The Option Investor Newsletter Wednesday 12-10-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Stocks Slip Slowly Futures Wrap: Santa's Sled Stalls Index Trader Wrap: That was neat. Now do it again! Traders Corner: Emotion and Logic - The Never-Ending Story Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-10-2003 High Low Volume Advance/Decline DJIA 9921.86 - 1.56 9958.38 9882.38 1.73 bln 1048/1813 NASDAQ 1904.65 - 3.67 1916.00 1887.46 1.92 bln 1034/2036 S&P 100 525.33 + 1.18 526.62 522.34 Totals 2082/3849 S&P 500 1059.59 - 1.13 1063.02 1053.41 RUS 2000 528.49 - 6.05 535.58 526.42 DJ TRANS 2912.67 - 8.25 2933.09 2893.87 VIX 17.87 + 0.24 18.27 17.58 VXO 17.33 + 0.25 19.71 17.13 VXN 27.84 - 0.48 28.66 27.79 Total Volume 4,114M Total UpVol 1,663M Total DnVol 2,413M 52wk Highs 307 52wk Lows 38 TRIN 1.09 PUT/CALL 0.81 ******************************************************************* Stocks Slip Slowly by James Brown Given the pace of Tuesday afternoon's decline plenty of traders thought today was going to be a tough one for the market. Yet by the close of business the major U.S. indices were relatively unchanged. There were plenty of stories to follow like AutoZone cratering and SBC slashing jobs but overall the session was characterized by widespread but mild profit taking. If you're feeling truly optimistic one could even call it a small victory for the bulls by the lack of heavy selling. Granted there were pockets of weakness. Gold stocks and homebuilders were hit hard but then these sectors had made some of the biggest gains this year and investors were taking some money off the table. Global markets were generally weaker lead by strong declines in the Japanese NIKKEI index. The constant weakness in the dollar continues to put pressure on Japanese exporters and despite intervention by the Bank of Japan to sell yen to weaken their own currency the NIKKEI dropped 213 points or 2.11% to close at 9910. It has been a tough few days for the Japan's markets. The NIKKEI has lost more than 500 points since last Thursday and investors are nervous about this Friday's Tankan survey for the Japanese economy. European markets are also suffering from some profit taking and the FTSE lost 44 points to close at 4335 while the DAX lost 25 points to close at 3820. Meanwhile the greenback actually strengthened somewhat against the yen and the euro. The U.S. dollar wasn't the only thing on traders' minds. There was a sharp surge in energy prices early in the session. Crude oil shot to $32.63 a barrel, a three-week high, before slipping back to $31.88. Natural gas spiked to $7.55 intraday before closing down 1.1 cents at $6.711/BTU. Investors also noticed some volatility in gold. February gold futures hit an intraday high near $413 an ounce but ended the day with a $1.90 loss at $407. This sent the XAU gold & silver index to a 4.44% decline. It was just a few weeks ago when gold was trading near $380 that there was renewed talk of seeing $420 an ounce before December 31st. That target doesn't seem so far away now but gold may retest the $400 level again before bouncing. Market internals were a lot more bearish than the final tally in the indices may suggest. Declining stocks overwhelmed advancing stocks 18 to 10 on the NYSE and 2 to 1 on the NASDAQ. Down volume flooded past up volume 2179 million to 1443 million between the two exchanges. The volatility indices (VXO, VIX, VXN) did inch higher showing some small amount of investor fear but they remain stuck in their downtrends. Technology stocks may have been spared a worse fate by strength in the SOX, today's best performing sector. Of course the SOX was down 10% in the last six sessions so today's move could just be an oversold bounce. Chart of the DJIA: Chart of the NASDAQ: There were plenty of company or stock-specific stories today but probably the biggest one was the selling in the homebuilders. The DJUSHB home construction index dropped more than 5% as investors took profits from one of the best performing sectors all year. This sector has more than doubled from its March 2003 lows and the threat of higher interest rates (per the Fed's new neutral stance) and a drop in the U.S. mortgage application index had traders running to sell these winners and lock in gains. This morning's report from the Mortgage Bankers Association showed that mortgage applications had dropped 12.2% to a new 52- week low. Part of this drop is due to a decline in refinancings, which do not affect the homebuilders but it was a perfect excuse to sell. While we're on the subject of declines shares of AutoZone (AZO) were hammered for a 12 percent loss ($11) for the biggest drop in the S&P 500. The company had reported earnings yesterday evening that beat estimates by 7 cents with net income of $1.35 per share. Unfortunately, revenues only rose 5.2% to $1.28 billion, which missed the average estimate of $1.3 billion. As would be expected the news produced a number of broker downgrades. On the positive side shares of SBC Communications added 2.67% to lead the Dow's gainers after announcing 3,000 to 4,000 job cuts in the fourth quarter. The 2.5 percent reduction in its workforce is an effort by SBC to offset the company's declining revenues. Rival Verizon (VZ) also rallied strongly after announcing a $3.7 billion buyout for nearly 10 percent of its workforce. Short-term the charge will affect earnings but analysts believe it will strengthen the company's balance sheet longer-term. Traders also bid up shares of Cisco Systems after its CEO John Chambers mentioned that they are seeing rising corporate budgets for the first time in years. While Chambers was optimistic for 2004 he didn't offer any specific numbers that might indicate tech spending would outpace the recent Gartner-Soundview survey, which forecasted a dismal 1.6% growth for 2004. Tomorrow is another busy session. Investors will be eager to hear the November retail sales report. Estimates are for a 0.7 percent increase leapfrogging the 0.3 percent decline in October. Wall Street will also absorb the November import and export numbers, the October business inventories and the weekly jobless claims. Expectations are for a drop in jobless claims to 359,000 down from 365,000. ***************************** 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? 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We will still send it Priority Mail but you will not receive it until three days after your subscription is received. ************ FUTURES WRAP ************ Santa's Sled Stalls Jonathan Levinson Equities fell from lower highs today, with the US Dollar trapped below 89, but managed to return to positive territory at the close. Treasuries retraced part of yesterday's losses, metals pulled back and gold miners were sold off. ***Note that December equity futures (Z3) roll over tomorrow, and March (H4) will become the front month. While I have profiled today's action using December contracts, the pivot matrix with tomorrow's levels has been done with March contracts, as we'll be trading those in the Futures Monitor tomorrow. 