where Mr. Auriana chooses entry points (on the PnF chart) served as a good example as to.... Listening to an institutional money manager and his/her thoughts on what stocks they are buying or sometimes shorting.... then use their ideas to match against the technicals..... then have an understanding of how an institutional money manager will go about building a position as long as they continue to view the stock attractive. While any "buy side" money manager that buys stock is not necessarily the MARKET, its this kind of money we want to try and follow, get in front of, or try and use their buying power to drive our trades higher. Mr. Auriana and his Kaufmann fund couldn't really do anything about the market's decline past years as he is supposed to invest his shareholders money in stocks. However, we as traders will try and get inside the mind of the institutional investor/trader, try and figure out where he/she is buying and perhaps selling, to also choose our entry and exit points. While I went a lot further than what the trader actually asked for, it was by pure accident that I ran across Mr. Auriana's SEC filings, but what a great accident to have happen. Here's an article I stumbled across on Mr. Auriana. http://www.neco.org/awards/recipients/leauriana.html Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- HOV Hovnanian Ent, Inc. Mon, Dec 08 After the Bell 2.68 ------------------------- TUESDAY ------------------------------ AZO AutoZone Inc. Tue, Dec 09 After the Bell 1.28 COST Costco Wholesale Corp Tue, Dec 09 Before the Bell 0.31 EASI Engineered Sprt Sys Tue, Dec 09 Before the Bell 0.48 KR The Kroger Co. Tue, Dec 09 Before the Bell 0.29 ----------------------- WEDNESDAY ----------------------------- TOL Toll Brothers Wed, Dec 10 Before the Bell 1.14 TTC Toro Wed, Dec 10 Before the Bell 0.21 ------------------------- THUSDAY ----------------------------- ADBE Adobe Systems Thu, Dec 11 After the Bell 0.32 CIEN CIENA Corporation Thu, Dec 11 Before the Bell -0.09 MDZ MDS Inc. Thu, Dec 11 Before the Bell N/A NDSN Nordson Thu, Dec 11 Before the Bell 0.39 COO The Cooper Companies Thu, Dec 11 -----N/A----- 0.62 ------------------------- FRIDAY ------------------------------- PNY Piedmont Natural Gas Fri, Dec 12 -----N/A----- -0.18 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable MRTN Marten Transport, Ltd 3:2 Dec 5th Dec 8th CRRC Courier Corporation 3:2 Dec 5th Dec 8th ATA Apogee Technology, Inc 2:1 Dec 11th Dec 12th CKFB CKF Bancorp, Inc 2:1 Dec 11th Dec 12th TRID Trident Microsystems Inc 3:2 Dec 12th Dec 15th ADTN Adtran 2:1 Dec 15th Dec 16th PX Praxair Inc 2:1 Dec 15th Dec 16th IMDC Inamed Corporation 3:2 Dec 15th Dec 16th FFIC Flushing Finl Corporation 3:2 Dec 15th Dec 16th CFC Countrywide Finl Corp 2:1 Dec 17th Dec 18th WSBK Wilshire State Bank 2:1 Dec 17th Dec 18th CW Curtiss-Wright C 2:1 Dec 17th Dec 18th ROST Ross Stores Inc 2:1 Dec 18th Dec 19th CLE Claires Stores Inc 2:1 Dec 18th Dec 19th AMHC American Healthways Inc 2:1 Dec 18th Dec 19th MBFI MB Financial, Inc 3:2 Dec 18th Dec 19th -------------------------- Economic Reports This Week -------------------------- The main event this week is the FOMC meeting on Tuesday but Thursday and Friday are bristling with economic reports from retail sales, import/export prices, PPI, sentiment numbers and more. ============================================================== -For- ---------------- Monday, 12/8/03 ---------------- None ----------------- Tuesday, 12/9/03 ----------------- Wholesale Invntories(DM)Oct Forecast: 0.1% Previous: 0.4% FOMC Meeting (DM) ------------------- Wednesday, 12/10/03 ------------------- None ------------------ Thursday, 12/11/03 ------------------ Initial Claims (BB) 12/06 Forecast: N/A Previous: 365K Business Inventories (BB) Oct Forecast: 0.1% Previous: 0.3% Retail Sales (BB) Nov Forecast: 0.5% Previous: -0.3% Retail Sales ex-autp (BB) Nov Forecast: 0.3% Previous: 0.2% Export Prices ex-ag. (BB) Nov Forecast: N/A Previous: 0.1% Import Prices ex-oil (BB) Nov Forecast: N/A Previous: -0.1% FOMC Minutes (DM) ---------------- Friday, 12/12/03 ---------------- PPI (BB) Nov Forecast: 0.1% Previous: 0.8% Core PPI (BB) Nov Forecast: 0.0% Previous: 0.5% Trade Balance (BB) Nov Forecast: -$41.2B Previous: -$41.3B Mich Sentiment-Prel. (DM) Nov Forecast: 96.4 Previous: 93.7 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Sunday 12-07-2003 Sunday 2 of 5 In Section Two: Watch List: Stocks To Watch! Call Play of the Day: QLTI Dropped Calls: DGX, HOV Dropped Puts: None ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** Watch List ********** Stocks To Watch! Factset Research - FDS - close: 40.78 change: -0.72 WHAT TO WATCH: Earnings for FDS are less than two weeks away and from the trajectory of its stock price there is not a lot of excitement for this quarter's earnings. FDS has pulled back to support at $40.00 and its simple 200-dma. Given the signs the stock looks headed for a breakdown. Shares have produced a number of lower highs and recently failed near 42.50, which was previous support. A breakdown could lead to a test of support at $35.00. Chart= --- Countrywide Financial - CFC - close: 107.70 change: +0.80 WHAT TO WATCH: Shares of CFC gapped higher on Monday Dec. 1st and then slowly drifted lower to fill the gap on Thursday. With this new level of support below it CFC looks ready for another leg higher. The stock is due to split on December 18th and there may be some momentum traders still riding it into the split date. Chart= --- QLogic Corp - QLGC - close: 52.79 change: -1.71 WHAT TO WATCH: Several of the larger chip stocks have all pulled back to support. The question now is will they bounce from support or break it? QLGC appears to be breaking it having closed under its simple 50-dma on Friday. The stock could still bounce from 52.50 but the overall trend looks negative. The $50 level might offer some psychological support but next price support is near $47.50 and its 200-dma. Chart= --- KLA-Tencor - KLAC - close: 55.62 change: -1.79 WHAT TO WATCH: KLAC has not been immune to the profit taking in chip stocks. Shares pulled back from resistance at $60 to support at $55. This support level is bolstered by the rising trendline of higher lows from August. A breakdown here and traders could short KLAC to the $50.00 level. A bounce and bulls could bet on a retest of $60.00. Chart= --- Ingersoll-Rand - IR - close: 63.43 change: +0.71 WHAT TO WATCH: IR is one of the few stocks that has been able to resist some of the profit taking this last week. The stock actually hit a new multi-year high on Friday afternoon. The relative strength makes it attractive for new bullish plays but this may not be the best entry point. Watch it for a bounce from the 61.00 region. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- SNV $28.14 -0.54 - SNV continues to climb higher in its rising channel. The recent consolidation has brought it back to the bottom edge of this channel. Look for a bounce from $28 to go long. Consider shorts if SNV breaks its 50-dma. BJS $35.00 +1.62 - Friday was a big day for BJS. The 4.85% gain pushed it up and through a descending trendline that began back in June. Volume was strong but the rally ran out of steam at its 200-dma. FNM $70.65 +0.29 - Could this stock be curling higher for another rally attempt towards the $75 mark? Look for a move past its 50- dma. S $48.96 -3.63 - Ouch! That's a major breakdown in the rising trend for Sears. It broke through its channel, its 50-dma and round-number support at $50. It feels like a chase here but bears will want to watch it for another entry point. ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** THE PLAY OF THE DAY ******************** Call Play of the Day: ********************* QLT Inc - QLTI - close: 18.86 chg: +0.39 stop: 16.99 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Quest Diagnostics - DGX - cls: 71.65 chng: -0.88 stop: 72.00 Hindsight being 20/20, we should have just said "good enough" when our DGX play traded within a penny of our $75 profit target on Tuesday. Since then, the stock has been pressured by the weakness in the overall market and fell to violate our $72 stop on Friday. We still managed to book a gain, but it was significantly below what could have been realized earlier in the week if that ugly green monster (greed) hadn't reared its head. With the drop back inside the late November consolidation zone and a close under our stop, clearly any open trades should have been liquidated on Friday. The moral of the story is that it's always a good idea to harvest gains when they're offered. Picked on November 13th at $69.46 Change since picked: +2.19 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 884 K Chart = --- Hovnanian Enterprises - HOV - cls: 95.16 chg: +0.25 stop: 92.94 HOV has been hovering in the $93-95 range all week long. The relative strength in this stock is incredible. Unfortunately, earnings are early next week and we're going to follow our trading plan to exit as of Friday's close (see previous updates). HOV has been a very successful play for us with almost 10 points in our favor. The question now is will investors sell the news when HOV announces? And will HOV announce a stock split so close to the $100 mark? Both are distinct possibilities. Please note there seems to be some confusion over HOV's earnings announcement. Some sources say Tuesday, Dec. 9th. Other sources report Monday, Dec. 8th after the close. We'll be sure to keep our eye on HOV post-announcement. Picked on November 21 at $85.51 Change since picked: + 9.65 Earnings Date 12/09/03 (confirmed) Average Daily Volume: 827 thousand Chart = PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-07-2003 Sunday 3 of 5 In Section Three: Current Calls: AMZN, BCR, DHR, PGR, UTX, ZMH New Calls: QLTI Current Put Plays: KSS, NUE, PNRA, THO New Puts: AVID ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** Amazon.com - AMZN - close: 51.56 chg: -0.24 stop: 48.99 Company Description: Amazon.com, a Fortune 500 company based in Seattle, opened its virtual doors on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com seeks to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices. Amazon.com and sellers list millions of unique new and used items in categories such as jewelry and watches, gourmet food, apparel and accessories, sporting goods, electronics, computers, kitchenware and housewares, books, music, DVDs, videos, cameras and photo items, toys, baby items and baby registry, software, computer and video games, cell phones and service, tools and hardware, travel services, magazine subscriptions and outdoor living items. (source: company press release) Why We Like It: We can't say much more than what we've already written about AMZN. Plenty of investors think the stock is an overvalued "pig" but there's no denying shares have more than doubled this year. This last week may have thrown some doubt over what was believed to be a very robust holiday shopping season but there is no doubt that online sales are set to surge. The recent November low was a bounce from the 38.2% retracement of the big multi-month run higher. AMZN made it right back to the $55 level before profit taking in the NASDAQ pulled it back. This dip towards the $50 level might actually be a decent entry point but we'd prefer to see some signs of a bounce before committing any new capital. Besides AMZN still has to deal with its 50-dma again just overhead. Suggested Options: We have plenty of December and January options to choose from but our favorite is the January 50's. ! Alert - December options expire in 2 weeks! BUY CALL JAN 47.50 ZQN-AW OI= 4269 at $5.70 SL=3.35 BUY CALL JAN*50.00 ZQN-AJ OI=12283 at $4.00 SL=2.25 BUY CALL JAN 55.00 ZQN-AK OI=12918 at $1.70 SL=0.90 BUY CALL JAN 60.00 ZQN-AL OI=10189 at $0.65 SL= -- Annotated Chart: Picked on November 30 at $53.97 Change since picked: - 2.41 Earnings Date 10/21/03 (confirmed) Average Daily Volume: 10.7 million Chart = --- C R Bard - BCR - close: 77.28 change: +0.00 stop: 74.99 Company Description: C.R. Bard, Inc., (www.crbard.com) headquartered in Murray Hill, N.J., is a leading multinational developer, manufacturer, and marketer of innovative, life-enhancing medical technologies in the fields of vascular, urology, oncology, and surgical specialty products. (source: company press release) Why We Like It: Medical device makers have been strong in this market and BCR is no exception. The company has a positive trend of earnings growth and double-digit sales growth. It's no secret and shares have appreciated but investors are still buying the dips. We added this play on Tuesday with a TRIGGER at $78.01. Currently, the play is unopened as we wait for BCR to trade at or above our trigger price. Until then more aggressive players might want to look for a dip to the 50-dma near $76.00 as an alternative entry point. BCR does have a fresh buy signal in its MACD. Split fans will note that BCR has not split its stock since 1988. Shares are well over there previous split price and the company could announce one at any time. Suggested Option: There are only 2 weeks left for December options so our preference will be the January strikes. Our favorite is the January 75 call. ! Alert - December options expire in 2 weeks! BUY CALL JAN 75*BCR-AO OI= 88 at $3.80 SL=1.75 BUY CALL JAN 80 BCR-AP OI=767 at $1.20 SL=0.65 Annotated Chart: Picked on December 02 at $xx.xx Change since picked: + 0.00 Earnings Date 10/15/03 (confirmed) Average Daily Volume: 322 thousand Chart = --- Danaher Corp - DHR - close: 83.83 chg: -0.33 stop: 82.49 Company Description: Danaher, a leading industrial company, designs, manufactures, and markets innovative products, services and technologies with strong brand names and significant market positions. The company was previously known as DMG Inc. In addition to process/ environmental tools the company also supplies aircraft safety equipment. Its general-purpose tools include hand tools, ratchets, sockets, wrenches and more. Why We Like It: Another week, another hard fought gain. Shares of DHR continue to inch higher with a steady stream of higher lows but we need to see the stock breakout above resistance at $84.50. Technically, the stock's relative strength is encouraging and its MACD indicator has just produced a fresh buy signal. This past week of economic reports have been bullish for "old" economy cyclical stocks like DHR. We are optimistic that DHR can clear resistance but current levels don't make the best entry point. Traders can look for a dip and bounce in the 82.50-83.00 region or a breakout above 84.50 before evaluating new positions. The company last split its stock 2-for-1 in June of 1998 near $72 so the possibility of another split announcement certainly exists. Suggested Options: There are only two weeks left for December options. Our new recommended option is the January 80 call but look for a breakout or a dip to buy it. ! Alert - December options expire in 2 weeks! BUY CALL JAN 80*DHR-AP OI= 627 at $5.40 SL=3.25 BUY CALL JAN 85 DHR-AQ OI=1312 at $2.20 SL=1.10 Annotated Chart: Picked on November 23 at $81.95 Change since picked: + 1.88 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 829 thousand Chart = --- Progressive - PGR - close: 78.72 chg: -0.78 stop: 77.95 Company