The Option Investor Newsletter Thursday 12-11-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Santa Came Early Futures Markets: Summit Push Part Deux Index Trader Wrap: Two paragraphs have Dow closing above 10,000 Market Sentiment: Party Like It's 1999 Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-11-2003 High Low Volume Advance/Decline DJIA 10008.16 + 86.30 10026.53 9920.97 1.70 bln 2231/ 899 NASDAQ 1942.32 + 37.70 1945.92 1903.93 1.74 bln 2258/ 851 S&P 100 530.16 + 4.83 531.44 525.33 Totals 4489/1750 S&P 500 1071.21 + 12.16 1073.63 1059.05 W5000 10430.54 +134.80 10448.80 10295.70 RUS 2000 542.92 + 14.43 542.93 528.49 DJ TRANS 2965.90 + 53.20 2970.09 2910.84 VIX 16.74 - 1.13 17.95 16.51 VXO (VIX-O)15.86 - 1.47 17.16 15.66 VXN 26.44 - 1.40 28.05 26.34 Total Volume 3,812M Total UpVol 3,286M Total DnVol 472M 52wk Highs 456 52wk Lows 36 TRIN 0.45 NAZTRIN 0.38 PUT/CALL 0.66 ************************************************************ Santa Came Early Nobody really knows why but Santa came early to the markets and left a load of goodies for all the nice bulls. The Dow opened up and never looked back and there were as many excuses as there were points on the board but the bottom line was a complete lack of sellers. Dow Chart - Daily Nasdaq Chart - Daily This bullish bounce was surprising on the surface because the primary economic report for the day was negative. The Jobless Claims jumped to 378,000 for the week and the first time over 370,000 since mid October. On the surface this would appear negative as the second consecutive weekly gain but analysts were quick to dismiss the number as skewed by the Thanksgiving holiday. They felt many newly unemployed workers may have put off applying for benefits during the holiday week and that pushed the current reporting week higher. For the first time in recent memory the prior week's number at 365,000 was not revised upward. The four week average moved up to 364,750 and continuing claims rose to 3,346,000. The Jobless Claims were ignored despite it being the highest number in six weeks. When the bulls want to buy do not confuse them with the facts. Helping boost the sentiment was a larger than expected bounce in the Retail Sales for November by +0.9%. The consensus had been for only a +0.6% gain. While this is still well off the highs from the summer there were worries that it could have been worse. Auto related sales boosted the headline number which would have been only +0.4% without autos. Helping build investor confidence was the +7% increase in year over year sales and suggests that this holiday season will be the best since 1999. This is contrary to the recent dire predictions of retail weakness. This turnaround in retail sentiment helped inspire traders and put the spirit of Christmas into their holiday stock shopping. The Business Inventory number rose by +0.4% for October and was twice the consensus estimates. This was the second month of gains for inventories and sales rose at an even faster rate at +0.7%. This pushed the inventory to sales ratio to 1.35 and an all time low. This suggests that the 4Q GDP could already be building to stronger than expected levels. The last economic report was the Import and Export Prices which rose unexpectedly by +0.4%. While the FOMC minutes discussed below claim there is no danger of inflation there are several signs of the inflation monster creeping back into the picture. Import and Export Prices is one of them. A +1.1% increase in petroleum prices helped fuel the headline number but ex-energy the prices still rose +0.3% overall. The biggest impact to the market came from the FOMC minutes for October that were released at 2:PM. The outlook expressed in the minutes was for continued growth and shock that the growth was so strong in the 3Q. However, there were some surprises. Some of the members expressed willingness to change the bias if the economy continued to strengthen in the 4Q. We saw that morphing of the bias in the Dec-9th announcement when they tied inflation to that considerable period statement. Other surprising views included a doubt that employment will rise substantially until LATE 2005. This is a huge change in expectations. Last month we had every Fed head on the panel making speeches about growing employment and how jobs will follow the recovery. Nobody said they would follow two years later. The other statement causing excitement was a very distant view of any inflation problem. They felt the economy was growing too slow to produce any inflationary conditions for quite some time. This was interpreted by many as late 2004 or even early 2005. This was a huge positive for the market. With the bond market keying on jobs as the primary reason for the Fed to not raise rates and inflation not expected to be a problem for a long time the obvious conclusion was the Fed is not going to raise rates for an even longer period than originally thought. I had