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 US Dollar Index made valiant attempts to regain the 89 level but it was not to be. Word of the Bank of Japan's attempt to intervene overnight didn't persuade the currency markets, but the morning bounce set off from a higher low. Nevertheless, metals were lightly sold during today's trading, while mining stocks got shellacked. The CRB dropped .61 to close at 260.44, with strength in platinum, lean hogs and crude oil futures. Daily chart of February gold February gold went to a new high today and failed, printing a gravestone doji below the upper bear wedge resistance line. The lower low at 406 with the failed higher high constitutes a key outside reversal, which portends a lower low and possible break below the bear wedge support line for tomorrow. The action in the miners was far more distressing, however, with the HUI getting sold to below the 230 level and XAU below 105. February gold closed lower by 2.30 at 406.60, HUI –14.60 at 227.62, and XAU –4.79 at 103.04. Daily chart of the ten year note yield The Fed added a modest 1.75B in overnight repos today, as the treasury auctioned off 5 year treasury notes. The auction generated an average 3.375% yield and a 1.92 bid-to-cover ratio, which was below the average of 2.36. Despite this apparent disinterest in US debt, treasuries were firm today, with the ten year note yield dropping 3.4 basis points to close at 4.318%. The move retraced part of but did not reverse yesterday's trendline breakout on the yield, and in fact closed right on the line. The oscillators are in potential rollover territory, but at this level no direction is clear either way. Daily NQ candles In what is becoming routine, the dippers of the last two days were trapped beneath a sea of cement, only to be miraculously rescued by a triad of buy programs commencing at 3PM. Take a look at the 150 tick ES chart below for a clearer snapshot of the rescue operation. The daily NQ3Z printed a throwover, or rather a throwunder beneath the last rising support trendline and but for the 3 buy programs in the last hour, would have closed below it. Other than the ES, which closed unchanged for the day, both the YM and NQ managed positive closes. Despite the late day advance, the NQ's daily cycle downphase is in progress, and 1380 support is far from homefree. A move above 1400 will be the first sign that bears are in trouble, but I believe that it will take a test of 1420 to actually abort the daily downphase currently in progress. 30 minute 20 day chart of the NQ The 30 minute NQ3Z broke below the apex of the bullish descending wedge, but the late-day stick-save returned the NQ to just above it at 1393. The 30 minute cycle upphase aligns itself with the buying that occurred, and exhausted about half its energy in the process. So long as the daily cycle remains in a downphase, I expect this 30 minute cycle upphase to be shortlived and weak, and 1400 again looks like a worthy upside target, with 1410 the next strong resistance. Daily ES candles The ES3Z sold off but closed on a perfect doji star, unchanged for the day. This print indicates indecision, and given the rapid bounce from 3PM, it's no wonder. The daily cycle downphase did not confirm on the ES' oscillators, but any downside from here will do it. 1062-4 remains strong resistance, with support at 1048-50. Any net selling tomorrow should give us our bearish confirmation and target the rising trendline currently at 1045. 20 day 30 minute chart of the ES The 30 minute cycle oscillator gave us a tipoff on the 3PM ramp job, with a bullish divergence printed on the higher oscillator low. Again we see the heavy confluence from 1060 to 1064, and the 30 minute upphase is going to have difficulty breaking above it. I don't expect to see 1065 exceeded, but with the daily cycle not on a formal sell signal yet, we can't rule it out. A move above 1065 would likely renew the upphase currently stalling on the daily. 150-tick ES The end of day buy program was another example of a heavily divergent move, running over my wide Keltner bands for nearly half an hour. The short cycle is in an upphase that should peak out in the opening hour tomorrow, and again, resistance up to 1064-5 looks formidable. Daily YM candles The daily cycle upphase on YM3Z retreated today, closing on a bearish kiss despite the rescue ops carried out into the close. The doji star indicates a lack of commitment in either direction, but the bulls appear to be running on fumes. 20 day 30 minute chart of the YM On the 30 minute chart, the YM3Z is not printing a head and shoulders top, but the uptrend appears to be weakening. 9670 is trendline and confluence support, with resistance at 9930. Bear in mind that the March YM contract was backwardated, trading 20-30 points below the December YM all day, while the NQ March traded higher than the December, as normal. Keep an eye on your charts and note that the December levels discussed above will diverge from the March levels we'll begin discussing tomorrow. The pivot matrix has been calculated with March levels for this reason. ******************** INDEX TRADER SUMMARY ******************** That was neat. Now do it again! The Santa Claus rally might just be in the setup stage, but traders and investors will want to be sharp tomorrow, as we'll be using some of today's observations as a test tomorrow. While trading was a bit sloppy within the pivot matrix for the NDX/QQQ, the SPX/SPY and OEX, the progression of the NASDAQ-100 Index (NDX.X) 1,388.96 +0.38% and its Tracking Stock (AMEX:QQQ) $34.56 +0.37% leading today's session weakness and find trade just below their WEEKLY S2s did see a late-session rebound on very week market internals placing a few pieces of candy in a bull's holiday stocking by session's end. The notably weaker NDX/QQQ trade just below their WEEKLY S2, helped pull the broader S&P 500 Index (SPX.X) 1,059.05 -0.10% below its WEEKLY S1 of 1,055.99, as the staggered trade within the WEEKLY pivot matrix plays itself out. Meanwhile, the Dow Industrials (INDU) 9,921.86 -0.01%, which traded a session low of 9,882.38, didn't quite see a test of its WEEKLY Pivot (9,863.40) with a session low of 9,882.38. Tonight's wrap is for everyone. It doesn't matter if you're a bull or a bear. It doesn't matter if you believe, or don't believe in Santa Claus. All you need to do, when looking at the Pivot matrix is imagine the logistics of just how Santa Claus gets to where he's supposed to go. Rudolph the red-nosed reindeer need to lead the team of reindeer, if Santa's sleigh is ever going to get to where it is supposed to go. As I see it right now, the Dow Industrials are the equivalent of Rudolph. I can't for the life of me remember all the other reindeer's names, but I see the rest of the team being the S&P 500 Index (SPX.X) 1,059.05 -0.10% and the S&P 100 Index (OEX.X) 525.33 +0.22%. And at the far end of the line, is jolly old Santa Clause, or at least his sleigh, where the sleigh full of end of year "goodies" is currently weighed heavily with a bunch of technology stocks. Let's take a quick look at today's market snapshot, where for the most part, the deer looked to be coming down with that flu virus again today, as market internals were rather weak. Market Snapshot / Internals - 12/10/03 Since I started posting the intra-day advance decline line, I've received a lot of questions as to just how a trader interprets such an indicator of breadth. To tell you the truth, the A/D line has never been one of my "favorite" indicators, but how I find it useful is to thing of bulls (advance) and bears (decline) playing tug-of-war with a rubber band. An INVESTOR will do the same, but most likely with the end of day, or 04:00 tabulations. Let's use the NYSE 10:00 and 11:00 hour comparison. You can see how the advancer from 10:00 to 11:00 show some addition to their numbers (+98), while the decliners also added to their number (+230). The observation, and perhaps the "feel" for lack of a better word, is that the rubber band was being stretched at both ends, but it was BEARS or decliners that was actually leading, or doing the bulk of the stretching. It would be an ERROR to then simply assume price action will follow, as the major indices are weighted, with some stocks carrying greater weight, but for the most part, the A/D line and 11:00 marks for the major indices did show price decline at the 11:00 hour. You can make a similar hourly comparison for the NASDAQ breadth and make the notable observation that some indices (NASDAQ Composite, Russell-2000 and QQQ) found greater price movement lower. This may not be a surprise, based on what we've been noticing in the pivot analysis matrix. The NASDAQ stocks (4- lettered stock symbols) have been showing greater weakness of late. If we move on to 12:00, what happened? Internals weakened further at both the NYSE and NASDAQ, but PRICE action actually saw improvement. In today's market monitor, I commented on this type of internal/price action, which is what traders/investors call BEARISH DIVERGENCE. While price action matters most to a trader/investor, this DIVERGENCE is often times a heads up, that something has got to give! Moving on to 01:00 PM EST, what gave? By 12:00, PRICE action fell, while A/D lines IMPROVED. Even here, by thinking of a rubber band the A/D line compared to price "feeling" like a rubber band being pulled at both ends, then