Description: The Progressive group of insurance companies ranks third in the nation for auto insurance based on premiums written, offering its products by phone at 1-800-PROGRESSIVE, online at progressive.com and through more than 30,000 independent insurance agencies. (source: company press release) Why We Like It: Once again we're at a short-term inflection point for shares of PGR. The stock surged higher to a new all-time high on Monday and spent the rest of the week consolidating back toward the bottom of its rising channel. We've been cautious lately and have not been recommending new positions as every week the stock looks ready to break its trend. Technically, this would be the entry point, here above $78 but odds are good that if the broader markets see any strong selling then PGR could breakdown and we'd be quickly stopped out. Headlines have been quiet for PGR but we did note a Forbes article by Laszlo Birinyi Jr. who recommended PGR and commented on its low valuation at just 16 times trailing earnings. Suggested Options: We're not suggesting any new plays at this time until PGR can display a little more upward momentum. ! Alert - December options expire in 2 weeks! Annotated Chart: Picked on November 07 at $76.25 Change since picked: + 2.47 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 654 thousand Chart = --- United Tech. - UTX - cls: 87.73 chng: -0.22 stop: 85.70 Company Description: As a diversified manufacturing company, UTX has four principal operating segments: Otis (elevators and escalators), Carrier heating, ventilation and air conditioning systems), Pratt & Whitney (aircraft engines and space propulsion), Flight Systems helicopter electrical systems). Between the Pratt & Whitney and Flight Systems divisions, UTX participates in virtually all aspects of the design and manufacture of aircraft propulsion systems, from engines and their associated flight controls to auxiliary power units, compressors and instrumentation. Why we like it: To say that UTX has been resilient over the past week would be a gross understatement. Despite all the gyrations in the DOW, the stock has stubbornly held just below the $88 resistance level on a closing basis, all the while posting slightly higher intraday lows. It would have been nice to see the breakout to new highs ahead of the weekend, but it certainly looks feasible next week. A pullback near $86.50-87.00 could provide for a fresh entry, although at this point, we'd prefer to wait and enter on the breakout over $88.50. That breakout would then propel UTX into the upper half of its rising channel and set things up for a continued rally to the upper channel line, now at $92.00. As the channel has risen, it has given us the ability to raise our target on the play and now we're looking for a run to the $91-92 area, where we're recommending traders look to book gains. The combination of the 10-dma ($86.19) and 20-dma ($85.83) should keep our $85.70 stop safe, but if not, we'll definitely want to honor that stop, as it would be a distinct break of the strength of the past couple weeks. Suggested Options: Shorter Term: The December 85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 90 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the January 85 Call. Our preferred option is the January 85 strike. ! Alert - December options expire in two weeks! BUY CALL DEC-85 UTX-LQ OI=2587 at $3.50 SL=1.75 BUY CALL DEC-90 UTX-LR OI=3264 at $0.45 SL=0.25 BUY CALL JAN-85*UTX-AQ OI=1657 at $4.40 SL=2.75 BUY CALL JAN-90 UTX-AR OI=4767 at $1.50 SL=0.75 Annotated Chart of UTX: Picked on November 23rd at $83.90 Change since picked: +3.83 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 1.84 mln Chart = --- Zimmer Holdings - ZMH - close: 65.78 chg: -0.37 stop: 64.49 Company Description: Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is the worldwide #1 pure-play leader in the design, development, manufacture and marketing of reconstructive orthopaedic, spinal and dental implants, trauma products and related orthopaedic surgical products. The new Zimmer has operations in more than 24 countries around the world and sells products in more than 80 countries. In October, 2003, the company finalized its acquisition of Centerpulse AG, a Switzerland-based orthopaedics company and the leader in the European market. For the year 2002, the pro forma worldwide combined revenues of Zimmer and Centerpulse were approximately $2.2 billion. On a combined basis, Zimmer and Centerpulse are supported by the efforts of nearly 7,000 employees. (Source: company press release) Why We Like It: Yet another medical device maker on our list, ZMH has managed to outpace the markets for months. The company has also been on quite the buying spree. Last month ZMH just finished its $3.2 billion acquisition of Swiss rival Centerpulse AG. Now ZMH just recently announced a $108 million acquisition of New Jersey based Implex Corp. The stock shot higher on the news and broke resistance at $65.00. It's somewhat uncommon for the acquirer to trade higher on merger news but ZMH did. Usually that means the market strongly approves of the merger. Shares of ZMH spent this last week digesting its gains from Monday. The profit taking has pulled it back to its simple 10- dma just above round-number support at $65.00. Normally, this would look like an entry point for new bullish positions but we'd like to see some signs of a bounce. Aggressive traders can gauge entries now but use a tight stop loss and be ready to exit should ZMH break $65.00. We are going to leave our stop loss at $64.49. Suggested Option: There are only two weeks left for December options so our recommended option will be the January 65's or 60's if you can afford it. ! Alert - December options expire in 2 weeks! BUY CALL JAN 60 ZMH-AL OI= 4 at $6.60 SL=4.00 BUY CALL JAN 65*ZMH-AM OI= 43 at $2.80 SL=1.45 BUY CALL JAN 70 ZMH-AN OI= 187 at $0.70 SL= -- Annotated Chart: Picked on November 30 at $65.92 Change since picked: - 0.14 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 1.8 million Chart = ************** NEW CALL PLAYS ************** QLT Inc - QLTI - close: 18.86 chg: +0.39 stop: 16.99 Company Description: QLT Inc. is a global pharmaceutical company specializing in the discovery, development and commercialization of innovative therapies to treat cancer, eye diseases and niche areas for which treatments can be marketed by a specialty sales force. Combining expertise in ophthalmology, oncology and photodynamic therapy, QLT has commercialized two products to date, including Visudyne therapy, which is the most successfully launched ophthalmology product ever. (source: company press release) Why We Like It: Our new bullish play is a biotech-pharmaceutical stock. The company has been getting a lot of press over its up and coming Visudyne treatment. The drug is designed to fight age-related macular degeneration, which is the leading cause of blindness in people over 55. Ninety percent of the 500,000 cases reported worldwide are the "wet" form of the disease, which can produce rapid vision loss. Back in October QLTI received approval for its FDA Fast Track application process here in the U.S. and approval for use of Visudyne in Japan. The company also beat earnings estimates by 6 cents with net income of 19 cents a share and guided higher for the next quarter. The good news and the strong earnings prompted a wave of analyst upgrades. In the middle of November news came out that Pfizer and partner Eyetech Pharmaceuticals had released data that their experimental drug, Macugen, was 27 percent more effective than the placebo for treating macular degeneration. Shares of QLTI soared because its own phase III trials indicate a 33 percent improvement (source: Reuters). When the markets rallied this last Monday, QLTI bounced from its simple 50-dma but the session was nothing special. The next day QLTI soared 12% on nearly 3 times the average volume for no apparent reason. We suspect someone heard some good news or just initiated a large bullish position in the stock. Bulls should be excited because the profit taking this last week was stymied at the $18 mark, previous resistance. The next clearest resistance level appears to be the $25 region. Fortunately, QLTI's point- and-figure chart is in a bullish catapult formation. Now we just need someone to pull the launch lever. We're going to start the play with a stop loss at 16.99, just over 10% from current levels. Suggested Options: Our preference is for the January calls. Our favorite is the January 17.50 strike. ! Alert - December options expire in 2 weeks! BUY CALL JAN*17.50 QTL-AW OI=112 at $2.35 SL=1.15 BUY CALL JAN 20.00 QTL-AD OI= 61 at $1.00 SL=0.50 Annotated Chart: Picked on December 07 at $18.86 Change since picked: + 0.00 Earnings Date 10/23/03 (confirmed) Average Daily Volume: 1.1 million Chart = ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** Kohl's Corporation - KSS - close: 47.35 change: +0.39 stop: 49.25 Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: Following its precipitous plunge to the $44.50 level on Wednesday, KSS has been finding some buying interest, which we can only attribute to optimism over the company's bullish comments on Thursday about the start of the holiday shopping season. Our initial target for KSS was in the $44-45 area and in retrospect, we should have dropped the play on Wednesday after it dipped into the middle of that zone. Conservative traders should have certainly harvested gains on that drop and now we're left trying to decide if the current bounce is the beginning of a rebound or just the latest entry opportunity. In favor of the bearish case, price was once again rejected at the 10-dma ($47.86) on Friday, which has been providing resistance for nearly a month. On the bullish side of the ledger, daily Stochastics are just beginning to hook up out of oversold territory, indicating there could be a more upside in store. Friday's gain is disconcerting on another level and that is in comparison to the Retail sector's 1% loss. What happened to KSS' relative weakness. At this point, the only viable entry strategy is to enter on a failure to push through $48 resistance. We're maintaining our stop at $49.25, which is tight enough to keep our risk limited, while at the same time being above the 20-dma ($49.16). 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, as it is currently in the money. ! Alert - December options expire in two weeks! BUY PUT DEC-50*KSS-XJ OI=10290 at $3.10 SL=1.50 BUY PUT DEC-45 KSS-XI OI= 4469 at $0.50 SL=0.25 BUY PUT JAN-45 KSS-MI OI= 9007 at $1.40 SL=0.75 Annotated Chart of KSS: Picked on November 18th at $48.75 Change since picked: -1.40 Earnings Date 2/12/04 (unconfirmed) Average Daily Volume = 4.34 mln Chart = --- Nucor Corp. - NUE - close: 51.36 change: -0.84 stop: 54.00*new* 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. Why we like it: After a one-day bounce attempt in "buy the news" fashion after the announcement of the Bush administration's premature termination of tariffs on steel imports, shares of NUE were back in the bears' sights on Friday. The initial plunge on the employment news dropped the stock to its intraday low of $50.52 before a sharp rebound, failure at $52 and then a slow bleed into the close. Despite the rebound attempt from just above $50, it is clear the downtrend is very much in force and breaching the 50-dma ($51,74) on Friday is going to be tough for the bulls to overcome. At the current rate, reaching our $47-48 target by next week seems entirely possible. NUE has strong resistance now in the $52-53 area, making it an ideal area to consider initiating new positions on a failed rebound. With the 10-dma ($53.85) and 20-dma ($54.06) about to cross down through the 30- dma ($53.78), that area is about to become even stronger resistance, giving us the freedom to tighten our stop to $54 this weekend. 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. ! Alert - December options expire in two weeks! BUY PUT DEC-55 NUE-XK OI= 163 at $4.10 SL=2.50 BUY PUT DEC-50 NUE-XJ OI= 549 at $0.85 SL=0.40 BUY PUT JAN-50*NUE-MJ OI=1006 at $1.90 SL=1.00 Annotated Chart of NUE: Picked on December 2nd at $52.66 Change since picked: -1.30 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 689 K Chart = --- Panera Bread Co. - PNRA - cls: 35.30 chng: -1.20 stop: 38.50*new* Company Description: Panera Brea Company, through its wholly owned subsidiary Panera LLC, operates bakery-cafes under the names Panera Bread and Saint Louis Bread Company. As of the end of 2001, the company had a total of 110 company-owned bakery-cafes and 259 franchise- operated units. The company specializes in meeting four consumer dining needs (breakfast, lunch, daytime and take home bread) through the provision of high quality food, including fresh baked goods, made-to-order sandwiches on fresh-baked bread, soups, salads, and custom roasted coffees. Why we like it: Despite support in the $35-36 area, PNRA just continued its slide on Friday with volume still running well above the ADV. The weakness in the broad market certainly put the wind at the backs of the bears, but the key to Friday's price action was probably follow-through from Thursday's break of the 200-dma. After losing another 3% on Friday and coming to rest right on solid support near $35, chasing the stock lower does not sit high on our list of choices. PNRA ought to stage a near-term bounce from near its current level and the optimum approach for new entries will be to pull the trigger on a rollover below stiff resistance at $37.00-37.50. Of course, there is the possibility that support will just give way and allow PNRA to continue bleeding lower towards our $32 initial target. Traders that don't want to take the chance on the play getting away from them can enter on the breakdown, but need to be aware of the risk of a bounce back up towards the 200-dma before the subsequent rollover. If the stock does rally back through the 200-dma, we can take that as a clear sign that the breakdown has failed and we'll want to bail from the play. Lower stops to $38.50, just above the 200-dma and Thursday's intraday high. Suggested Options: Aggressive short-term traders can use the December 35 Put, while those with a more conservative approach will want to use the January 35 put. Our preferred option is the January 35 strike, as it provides more time until expiration. ! Alert - December options expire in two weeks! BUY PUT DEC-40 UPA-XH OI=360 at $4.90 SL=3.00 BUY PUT DEC-35 UPA-XG OI=754 at $1.10 SL=0.50 BUY PUT JAN-35*UPA-MJ OI= 40 at $1.85 SL=0.90 Annotated Chart of PNRA: Picked on December 4th at $36.50 Change since picked: -1.20 Earnings Date 1/29/04 (unconfirmed) Average Daily Volume = 766 K Chart = ---- Thor Industries - THO - close: 54.25 chg: +1.00 stop: 56.01 Company Description: Based in Jackson Center, Ohio, Thor Industries is the largest producer of small to mid-sized recreational vehicles (RVs) and buses. Trailers, fifth wheels and motor homes including all the parts and accessories can be found in THO's product line. The company has plenty of subsidiaries like Airstream, Dutchmen Manufacturing, Four Winds, Keystone RV Co, Komfort, Thor America and more. (source: company press release) Why We Like It: (Thursday's Original Write up) Our