mentioned earlier that due to the election any hike had to be in March or before and after today's Fed minutes release it is extremely unlikely that hike will happen. The conventional wisdom tonight is no rate hikes until 2005. We speculated about this last week and now it almost appears to be a sure thing. If there was any bad news it was the traders pricing this into the market and setting themselves up for a monster disappointment if conditions suddenly change in March. Overall the Fed was very optimistic about the economic outlook but almost unbelievably calm about the potential for inflation. If you believe them inflation is on hold until after the election. Quite a coincidence. They feel business spending is filling the gap the consumer created in the 4Q and will continue to grow. The biggest shocker was their outlook was so far reaching going to late 2005 in some areas and they were not seeing any need to make changes for quite some time. This is a major relief to the bond market and to the equity market. Thank you Santa. Tech stocks got a boost from Cisco after CEO Chambers said they were seeing a rise in orders and a rise in budgeting for 2004. PC box makers also got a boost from an IDC survey that said PC shipments for 2003 are going to be +9% higher than 2000, which was a record year and +11.4% over last year. Notebook computers are the hot item with desktops lagging. Dell said customer traffic for the first week of December totaled nearly five million visitors compared to only four million in the same week last year. HPQ CEO Carly Fiorina also said this week that holiday sales were going well. I have mentioned this several times in the past but I think it bears repeating. I think the PC makers are all beating each other up on price point and nobody is really making any real money. We bought two 2.0GHZ computers over the last couple weeks to replace some Y2K 600mhz models. We paid $289 plus shipping for 2.0GHZ Intel, 256MB ram, 40GB disk and all the bells and whistles. (no monitor) Considering the computers I replaced cost me over $2000 each three years ago where is the profit? Using the ratios above the box makers have to sell seven boxes today to equal the gross revenue of only one box three years ago. Like the HWP CEO said last week, Dell is trapped in an ever increasing price/commodity struggle with no way out. While that is obviously a biased view it does have a lot of truth. This is why Dell and others are rapidly trying to branch out into consumer electronics, cameras, printers, plasma TVs, etc. Computers have no profit left and they have to sell 25% more each quarter just to break even. If it were not for the boom in notebooks the PC makers would be in serious trouble. Despite the problem mentioned above the tech stocks took off on the double dose of good news about rising IT budgets and higher PC shipments. The SOX bounced +2.54% on the news that Taiwan Semiconductor said 4Q sales would beat forecasts and hit a record high. This was an unusual move and came on the heals of cautious comments on Tuesday by TSM and United Microelectronics that November sales would be flat or down from October. The semiconductor sector had dropped strongly on the earlier news and TSM sought to correct the impression that business was bad. I guess it is all in how you report the numbers. November could be flat to down but maybe it was flat to down from a strong October. Maybe December orders surged strongly. It just seems strange to caution on Tuesday and then guide higher on Thursday. The markets blasted out of the gate this morning and the Dow came very close to 10,000 at 9993 but was unable to break that psychological level. The Dow traded sideways with a very slight negative trend until the ten-year note auction concluded badly and it dropped to near 9960. When the Fed minutes were released and investors got a glimpse of a distant future without rate hikes and no inflation it was too much for those undecided investors to take. The Dow surged to break 10K and traded over that level into the close. While the close over 10K was the first close over that level since May-24th 2002 it was barely convincing. The 10026 high lasted for about 20 min before the profit taking began. Even then it was very light profit taking and they managed to hold the 10K level. The Nasdaq tacked on +37 points but was unable to touch the 1950 resistance level. In reality neither the drop yesterday or the bounce today is relative to anything but the reporters. According to sources that claim to know there was a large mutual fund unloading some major positions on Tue/Wed after the first touch of 10,000. They concluded their selling yesterday afternoon and the rebound began. This makes sense to what we saw intraday today. The market did not move up prior to the FOMC minutes in normal fashion. The gains were slow and methodical with no bouts of selling. There were only a couple of