some tension being released (snapping back a bit, but still weak) and price action fluctuating as that tension is applied, then released. Again... these breadth indicators are really observed, so that the trader/investor develops a "feel" for what is taking place internally. NEVER underestimate what PRICE action has on MARKET psychology! Why would a weaker A/D line and higher price action one hour (12:00 for example) find a slightly improved A/D line and LOWER price action the next hour (01:00 PM EST)? I think it is because BEARISH traders see price improvement in a major index/sector, and when they've got a nice gain at risk, they tend to want to lock in the gain. For example, I sell the ABCDE stock short on Monday at $35.00, and see at 12:00 PM EST, I see the major indices holding relatively tough, look at my ABCDE short trading $32.00 -0.05% at the 12:00 PM EST mark, and decide to cover that short and lock in gains. While I alone am probably not dictating ABCDE's price action, there are perhaps other traders thinking, observing some of the same things, and more inclined to book the gain near-term, than risk the stock rebounding with slight price gains, or stability being found in the indices. I discuss the above, MAINLY for those intra-day traders that asked quite a few questions today. Try and use the analogy of bulls and bears pulling at both ends of a rubber band. As we get set to look at the pivot matrix, today's trade did see the S&P Banks Index (BIX.X) 328.07 -0.56% finish lower by 1.87 points, where session low of 326.31 did see a test of its correlative levels of support at the 328 levels of DAILY S1, WEEKLY S2, MONTHLY S1. Observation is that while there was most likely some basket buying of banks today, the session low wasn't an exact match, so I'm still not overly aggressive for a bullish entry. Still... "that was neat. Now do it again!" S&P Banks Index (BIX.X) Chart - Daily Intervals I've stretched the BIX.X chart about as vertical as I can to give all of us the observation at what a powerful move this group of stocks has had since breaking above its summer's highs. This isn't a technology sector! But they've traded like it. Look at that 50-day SMA rocketing higher! It did serve as greater support than our Pivot levels. After two days of sharp declines (for the BIX.X) I now begin making some assumptions as to levels I think this sector needs to hold for BULLISH thoughts toward a rebound. I think 325.00 needs to hold support, and sign of strength is above 331. Since the BIX.X did pierce below its MONTHLY S1 and WEEKLY S2, then I will monitor for FIRMING or more anxious buying to show up, should the BIX.X show intra-day support at these MONTHLY S1 and WEEKLY S2 levels. Let's look at the pivot matrix now, use some of the BIX.X observations, 331 and 325, and see if any of this ties into the DAILY levels, for testing tomorrow. With the oscillators suggesting bullish caution (bullish as MACD is still above zero, and BIX.X is still in a longer-term upward trend, hasn't broken a relative low), this is still a sector that I feel needs to be monitored for support. Remember that long ago we labeled the regional banks as somewhat of a sector, that while interest rate sensitive, gives us a pretty good representation for financials, which make up about 28% weighting in the SPX. Pivot Matrix - Underlined in PINK : BIX.X , QQQ, NDX WEEKLY S2s. I think of this as the lower end of a week's range, and all three traded these level, and just below, then closed above these levels as if there was formidable buying triggered at those levels. Today we saw brief violations of those levels. One thing to look for early tomorrow morning, should we see weakness early in the session, is for these levels to FIRM. Now take note of the NDX's DAILY S2 at 1,376.32. This observation is noted in dashed green, to depict tentative support, but the observation of this DAILY WEEKLY support correlation suggests a level to look for support on a retest. We've noted how the BIX.X and the NDX/QQQ have NOTHING in common as it relates to stock composition, but these two indices seem to mirror each other in the MATRIX. Note the BIX.X DAILY S1. I highlight this in a PINK box, only because it matches almost to the penny, the rising 50-day SMA. Here too, a level early tomorrow morning to monitor as a support level in the BIX.X, should the BIX.X once again try and violated its correlative MONTHLY S1 and WEEKLY S1. These observations in the BIX.X, with "bad news" in the sector (mortgage refinancing) provides the ultimate test for strength, or stability! I think the BIX.X is going to hold these support levels. Now note the THREE levels of correlative resistance in the BIX.X at MONTHLY Pivot, WEEKLY S1 and DAILY R1. This certainly looks like formidable resistance. My thoughts here are that if the BIX.X tests these levels, it would be a sign of strength considering the news in the sector. If the BIX.X breaks above these levels.... here comes Santa Claus! The SPY resistance correlations at WEEKLY Pivot and DAILY R1 of $107.18 and $107.15. I view these as near-term resistance, so I'm setting upside alerts there to alert to bullishness building to a higher degree. Let me quickly mention the OEX! On Friday of last week, I used the OEX break below 524 as a trigger for a QQQ short at $35.08. Folks... the OEX is trading 525.33 at tonight's close, while the QQQ is trading $34.56, where QQQ traded a session low of $34.13 today! This observation and comparison certainly has to hint that there is a underlying bid to the OEX, if not the markets. This has me VERY ALERT TOMORROW to be monitoring any early session weakness at NDX/QQQ WEEKLY S2, and SPX/SPY WEEKLY S1 for support, and perhaps some strong bounces. One reason I think the markets have a good shot at a rally, or just don't seem to be giving up some larger declines, is that fund managers may well be trying to protect gains for the year- end reviews. While market internals A/D are weak, my best guess at this point, is that the declines, in stock-related terms are not overly large. Yes, there are some exceptions (WM, AZO, etc.). S&P 100 Index (OEX.X) Chart - Daily Intervals The OEX has been back and forth its WEEKLY Pivot, but a range from 522-529 (that's 7 points) really begins to show up. This type of range, in my opinion, has to have an OEX trader monitoring a sector like the BIX.X, which has been weaker, as their directional index. As tough as the OEX has been holding around the 525 level, despite the banks weakness, if the banks rebound, then it would have to be my best estimate that the OEX breaks out of this consolidation to the upside. When I say "The best trade setup for a bullish Santa Claus.... is to buy the OEX 520," what I would look for is ... IF the OEX were to trade back to 520 area, but the BIX.X be holding at or near its rising 50-day SMA and showing stability, then there is very good risk/reward trade setup, for the bullish side. My thinking is that the BIX.X has been weaker the last couple of session, but if it firms, and should the OEX compress lower to 520, then this is somewhat equivalent to pushing/compressing a coiled spring together, where I think there's still enough upside pressure for the end-of-year rally. NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals The QQQ is our weaker major index right now, and today's trade just under the WEEKLY S2 did manage to find enough buying to drive the QQQ back near its morning highs. This was what I would consider the first test of a rather CRITICAL near-term support zone. I want to quickly put myself in a BEAR's shoes. "Oh crud... did I miss my MAX weekly decline cover point?" I may have, and this is why on any weakness tomorrow, I look to COVER a short back near $34.22, and CLOSE OUT a bearish trade on a break above today's high. I'm trying to think how I would if I were still short the QQQ and hadn't gotten stopped out yesterday morning. How would I be using a trailing profit stop in that trade to protect the bearish gain after seeing a late session bounce today from the WEEKLY S2? Dow Industrials (INDU) Chart - Daily Intervals The INDU is holding very tough after seeing trade at 10,000 yesterday. My main thoughts here are this... The INDU holding tough keeps market psychology rather bullish. "Hey, it isn't getting sold as hard like NASDAQ Composite (COMPX) 1,904.65 -0.19% did from 2,000 trade." Right now, the QQQ is perhaps looking for this type of stability from the Dow, to help put a bid under the QQQ and have it firm. Meanwhile, the INDU is looking back at the QQQ and saying "c'mon you bugger, I can't hold this market up by myself, I need some strength from the bottom!" Thinking like this is where I now place a greater emphasis on the INDU's WEEKLY Pivot as an important support level, and tie that to the QQQ's MONTHLY S1, which I deem a rather CRITICAL support level near-term. I'm past deadline. I'll have an SPX chart in the morning, and I will try and get the weekly Mortgage Banker's Association data shown tomorrow morning too. I'm simply out of time! Still, I think it very important for traders and investors to try and "feel" the trade ahead, make some observations as we have tonight, and then define near-term levels as we get more information, to then act on. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Emotion and Logic - The Never-Ending Story by Mark Phillips mphillips@OptionInvestor.com Before we even get started today, I have to apologize for not getting to the followup article from my weekend discussion of the DOW as it relates to strength in different currencies. I actually managed to get most of the article done, but can't seem to keep my cable modem alive long enough to capture the charts I wanted to use for illustration. So I decided to take a detour tonight and delve into another topic that I think is far more important to our long-term investing success - that of understanding how human psychology drives the markets. Next week, I promise we'll pick up where we left off on the currency/market issues. To be a successful investor, it is necessary to have a fundamental understanding of the philosophy that drives the stock market. The mass psychology of human nature is the biggest single factor you must comprehend if you expect to trade profitably on a consistent basis. This emotional and psychological ingredient doesn't necessarily have anything to do with the state of the economy, but it does have an overwhelming affect on the movement of the market. The first unwritten rule is that rumors are the prime movers of the stock market. It's amazing how quickly speculation of upcoming events can change the character of the current trend. When investors and analysts begin to discuss bearish trends, the market generally reacts negatively because the public believes it is destined for a downturn. Similarly, we have recently seen the slightest hint of an economic uptick launch many Technology related stocks on 200-300% rallies since the March lows. Is that logic at work? I think not. Serious mention of inflation can cause investors to rush for the exits in order to dump their holdings. This type of activity will often precipitate a general market decline long before the economy actually changes into that state or condition. The market anticipates the movement of the economy and shows us in advance what we can expect with regard to corporate health, unemployment, interest rates and other financial trends. It is also said that a crash in the market is foretold by events that are mostly psychological, not economic. Sure enough, the euphoria that preceded the current bear market would have led any new investor to expect the markets to rise to the sky. Why didn't they? Because an extreme emotion cannot be sustained by either an individual or a group of individuals. Once that euphoric mood had affected all those involved, it was bound to dissipate. As it began to diminish, investors became increasingly aware of the lunacy in which they had participated, and each wave of selling generated more selling. This created waves like those that emanate out from a stone dropped in a lake, affecting all those in the water. Similarly, the rally of the past year can be attributed to the same phenomenon. The pessimism had gotten so thick, you could cut it with a knife last October and the market and investors needed a chance to exhale. Any hint of an economic upturn or even the promise of a future economic improvement was latched on as the "reason" to buy stocks. As it turned out, this was justified to a certain extent, as the flood of liquidity and government spending unleashed in the past year has at least given the impression of an improving economy. The big question is whether the pendulum has swung to far towards the optimists and the possibility that a correction in the emotions of market participants is necessary. When a major financial report is rumored as favorable, the market erupts far in advance of the actual announcement. Rumblings of interest rate reductions can have the same effect as rocket fuel - it provides a quick boost until investors come to their senses and realize the folly of their just-completed buying frenzy. Similarly, the issue before the markets right now is when will the Fed start raising interest rates again and the slightest hint of a change in the assumed timetable can send things reeling. Not due to logic, but due to emotions, as investors react in fear or greed to the most miniscule change in the winds. Take yesterday's huge drop in the bond market following the FOMC meeting. No change in bias, no change in interest rates and only a slight rewording of the policy statement that we've seen for months now sent bond junkies on the biggest one-day selling spree we've seen in months -- and it all happened in only 30 minutes. Once the initial surge and consolidation has run its course though, investors will step back and evaluate the situation in a more rational manner. They are still ruled by their emotions, but at least they are not completely blinded by them. If they believe the economy is about to turn upwards, and more importantly, that other investors believe the same thing, they will trample one another in their rush to buy equities. This in turn leads to increasing equity prices, fueled by more investors coming off the sidelines, their greed overwhelming their fears, as the markets move into rally mode. Emotion taking precedence over logic. This all happens before the first signs of true economic recovery. The recovery in equity prices will begin 1-2 quarters before the signs of recovery can be seen in the economy. Investors know this, and not wanting to be left behind when the market takes off again, many will follow the emotion of greed and jump into the markets prematurely, only to be justly punished for their over- exuberance. Buying the dips on the way down has decimated many an investors account, and the psychological beating inflicted by watching the losses mount, conspires to make investors afraid to get into the market even when all the signs are positive. Emotion rules again. How about going the other direction? It works the same way. How many bears have been repeatedly run over in the past year, as they have continued to stubbornly play the short side as their personal ego/opinion told them that the market just "couldn't" go up. Each time those shorts covered, it provided a bit more fuel for the market to rise. Logic or emotion? I say emotion. The bears covering are motivated by fear of loss and the bulls continuing to buy at these nosebleed valuation levels are motivated by greed. It is hard to justify buying most stocks at current valuation on any rationale other than the "greater fool theory", as few stocks are actually being valued as a part of a growing business that will throw off a consistent cashflow. If that logic were part of the equation, then valuations would be significantly lower than they are now. That doesn't mean the market can't continue to rise, but we must understand that it is driven by volatile emotions (greed and fear) and not by any underlying economic logic. After having been flattened by the freight train known as a bear market, many investors will be paralyzed by fear, unable to step back onto the tracks, even though they can see that the train has passed. Afterall, the last time they stepped into the markets (following the crowd at the last market peak or trying to buy the dips on the way down), they got flattened. Just