put play in THO is mainly a technical play. Shares are breaking support on high volume declines. That's never a good sign and usually means there's more weakness to follow. However, we are going to use a TRIGGER to open the play because the stock still has one more support level to break and investors may begin to overlook the recent earnings announcement. Actually, it was the earnings announcement on December 1st that started the recent slide but the numbers are a little confusing. Back in November THO pre-announced strong earnings claiming that this last quarter would be a record-breaker for sales. Revenues were up 20%. Yet when the company announced they turned in 83 cents a share compared to Thomson First Call estimates of 91 cents. Investors didn't like the different and the selling began. We're going to use a TRIGGER at $51.99 to open the play. Until THO trades at or below this level we're just spectators. Fortunately, THO's P&F chart looks pretty bearish. A move under the $52 mark and the next support level appears to be the $44-45 region. Coincidentally, the simple 200-dma is approaching $44. If we're triggered our target will be $45.00 with a stop loss at 56.01. ! Weekend Update: Surprise, surprise, shares of THO decided to bounce on Friday. It was short-term oversold and in need of a bounce, which is one of the reasons we used a trigger. Fortunately, the stock failed at its 100-dma, which just happens to coincide with the top of the gap from Thursday. So now that the gap has been filled THO is cleared for further declines. We just need it to hit our TRIGGER point at $51.99 to open the play. More aggressive traders can try and gauge an entry on these failed rallies. Suggested Options: January options are a little thin but December options only have two weeks left. Our preferred option is the January 55 put. ! Alert - December options expire in 2 weeks! BUY PUT DEC 55 THO-XK OI=261 at $3.30 SL=1.65 -2 weeks left- BUY PUT JAN 55*THO-MK OI= 1 at $4.30 SL=2.15 BUY PUT MAR 55 THO-OK OI=189 at $5.90 SL=3.25 BUY PUT MAR 50 THO-OJ OI=103 at $3.40 SL=1.70 Annotated Chart: Picked on December 04 at $xx.xx Change since picked: + 0.00 Earnings Date 12/01/03 (confirmed) Average Daily Volume: 236 thousand Chart = ************* NEW PUT PLAYS ************* Avid Technology - AVID - close: 48.46 change: -1.99 stop: 52.50 Company Description: Avid Technology, Inc. develops, markets, sells and supports a wide range of software and hardware for digital media production, management and distribution. Digital media are video, audio or graphic elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog, or tape- based, signals. The company's range of product and service offerings enable customers to make, manage and move media. Why we like it: After gaining over 200% from the March lows, AVID topped out near the $60 level in early October and then began a slow profit- taking decline into late November. After rallying off the $48 level in late November, things were looking pretty bullish. AVID surged back above its 50-dma and was challenging the $55 resistance level enroute to a retest of $60 resistance. There isn't any news to explain it, but something happened to derail the stock last week and in the past four days, price has dropped $6.50 or nearly 12%. But that drop looks like it may just be the opening act for a deeper plunge, especially with the PnF chart right on the verge of a new Sell signal. If given, that signal will provide a tentative bearish price target of $38. With strong historical support near $37 and the 200-dma at $39.67, it certainly looks like the $38-40 area is a viable downside target IF we get the breakdown. We don't want to get stuck selling a bottom, so we're going to initiate coverage with a trigger set at $47. If hit, that ought to open the door to some significant downside, as the next mild support isn't found until $43-45. Aggressive entries can be taken on the initial break, while more timid traders can wait for a reflexive retest of that broken support ($47-48) as new resistance and enter on the rollover from that area. We're initiating coverage with a fairly wide stop at $52.50 to give AVID room to move in case it takes a few days before the breakdown commences. Note that our stop is below the 50-dma ($52.51) this weekend, but will be above it on Monday. Suggested Options: Aggressive short-term traders can use the December 45 Put, while those with a more conservative approach will want to use the January 45 put. Our preferred option is the January 45 strike, as it provides more time until expiration. ! Alert - December options expire in two weeks! BUY PUT DEC-50 AQI-XJ OI=564 at $2.70 SL=1.25 BUY PUT DEC-45 AQI-XI OI=598 at $0.80 SL=0.40 BUY PUT JAN-45*AQI-MI OI= 23 at $2.00 SL=1.00 Annotated Chart of AVID: Picked on December 7th at $48.46 Change since picked: +0.00 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 637 K Chart = ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. 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The Option Investor Newsletter Sunday 12-07-2003 Sunday 4 of 5 In Section Four: Leaps: Perspective Traders Corner: Mind Your Own Business – Your Trading Business! Futures Corner: Moving Average Trading System (MATS) ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Perspective By Mark Phillips mphillips@OptionInvestor.com As we speculated might be the case some months back, all eyes are now focused on whether the DOW can breach the venerable 10,000 mark and I'd list it as an almost certainty to occur before Saint Nick arrives in less than 3 weeks. That's right campers -- only 17 more shopping days left until Christmas! But I digress. We're talking about this persistent rally in the broad market and when we can expect it to end. How about this for a bold assessment -- the rally already ended, either in late September or early July or even back in March. It's all about your perspective. Full disclosure here - the idea I'm about to share is not my own. Oh sure, the idea was floating around in my head, but I hadn't yet figured out how to put the pieces together. Fortunately, Rick (another of my readers, who just happens to be a fellow engineer) put it all together and sent it to me last week, complete with the pertinent charts. All I did was say, "Wow, can I use that for my LEAPS article, dude?" Lucky for me, Rick is more interested in money than fame, so gave me permission and promised to forward a bill for services rendered. We had been working along similar lines, both looking for some clue as to how this strong bull market in gold was playing out in the other currencies. We all know that gold looks strong in US dollar terms, but how much of that strength is attributable to dollar weakness and how much to actual strength in gold? Inquiring minds wanted to know! After much searching, Rick found a site that showed the price of gold, denominated in several of the major currencies. Without duplicating the charts here, suffice to say that gold has NOT broken to multi-year highs against most currencies yet. That means the majority of the strength in the yellow metal so far has simply been due to the weakness in the US dollar. Now if gold breaks out against currencies such as the Euro, the Canadian dollar, the South African Rand and others, I think it will be safe to say that the second leg of the bull market in gold will be underway. Once again, I digress. "This is all very interesting, but weren't we talking about the equity markets" you ask. Exactly, and back there we shall go. The next step of this journey turned the focus back to the action in the DOW. We've all seen endless copies of the DOW chart in the past several weeks, so I won't waste your time by duplicating it here. But noodle on this for a moment - all of our charts are denominated in dollars, which has been a depreciating asset. What happens if we show the DOW denominated in a different currency? The picture definitely changes. Take a look at this chart of the DOW shown relative to the Euro. Daily Chart of the DOW Relative to the Euro - 2003 Rather than continuing to creep to new highs, we can see that this view shows the DOW topping in early March and then drifting sideways for the past 9 months. Note how price action continues to weaken relative to the important 50-dma and 200-dma. For most of the summer, price vacillated about the 50-dma, then finally tested the 200-dma in late August. This latest violation of the 50-dma led to a break of the 200-dma for the first time this year and that last red candle hints that resistance may be forming at the 50-dma. Support becoming resistance? That doesn't sound bullish to me. Actually, if you look at the heading on that chart, you can see that it is the DJIA/Europe Ratio. Add that with the fact that the vertical axis scale doesn't seem to make sense relative to what I know about the relative value of the dollar and the euro, I'll have to assume that it isn't truly the DOW denominated in terms of the Euro. But it was enough to really get me thinking. What if this great new bull market is nothing more than a reflection of the weakening dollar. For those of you a little slow on the uptake, if the DOW IS going up due to the fact its native currency is weak, is there any way that we can conclude that inflation is NOT heating up? That's what I come up with and I'm left scratching my head wondering why there isn't the slightest hint of inflation in the government economic reports? Could it be that they really need to be able to keep interest rates low to hopefully spur the economy into real growth during an election year? They know they can't do that if the public (especially the bond traders) see the evidence of inflation and know the Fed is soon going to embark on its tightening cycle. Back in June and July, bond traders called the Fed's bluff and made it quite clear that if they don't believe the rhetoric, they can take matters into their own hands to raise the long end of the interest rate curve. You can bet that Greenspan, Bernanke and the rest of their gang took that lesson to heart! We're just peeking down that rabbit hole here, but trust me when I say it opens into a vast cavern of interesting thoughts and speculations. But I'm once again getting off track. We were talking about the possibility that the recent rally in the DOW didn't really happen. Since I wasn't convinced that the DJIA/EUR chart was truly what I thought it was, I figured I'd go back to first principles. Let's look at the DOW in terms of the only measure of true money we have available...GOLD. The beauty of gold is that it holds its value across the centuries, in sharp contrast to every fiat currency -- all of which eventually are inflated into worthlessness. 100 years ago, an ounce of gold would have purchased a nice suit. Not an extravagant one, but a nice one. Today, an ounce of gold will still buy a nice suit. The key is that gold cannot be inflated or devalued. It has real, intrinsic value. Paper currencies only have value because the issuing government says they do. So if we want to see what is really happening with the DOW, don't you think it would be valuable to denominate it in a currency that is stable in terms of actual value? Let's take a look. Daily Chart of the DOW Scaled Relative to Gold - 2003 I like that picture even better for what it shows. The DOW reached a peak in April, slightly exceeded it in July and then built a lower peak in October. Wait a minute! Isn't that a Head & Shoulders top? I neglected to place the trendline on it before I snapped the chart, but you can do it yourself. Draw a line from the May low (left armpit) to the late September low (right armpit) to construct the neckline and you can see it has already been broken. By my reckoning, that gives a distance of roughly 2.50 (27-24.5) downside from here. That equates to a drop to 22 on the chart above. I find it quite interesting how that target (which is a minimum target by the way) isn't far above the lows from February and March. New bull market? Santa Claus Rally? Bah Humbug! For those doubters out there, let's take a look at a longer-term view. Weekly Chart of the DOW Scaled Relative to Gold: 2001-2003 Ouch! That paints a pretty clear picture for me. The DOW got a quick bounce from the Feb/Mar lows, but it has been weakening for months. Not only that, but we haven't yet broken the pattern of lower highs, with the December-02 highs still well out of reach of the bulls so far. I've been searching for some sort of indication as to whether the bulls would be vindicated in their faith in a recovering economy or if the bears would be shown to still be correct in waiting for this bear market rally to run its course and then pile back on. To me, the above charts paint the answer pretty clearly -- the rally in the DOW for the past several months has been fiction, created by the expansion of the money supply and the continued downtrend of the U.S. dollar. I don't expect a big decline into the end of the year, but I also am bolstered in my belief that the strength we are seeing in the broad market will fail sometime next year, probably in the first quarter and we'll start seeing some real selling come in to remove the artificial props that have been keeping daily ranges so tight. Maybe I'll revisit this concept with respect to some different market indices in next week's article. Who knows, we may find more valuable insights awaiting us! So there's my prediction for the next few months. Steady as she goes into the holiday season, but look out below after the January fund inflows have worked their magic. More than before, I feel like the appropriate course of action for playing the broad market is to short the failed rallies. I'm not yet ready to enter on breakdowns, especially after Friday's defense of critical support. As we've harped on for months now, there isn't really any sign of weakness in the internals of the market; the VIX remains incredibly low, the bullish percents are still pegged very near multiyear highs and every time there is a dip in price, it is the result of a weakening in buying pressure, not an increase in selling pressure. It's not yet the time to aggressive short the market, but I believe we have now reached the point where failed rallies can be shorted. In addition, there are individual pockets of strength that probably will be able to continue even when the broad market does turn down. All we have to do is find them and then hope that those stocks have LEAPS available. Without further ado, let's go check out the action in the play lists. I can tell you this -- our WMT play is finally in the black! Portfolio: WMT - Well it took long enough, but finally it looks like our WMT play has gotten a move on and fortunately it is in our favor. We certainly had to wait long enough, but the continued bearish perception of Retail reports both from the company and the overall industry have been enough to exacerbate and solidify the downtrend in recent weeks. We knew the $52-53 area would be pretty solid support, so the Thursday/Friday rebound from that area is really no surprise. We should see this bounce roll over from a lower high as well, and perhaps the next leg will take us down to our $48-50 target range. There should now be pretty solid resistance in the $55-56 