noticeable buy programs and no sell programs. In fact there was almost no selling at all. The market internals were very lopsided with only one missing ingredient. The advancing volume was 6:1 over declining volume. Very bullish under any conditions. The declining volume across ALL markets was only 472 million shares with 3.3 billion in advancing volume. What was missing was volume. With only 3.7 billion shares overall that is less than the 4.1 billion on the down day on Wednesday. Those volume levels are well below the 4.5 billion share days we were seeing when the market was rising in October. Also light were the new 52-week highs. Despite a 5:2 advancer over decliner ratio the new highs across all markets were only 468. This is well below the 1100-1200 levels back on Dec 1st/2nd. The most bullish factor I saw was the +14 point jump in the Russell-2000. This was very strong and indicates a new round of buying by funds. At this stage in December this is very bullish. The RUT retraced nearly all the selling for week in only one day. Where are we going from here? This is the $64 question tonight. The Dow closed right on psychological resistance at 10000 and the Nasdaq is stuck under 1950 resistance. The Wilshire 5000 did NOT set a new high and only managed to retrace to 10450 resistance. The high was 10506 last week. The S&P also failed to reach a new high. With the Dow standing out in the crowd I glanced at the Dow stocks for a hint of what happened. CAT soared +1.94 on news that their Chairman and CEO would retire and be replaced by a 30 year veteran. Home Depot rose +1.45 on news of a new $1 billion share buyback and news that they had $5 bil in cash at the end of the 3Q despite completing a $3 bil buyback since July-2002. UTX jumped +1.00 on new guidance to +14% earnings growth. AA jumped +.92 on news that China wanted to import more raw aluminum and that a supply shortfall in China was causing a spike in the price. Finally MO rose +.78 on a favorable court ruling and BA spiked on a contract win. Those six Dow stocks accounted for +56 points of the +86 points the Dow gained. Not exactly a strong showing. This produces some conflicting indications. Breadth was strong but new highs were weak. The Dow broke to a new high that just happened to be over 10,000 but all the other indexes failed to follow suit. On the surface it would appear that a Santa rally had begun. Considering that sentiment is a surface commodity anyway the positive press tonight could help stimulate buyer interest on Friday. The Nikkei opened up +140 points and our futures are positive in the overnight session. All seems well with the market. I suggested on Tuesday that the Dow would probably test strong support at 9850 before beginning the Santa rebound. On Wednesday the low was 9882. Evidently there were enough traders watching the 9850 support level that they jumped in front of that level and the race was on. It helped to have that mutual fund run out of stock there as well. I have to admit I am surprised. I did not think the Dow would close over 10K until next week or even Christmas week. Now that we are there the markets may lack motivation for any future gains. The distinct lack of any short covering makes me wonder if anyone believes there could be a higher high in our future. Now that we have closed over 10K there is congestion all the way to 10,300. It will not be a walk in the park to higher ground. My view for the rest of the year was to remain range bound between 9700-10000. The minor move over 10K has not changed my view but I may need to raise the upper boundary depending on Friday's action. Economic reports for Friday include the PPI, International Trade and Consumer Sentiment. None should be market movers unless there is a significant change in the readings. If you are not in the markets tonight I would probably not go long at the open. You may want to err on the side of caution and wait until Monday to see if the apparent bullishness holds until next week. We saw what profit taking from one fund can do and as long as we hold at the 10K level without moving higher we have a bulls eye on our back and carrying a sign saying bears are sissies. It is dangerous to tempt fate this close to year end. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ***************************** 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. 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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 MARKETS *************** Summit Push Part Deux Jonathan Levinson In what must have been an attempted Jedi mind-trick, the FOMC minutes reiterated the Fed's view that it sees inflation remaining "at very low levels over the next year or two." With higher prices in everything but the US Dollar the only theme in the financial press since March, I was and remain stunned. The bulls knew what to do, though, buying up equities, gold miners and bonds while selling dollars. The only surprise, other than the Fed's myopia, was the weakness in the CRB. 