because this train has passed, doesn't mean there isn't another one speeding down the track right at that moment. Not wanting to repeat that painful experience, they stand on the sidelines, waiting for the next major pullback to give them the "thumbs up" signal to jump in with both feet. Alas, it never seems to look quite good enough to overcome their fear. With each pullback that results in markets running higher, a bit of that fear dissipates, until they finally have enough courage to overcome their fear. Sound familiar? It shouldn't take a great leap of intellect to see that it works both ways. The shorts have been beaten up so many times in the past year that they've gotten downright timid in their attempts to drive the market lower. We might say that each step higher in the market should logically embolden the bears as the market is thus that much closer to its elusive top, but the problem is that each move higher also removes a level of technical resistance, making it harder for them to show the necessary conviction to take the big positions. Let's look at the typical cycle of hope to exuberance to despair, in order to learn something about how human psychology fits into the movement of the markets. After a significant market decline, all but the most adventurous investors are afraid to venture back in. They have had one position after another go bad and have begun to question their own abilities. As the bolder investors venture into the markets near the bottom, the recovery begins slowly, gradually attracting more players from the sidelines. Despair begins to give way to hope, as those that were beaten up by the market on its way down, timidly venture back into the fray. The cycle begins to feed on itself with increased buying volume attracting more buyers, which in turn creates more buying volume, driving prices higher and attracting more buyers. At the same time, broad investor sentiment moves from despair to hope to enthusiasm. This phase of the market growth cycle is entirely healthy, but the next step is dangerous. Investors see everything go up on a weekly basis, and their enthusiasm gives way to unbridled exuberance. Everyone is an equity investor now, buying stocks with abandon and without any consideration of whether the inflated prices are warranted. Voices of caution can be heard in the mainstream media, but the crowd drowns them out, as they believe new market highs will continue forever, punctuated by brief dips that offer new entry points. When investors' emotions have become uniformly bullish, and they consistently ignore signs of slowing economic growth, we know the end is near. If every investor is long the market, who is left to bid prices still higher? The first few to jump ship are ignored by the majority, who "know" that the law of gravity has been repealed, and that prices will go up indefinitely, punctuated by brief, inconsequential dips. Emotions have driven the markets too high, and the inevitable correction will have the impact of yelling fire in a crowded theatre. People can't get out fast enough, and many are trampled in the panicky process. The market decline will be met first with surprise, then disappointment, as investors see support levels give way to selling pressure in the midst of signs of slowing economic growth. That disappointment will give way to despair as investors who have held onto "invincible" stocks, watch them crumble to prices they thought would never be seen again. This despair feeds on itself and the bulk of investors become myopic, able only to see gloom and doom around every corner. When every one is lined up in the bearish camp, that is where the seeds of a market recovery are sown. Hope begins to emerge in select areas, and the cycle repeats itself. Those looking for a recent "micro" example need look no further than Technology stock SNDK over the past couple weeks or shares of any of the education stocks (APOL, CECO, COC, UOPX, etc.) as the persistent bullish trends were shattered by rumors and allegations. Greed was instantly supplanted by fear of loss and there was a rush for the exits. Note that in both cases it was a matter of price action being ruled by emotions, not logic. Looking to the end of that cycle, can we maybe make the inference that at some point early next year, some of these stocks might make attractive bargains for investors that can sniff out the underlying values in the wake of the emotional orgy that has driven them lower? It certainly merits consideration. Once again, emotion trumps logic. But there is the seed of opportunity for sharp-eyed investors. If you can perform your analysis devoid of human emotion, then you know that your decisions are based on logic. Selecting stocks that should lead an economic recovery is only the first step. The next, and perhaps more important step is to identify what I call the "Pinnacle of Fear" in the market. This is the confluence of events that has driven all but the strongest hands out of equities, allowing those of us with vision to step forward and scoop up bargains at nearly every turn. It sounds so easy and is likely one of the hardest things to practice, because it means that you have to step forward and hit the "Buy" button when all those around you are screaming that the sky is falling. Separating your logical market analysis from the emotions present in the daily gyrations of the market is one of the most difficult (and important) tasks that will face an investor. It is a long process and requires much work (heck, I'm still working on it!), but the rewards far exceed the price because it allows you to know that your actions are based on the bedrock of solid knowledge, not the shifting sands of group psychology. A key to this process on a daily and weekly basis is to perform your research and analysis when the markets are closed, with the evidence upon which you will base your decision sitting before you in black and white. Whether that evidence is fundamental or technical (depending on your individual preference), if we each take responsibility for our own analysis, and do it in the absence of real-time market noise, we are far less apt to make rash decisions with our investment capital. So emotion trumps logic over the near term. But here's where the rubber meets the road. Over the long term, logic will win, meaning that the markets will rise so long as earnings are growing, and fall if earnings are falling. But if you can stand aside from the emotional masses without having your decision- making process affected by them, it will allow you to buy near the emotional troughs (extreme depression) and sell near the emotional peaks (extreme optimism), supercharging your investment results over a lifetime in the markets. And that will produce the most- desired emotion (feeling) of which I am aware -- Security. Have a great week! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. 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The Option Investor Newsletter Wednesday 12-10-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: QLTI, AVID Dropped Calls: DHR Dropped Puts: None Play of the Day: Put - AVID Spreads, Combinations & Premium-Selling Plays: Stocks Drift Lower Amid Cautious Outlook Watch List: To Go Long or Short? Market Posture: Traders are still FED-up ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** QLTI (call) raise stop from 16.99 to 17.49 AVID (put)lower stop from 51.00 to 50.25 ************* DROPPED CALLS ************* Danaher Corp - DHR - close: 82.70 chg: -1.15 stop: 82.49 We were expecting a headline or two out of DHR's annual shareholder meeting today and the company reaffirmed its fiscal year 2003 guidance. Unfortunately that was not enough for investors and the selling that began yesterday continued today. The low for the session was 82.35, stopping us out at 82.49. DHR's short-term rising channel that began mid-November is broken and the strong volume on the last two days of selling might suggest there is more to come. Bulls can hope for support at DHR's 50-dma but we would expect a test of the $80 level. Picked on November 23 at $81.95 Change since picked: + 0.75 Earnings Date 10/16/03 (confirmed) Average Daily Volume: 829 thousand Chart = ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* Avid