area, with the 200-dma at $55.38 and the 20-dma ($55.56) about to cross down through the 200-dma. Obviously, it is time to tighten that stop, and I'm lowering it to $56.50, which is just above the bottom of the mid-November gap. It should go without saying, that I'm TICKED about the pricing on this play. We entered the play on 10/3 at $57.48 and the price of the stock is now exactly $4.00 lower. The market makers have been jacking with the option prices for the results we're looking at here. The '05 LEAP has gained just under 12% and the '06 LEAP hasn't done squat for us! Oh well, if we do reach our $48-50 target, then both options "should" show a decent gain. SBUX - It doesn't look like investors are overly concerned about consumers halting their practice of standing at line at Starbucks for coffee during the holidays. The mildest of dips occurred last week, but SBUX continues to work higher in that shorter-term ascending channel, the bottom of which is at $31.40. The real key to near-term strength will be the 50-dma at $30.91 though. As long as price remains above there on a closing basis, the stock has the clear potential to break out over the top of its longer- term rising channel (and stay there). Raise stops to $27.00, which is right at the bottom of the rising channel. Watch List: QQQ - We got lucky on Friday! I watched the QQQ all week to see if once entering our lower entry target zone of $35.00-35.50, if price would be able to close below $35.00 and trigger entry. As you should understand by now, my preference for initiating new bearish positions right now is to short the top of failed rallies, not enter on breaks of support. So I was actually rooting for the QQQ to put together enough of a bounce to close above $35. The bulls must have heard me, as they managed to eke out a close at $35.04, keeping us on the sidelines for one more week, even if we are leaning so far forward, we're almost on the playing field. I'd still prefer to enter on a foray up near the $36.50 level and that certainly seems possible if we can get one more push towards the 2000 level on the NASDAQ Composite. But if the bottom falls out next week, then we'll take the secondary entry on the drop below $35.00 on a closing basis. SMH - Semiconductor stocks got pummeled towards the end of last week, with Friday's session delivering a 3.19% drop in the SOX. Looking at the SMH, we can see that price came to rest just above $41 support and right on the convergence of the top of the long- term rising channel (which SMH last broke above in late October) and the bottom of the shorter-term rising channel that has been in effect since early August. Then there's the 50-dma lying in wait at $40.36 to provide further support. We did get a lower high last week, but only fractionally so. But the lower high was what I've been waiting for, so... What to do? I was tempted to put this one back into play, except for the way we got that lower high pattern in September, an apparent breakdown and then right back up to new highs. I'm content to keep SMH on hold for another week. NEM - Well, it sure is nice to see some level finally serve as resistance for NEM. That's one heckuva run the stock has had since mid-October! Can you say currency weakness? You don't think the dollar plunging to new lows on a daily basis has anything to do with this do you? GRIN I want to have positions in NEM, but have no interest in chasing this one higher, so reluctantly I'll remain cautious and wait for the pullback. Our official entry target remains down at $40, a level I strongly doubt we'll see visited between now and 2004. DJX - DOW 10,000 certainly seems close now doesn't it? An intraday high of 9942 on Wednesday and a new closing high of 9930 on Thursday certainly bolsters the bulls resolve. The long commentary above tells you what I think of the overall picture in this index, and my chosen approach is still to short the touch of $100. Like with the QQQ, I was rooting for the DJX to hold above that lower entry target at $98.50 at the close so that we can wait for next week's rally attempt as the more favorable entry strategy. The bulls just barely pulled it off! So here's the strategy. A close below $98.50 is an entry, as is a touch of $100. The more conservative approach would be to split your entries. Open a half position on whichever target is hit first and then round out to a full position if the other target is reached. Remember, we're still going to use a wide stop of $104 to give the DJX room to move before taking aim on the downside like we "know" it must. QCOM - Missed it again! Just when it looked like we'd get a dip into our $42-43 targeted entry zone, QCOM came out raising their guidance and the stock popped sharply higher on Thursday. Coming to rest on Friday just below the key $50 resistance level is not where I'd be interested in initiating new positions. After the latest dip and run to new recent highs, I redrew the rising channel the stock has been in these past several months and concluded that I simply screwed up in not raising the entry to the $44 level last weekend. Sigh... Maybe next time. For now, I'm raising the entry target to $45 in hopes that we can get a nice little pullback between now and the holidays. AIG - Call me skeptical, but I've been burned enough times in this choppy and volatile market. I looked at Wednesday's failed rally and intraday high of $59.98 and I was tempted to log that as an entry into the new bearish play. But I decided to stick to the entry plan and wait for a foray into the targeted entry zone ($60- -61) before playing. I really see no hurry for entries here, as AIG is simply holding its ground as the broad market quietly creeps higher. Of course, if the unexpected happens and AIG busts higher through the descending trendline at $61, all bets are off and we'll want to leave this one alone. We're looking for the failed rally in the $60-61 area, not just an ability to move price into that area. Radar Screen: GENZ - I took another look at GENZ this week and something bothers me. The weekly Stochastics (10,5,3) has begun to turn up from oversold territory. That tells me there is a fair amount of longer-term bullishness that ought to be directed towards the stock and I think we'll actually see a test of the bottom of that channel or horizontal resistance at $52, whichever comes first. I still would have put it on the Watch List this weekend, but I got carried away with all the DOW vs. currency commentary up above and ran out of time before my publication deadline. Barring a large breakout or breakdown over the next week, GENZ will be in the Watch List next weekend. MEL - I have the same concerns with MEL that I have with GENZ this week. Weekly Stochastics are starting to tip up from near oversold and that is not normally conducive to good bearish entry points. I still like the consistent downtrend that is still in place, but determining the right entry could be tricky. Looking at the PnF chart, we can see that any entry below $33 will be in keeping with the overall downtrend. Let's see if we can get in a bit higher later in the year or more likely next year. Still in the waiting stage here as well. EK - There aren't a whole lot of more pronounced downtrends in the market than that offered by EK. As noted last weekend, finding the right entry is critical though and I don't believe this is it. Price is midway between support ($20.50) and resistance ($27.00), so we've got plenty of time to wait. Closing Thoughts: This week's commentary was a bit different than usual, but hopefully you found it useful. It took far more time than I anticipated this weekend and therefore I didn't get to spend the necessary time on picking new play candidates. Next week GENZ should move to the Watch List and I expect either QQQ or DJX (maybe both) will make the move to the Portfolio. As if that won't keep things busy enough, I think I ought to be able to dredge up a couple more Radar Screen candidates. We're getting these lists populated bit by bit again and getting ready for what ought to be an exciting and profitable 2004. Just keep in mind that we're unlikely to make a commitment to a strong directional move for the broad markets between now and the end of the year. Like the big boys, we should be focusing our efforts on not getting hurt for the remainder of the year (trade conservatively over the near term) and position ourselves for a resumption of trending markets next year with the VIX getting out of multi-year low territory and acting normally. Two more weeks of real market action and then we can coast into the end of the year. I'll bet that phrase is on the lips of more than a few mutual fund and hedge fund managers. My advice would be to make plans now to take off from the day before Christmas until the day after New Years. That period of time is not likely to offer an abundance of winning trade opportunities. Remember, we need to carefully pick our battles! Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: SBUX 11/24/03 '05 $ 30 ZOS-AF $ 4.30 $ 5.00 +16.28% $27.00 '06 $ 30 WSP-AF $ 6.40 $ 6.90 + 7.81% $27.00 Puts: WMT 10/03/03 '05 $ 55 ZWT-MK $ 5.10 $ 5.70 +11.76% $56.50 '06 $ 55 WWT-MK $ 7.20 $ 7.20 0.00% $56.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 10/05/03 $40 JAN-2005 $ 40 ZIE-AH CC JAN-2005 $ 35 ZIE-AG JAN-2006 $ 40 WIE-AH CC JAN-2006 $ 35 WIE-AG QCOM 11/16/03 $45 JAN-2005 $ 45 ZLU-AI CC JAN-2005 $ 40 ZLU-AH JAN-2006 $ 45 WLU-AI CC JAN-2006 $ 40 WLU-AH PUTS: QQQ 08/10/03 $35, $36.50 JAN-2005 $ 32 ZWQ-MF JAN-2006 $ 32 WD -MF SMH 08/24/03 HOLD JAN-2005 $ 35 ZTO-MG JAN-2006 $ 35 YRH-MG DJX 11/02/03 $98.50, $100 DEC-2004 $ 96 YDK-XR JUN-2005 $ 96 ZDK-RR AIG 11/30/03 $60-61 JAN-2005 $ 60 ZAF-ML JAN-2006 $ 60 WAP-ML New Portfolio Plays None New Watchlist Plays None Drops None ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Mind Your Own Business – Your Trading Business! By Mike Parnos, Investing With Attitude Buy Low – Sell High. That doesn't mean buy when you're depressed and sell when you're stoned. Actually, most traders do the reverse. They use 80-proof judgment enhancers (plus a little wishful thinking) to justify buying decisions. Then, when they sober up and realize what they've done, they get depressed and finally sell at the lows and they can no longer stand the pain. Couch Potato Trading Institute (CPTI) words to live by are "sell high and expire." There's a premium to our method of trading – and it usually ends up in our pocket. The options expire worthless while CPTI students are very much alive and prosperous. Can you make a living in the stock market? Yes, particularly if you use our CPTI strategies. However, you still have to treat it like a business. Before you invest – whether you’re trading options, stocks, baseball cards or Barbie Dolls – you need to invest in yourself. You need to prepare yourself mentally, physically, and financially. It takes commitment! Are you up to it? What Do You Need To Succeed? 1. EDUCATION: Your subscription to OptionInvestor is a giant step towards that end. OI provides a ton of timely information. There’s something for everyone. Everything is discussed, from aggressive trading strategies to our CPTI conservative trading strategies. But, it takes more than just reading the information. You have to lean how to implement it. 2. INFORMATION: You need to have access to the Internet for a variety of reasons. The Internet is your primary source of information. CNBC is more a source of entertainment than information – and not something on which to base your trading decisions. Ideally you should have streaming stock and index quotes. Many Internet sites offer free 15-minute delayed quotes, but that’s not good enough. The markets move much too fast. Some brokerage firms now offer streaming quotes at no charge if you open an account (PreferredTrade, OptionsXpress, Scottrade, and others). The streaming real time quotes often include daily and real time intraday charting. If not, there are a number of free Internet sites that will give you 15-minute delayed daily and intraday charts. They are interactive charts that can show you different time frames, chart sizes, various indicators, moving averages, volumes, etc. There are many quote and charting services available – some for under $100 per month. For the most sophisticated traders, NASDAQ Level II quotes and tick-by-tick charting can help with entering and exiting trades. Some brokerages even offer free Level II quotes and charting services to very active traders 3. BROKERAGE ACCOUNT: You will need to have an online margin brokerage account. Accounts where you have to talk to a human(?) to place your order will invariably cost you money. Why? Because by the time you dial the phone, get connected to a broker, explain what you want to do, get a quote, have him repeat it back to you, and place the order, the underlying could have moved a point in either direction. In that extra minute or two, the information you just received on the phone may now be obsolete. Ideally, an on-line account will have software that will show you the bid and ask prices of an option on ALL exchanges on which the option trades. The prices for an option can vary from one exchange to another. Seeing the different exchanges enables you, with a simple mouse-click, to send your order directly to the exchange offering the best price – instantly. If you send your limit order at the bid or the ask, it will likely be filled in a matter of a few seconds. No phones, no fouls. When you open your account, you’ll need to get approval to trade options. The levels of approval go from novice to professional. The more experience you have, the higher approval level you’ll get. If you’re relatively new to options, you’ll probably get approval to sell covered calls and the straight purchase of puts and calls. If you have more experience, you’ll be able to trade spreads. The highest approval level will allow you to sell uncovered options (beware). 4. MONEY: If you’re planning to treat trading, whether it’s stocks or options, as a business, your money and your positions represent your inventory. They say, “It takes money to make money.” It wouldn’t be a cliché if it weren’t true. How much money is necessary to start your business? It depends on what strategies you want to use. Do your strategies involve stock purchases? If so, then you’ll need enough to subsidize the purchase (or half the purchase on margin) of the stocks. If you’re going to simply buy calls and puts, you need enough to cover the purchases of the puts and calls. For spread trades or trading uncovered options, the brokerage will likely require an account minimum. When spread and uncovered option trading, you’ll need to have cash or other marginable securities (stocks, mutual funds, bonds, CDs, etc.) in your account to enable you to make the trades and adjustments in your positions. Brokerages have different policies in determining what securities they accept as marginable. CPTI strategies often require substantial maintenance, though normally only a small portion of it is at risk. 5. TIME: You’ve got it. Now, you just have to prioritize it. If trading is your business, you’ll have to do research on what to buy, when to buy it and what’s the right price. That takes time. If you don't spend your time wisely, it's not likely you'll have profits to spend – wisely or otherwise. 