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 When the Department of "Yes We Have No Inflation" says that it thinks it might have to continue printing dollars into oblivion for the foreseeable future, traders sell, which is what occurred from the minute of the release of the FOMC minutes. Not all governors concurred, which might account for the residual softness in gold and the CRB. Daily chart of February gold February gold got sold on what was most likely more intervention from Fukui-San and the BoJ, but recovered only slightly following the FOMC dollar dump at 2PM. The move left a doji bottom below the rising lower wedge trendline, with February gold closing lower by .60 at 406.40. The more impressive action was in the miners, which were sold hard in the morning and then Steve McQueened to close deep in the green, with HUI +7.76 at 235.38 and XAU +2.97 at 106.01. The daily print on gold left the daily cycle oscillators on the cusp of a downphase, and any selling tomorrow should be enough to push them over the brink, with price diving back below 405 wedge support. Daily chart of the ten year note yield Bonds rose alongside equities at the very suggestion that the Fed would continue printing dollars and suppressing rates. The TNX dropped a whopping 8 basis points, a key outside reversal for the yield despite the earlier ten year auction results indicating a lukewarm 1.78 bid to cover ratio on fresh treasury debt. The move left the TNX at 4.238%, and gave us a preliminary sell signal on the yield's daily cycle oscillators. If 4.2% breaks tomorrow, then it's off to the races for the ten year bond. Daily NQ candles The chorus tonight promises to be "Dow 10K" on a closing basis, and so I'll stick to the cycles. The daily NQ confirmed yesterday's doji hammer as a true reversal print, and resistance at 1425-30 is clearly the next hurdle. Looking over the daily chart from September, we see this level as a key confluence zone that should not, under normal circumstances, fall easily. The fact that the Dow made new year highs today while the broader NQ and ES could not is not a bullish sign, but if the Dow can hold 10K, one might expect the NQ to catch up. The daily cycle downphase hesitated on a bullish kiss, and if 1425-30 falls, I expect to see a new buy signal on this cycle. If so, 1437-40 will be the next resistance before the year highs come into view. To the downside, 1380 is next support. 30 minute 20 day chart of the NQ On the 30 minute chart, NQ broke upward out of its bull wedge/flag, stalling just below that 1425-30 zone. The 30 minute cycle oscillator completed its upphase and spent the last hour diverging from the price increase, which should indicate that the high is in. However, prices were firm afterhours as of this writing, and any bullishness tomorrow morning could reignite the bullish frenzy. Again, 1380 is the only support that interests me, but below 1410 we will have confirmation of a new 30 minute cycle downphase in progress. Daily ES candles We have the same doji reversal confirmation printed on the ES beginning at 1058, with the ES pausing below 1072 resistance. The year highs are spitting distance from the close, and a short covering rally could kick off at the slightest increase. That said, the upper wedge trendline is up to 1075, will Bollinger band resistance a hair above that, and these levels should provide resistance. Were I short ES here, my pain threshold would be between 1079 and 1081, and I would expect the real covering to take place from that zone upward. The daily cycle never gave us our sell signal yesterday, and we see the Macd bouncing away from it, reaching higher into overbought territory. With the daily, 30 minute and intraday cycles all maxxed out in overbought, the only buying I'd be seeking to do would be to cover shorts, and even then I'd be resisting the urge because of the likelihood of these cycles turning down for a fresh synchronous downphase. Whether we saw the blowoff top after 3PM or not cannot yet be known, but it will be in the early going tomorrow morning. 20 day 30 minute chart of the ES The 30 minute ES broke north above its upper descending trendline, and like the NQ printed a fairly steep bearish oscillator divergence on that last price spike. The Macd always lags, and indicates that there might be more gas in the tank, but the 300 minute stochastic looks ready for the next move south. Above 1072, it will begin trending, while below 1068 should have confirmation of the new downphase. Expect trendline support between 1058 and 1060, followed by confluence support at 1056. 