Technology - AVID - cls: 45.53 chng: -1.07 stop: 50.25 *new* -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. - Most Recent Update (Tuesday, Dec. 02, 2003) - Look out below! AVID offered up a really tasty entry point this morning for those willing to take it before our official $47 trigger was hit. The stock pushed up to kiss $50 resistance and was firmly rejected right there at the converged 10-dma ($50.21) and 20-dma ($50.45). The stock quickly fell back from there, finally satisfying our trigger during the lunch hour and then closing right at its low of the day. This represents a complete break of the support that has been holding for the past several weeks and with volume running nearly double the ADV, it looks like the beginning of a solid breakdown. There is potential support near $45 and then again at $43, but we're viewing those levels only as potential bounce points on the way to our $40 target. Aggressive traders can consider new entries on a break below today's low, while those looking for a more conservative entry will want to target a failed bounce below $50 now that the PnF chart has issued a fresh Sell signal with a tentative price target of $38. Lower stops to $51, which is just above today's intraday high, as well as the 10-, 20-, 30- and 100-dmas. - Play of the Day Comments - Shares of AVID saw additional selling today to confirm yesterday's high volume breakdown below support. The stock actually traded to $44.65 midday before some last hour buying lifted it from its lows. We like the continued sell off but traders might want to look for a short-term oversold bounce- failed rally set up near the 47-48 region. Its MACD indicator is growing more bearish. Note that we are lowering our stop loss to 50.25. - 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. BUY PUT JAN 50 AQI-MJ OI=182 at $6.10 SL=4.00 BUY PUT JAN-45*AQI-MI OI=236 at $3.10 SL=1.50 Annotated Chart: Picked on December 9th at $47.00 Change since picked: -1.47 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 637 K Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Stocks Drift Lower Amid Cautious Outlook By Ray Cummins The major equity averages lingered in the red for most of the session Wednesday as investors sifted through the FOMC's newest comments about the condition of the U.S. economy. The Dow Jones Industrials closed down 1 point at 9,921 after recovering from a 40 point slide in late-afternoon trading. Among the best performing issues were International Business Machines (NYSE:IBM), SBC Communications (NYSE:SBC) and Altria Group (NYSE:MO). The technology segment saw similar activity, with a late-session slump followed by a recovery at the close. The NASDAQ composite finished 3 points lower at 1,904. The broader S&P 500 index slid 1 point to 1,059 with oil service stocks standing out among the few bullish sectors. Trading volume was 1.41 billion shares on the Big Board, where losing issues outpaced gaining stocks better than 3 to 2. The NASDAQ saw 1.93 billion shares change hands with decliners doubling advancers 2 to 1. The bond market closed with gains across the yield curve and the 10-year note up 9/32, bringing its yield down to 4.31%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 12/09/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AMAT DEC 22 22.05 21.36 (0.69) 0.00% 0.00% EYE DEC 20 19.65 24.05 0.35 5.21% 1.78% ICOS DEC 35 34.55 40.81 0.45 3.81% 1.30% NVLS DEC 40 39.20 39.00 (0.20) 0.00% 0.00% PHTN DEC 35 34.25 36.83 0.75 5.41% 2.19% PMCS DEC 17 17.10 17.66 0.40 6.88% 2.34% ANPI DEC 40 39.05 48.24 0.95 7.86% 2.43% APPX DEC 25 24.55 34.60 0.45 6.28% 1.83% EASI DEC 42 42.68 60.56 0.70 4.74% 1.64% GPRO DEC 25 24.65 30.75 0.35 4.88% 1.42% INSP DEC 22 21.85 23.51 0.65 8.33% 2.97% MGAM DEC 35 34.60 37.24 0.40 4.33% 1.16% NEM DEC 42 41.60 47.77 0.90 5.61% 2.16% NVLS DEC 37 36.95 39.00 0.55 4.49% 1.49% PHS DEC 50 49.40 65.05 0.60 3.91% 1.21% UTSI DEC 30 29.65 36.52 0.35 3.83% 1.18% APPX DEC 30 29.50 34.60 0.50 7.22% 1.69% BRCM DEC 32 32.10 32.78 0.40 4.65% 1.25% EASI DEC 47 46.08 60.56 0.55 4.75% 1.19% GPRO DEC 30 29.60 30.75 0.40 5.21% 1.35% PHTN DEC 35 34.60 36.83 0.40 4.79% 1.16% BRCM DEC 32 32.25 32.78 0.25 4.27% 0.78% EASI DEC 50 49.45 60.56 0.55 6.30% 1.11% FCS DEC 22 22.25 22.99 0.25 6.38% 1.12% KMRT DEC 30 29.50 26.25 (1.65) 0.00% 0.00% * MICC DEC 65 64.35 71.00 0.65 6.05% 1.01% ONXX DEC 25 24.65 26.90 0.35 7.96% 1.42% RMBS DEC 25 24.60 28.40 0.40 10.03% 1.63% TELK DEC 20 19.75 21.60 0.25 6.66% 1.27% Tuesday's sell-off made a number of positions "early-exit" candidates and the majority of the issues in the portfolio are on the "watch" list. Among the obvious laggards are: Applied Materials (NASDAQ:AMAT), Broadcom (NASDAQ:BRCM), Fairchild Semi (NYSE:FCS), Novellus (NASDAQ:NVLS), Photon Dynamics (NASDAQ:PHTN), and PMC Sierra (NASDAQ:PMCS). Kmart's (NASDAQ:KMRT) quarterly earnings announcement was last Friday and the sharp drop in the stock price, below the sold (put) strike at $30, forced a quick exit in the new position. The summary reflects the closing debit as of 12/05/03. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield IACI DEC 37 35.90 29.48 0.40 3.22% 1.11% WEBX DEC 25 25.30 17.37 0.30 5.79% 1.19% MERQ DEC 50 50.40 45.67 0.40 3.21% 0.79% SEPR DEC 27 27.75 24.37 0.25 5.36% 0.90% TTWO DEC 40 40.40 29.11 0.40 5.84% 0.99% CVTX DEC 25 25.40 12.22 0.40 13.63% 1.57% TTWO DEC 37 37.95 29.11 0.45 6.65% 1.19% CERN DEC 50 50.30 37.43 0.30 6.08% 0.60% CVTX DEC 25 25.45 12.22 0.45 21.60% 1.77% HYSL DEC 35 35.40 30.24 0.40 6.95% 1.13% Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status KLAC 60.08 53.20 DEC 50 55 0.75 54.25 (1.05) Closed MIK 50.55 43.20 DEC 42 45 0.30 44.70 (0.95) Closed * SMH 44.65 39.40 DEC 37 40 0.25 39.75 (0.35) Closed BRCM 34.62 32.78 DEC 27 30 0.25 29.75 0.25 Open BRL 81.14 82.00 DEC 70 75 0.50 74.50 0.50 Open TOL 38.27 39.45 DEC 30 35 0.55 34.45 0.55 Open TARO 68.59 68.80 DEC 60 65 0.45 64.55 0.45 Open TECD 36.13 35.44 DEC 30 35 0.60 34.40 0.60 Open? HAR 71.90 69.63 DEC 62 65 0.25 64.75 0.25 Open SCHN 49.98 55.20 DEC 40 45 0.55 44.45 0.55 Open KLA-Tencor (NASDAQ:KLAC) became the second "early-exit" victim in Wednesday's credit-spreads portfolio for December when the issue slumped in conjunction with Tuesday's broad retreat. Our recent watch-list candidate; Michael's (NYSE:MIK), was the first loser as it closed below the sold (put) strike at $45 during last Friday's sharp downdraft. The portfolio summary reflects the closing debit on 12/05/03. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status NE 33.79 36.96 DEC 37 35 0.40 35.40 ($1.56) Closed HDI 45.17 46.14 DEC 50 47 0.25 47.75 $0.25 Open SYMC 30.17 32.18 DEC 35 32 0.40 32.90 $0.40 Closed AMGN 58.14 57.93 DEC 65 60 0.65 60.65 $0.65 Open SNPS 29.57 31.79 DEC 35 32 0.25 32.75 $0.25 Open AMZN 51.51 49.34 DEC 60 55 0.55 55.55 $0.55 Open ERTS 42.27 41.43 DEC 47 45 0.25 45.25 $0.25 Open The bearish position in Noble (NYSE:NE) was a casualty of the recent surge in oil service shares and although last week's rally helped our bullish spreads in that group, we were forced to close the play on Friday for a smaller than published loss. Fortunately, we recouped that loss this week with a synthetic position (12/7 Spreads/Combos) in Noble. Symantec (NASDAQ:SYMC), although now profitable, has previously been closed to limit potential losses. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** AMHC - American Healthways $47.70 *** Near All-Time Highs! *** American Healthways (NASDAQ:AMHC) is the nation's leading and largest provider of specialized, comprehensive care enhancement services to hospitals, physicians and health plans. In addition, American Healthways is the only company in its industry whose programs are designed to meaningfully address the needs of 100% of its customer populations. The clinical excellence of the firm's programs have been reviewed and approved by Johns Hopkins, and their quality has been recognized by the National Committee on Quality Assurance, the Joint Commission on Accreditation of Health Care Organizations, and the American Accreditation Health Care Commission, making American Healthways the first and only care enhancement provider in the nation to be accredited or certified by all three organizations. American Healthways contracts to provide disease and care management programs to health plans with members in all 50 states, the District of Columbia and Puerto Rico. The company also operates diabetes management programs in hospitals nationwide. AMHC - American Healthways $47.70 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 45 QMH XI 72 0.30 44.70 6.1% 0.7% * SELL PUT JAN 45 QMH MI 47 1.35 43.65 6.1% 3.1% ************** FRX - Forest Labs $57.51 *** Rally Mode! *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, an SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Labs $57.51 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 55 FHA XK 3058 0.30 54.70 4.9% 0.5% * SELL PUT JAN 55 FHA MK 4096 1.00 54.00 3.7% 1.9% ************** NPSP - NPS Pharmaceuticals $31.61 *** Drug Speculation! *** NPS Pharmaceuticals (NASDAQ:NPSP) is a biopharmaceutical company engaged in discovering, developing and commercializing small molecule drugs and recombinant proteins. The company's product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders. NPS Pharmaceuticals has three product candidates in active clinical development and several pre-clinical product candidates. NPSP - NPS Pharmaceuticals $31.61 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 30 QKK XF 1212 0.25 29.75 7.4% 0.8% * SELL PUT JAN 30 QKK MF 54 1.20 28.80 7.8% 4.2% ************** NTLI - NTL Incorporated $66.10 *** Up, Up And Away! *** NTL Incorporated (NASDAQ:NTLI) provides communications services to residential, business and wholesale customers. The company offers residential telephony, cable television and Internet access services. NTL also provides national and international carrier telecommunications, satellite and radio communications, as well as digital and analog television and radio broadcast transmission services. NTLI - NTL Incorporated $66.10 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 60 NUD XL 2632 0.35 59.65 5.7% 0.6% * SELL PUT JAN 55 NUD MK 512 1.05 53.95 5.1% 1.9% SELL PUT JAN 60 NUD ML 12 2.00 58.00 7.2% 3.4% ************** ONXX - Onyx Pharmaceuticals $26.54 *** Entry Point? *** Onyx Pharmaceuticals (NASDAQ:ONXX) is engaged in the discovery and development of novel cancer therapies utilizing two primary technology platforms, small molecules that inhibit the proteins involved in excess growth signaling, and therapeutic viruses that selectively replicate in cells with cancer-causing genetic mutations. The firm is developing a new small molecule compound, BAY 43-9006, in collaboration with Bayer Pharmaceuticals. Using its proprietary virus technology, the company is also developing ONYX-411, a second-generation product that targets cancers with abnormal function of the retinoblastoma tumor-suppressor gene, and is developing Armed Therapeutic Virus products. ONXX - Onyx Pharmaceuticals $26.54 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 25 OIQ XE 1502 0.30 24.70 10.8% 1.2% SELL PUT JAN 22.5 OIQ MX 9 0.50 22.00 5.7% 2.3% * SELL PUT JAN 25 OIQ ME 531 1.05 23.95 8.3% 4.4% ************** QCOM - Qualcomm $48.75 *** New Trading Range? *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $48.75 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 47.5 AAO XW 6895 0.50 47.00 9.0% 1.1% SELL PUT JAN 45 AAO MI 21918 0.70 44.30 3.4% 1.6% TS SELL PUT JAN 47.5 AAO MW 4026 1.45 46.05 5.9% 3.1% ************** RMBS - Rambus $27.93 *** Entry Point? *** Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip" interface solutions that enhance the performance and effectiveness of its client's chip and system products. These solutions include multiple chip-to-chip interface products, which can be grouped into two categories: memory interfaces and logic interfaces. Rambus' memory interface products provide an interface between memory chips and logic chips. In addition, the firm's logic interface products provide an interface between two logic chips. Rambus has two major memory interface products: Rambus dynamic random access memory and Yellowstone. Additionally, it offers a logic interface product for high-speed serial chip-to-chip communications between logic chips in a range of computing, networking and communications applications. RMBS - Rambus $27.93 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT DEC 25 BNQ XE 10235 0.50 24.50 19.4% 2.0% SELL PUT JAN 20 BNQ MD 9200 0.50 19.50 6.6% 2.6% * SELL PUT JAN 22.5 BNQ MX 3883 1.00 21.50 11.9% 4.7% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** NBIX - Neurocrine Biosciences $53.83 *** Next Leg Up? *** Neurocrine Biosciences (NASDAQ:NBIX) is a unique, product-based biopharmaceutical company focused on neurological and endocrine diseases and disorders. Their product candidates address some of the largest pharmaceutical markets in the world including insomnia, anxiety, depression, diabetes, multiple sclerosis, irritable bowel syndrome, eating disorders, pain, autoimmunity and certain female and male health disorders. The company has a large number of programs in various stages of research and clinical development. Its lead clinical development program is indiplon, a drug for the treatment of insomnia that is being evaluated in Phase III clinical trials. The company's other products under clinical development are altered peptide ligand, gonadotropin-releasing hormone antagonist, interleukin 4 fusion toxin and corticotropin-releasing factor. NBIX - Neurocrine Biosciences $53.83 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-45.00 UOT-MI OI=10 ASK=$0.30 SELL PUT JAN-50.00 UOT-MJ OI=90 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$49.35 ************** NE - Noble Corporation $37.01 *** 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 $37.01 PLAY (conservative - bullish/credit spread): BUY PUT JAN-32.50 NE-MZ OI=641 ASK=$0.25 SELL PUT JAN-35.00 NE-MG OI=8877 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$34.70 ************** WGO - Winnebago $60.60 *** All-Time High! *** Winnebago Industries (NYSE:WGO) is a United States manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. Motor home sales by the company represent more than 86% of its revenues. Winnebago motor homes are sold through dealer organizations, primarily under the Winnebago, Itasca, Rialta, and Ultimate brand names. Other products manufactured by the company consist primarily of extruded aluminum, commercial vehicles, and a variety of component products for other manufacturers. Finance revenues consist of profits from floor plan unit financing for a limited number of the company's dealers. WGO - Winnebago $60.60 PLAY (conservative - bullish/credit spread): BUY PUT JAN-50.00 WGO-MJ OI=115 ASK=$0.30 SELL PUT JAN-55.00 WGO-MK OI=270 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$54.50 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** AZO - Autozone $80.24 *** Sell-Off In Progress! *** AutoZone (NYSE:AZO) is a specialty retailer of automotive parts and accessories primarily to do-it-yourself customers. During the fiscal year ended August 31, 2002, the company operated 3,068 auto parts stores in the United States and 39 in Mexico. It also sells parts and accessories online at autozone.com. Each auto parts store carries an extensive product line for cars, vans and light trucks, including new and remanufactured automotive parts, maintenance items and various accessories. AutoZone also has a commercial sales program in the United States, AZ Commercial, which provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers and service stations. In addition, the company sells automotive diagnostic and repair software through ALLDATA and through alldatadiy.com. AZO - Autozone $80.24 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 85 AZO LQ 404 0.35 85.35 4.3% 0.4% * SELL CALL DEC 80 AZO LP 382 2.00 82.00 19.7% 2.4% SELL CALL JAN 85 AZO AQ 0 1.60 86.60 4.4% 1.8% ************** MRVL - Marvell Technology $36.14 *** In A Trading Range? *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL - Marvell Technology $36.14 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 37.5 UVM LU 1,189 0.45 37.95 11.2% 1.2% SELL CALL JAN 40 UVM AH 805 0.75 40.75 5.3% 1.8% * SELL CALL JAN 37.5 UVM AU 164 1.55 39.05 8.4% 4.0% ************** TTWO - Take-Two Int. Software $28.21 *** The Slump Continues! *** Take-Two