6. EMOTION: You can’t afford it. It has no place in the business of trading. Cry at sad movies, not over spilled milk or lost money. If you properly followed your trading rules, a loss is just a cost of doing business. Nothing more. Keep emotion, along with your ego, on a short leash. You’ll have good streaks and bad, but, if you use common sense, and know every aspect of your business, you'll likely do fine. 7. DESIRE: You have to want it badly enough. It’s amazing, if you want something bad enough, the number of sacrifices you’re willing to make in order to achieve it. You’ll be surprised how far desire will take you. Knowledge is Power If you want to trade for a living, you’ll spend the time to learn the strategies. You’ll find the strategies that are most comfortable and learn them inside and out. You’ll know what to do when the strategy works or if it goes against you. You’ll know the adjustments you can make and when to make them. You’ll know how to research and recognize opportunities and what strategies to use to take advantage of them. Those are the things we try to teach at OI and the CPTI. It’s here for the learning. _____________________________________________________________ DECEMBER CPTI PORTFOLIO POSITIONS SPX Iron Condor – 1061.50 We sold 7 contracts of December 1085 SPX calls and bought 17 contracts of December 1100 calls for net credit of about $1.75 ($1,225). Then, sold 7 contracts of December 1005 SPX puts and bought 7 contracts of December 990 puts for net credit of about $1.40 ($980). Total credit $2,330. Maximum profit range of 990 to 1075. Max profit potential of $2,330. BBH -- Baby Iron Condor - $129.29 BBH looks to be in a trading range. To take advantage of this range we sold 10 contracts of the Dec. BBH $130 calls and bought 10 of the Dec. $140 calls for a credit of about $2.00. Then, we sold 10 contracts of the Dec. BBH $125 puts and bought the $115 puts for a credit of about $1.85. Total credit and maximum potential profit of $3.85 if BBH finishes between $125 and $130. Safety range and suggested bailout points would be $121.15 and $133.85. Maximum potential profit of $3,850. OEX Credit Spread Boogie – 523.51 We sold 2 December OEX 520 calls @ $9.00 We bought 2 December OEX 545 calls @ $1.55 Total credit and potential maximum profit of $7.45 ($1,490). Exposure $17.55 ($3,510). Maintenance $25.00 ($5,000). NDX Iron Condor – 1406.90 Here's an index we haven't traded before. The NDX mirrors the NASDAQ 100 stocks, just like the QQQs. We sold six December NDX 1325 puts and buy the December NDX 1300 puts, taking in about $1.70. Then, we sold six December NDX 1525 calls and buy the December 1550 calls for a credit of about $1.00. Total credit: $2.70. Maximum profit range of 1325 to 1525. _____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $35.04 We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. We're going to make money by selling near term puts and calls every month. Here's what we've done so far – all in 10 contract quantities. October: Sold Oct. $33 puts and Oct. $34 calls -- total credit of $1,900. November: Sold Nov. $34 puts and calls – total credit of $1,150. December: Sold Dec. $34 puts and calls – total credit of $1,500. Note: Each month, near expiration, we buy back the expiring options and sell options for the next option cycle. We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! QQQ Put Calendar Spread – Ongoing -- Trading @ $35.04 We created a cheap play that will let us take advantage of a nice down move. Meanwhile, we sell against the January puts while we wait. Bought 10 January 04 QQQ $32 puts and sold 10 October 03 QQQ $32 puts for a total debit of $1.00 ($1,000). We rolled out to the November $32 and took in a $.30 credit and then rolled to the December $32 puts for another credit of $.40. Our cost basis is now only $.30. ______________________________________________________________ Long Term Trader How does a long term trader plan for the future? He buys two cases of beer. _____________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. ___________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************** FUTURES CORNER ************** Moving Average Trading System (MATS) Keene Little There are as many ways to trade as there are traders. One of the things we as traders need to do is identify a system that works for us. As individuals we see the market differently, form our own opinions and make trading decisions based on these opinions. We read constantly to learn what works for others so that we can see if it will work for us. Ultimately we each need to develop a system that we can call our own, for it is our own money on the line. For the Swing Trading model in the Futures Monitor, at this link if you'd like to review it: http://www.OptionInvestor.com/futurescorner/fc_110903_01.asp, I use a system that is based on Elliott Wave Theory and Fibonacci relationships to help me identify turning points in the market. I back it up with other technical indicators to give me greater confidence in forming an opinion about the market's direction and all of this combined in a system that I've honed over the years that works for me. If I can help others understand and use this system, then I will have accomplished what I set out to do--teach someone to fish so that they can feed themselves for the rest of their life. Some people are visual traders, some are system traders and some are "numbers" traders. Those who like to watch the charts and trade off of moving averages and trend lines for example are visual. They react to what they see happening in front of them. System traders set up their trading parameters and when the system says trade, they trade. Traders who set up support/resistance levels, or who calculate pivot points, use statistics and probabilities, and yes Fibonacci and EWT, are the numbers players. I believe the truly great traders use a combination of all of these, otherwise it's easy to get tunnel vision. One of the reasons I've followed OIN for many years is the vast resource of trading ideas. It's extremely helpful to me to use other peoples' ideas so as to avoid the tunnel vision that I could easily get caught in. For example, I realized I was not alone in struggling with when to exit a trade. I was giving back profits, and even letting profits turn into losses, much too often. A great trading partner and I were working on this "problem" when we developed MATS to help us get better exits, but as we used it, we defined and refined the rules to enable us to enter, manage and exit our trades more effectively. When you're in a trend you want to ride it until it's over. It's letting your winners run. Using the moving averages helps me identify an exit point for my trade. I believe one of the most difficult aspects of trading is exiting a trade. Once we're in a trade we feel like we've made a great accomplishment. Ending the trade will mean we've got to go through all that mental anguish again about where to set up the next trade. It's easier to stay in a trade, relax and let it ride, isn't it? While I now use MATS primarily to help me determine an exit point when I suspect my trade is getting close to the end of its run, I know others would be comfortable using it as one of their primary tools with which to trade. For this system I use the 1-minute chart to execute trades. I use the longer time-frames to help me set up a trade so that I'm trading with the larger trend. I like to watch Bollinger Bands and other technicals, but MATS uses just three moving averages--the 10-pma (period moving average), the 20-pma and the 40-pma, but primarily the 10 and the 20. When they cross, and when price crosses them is the basis of the system. Towards the end of this article are the "rules" for this system. As with any trading system you must set up rules by which you trade. Risk management is a rule you must follow. One of your rules might be that you don't trade during the lunch period. We develop our own rules that are usually based on pain. We've lost money too many times doing the same thing over and over until we realize we need to stop doing that. Hence a rule is born. For those who prefer to trade the ES over the YM or NQ, this system is challenged. I have found that ES tends to be "spikier" and is more difficult to keep tight stops than this system requires. YM has tighter spreads and is easier to control risk, and works well here. But it too is prone to manipulation and spikes. NQ seems to be the tamest, probably because the big boys' sandbox is the ES and to a lesser extend now the YM. Retail traders are the ones playing in the NQ sandbox and we are nicer to each other. Therefore, MATS is primarily designed for YM and NQ trading. For those who would like to trade ES with it, just remember that the YM is 1/10th the size of ES in its value per point so if I use 10 points to a stop in YM, it would equate to 1 point for ES. In reality I've found that you need a 2-point stop for ES to stay away from the spikes, hence it's riskier. One of the things I like to do is watch all three though on their own 1- min charts so that I can watch for divergence. It will help me decide whether or not to enter a trade or stay in a trade depending on whether or not I've got confirmation from the other indexes. The 1-minute chart of NQ below shows an example of how this system would have worked for us in the morning, Friday, 12/05/03. The rules at the end of this article further explain entry procedures and stop management, but the notes on the chart show where we would have entered and exited trades and why. So, for the morning we would have finished two trades for a net +12 NQ points ($240) and went flat for the mid-day period, in keeping with rule #11 below. A nice morning! By staying out of the market between 11-2:00, we missed a nice short set-up around 1:30 but it could just as easily have continued chopping around. You'll want to modify these times as you go along and see if you have more potentially profitable trades than not. Paper-trading this time period is the best way to determine that. So into the afternoon, picking up at 2:00 we see what a choppy day will do to this system: We had five more trades for a net -6.50 points (-$130). Net for the day was +5.50 points ($110). Nice lunch money but not stellar. Don't forget commission costs on 8 trades. This is a nice little system if you can catch a couple of trends during the day, but you will get chopped up in a non-trending market, as will happen with any moving average system in a choppy market. But as I mentioned earlier, this system helps me identify an exit point even if I don't use it to enter trades. Once I'm in a trade and I'm thinking the trend is getting close to a target price, I can either exit at the target price or let this system take over and exit for me. Have fun with this, paper-trade it to get comfortable with it, and of course modify it to your own parameters. I offer these rules to start with: Moving Average Trading System (MATS)--to be used during RTH only, not pre or post market hours (may need to use the All Sessions chart period for the first 15-30 minutes if the market gaps open). 1. trade using the 1-minute chart; YM and NQ are the preferred contracts as the ES tends to be more volatile. 2. trade when 1-minute candle closes and shows the 10-pma (period moving average) (exponential) has crossed the 20-pma; trade the opening of the next candle. 3. set stop 10/3 points from entry for the YM/NQ, resp., which is a $50/$60 stop loss maximum for each trade entered. a. modify the stop point to be just on the other side of the 20-pma if the standard stop level is not far enough away to get the "protection" of the 20-pma (this will occur when the price has moved quickly and the M.A.s haven't "caught up" yet; this will increase the amount of the potential stop loss so this must be done prudently); this will necessitate a decision as to whether or not to take the trade based on the larger risk with a stop further away. b. if the 20-pma is used for the stop, move the stop 10/3 points from your entry as soon as possible c. chase your stop by keeping it 5/1.5 points from the 20-pma once the price has moved sufficiently. 4. stop out of play sooner if the 10-pma crosses the 20-pma giving the opposite signal (the M.A. cross is based on the closing of the candle). 5. if an M.A. cross looks to stop you out but the other indexes are not confirming the same signal, subjective analysis is required to determine whether or not to take the stop and enter the opposite trade or to let the standard stop take you out. 6. after being stopped out on a hit of the 5/1.5 points from the 20-pma but the position of the M.A.s is still giving you a trade signal in the same direction, use subjective analysis to determine the momentum of the market to determine whether or not to wait for a clearer signal of M.A. position and momentum before entering the trade; e.g., if you were long the YM and then stopped out because the market dropped back down and triggered your trailing stop 5 points below the 20-pma, and you see the 10-pma still above the 20-pma (a long trade signal), but the 10-pma is coming down, then delay your trade signal to see if the 10-pma reverses back up. Additional methods to use to help get back into a trade: a. wait 5 minutes before taking another trade signal in the same direction (a spike reversal may be a precursor of a larger reversal coming, so give it time to prove which way it's going); use confirmation of the other indexes if you want to take a quicker trade. b. use the 5 or 15-minute chart(s) to confirm the longer-term trend and trade in that direction; this should allow a quicker reentry with a little more confidence. c. use the cross of the 20-pma over the 40-pma as your entry signal. d. if you miss the beginning of the move, or if stopped out and waiting to reenter same-direction trade, watch for price to bounce off the 20-pma and back through the 10-pma in the direction you want to trade. 7. if the market moves quickly in your favor by 20/6 points, to limit your loss in the event of a spike reversal, move the stop immediately to the 20-pma each time you get a quick 20/6-point move in your favor, and then continue to trail it once the normal stop (5/1.5 points from the 20-pma) is back in play. 9. approaching the end of the RTH, you can pull your stop up tighter after 15:45pm EST and use the 20-pma instead of 5/1.5 points from the 20-pma; also, be careful of your margin if carrying multiple contracts--15:45 pm marks the time where the overnight margin is calculated. a. alternatively, use subjective analysis to determine whether or not there appears to be enough momentum to stay in your trade using the standard stop settings; this includes carrying the trade until 16:14 (basis 16:15 trading stops in the NQ and ES), but it is recommended to close all trades NLT 16:14 to avoid trouble exiting a trade--with this system you do not want to carry a trade overnight! 10. market-moving news must be traded around very carefully--if currently in a trade when an announcement is coming, remain in the trade but prudence dictates whether or not to enter a new trade as you approach the announcement. 