150-tick ES The short cycle oscillators on the 150 tick ES were trending in overbought for much of the afternoon rally, while the action from 2PM onward hints at a head and shoulders top, neckline 1068.50. It projects only to 1064, but that level would be sufficient to kick off the 30 minute cycle downphase. A weak downphase on that cycle would be bullish, while anything impulsive should spell the end of the daily cycle downphase and convert us to "short every bounce" mode. Daily YM candles The daily YM is today's hero, peaking at 9995. The daily cycles are in topping territory but show no sign of weakness. The next, imminent 30 minute could change that if it's anything steeper than sideways. 20 day 30 minute chart of the YM The 30 minute YM is the most divergent of the 3 indices, with both the 300 minute stochastic and Macd printing lower highs so far beneath the new price highs for the year. The next move should be lower, and any move higher would a trending move on the 30 minute, and possibly daily cycles. This is possible, but less likely- as can be seen on the oscillators, the settings I use have trended very rarely in either overbought or oversold positions. For tomorrow, we should find out very quickly how much resolve the bulls have left. Depending on the reaction to 8:30's economic data, the direction could be determined by the cash open. See you there. ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** INDEX TRADER SUMMARY ******************** Two paragraphs have Dow closing above 10,000 What started to look like a rather normally bullish rebound got a boost late this afternoon as the Federal Open Market Committee's October 28th, 2003 meeting minutes were released at 02:00 PM EST, where a rather shocking revelation was interpreted by the markets that the Fed really is thinking that the weak dollar and high productivity can allow for low interest rates, potentially into 2005. Here are two paragraphs that I copied from The Federal Reserve Boar's website, and the Federal Open Market Committee minutes from October 28, 2003. You can view the full report if you would like (it is rather interesting what they discuss) at this http://www.federalreserve.gov/fomc/minutes/20031028.htm In their review of the outlook for inflation, members emphasized that the prospects for persisting slack in labor and other resources in combination with substantial further increases in productivity were likely to hold inflation to very low levels over the next year or two. Indeed, many saw modest further disinflation as likely, at least over the year ahead, though they also agreed that the probability of substantial and worrisome disinflation had become increasingly remote in light of the recent strengthening in economic activity. Members also cited the weakness in the dollar as a factor that would tend to reduce the degree of any domestic disinflation. Some members emphasized that the outlook for inflation was clouded by a high degree of uncertainty about the underlying trend in productivity. The growth in productivity could remain higher than had earlier been anticipated, damping employment, labor costs, and price pressures. On balance, the members did not view changes in inflation in either direction as likely to generate significant policy concerns over the forecast horizon. In the Committee's discussion of policy for the intermeeting period ahead, all the members agreed that an unchanged target of 1 percent remained appropriate for the federal funds rate. The current degree of policy ease evidently was contributing to an upturn in the expansion of economic activity. The strengthening economy had reduced concerns of significant further disinflation, but those concerns had not been eliminated. The pickup in demand had yet to materially narrow currently wide margins of idle labor and other resources, and these margins along with the uncertainties that still surrounded current forecasts of robust economic growth suggested that an accommodative monetary policy might remain desirable for a considerable period of time. Members referred to the contrast between their current policy expectations and the typical experience during earlier cyclical upturns when it was felt that policy adjustments needed to be made quite promptly to gain greater assurance that inflation would not rise from what were already relatively elevated levels. In present circumstances, the degree of slack in resources and a rate of inflation that was essentially consistent with price stability suggested that the Committee could wait for more definitive signs that economic expansion would otherwise generate inflationary pressures before making a significant adjustment to its current policy stance. You know me (Jeff Bailey), I like to benchmark things from time to time. On October 28th (October FOMC Meeting), the U.S. Dollar Index (dx00y) 88.87 +0.02% had the 6 foreign currency weighted dollar index trading at 91.87, and we can see since that time, the dollar has shown weakness. Now, I will also make note that the U.S. Dollar Index (dx00y) did rise to 94.00 in early November. However, the comments regarding the dollar's weakness is viewed