Interactive Software (NASDAQ:TTWO) is an integrated developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the personal computer, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star and under the Take-Two brand name. The company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. TTWO - Take-Two Int. Software $28.21 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL DEC 32.5 TUO LZ 5,336 0.25 32.75 11.7% 0.8% * SELL CALL DEC 30 TUO LF 811 0.70 30.70 23.2% 2.3% SELL CALL JAN 35 TUO AG 912 0.45 35.45 5.9% 1.3% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** COF - Capital One $55.30 *** Profit-Taking In Progress! *** Capital One Financial (NYSE:COF) is a holding company whose major subsidiaries market a variety of financial products and services to consumers using its proprietary information-based strategy. The company's primary business is consumer lending, with a focus on credit cards, but including other consumer lending activities such as unsecured installment lending and automobile financing. The company's principal subsidiary, Capital One Bank, a limited purpose, state-chartered credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered bank, offers consumer lending and deposit products. Capital One Services, the other major subsidiary, provides various operating, administrative and business services to the company and its subsidiaries. COF - Capital One $55.30 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-65.00 COF-AM OI=5424 ASK=$0.25 SELL CALL JAN-60.00 COF-AL OI=6760 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$60.65 ************** POWI - Power Integrations $31.41 *** Technical Break-Down? *** Power Integrations (NASDAQ:POWI) designs, develops, manufactures and markets proprietary, high-voltage, analog integrated circuits for use primarily in alternating current to direct current power conversion. The firm's products address market segments including communications, consumer, computer and industrial electronics. The company's high-voltage power conversion ICs include TOPSwitch, TinySwitch, LinkSwitch and DPA-Switch. Since introducing its TOPSwitch family of products in 1994, the company has shipped into the market approximately 890 million ICs. These ICs achieve a high level of system integration by combining a number of electronic components into a single IC. POWI - Power Integrations $31.41 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-40.00 QPW-AH OI=703 ASK=$0.35 SELL CALL JAN-35.00 QPW-AG OI=1024 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.70-$0.80 POTENTIAL PROFIT(max)=16% B/E=$35.70 ************** SRCL - Stericycle $44.20 *** A Big "Down" Day! *** Stericycle (NASDAQ:SRCL) is a leading provider of waste management services in the United States. Stericycle operates on a regional basis and internationally, providing waste collection, treatment, and disposal services. The company also has a fully integrated, national medical waste management network. Stericycle's network includes 36 treatment/collection centers and 94 additional transfer and collection sites. The firm uses the network to provide medical waste collection, transportation and treatment and many related consulting, training and education services and products. The firm's Stericycle's treatment technologies include its proprietary electro-thermal-deactivation system (ETD), as well as traditional methods, such as autoclaving and incineration. SRCL - Stericycle $44.20 PLAY (speculative - bearish/credit spread): BUY CALL DEC-50.00 URL-LJ OI=274 ASK=$0.15 SELL CALL DEC-45.00 URL-LI OI=69 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$45.45 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** To Go Long or Short? Toro Co - TTC - close: 45.16 change: -3.02 WHAT TO WATCH: Shares of TTC fell right to support at $45.00 as investors took profits after the company announced earnings. Results were good with a 12% increase in net income and the company raised guidance for 2004 where they expect a 10% jump in earnings on 8% growth in sales. Unfortunately they expect the first quarter next year to be a tough one. Keep an eye on TTC. Shares could easily bounce from $45, which coincides with its rising long-term trendline. If it breaks $45, then look for more support at 42.50 (resistance last July) and its 200-dma. If you're really patient wait and see if it pulls back to $40. Chart= --- O'Reilly Automotive - ORLY - close: 40.03 change: -2.62 WHAT TO WATCH: The car wreck in shares of AutoZone today reverberated across the group and rival ORLY felt some of AZO's sting. The pull back in ORLY broke its 50-dma but stalled at round-number support resistance of $40.00. The stock looks prone to more profit taking but we would watch further weakness under the $40 level. Chart= --- Labranche & Co - LAB - close: 9.82 change: +0.53 WHAT TO WATCH: It's been a pretty rough year for LAB. Earnings announced in October had dropped 40% from the previous year. The company suspended its dividend program for the foreseeable future until profitability was back inline. Soon thereafter the SEC subpoenaed the company along with several other specialist firms over trading violations. Less than two weeks after the SEC news LAB's CEO resigned. After all the bad news it looks like LAB may have finally hit bottom. Its low last month was $7.40. Now the stock is approaching psychological support-resistance at $10.00 and its 50-dma just above there near resistance at $11.00. Can it breakout? Chart= --- Netease.com - NTES - close: 38.96 change: -0.85 WHAT TO WATCH: Previous high-flyer Chinese Internet stock NTES is getting a price readjustment. After reporting earnings back in October the stock has suffered steady declines as traders take profits. The recent bounce from its October lows near $40.00 support failed at the descending 30-dma. Now the stock has broken $40.00 and touched its 200-dma today. The $40 mark is a key level because it also represents the 50% retracement of its $10 to $70 run. A break under its 200-dma could easily lead to a test of $35 if not $30.00. Trade with caution! Chart= --- Digital River - DRIV - close: 23.35 change: +1.41 WHAT TO WATCH: DRIV might be attempting a comeback. Share are trading just above its 50% retracement of its March '03 lows to its October '03 highs. Oscillators are turning bullish again and a move back over the $25.00 mark might be a potential entry point for new long positions. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- CDWC $57.40 -0.45 - We mentioned CDWC in the MarketMonitor today after the stock broke support at $57.50. Shares should test the $55 level and might consolidation to stronger support near $52.50-50.00. SINA $31.09 -0.57 - We'd keep an eye on SINA too. If the stock breaks $30.00-29.50 it could consolidate back to its 200-dma near $25.00. ************** MARKET POSTURE ************** Traders are still FED-up by - Nich Sheldon A quick once over on today's closing prices for the indexes and it is easy to see that sellers outnumbered buyers by more than a 2:1 ratio. Only seven indexes closed higher on the day and only one of those indexes managed to move more than one percent higher. The SOX Semiconductor Index was the only index to close more than one percent higher, as it gained +1.21 percent by the closing bell. Traders should note that today's gains were not enough to push the SOX back over it's 20-DMA and the MACD is still in bear territory. We're still cautious on the SOX. The index lost 10% in the last six sessions and today could be an oversold bounce. Out of our 20 losing indexes the DJUSHB DJ US Home Construction Index took the hardest hit on Wednesday, nearly falling to its gap higher open on October 28th, 2003. The DJUSHB fell -5.29 percent on the day but stopped above the 550 level and its simple 50-DMA. Gold bugs took the second hardest hit of the day, as the XAU Gold and Silver Index fell -4.44 percent. Today marks the third consecutive day of loses for the index. Together the recent weakness has produced a new sell signal in its MACD indicator. The only other index to lose more than two percent was the DDX Disk Drive Index, which fell -2.33 percent. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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