11. trading around the lunch hour period (11:00 am to 2:00 pm) is usually a choppy period and unprofitable time to trade and therefore is not recommended. a. if you are in an open trade that goes past 11:00 am, move stop to break-even as soon as possible (e.g., up to near 20-pma) or if you're trading multiple contracts, take some off the table to create a free trade on the remaining open position. b. entering a trade after lunch (start watching after 1:30 pm)--watch for a trend starting with 20-pma crossing 40-pma and look for confirmation of the other indexes; use the 5-minute chart's 10 and 20-pma's to help confirm the direction of the momentum. Lastly, for those who like to keep track of your trades in a spreadsheet, I've developed a spreadsheet to track just these trades (although certainly usable for all trades). I offer it to anyone who would like to have a copy. Just email me and I'll send it to you. It's hard to see here because I had to scrunch it and it's only part of the screen, but it looks like this: All you have to do is enter you trade data in the blue boxes and everything else is calculated for you. As always, good luck in your trading and let me know if there's anything I can do to clarify anything. Keene Little ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Sunday 12-07-2003 Sunday 5 of 5 In Section Five: Covered Calls: More Q&A With The Covered-Calls Editor Naked Puts: A Conservative Alternative For Put Writers Spreads/Straddles/Combos: Santa Delayed By Snowstorm! Updated In The Site Tonight: Market Posture: And the Profit Taking Continues ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: More Q&A With The Covered-Calls Editor By Mark Wnetrzak One of our new readers made some very interesting comments on a specific chart pattern that often identifies bullish issues. Attn: mark@OptionInvestor.com Subject: Technical Analysis Terms Hi Mark, I am looking over your website, specifically the covered call writing strategy you employ. It is the very one I like to use best. Thanks for all of your contributions. One question...is the newsletter where I will find your current discussion - contribution for covered calls? The purpose of this email though is just to share with you one of those slow head-shaking moments when an observation has been validated. I was reading your discussion on the stages of the market, and you mentioned the Runner's Crouch. I have never heard the term before, yet I knew exactly what I would see when I looked at the chart. The head-shaking grin came when I saw the "track shoe." What you, and apparently the rest of the trading world, call the "crouch," I have always called the "track shoe." The chart is FLML and just prior to the rally, the stock dips, which I am presuming is the crouch. For me, I would see that same pattern form and say, 'there it is'. Look at the first couple of days with the longer tails, like heel spikes, then the price rolls down just a bit, like the arch of the shoe, and then flattens and pushes off, again with tails, like spikes at the ball/toe of the shoe. Specifically I am talking about the few days on both sides of the line separating the AMJ and JAS periods. Actually, that line goes right through the arch of the foot. It is, as this one was, usually a pattern of maybe 5-8 days. Good luck tomorrow. Frank Hello Frank, Thanks for the kind words and yes, all of my contributions will be in the OIN. Actually Stan Weinstein described the "Runners Crouch" in his book, "Secrets for Profiting in Bull and Bear Markets." Generally it is simply seen as a final wash-out of the weak stock holders after the stock has been in a consolidation phase. It also just depends on your time frame. Take a look at FLML over several years: the 2001 to 2002 period could fit the description too (seven year time-frame). But, the change in character isn't confirmed until the stock moves above its long-term moving average and resistance area on increasing volume. Stan advised waiting for the break-out and then entering the position on a pullback towards the long-term MA. (Easier said than done...) Best regards, Mark W. OIN Editor's Note: For readers who are unfamiliar with the stages of a stock, here is a brief description of the first two categories and a simple explanation of how they can help identify favorable issues for bullish positions, as well as some hints for timing the entry transactions. Stage I is the basing stage that can last for months or sometimes years. The condition is usually defined by little or no vertical activity with a long-term moving average that is basically flat. A common axiom suggests that, "the longer the base, the stronger the case" (when a stock breaks out) and issues with this type of pattern have relatively low capital risk as there is usually little downside potential remaining. Stage II is when the issue begins to exhibit signs of a new upward trend. The stock price closes above a long-term moving average (150-200 DMA) with the average turning up, and that is the ideal time to enter a bullish play. Investors should look for the next resistance level to identify the potential profit target or range of movement. You should focus on stocks that have "room to run," picking only those issues that are in stage II climbs and buying on pullbacks to technical support; trend-lines, moving averages, previous resistance, etc. And some hints... 1. Stage II is the "ideal" time to enter for a bullish play. For trend trading, pick stocks that are in stage II rallies and buy on the pullbacks to technical support or major trend-lines. 2. Look for volume -- this is vital! Most big movers climb on substantially larger volume than that which occurs at any time during the basing stage. 3. Look for strong Relative Strength. When a stock breaks out of a base, the relative strength should cross up above the zero line into positive territory. The higher the climb to cross above the zero line, the more upside potential in the movement. 4. Look for the "Runner's Crouch" pattern before the stock breaks out of a long-term base. In many cases, stocks will go through a short period of "building steam." It's usually a small dip to gather strength for the upward push above the moving average. Once the stock crosses above the top of the base (resistance) it should also continue through the moving average. 5. As the rally begins in earnest, the long-term moving average should start to turn upward and after the stock corrects back to a technical support area, the next run-up, which must be supported by heavier-than-average volume, and should continue until a new (near-term) high is achieved. SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield NTPA 15.30 14.75 DEC 15.00 1.30 0.75 7.8% ARIA 7.70 8.00 DEC 7.50 0.80 0.60* 7.6% GSS 5.90 7.85 DEC 5.00 1.25 0.35* 6.5% PAAS 12.57 13.35 DEC 12.50 0.70 0.63* 5.8% MOBE 11.19 11.00 DEC 10.00 1.60 0.41* 4.6% ISSI 16.33 15.23 DEC 15.00 1.90 0.57* 4.3% MMR 16.30 18.95 DEC 15.00 2.00 0.70* 4.3% CLHB 6.12 7.50 DEC 5.00 1.35 0.23* 4.2% INSP 24.39 24.14 DEC 22.50 2.70 0.81* 4.1% IBIS 16.25 16.12 DEC 15.00 1.65 0.40* 4.0% ESPR 22.21 22.53 DEC 20.00 2.90 0.69* 3.9% CANI 14.05 14.50 DEC 12.50 1.95 0.40* 3.6% TLAB 8.08 7.79 DEC 7.50 0.80 0.22* 3.3% KMRT 30.44 29.40 DEC 30.00 1.50 0.46 2.3% XXIA 12.70 12.04 DEC 12.50 0.70 0.04 0.5% AVII 4.99 4.58 DEC 5.00 0.40 -0.01 0.0% SLNK 20.61 19.22 DEC 20.00 1.25 -0.14 0.0% * Stock price is above the sold striking price. Comments: After an exciting Monday rally, the major averages were unable to follow through and now appear at the mercy of Tuesday's FOMC meeting. In fact, the more speculative Russell 2000 and NASDAQ Composite indices ended the week in a rather worrisome fashion. Once again, a defensive nature may be appropriate as the major averages could move to test their support areas. As for the covered-call portfolio, the listed play for Protein Design Labs (NASDAQ:PDLI) was unavailable as the stock opened Monday's session well above last Friday's closing price. A few issues are acting horridly and should be monitored closely as potential early-exit candidates: Integrated Silicon Solutions (NASDAQ:ISSI) - which violated the 30-day MA; Infospace (NASDAQ:INSP) - also violated the 30-day MA; Kmart (NASDAQ:KMRT) - bearish candlestick pattern (Evening Star); Ixia (NASDAQ:XXIA) - a "key" test of 30-day MA; and Avi Biopharma (NASDAQ:AVII) - testing a major support area. Spectralink (NASDAQ:SLNK) is also at a key moment, with the next support area near its 150-day MA (~$16.50). Positions Previously Closed: Brocade (NASDAQ:BRCD) and TiVo (NASDAQ:TIVO). NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield IMMU 5.35 DEC 5.00 QUI LA 0.60 2143 4.75 14 11.4% NEOL 18.32 DEC 17.50 UOE LW 1.40 860 16.92 14 7.4% XING 10.66 JAN 10.00 QAE AB 1.35 227 9.31 42 5.4% NTIQ 12.53 JAN 12.50 CDJ AV 0.85 1922 11.68 42 5.1% IBIS 16.12 DEC 15.00 UIB LC 1.45 320 14.67 14 4.9% MYGN 12.76 JAN 12.50 GSQ AV 0.95 123 11.81 42 4.2% IM 15.06 DEC 15.00 IM LC 0.30 21 14.76 14 3.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** IMMU - Immunomedics $5.35 *** On The Rebound *** Immunomedics (NASDAQ:IMMU) is a biopharmaceutical company focused on the development, manufacture and marketing of monoclonal antibody-based products for the detection and treatment of cancer and other serious diseases. The company has developed a number of advanced proprietary technologies that allow it to create humanized antibodies that can be used either alone in unlabeled form or conjugated with radioactive isotopes, chemotherapeutics or toxins to create highly targeted agents. Using these technologies, IMMU has built a broad pipeline of diagnostic and therapeutic product candidates that utilize several different mechanisms of action. Its technologies are supported by an extensive portfolio of intellectual property that includes approximately 80 issued patents in the United States and 233 other issued patents abroad. Immunomedics suffered in early November after announcing that partner, Amgen (NASDAQ:AMGN), elected to drop development of an experimental drug. The stock has rebounded on heavy volume this month, shortly after the company's annual shareholders meeting. This play offers reasonable short-term speculation for investors who wouldn't mind owning IMMU near a cost basis of $4.75. DEC-5.00 QUI LA LB=0.60 OI=2143 CB=4.75 DE=14 TY=11.4% ***** NEOL - NeoPharm $18.32 *** Bracing For A Rally? *** NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. The company has built its drug portfolio based on its two novel proprietary technology platforms, the proprietary NeoLipid liposomal drug delivery system and a tumor-targeting toxin platform. NeoPharm has several promising compounds in various stages of development. The company's lead compound is IL13-PE38, a tumor-targeting toxin being developed as a treatment for glioblastoma multiforme, a deadly form of brain cancer. NeoPharm appears to moving up and out of its recent consolidation area and this short-term position simply offers a method to participate in the future movement of the issue with relatively low risk. DEC-17.50 UOE LW LB=1.40 OI=860 CB=16.92 DE=14 TY=7.4% ***** XING - Qiao Xing $10.66 *** Chinese Telecom *** Qiao Xing Universal Telephone (NASDAQ:XING) is engaged in the design, manufacture and sale of telecommunication terminals and equipment in the People's Republic of China, including in-house corded and cordless telephone sets under the Qiao Xing trademark. Its QX Communication subsidiary also designs, develops and manufactures global standard for mobile (GSM) mobile telephones for CEC Telecom Co., Ltd. Qiao Xing has a nationwide sales network that includes 3,500 retail outlets in China. The company has introduced smart card telephones and expects to develop and introduce a number of special function corded telephones to the market. Qiao Xing has also developed and introduced caller ID display and coin operated telephones. Qiao Xing rallied this week after a subsidiary said that it expects a substantial increase in both sales and profits over last year. XING seems to be stuck in a lateral trading range and this position allows for a reasonable reward at the risk of owning XING shares near recent technical support. JAN-10.00 QAE AB LB=1.35 OI=227 CB=9.31 DE=42 TY=5.4% ***** NTIQ - NetIQ $12.53 *** Bottom Fishing: Part I *** NetIQ (NASDAQ:NTIQ) provides systems and security management and Web analytics software solutions for assuring, analyzing and optimizing the performance, availability and security of its customers' IT infrastructure and Websites. Historically focused on Microsoft Windows applications management, NetIQ has become a provider of software to test, migrate, administer, monitor, secure and analyze complex, distributed Windows-centric computer systems. The company's UNIX and Linux modules address its customers' growing need to manage heterogeneous environments with cross-platform solutions, and enable them to manage more applications, servers and operating systems with its products. NTIQ has been forging a Stage I base for almost a year and this position offers speculators a method to profit from the current lateral trend. JAN-12.50 CDJ AV LB=0.85 OI=1922 CB=11.68 DE=42 TY=5.1% ***** IBIS - Ibis Technology $16.12 *** Rally Mode! *** Ibis Technology (NASDAQ:IBIS) develops, manufactures and markets SIMOX-SOI implantation equipment and wafers for the worldwide semiconductor industry. SIMOX, or Separation by IMplantation of Oxygen, is a form of silicon-on-insulator (SOI) technology that creates an insulating barrier below the top surface of a silicon wafer. SIMOX-SOI products are well suited for many commercial applications, including servers and workstations, portable and desktop computers, wireless communications and battery-powered devices such as laptop computers, personal digital assistants (PDAs) and mobile telephones, integrated optical components and harsh-environment electronics. Sales of 300-millimeter wafers accounted for approximately 44% of the company's total wafer product sales in 2002. Shares of Ibis Technology continue to rally (since May) and are now testing an "old" resistance area. Investors who have a bullish outlook and believe the rally will continue can use this position to establish a favorable cost basis in the issue. DEC-15.00 UIB LC LB=1.45 OI=320 CB=14.67 DE=14 TY=4.9% ***** MYGN - Myriad Genetics $12.76 *** Bottom Fishing: Part II *** Myriad Genetics (NASDAQ:MYGN) is a biopharmaceutical company focused on the development of novel therapeutic products and the development and marketing of predictive medicine products. The company's researchers have made important discoveries in the fields of cancer, Alzheimer's disease, viral diseases (such as HIV), depression and obesity. These discoveries point to novel disease pathways that may pave the way for the development of new drugs. Flurizan (MPC-7869), their lead therapeutic candidate for prostate cancer, is in a large, multi-center clinical trial. Myriad is also conducting a Phase I clinical trial for the evaluation of MPC-7869 for Alzheimer's disease. MYGN has been forging a Stage I base for almost a year and this position offers speculators a method to profit from the current lateral trend. JAN-12.50 GSQ AV LB=0.95 OI=123 CB=11.81 DE=42 