by the committee as lessening the possibility of deflation being a problem, combined with the dollar's further decline, did receive some positive comments from economist's this afternoon. What seemed to shock investors and seemed to create the bullish response toward equities and Treasury bonds, was the last sentence of the first paragraph I copied and the statement, "did not view changes in inflation in either direction as likely to generate significant policy concerns over the forecast horizon." And that sentence is still the topic of discussion as Treasuries suddenly found strong buying, which drove the benchmark 10-year YIELD ($TNX.X) lower by 8 basis points to 4.238% by the close, and reversing earlier session price losses. The topic of discussion is if the Fed is keeping rates low only because it feels the weaker dollar helps keep any deflation at bay, while at the same time, productivity is so high and labor plenty, that this offsets the possibility of inflation over the Committee's forecast, which is looking out two years to 2005? While I don't have the answer to this debate, I would have to interpret the market's reaction as rather bullish, and I'll discuss this not only from price action, but from what we saw from the market's internals just after the 2:00 PM announcement. Market Snapshot / Internals - 12/11/03 Close Did the FOMC minutes get a market response? Look at the volume rate jump from the 03:00 to 04:00 mark. The biggest jump actually came in the last hour of trade, where both the NYSE and NASDAQ showed hourly volume increase by about 400 million shares, while from the 01:00 EST to 03:00, volume builds were rather steady. Internals certainly showed some improvement from the 02:00 hour, and while the volume levels jumped from 03:00 to 04:00 (read the FOMC notes, then make a buy/sell decision) the increase in volume shows interest in what the Committee had written. While price action matters most, and was relatively unchanged from 03:00 on, I would have to disagree, based on the internals, with some comments I read from analysts saying the eventual reaction was negative, on concern that the Fed holding to its decision to keep rates low, is a sign that the Fed is OVERLY worried about the economy. Here's a quick look at the pivot analysis matrix for tomorrow, where some of the recent two session's of losses in the lagging NASDAQ-100 Index (NDX.X) 1,416.96 +2.01% and its Tracking Stock (AMEX:QQQ) $35.30 +2.14% was recouped. Pivot Analysis Matrix I'm not going to make any adjustments to today's profiled bullish swing trade in the QQQ from $35.05, stop $34.20, target $35.75. However, one test tomorrow that I think a bull would like to see the QQQ find some intra-day support at is at the Daily Pivot of $35.06, but some work I've done elsewhere, has $34.97 a more likely point where I would really want to see some QQQ support. There aren't a lot of good correlations in the matrix for tomorrow, but a good test for further upside would be if the BIX.X can move back above its WEEKLY Pivot and WEEKLY R1. The banks might just be able to do this based on the Fed's October comments. The reason I say this is the sudden decline from Fed funds futures, which to me signals that there were a lot of market participants really thinking the Fed was going to raise rates this spring, but with Fed funds futures falling rather sharply, it may be that some of the weakness in the banks, might have been attributed to thoughts of higher interest rates, which can be viewed as a negative for banks. Dow Diamonds (AMEX:DIA) - Daily Intervals I spent too much time on this DIA chart, but I wanted to show an index, where I could display some volume. The DIA is also a good chart to look at when the 10,000 mark on the Dow Industrials (INDU) has been tested again, which for the indices we've discussed like the Dow Transports (TRAN) 2,965.90 +1.82% which traded down rather sharply from 3,000.00, and the NASDAQ Composite (COMPX) 1,942.32 +1.97%, which traded down rather sharply from 2,000.00, the DIA and INDU have held up rather well after Tuesday's test of 10,000, and today managed to hold that level by the close. I did some work with a regression channel from the March lows to TODAY's trade. At the lower left corner of the above 30-minute interval chart, this brings into view a test of its base regression on November 21st, and on a DAILY interval bar chart, would show this base regression also being tested. My thoughts for a Santa Claus Rally would be that the mid-point of this regression will provide bullish resistance, and I would simply be amazed if the DIA traded much above $102.00 between now and the end of December. For now, holding support at MONTHLY R1, would in my opinion, be a strong sign of support. S&P 500 Index Chart - Daily Intervals Today's bold move back higher came just in the "St. Nick" of time for a bull's thoughts of a Santa Claus rally. Without so much as a