TY=4.2% ***** IM - Ingram Micro $15.06 *** Breaking Out? *** Ingram Micro (NYSE:IM) is a distributor of IT products and services worldwide. Ingram sells computer hardware, networking equipment and software products to nearly 170,000 reseller customers in more than 100 countries. It also provides supply chain optimization services and demand generation services for its suppliers and reseller customers. As a distributor, the company markets its products and services primarily to resellers and suppliers that, in turn, market and sell directly to end user customers. It offers its customers an aggregation of, and access to, a broad array of products and services by distributing and marketing hundreds of thousands of IT products worldwide from over 1,700 suppliers, including most of the computer industry's hardware suppliers, networking equipment suppliers and software publishers. Ingram Micro is on the verge of a breakout above a resistance area near $15. Investors who believe shares of IM are destined to climb higher can profit from that outcome with this position. DEC-15.00 IM LC LB=0.30 OI=21 CB=14.76 DE=14 TY=3.5% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield CLHB 7.50 DEC 7.50 QPB LU 0.35 400 7.15 14 10.6% IMCL 41.25 DEC 40.00 QCI LH 2.40 5013 38.85 14 6.4% GNTA 10.89 DEC 10.00 GJU LB 1.10 7061 9.79 14 4.7% ELN 5.51 JAN 5.00 ELN AA 0.80 41175 4.71 42 4.5% ISSX 18.05 DEC 17.50 ISU LW 0.90 2528 17.15 14 4.4% PDLI 16.15 JAN 15.00 PQI AC 2.00 610 14.15 42 4.3% VIRL 10.32 JAN 10.00 UVB AB 0.85 29 9.47 42 4.1% NTGR 16.01 JAN 15.00 TUD AC 1.80 30 14.21 42 4.0% IMGN 5.05 JAN 5.00 GMU AA 0.30 757 4.75 42 3.8% ***************** NAKED PUT SECTION ***************** Options 101: A Conservative Alternative For Put Writers By Ray Cummins This week, we continue with part II of the narrative concerning margin requirements for uncovered puts and other option selling strategies. In the previous article, we discussed the various formulas that brokerages use to determine the necessary margin (or collateral) for writing uncovered options. In most cases, the initial margin is equal to roughly 25% of the value of the underlying issue, however the collateral requirement can increase significantly in volatile markets. One way to reduce the amount of margin for a "naked" (short) option is to cover it with a more distant series and that technique is the basis for a popular combination play: the (vertical) credit spread. Credit Spreads A credit spread is a simple strategy that allows traders to have time decay work in their favor while maintaining a favorable risk-reward outlook. To initiate a bullish credit spread, an investor would simultaneously write a put option and buy a put option that expire at the same time, but with different strike prices. The written (sold) option is closer to the price of the underlying issue than the purchased option, and therefore has a higher premium. Traders will receive a credit in their account, hence the name "credit" spread. The objective of the strategy is for both options to expire worthless so that an investor can keep all of the credit (profit) in their account. Normally, a credit spread trader utilizes front-month options only, as the time-value premium evaporates most rapidly in the final month of expiration and this erosion effect is beneficial to the overall position. The risk-reward calculations are: Maximum profit = the "net" credit received from the purchase and sale of the options. Maximum risk (and margin requirement) = the difference between the strike prices - the "net" credit. Break-even point = the sold strike price - the "net" credit. Return on Investment = "net" credit / margin requirement. An example using a naked-put play from last Wednesday's OIN: BRCM - Broadcom $35.88 PLAY (sell 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 3542 0.40 32.10 4.7% 1.2% Note: The Maximum (monthly) Yield of 4.7% is based on E-trade's margin requirements and 23 days until option expiration. Compare the position above to this put-credit spread: BRCM - Broadcom $35.88 PLAY (bullish/credit spread): BUY PUT DEC-30.00 RCQ-XF OI = 2503 ASK = 0.20 SELL PUT DEC-32.50 RCQ-XZ OI = 3542 BID = 0.40 NET-CREDIT = 0.20 SIMPLE YIELD = 0.20 / (2.50 - 0.20) = 9% MAX YIELD (monthly) = 9% / 23 X (365 / 12) = 11% As this example reflects, credit spreads can offer similar reward potential with far lower margin/collateral requirements and often less risk than (short) uncovered options. However, both methods are useful and only you can decide what strategy is most suitable for a specific situation, as well as your personal experience level, risk-reward tolerance and portfolio outlook. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield RMBS 30.00 29.30 DEC 25.00 0.55 0.55* 3.3% 10.6% RDWR 23.46 24.89 DEC 20.00 0.65 0.65* 2.9% 8.6% SANM 11.11 11.45 DEC 10.00 0.25 0.25* 2.8% 7.6% RDWR 26.84 24.89 DEC 25.00 0.60 0.49 2.9% 7.5% APPX 32.62 35.50 DEC 25.00 0.45 0.45* 2.0% 7.0% APPX 32.29 35.50 DEC 25.00 0.55 0.55* 2.0% 6.8% AEIS 26.30 25.00 DEC 22.50 0.45 0.45* 2.2% 6.8% NTE 36.99 38.20 DEC 22.50 0.35 0.35* 2.3% 6.5% SWIR 18.75 15.57 DEC 15.00 0.30 0.30* 1.8% 6.4% ALTR 23.93 23.43 DEC 22.50 0.50 0.50* 2.5% 6.3% FFIV 25.07 24.95 DEC 22.50 0.55 0.55* 2.2% 6.0% XMSR 22.10 22.95 DEC 17.50 0.25 0.25* 1.6% 5.8% APPX 36.04 35.50 DEC 30.00 0.35 0.35* 1.7% 5.8% PDII 25.97 27.84 DEC 22.50 0.45 0.45* 1.8% 5.3% MGAM 42.90 36.45 DEC 35.00 0.45 0.45* 1.4% 5.0% NPSP 29.26 30.75 DEC 25.00 0.35 0.35* 1.5% 4.9% FLEX 16.00 14.83 DEC 15.00 0.30 0.13 1.3% 3.3% ECLG 24.14 18.51 DEC 20.00 0.40 -1.09 0.0% 0.0% ADEX 25.14 18.64 DEC 22.50 0.45 -3.41 0.0% 0.0% * Stock price is above the sold striking price. Comments: Expectations were high Friday but data from the Labor Department failed to inspire investors and the market eventually drifted to a new low for the month of December. The jobs report wasn't bad from a relative perspective, however it simply was not up to the "exceptional" standards currently priced-in to share values. A similar situation occurred with ADE Corporation (NASDAQ:ADEX), which plunged almost 20% Wednesday after reporting no worse than "acceptable" earnings for its fiscal second quarter. The firm noted increased revenues, bookings and order backlog, and a much improved cash flow, but that did little to stem the selling that occurred after the company mentioned additional expenses due to upcoming litigation with KLA-Tencor. In any case, traders should have been out of the position with a stop-loss order on Wednesday, or in a worst case, by the market close on Thursday, and neither exit would have resulted in a loss as large as that which is shown in the summary. Our recent "watch" list candidate: eCollege.com (NASDAQ:ECLG) also succumbed to a sell-off on Wednesday as the education group tanked in conjunction with the precipitous decline in Career Education (NASDAQ:CECO). CECO was hammered by investors for a 30% loss amid new allegations of inflated enrollment numbers. Our position in ECLG was closed Thursday (at a lower than published debit) to limit potential losses. New issues on the "early-exit" list include Radware (NASDAQ:RDWR), Flextronics (NASDAQ:FLEX), Multimedia Games (NASDAQ:MGAM) and Sierra Wireless (NASDAQ:SWIR). Previously Closed Positions: None WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield RMBS 29.30 DEC 25.00 BNQ XE 0.40 9014 24.60 14 3.5% 11.1% MMR 18.95 DEC 17.50 MMR XW 0.30 70 17.20 14 3.8% 10.1% QLTI 18.86 DEC 17.50 QTL XW 0.25 1169 17.25 14 3.1% 8.4% USNA 34.39 DEC 30.00 UNX XF 0.35 160 29.65 14 2.6% 7.8% ONXX 27.63 DEC 25.00 OIQ XE 0.25 1388 24.75 14 2.2% 6.3% DIGE 38.50 DEC 35.00 QDG XG 0.35 247 34.65 14 2.2% 6.2% MEDI 27.04 DEC 25.00 MEQ XE 0.25 6474 24.75 14 2.2% 6.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** RMBS - Rambus $29.30 *** Recent Unocal Settlement! *** 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. Shares of RMBS rallied last week in the wake of a new legal ruling involving Unocal (NYSE:UCL), which analysts say could foreshadow a positive outcome for Rambus in its suit with the government. The ongoing saga of the company's royalty issues may be resolved in a favorable manner after this ruling, and traders can profit from that outcome with this position. DEC-25.00 BNQ XE LB=0.40 OI=9014 CB=24.60 DE=14 TY=3.5% MY=11.1% ***** MMR - McMoRan Exploration $18.95 *** Sector Rally! *** McMoRan Exploration (NYSE:MMR) is engaged in the exploration, development and production of oil and gas offshore in the Gulf of Mexico and onshore in the Gulf Coast region. The company has rights to explore on over 400,000 gross acres, which is one of the largest exploration acreages held by any independent company in the Gulf of Mexico. In November, shares of McMoRan rallied sharply after it said it found hydrocarbons at an exploratory well in the Gulf of Mexico, making a total of three such wells successfully drilled in the last 12 months. The news has pushed this stock to multi-year highs and the current upside momentum in the oil and gas industry should help support the share value in the near term. DEC-17.50 MMR XW LB=0.30 OI=70 CB=17.20 DE=14 TY=3.8% MY=10.1% ***** QLTI - QLT Inc. $18.86 *** New Multi-Year High! *** QLT Inc. (NASDAQ:QLTI) is a bio-pharmaceutical company engaged in the development and commercialization of products in ophthalmology and oncology and in other fields where the product can be marketed by a focused specialty sales and marketing team. QLT is a provider in the field of photodynamic therapy, a field of medicine that uses photosensitizers (light-activated drugs) in the treatment of disease. QLT is also actively developing pharmaceutical products that do not employ photodynamic therapy. Visudyne, QLT's commercial product, is a photosensitizer used to treat choroidal neovascularization in patients with wet form, age-related macular degeneration. Shares of QLTI have been in "rally mode" since the first day of December and it appears that investors are celebrating the potential for a favorable ruling on reimbursement and positive numbers for the 4th quarter. Traders can speculate conservatively on continued upside movement in the issue with this position. DEC-17.50 QTL XW LB=0.25 OI=1169 CB=17.25 DE=14 TY=3.1% MY=8.4% ***** USNA - USANA Health Sciences $34.39 *** A Healthy Stock! *** USANA Health Sciences (NASDAQ:USNA) develops and manufactures nutritional, personal care and weight management products that are distributed through a network marketing system throughout the United States, Canada, Australia, New Zealand, the United Kingdom, Hong Kong, Japan and Taiwan. The firm's three primary product lines consist of USANA Nutritionals, Sense-Beautiful Science and LEAN Lifelong. USANA Nutritionals include a range of antioxidants, minerals, vitamins, and other nutritional supplements. The Sense-Beautiful Science product line is comprised of products designed to support healthy skin and hair. LEAN Lifelong products were developed to provide a comprehensive approach to weight management, proper diet and nutrition and healthy living. There has been little news on this health products company since the quarterly report and 2-for-1 stock split in October. However, the volatility in early November has inflated the option premiums and the technical indications suggest a reasonable probability of a profitable outcome in this bullish position. DEC-30.00 UNX XF LB=0.35 OI=160 CB=29.65 DE=14 TY=2.6% MY=7.8% ***** ONXX - Onyx Pharmaceuticals $27.63 *** Own This One! *** 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 is a popular issue among biotech traders and the potential for future volatility keeps the option premiums robust. Investors who favor the recent technical indications for ONXX can establish a cost basis below $25 in the issue with this position. DEC-25.00 OIQ XE LB=0.25 OI=1388 CB=24.75 DE=14 TY=2.2% MY=6.3% ***** DIGE - Digene $38.50 *** Entry Point? *** Digene (NASDAQ:DIGE) develops, manufactures and sells proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. A recent study suggests that an HPV DNA test is more effective than a Pap smear alone in identifying women with cervical cancer or its precursors, and may facilitate earlier treatment, while allowing others to avoid unnecessary, invasive follow-up procedures. The research utilized Digene's DNAwithPap Test, which is the only FDA-approved test that detects the presence of HPV -- the primary cause of cervical cancer. The news may explain Friday's rally in DIGE and traders who wouldn't mind owning the issue near a basis of $35 should consider this position. DEC-35.00 QDG XG LB=0.35 OI=247 CB=34.65 DE=14 TY=2.2% MY=6.2% ***** MEDI - MedImmune $27.04 *** Bottom-Fishing Only! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with a range of unique products on the market and a diverse product pipeline. The firm is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease, immune regulation and cancer. MedImmune actively markets four products, Synagis, Ethyol and CytoGam and FluMist. MedImmune co-markets the FluMist vaccine with Wyeth and the company plans an initial product run of 4 to 5 million doses of FluMist for the 2003-2004 flu season. Last week, MEDI reported that live, attenuated vaccines may have a greater potential to produce a broad immunity to influenza such as drifted strains like those currently circulating, than the inactivated flu vaccines. In addition, the unexpectedly strong demand for flu shots may have helped the nasal product's flagging sales and investors who believe the rebound in MEDI will continue can speculate on that outcome with this position. DEC-25.00 MEQ XE LB=0.25 OI=6474 CB=24.75 DE=14 TY=2.2% MY=6.0% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield IBIS 16.12 DEC 15.00 UIB LC 1.45 320 13.55 14 23.2% 46.5% NEOL 18.32 DEC 17.50 UOE XW 0.50 29 17.00 14 6.4% 15.5% ADRX 22.83 DEC 22.50 QAX XX 0.55 531 21.95 14 5.4% 12.8% NPSP 30.75 DEC 30.00 QKK XF 0.55 361 29.45 14 4.1% 9.9% ARTC 23.04 DEC 22.50 ARU XX 0.40 18 22.10 14 3.9% 9.6% QCOM 49.48 DEC 17.50 AAO XW 0.45 5616 17.05 14 5.7% 9.4% DY 26.01 DEC 25.00 DY XE 0.40 29 24.60 14 3.5% 8.9% DAKT 20.36 DEC 20.00 QKC XD 0.30 0 19.70 14 3.3% 8.1% ADSK 23.53 DEC 22.50 ADQ XX 0.25 781 22.25 14 2.4% 6.3% NCEN 39.62 DEC 35.00 URE XG 0.25 1202 34.75 14 1.6% 4.7% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Santa Delayed By Snowstorm! By Ray Cummins The holiday rally came to an unscheduled halt Friday as weaker than expected employment data and mediocre guidance from Intel (NASDAQ:INTC) conspired to instigate a selling spree. The Dow Jones industrial average ended down 68 points at 9,862 with the majority of blue-chip components in the red. Among the bullish issues were Caterpillar (NYSE:CAT), SBC Communications (NYSE:SBC) and Wal-Mart (NYSE:WMT). The tech-laden NASDAQ slid 30 points to 1,937 with semiconductor shares leading the retreat. The Standard & Poor's 500 Index finished 8 points lower at 1,061 with only oil service and gold shares enjoying buying pressure. Losers edged past winners by a ratio of 6 to 5 on the Big Board, where only 1.2 billion shares traded. Declining shares outpaced advancing issues 2 to 1 on the NASDAQ, where 1.7 billion shares changed hands. The bond market was buoyed by the uninspiring jobs report, which some experts say will keep the Fed's optimism in check during its interest rate policy-setting meeting next week. The yield on the benchmark 10-year Treasury fell to 4.22%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position or to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status MGAM 41.45 36.45 DEC 30 35 0.45 34.55 0.45 Open? ANPI 48.77 49.15 DEC 35 40 0.45 39.55 0.45 Open PFE 34.08 34.20 DEC 30 32 0.25 32.25 0.25 Open PHS 58.10 66.20 DEC 47 50 0.30 49.70 0.30 Open SII 39.07 40.22 DEC 35 37 0.45 37.05 0.45 Open IVGN 64.85 66.40 DEC 55 60 0.50 59.50 0.50 Open NTLI 58.96 63.40 DEC 45 50 0.45 49.55 0.45 Open NVLS 42.54 40.80 DEC 35 37 0.25 37.25 0.25 Open HOV 92.25 95.16 DEC 80 85 0.55 84.45 0.55 Open IMCL 39.29 41.25 DEC 30 35 0.55 34.45 0.55 Open MATK 60.74 58.39 DEC 50 55 0.45 54.55 0.45 Open MSTR 54.00 51.00 DEC 45 50 0.65 49.35 0.65 Open? LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Multimedia Games (NASDAQ:MGAM) and Microstrategy (NASDAQ:MSTR) are the new issues on the "watch" list and any further downside movement in these issues should be seen as a potential early-exit signal. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status AIG 58.28 58.63 DEC 65 60 0.90 60.90 0.90 Open BJS 32.18 35.00 DEC 37 35 0.30 35.30 0.30 Closed SNPS 30.85 30.55 DEC 37 35 0.25 35.25 0.25 Open CCMP 54.16 52.22 DEC 65 60 0.50 60.50 0.50 Open KKD 41.85 38.66 DEC 50 45 0.60 45.60 0.60 Open SNPS 30.28 30.55 DEC 37 35 0.20 35.20 0.20 Open MRVL 38.90 38.01 DEC 45 42 0.30 42.80 0.30 Open QCOM 43.97 49.48 DEC 50 47 0.25 47.75 (1.73) Closed MHK 72.08 71.24 DEC 80 75 0.45 75.45 0.45 Open TTWO 33.10 30.11 DEC 37 35 0.25 35.25 0.25 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Qualcomm (NASDAQ:QCOM) gapped higher Thursday after the company raised its forecast for the first quarter, citing stronger demand for its wireless phones and the computer chips used to power them. There was little chance to close the position without a loss. BJ Services (NYSE:BJS) became an early-exit candidate after its sharp rebound in conjunction with the rallying oil service group. The position in Intermune (NASDAQ:ITMN) has previously been closed to limit losses. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status VLO 44.00 45.04 DEC 37 40 2.20 39.70 0.30 Open ADRX 21.66 22.83 DEC 17 20 2.15 19.65 0.35 Open ELAB 48.17 52.99 DEC 40 45 4.50 44.50 0.50 Open ANPI 49.32 49.15 DEC 40 45 4.50 44.50 0.50 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status CTMI 16.08 15.53 DEC 20 17 2.25 17.75 0.25 Open As noted last week, Apria Healthcare (NYSE:AHG) was on the "watch" list and the position was closed for a small loss during Monday's rally. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status IDCC 19.00 19.77 JAN 25 15 0.20 0.45 Open ELX 29.50 27.37 APR 35 25 0.10 0.00 Open The recent rally in Emulex (NYSE:ELX) failed at resistance near $30 and with the bearish trend now resuming, a move below support at $26.50 would signal our exit in the position. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status SCRI 20.52 26.74 FEB-22C DEC-25C 1.40 2.10 Open CEPH 46.34 46.56 FEB-50C DEC-50C 1.30 1.60 Open DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status MACR 20.22 18.76 DEC 20 20 2.20 2.10 Open ATN 17.93 17.80 JAN 17 17 2.40 2.75 Open MYL 25.32 25.45 JAN 25 25 2.25 2.10 Open CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance, and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** CME - Chicago Mercantile $70.63 *** Consolidation Complete? *** Chicago Mercantile Exchange Holdings (NYSE:CME) is the holding company for Chicago Mercantile Exchange and its subsidiaries. CME is a designated contract market for the trading of futures and options on futures contracts. Trades are executed through open outcry, electronic trading and various privately negotiated transactions. Through its in-house Clearing House Division, CME clears, settles, nets and guarantees performance of all matched transactions in its products. CME resulted from the completion of a demutualization process whereby Chicago Mercantile Exchange, an Illinois not-for-profit membership organization, became a Delaware for-profit corporation. The transaction resulted in a conversion of membership interests in the Illinois organization into stock ownership in the Delaware corporation. CME - Chicago Mercantile Exchange $70.63 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-60.00 CME-ML OI=200 ASK=$0.45 SELL PUT JAN-65.00 CME-MM OI=80 BID=$0.90 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$64.50 ***** NCEN - New Century Financial $39.62 *** New 2003 High! *** New Century Financial Corporation (NASDAQ:NCEN) is one of the nation's largest specialty mortgage companies, providing first and second mortgage products to borrowers nationwide through its operating subsidiaries. It offers mortgage products to borrowers who generally do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. New Century is committed to serving the communities in which it operates with fair and responsible lending practices. NCEN - New Century Financial $39.62 PLAY (conservative - bullish/credit spread): BUY PUT JAN-30.00 NWR-MF OI=258 ASK=$0.55 SELL PUT JAN-33.37 NWR-MX OI=440 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=15% B/E=$32.92 ***** SII - Smith International $40.22 *** New Trading Range? *** Smith International (NYSE:SII) is a worldwide supplier of premium products and services to the oil & gas exploration and production industry, the petrochemical industry and other industrial markets. The firm provides a comprehensive line of technologically advanced products and engineering services, including various drilling and completion fluid systems, solids control, waste management services, production chemicals, three-cone and diamond drill bits, turbines, fishing services, drilling tools, under-reamers, casing exit and multilateral systems, packers and liner hangers. The firm also offers supply chain management solutions through an large North American branch network providing pipe, valves, fittings, mill, safety and other maintenance products. SII - Smith International $40.22 PLAY (conservative - bullish/credit spread): BUY PUT JAN-30.00 SII-MG OI=1533 ASK=$0.25 SELL PUT JAN-37.50 SII-MU OI=216 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$37.25 ***** CECO - Career Education $38.45 *** Scandalous Accusations! *** Career Education Corporation (NASDAQ:CECO) is a provider of private, for-profit post-secondary education, with 51 campuses throughout the United States, Canada, France, the United Kingdom and the United Arab Emirates. The company also offers online programs through American InterContinental University-Online, its e-learning division. The company's schools have master's degree, bachelor's degree, associate's degree and a range of diploma programs in career-oriented disciplines. The company's schools offer educational programs principally in five major career-related fields of study: visual communication and design technologies, offered at 34 campuses; business studies, offered at 32 campuses; information technology, including Internet and intranet technology, offered at 27 campuses; culinary arts, offered at 10 campuses, and health education, offered at three campuses. CECO - Career Education $38.45 PLAY (speculative - bearish/credit spread): BUY CALL DEC-50.00 CUY-LJ OI=2685 ASK=$0.20 SELL CALL DEC-45.00 CUY-LI OI=4509 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$45.40 ***** S - Sears, Roebuck & Co. $48.96 *** Profit-Taking Underway! *** Sears, Roebuck & Co. (NYSE:S) is a multi-line retailer that offers an array of merchandise and related services. Sears is organized into four principal business segments: retail and related services, credit and financial products, corporate and other and Sears Canada. The firm has 872 full-line stores and approximately 1,300 specialty stores spread across the United States. It conducts similar retail, credit and corporate operations in Canada through Sears Canada. In June 2002, Sears acquired Lands' End, Headquartered in Dodgeville, Wisconsin, Lands' End is was direct merchant of traditionally styled casual clothing for men, women and children, accessories, footwear, home products and soft luggage. S - Sears, Roebuck & Co. $48.96 PLAY (very speculative - bearish/credit spread): BUY CALL DEC-55.00 S-LK OI=4583 ASK=$0.10 SELL CALL DEC-50.00 S-LJ OI=821 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$50.65 ***** SNDK - SanDisk $64.35 *** Sell-Off In Progress! *** SanDisk (NASDAQ:SNDK) designs, manufactures and markets flash memory storage products that are used in a wide variety of electronic systems and devices. SanDisk's products are compatible with a number of consumer electronics applications including digital cameras, PDAs, portable digital music players, digital video recorders and mobile telephones, as well as in industrial and communications applications, such as communications routers and switches and wireless communications base stations. The company's products include removable CompactFlash (CF) cards, SD cards, miniSD cards, xD-Picture cards, SmartMedia cards, FlashDisk cards, MultiMediaCards (MMC), Memory Stick and Memory Stick Pro version, CompactFlash and SD card Wi-Fi access and storage cards, Cruzer, Cruzer Mini Universal Serial Bus flash drives, plus-embedded flash chipsets and NAND flash components ranging in storage capacities ranging from 16 megabytes to four gigabytes. SNDK - SanDisk $64.35 PLAY (very speculative - bearish/credit spread): BUY CALL DEC-75.00 SWQ-LO OI=5429 ASK=$0.40 SELL CALL DEC-70.00 SWQ-LN OI=4713 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$70.60 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** OSX - PHLX Oil Service Sector $89.45 *** Strong Sector! *** The PHLX Oil Service Sector (PHLX:OSX) is a price-weighted index composed of the common stocks of 15 companies that provide oil drilling and production services, oil field equipment, support services and geophysical/reservoir services. For a list of the companies in the index and their weightings, click here: http://www.phlx.com/products/sectors/osxcomp.htm OSX - PHLX Oil Service Sector $89.45 PLAY (conservative - bullish/debit spread): BUY CALL JAN-80.00 OSX-AP OI=2412 ASK=$10.20 SELL CALL JAN-85.00 OSX-AQ OI=2846 BID=$5.70 INITIAL NET-DEBIT TARGET=$4.40-$4.50 POTENTIAL PROFIT(max)=11% B/E=$84.50 ***** SYMC - Symantec $32.42 *** Post-Split Slump Coming? *** Symantec (NASDAQ:SYMC) provides content and network security software and appliance solutions to enterprises, individuals and service providers. The company provides client, gateway and server security solutions for virus protection, firewall and virtual private network (VPN), security management, intrusion detection, Internet content and e-mail filtering, remote management technologies and security services to enterprises and service providers worldwide. Symantec has offices in 36 countries worldwide. The company views its business in five operating segments: enterprise security, enterprise administration, consumer products, services and other activities. SYMC - Symantec $32.42 PLAY (conservative - bearish/debit spread): BUY PUT JAN-37.50 SYQ-MU OI=191 ASK=$5.40 SELL PUT JAN-35.00 SYQ-MG OI=2070 BID=$3.20 INITIAL NET-DEBIT TARGET=$2.15-$2.20 POTENTIAL PROFIT(max)=14% B/E=$35.30 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** NE - Noble Corporation $36.09 *** Trading Range Break-Out? *** Noble Corporation (NYSE:NE) is a provider of diversified services to the oil and gas industry. The firm performs contract drilling services with a fleet of 49 offshore drilling units located in key markets worldwide. Its fleet of floating deepwater units consists of nine semisubmersibles and three dynamically positioned drillships, seven of which are designed to operate in water depths greater than 5,000 feet. Its premium fleet of 34 independent leg, cantilever jack-up rigs includes 21 units that operate in depths of 300 feet and greater, four of which operate in depths of 360 feet and greater, and 11 units that operate in depths up to 250 feet. Its fleet also includes three submersible drilling units. Over 60% of the fleet is deployed in global markets, principally the North Sea, Brazil, West Africa, the Middle East, India and Mexico. The firm also provides labor contract drilling services, site and project management services, and engineering services. NE - Noble Corporation $36.09 PLAY (speculative - bullish/synthetic position): BUY CALL JAN-37.50 NE-AU OI=365 ASK=$0.70 SELL PUT JAN-35.00 NE-MG OI=8350 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.05-$0.15 INITIAL TARGET PROFIT=$0.70-$1.05 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $1400 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($35.00). ***** PTEN - Patterson-UTI Energy $31.34 *** Oil Service Soars! *** Patterson-UTI Energy (NASDAQ:PTEN) is an operator of land-based drilling rigs in North America. Formed in 1978 and reincorporated in 1993, the company focuses its contract drilling operations in Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Utah and Western Canada (Alberta, British Columbia and Saskatchewan). Patterson-UTI's operates in three industry segments: contract drilling, which the company markets to major and independent oil and natural gas producers and operators; drilling and completion fluids services, which provides drilling fluids, completion fluids and related services to oil and natural gas producers, and pressure pumping services, which provides pressure-pumping services in the Appalachian Basin. PTEN - Patterson-UTI Energy $31.34 PLAY (speculative - bullish/synthetic position): BUY CALL JAN-32.50 NZQ-AZ OI=836 ASK=$0.90 SELL PUT JAN-30.00 NZQ-MF OI=813 BID=$0.70 INITIAL NET-DEBIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.65-$0.90 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $1200 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($30.00). **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** OIH - Oil Service Holdrs Trust $58.73 *** Sector Rally! *** The Oil Service Holdrs Trust (AMEX:OIH) is a unique instrument that represents an investor’s ownership in the stock of specified companies in the oil service sector. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDR is a fixed basket of 20 stocks (except the Telebras HOLDR, which holds 12 companies). They work operate much like ADRs; American Depositary Receipts, which allow U.S. investors to purchase foreign-owned companies on the U.S. exchanges in dollar denominated amounts. In just the same way, the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRs are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRs differ somewhat from Spiders (SPDRs), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking. A complete explanation of this issue, including the companies that make up each HOLDRS' particular industry, sector or group can be found here: http://www.holdrs.com/holdrs/main/index.asp?Action=Definition OIH - Oil Service Holdrs Trust $58.73 PLAY (speculative - bullish/calendar spread): BUY CALL JAN-60.00 OIH-AL OI=4856 ASK=$1.35 SELL CALL DEC-60.00 OIH-LL OI=2706 BID=$0.50 INITIAL NET DEBIT TARGET=$0.75-$0.80 INITIAL TARGET PROFIT=$0.45-$0.70 ***** ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. 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