look back lower, like I thought we might see early in the session, the WEEKLY Pivot should be viewed as support tomorrow, and a break above the 1,075 level could well see 1,080. I'm not aware of what this expiration's "Max Pain" levels are, but a break above 1,075 could trigger some unraveling of at or in the money puts, with option expiration next week. The reason I say this, is in yesterday's market monitor, fellow analyst Jonathan Levinson thought the lower trade might have been attributed to futures rollover. This is something I'm not all that up to speed on (impact of futures rollover) but with rollover complete, the SPX sure seemed to want to recoup yesterday's losses in quick fashion. NASDAQ-100 Tracking Stock - Daily Intervals I'm surprised at today's percentage gain, and I thought it would be a bullish day for a swing trade long if the QQQs could muster a move to the MONTHLY Pivot. While a follow through day would certainly be positive for a swing trade bull, I would like to see the QQQ hold $35.09-$35.10 and have MACD turning back higher from its zero level. With the NASDAQ bullish % reversing to "bear alert," I don't want to get cute with a bullish trade, and will gladly look to book gains on a trade at $34.75. Jeff Bailey ------------------------------------------------------------ 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 ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Party Like It's 1999 - J. Brown Wow! The Dow Jones Industrial Average traded above the psychological 10,000 mark on Tuesday of this week but could not hold it. The very first time the DJIA traded above 10,000 was March 16, 1999. Back then the index couldn't close above the big five-digit round number either. It was two weeks later on March 29th, 1999 that the DJIA finally closed above the 10K level. This time it only took two days for the index to actually close above this mark. Most veteran traders will tell you it's just a number. They're right but it's a number with significance. Untold thousands of traders big and small had been planning on shorting the market when the Dow hit 10,000. They tried on Tuesday and tried on Wednesday but they couldn't get any downside moment. Now the index has closed above it and we could see a short-squeeze as bears panic to close positions before they get away from them. Back in 1999 it only took six weeks for the DJIA to run from 10,000 to 11,000. Short-squeeze or not I don't know anyone expecting a repeat performance. However, we could very well see a continuation of the current rally. As Jim said, it looks like the Santa Claus rally may have started a little early. Market internals were VERY bullish. Advancing stocks crushed decliners 21 to 7 on the NYSE and 22 to 8 on the NASDAQ. Up volume was almost 7 times down volume on the NYSE and it was 8 times down volume on the NASDAQ. Those are some pretty hefty numbers and indicate just how wide and deep the rally was today. Contributing to investor confidence this week has been two high profile stock buy backs. Normally, companies offer stock buy backs because they're confident about future performance and it enhances shareholder value. This week both Lowe's (LOW) and rival Home Depot (HD) announced $1 billion stock buy backs (each). That sounds like a pretty big vote of confidence. Hopefully we'll see a similar vote of confidence tomorrow in the University of Michigan consumer sentiment numbers. Analysts are expecting it to rise from 93.7 to 96.0. Meanwhile, look for some follow through in the software rally tomorrow. After the bell tonight Adobe Systems (ADBE) beat earnings estimates and guided higher for the first quarter. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10026 52-week Low : 7416 Current : 10008 Moving Averages: (Simple) 10-dma: 9902 50-dma: 9759 200-dma: 9078 S&P 500 ($SPX) 52-week High: 1074 52-week Low : 788 Current : 1071 Moving Averages: (Simple) 10-dma: 1065 50-dma: 1048 200-dma: 976 Nasdaq-100 ($NDX) 52-week High: 1453 52-week Low : 795 Current : 1416 Moving Averages: (Simple) 10-dma: 1416 50-dma: 1407 200-dma: 1247 ----------------------------------------------------------------- There is absolutely NO FEAR in the markets right now as traders pushed the DJIA back above the 10,000 mark and the S&P 500 back towards its yearly high. This sent the volatility indices back toward their multi-year lows. CBOE Market Volatility Index (VIX) = 16.73 -1.14 CBOE Mkt Volatility old VIX (VXO) = 15.86 -1.47 Nasdaq Volatility Index (VXN) = 26.15 -1.69 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.67 767,216 514,764 Equity Only 0.50 589,907 297,193 OEX 0.92 40,403 43,783 QQQ 1.57 31,180 48,862 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.9 - 1 Bull Confirmed NASDAQ-100 67.0 - 1 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 80.2 - 1 Bull Confirmed S&P 100 79.0 - 1 Bull Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.22 10-dma: 1.12 21-dma: 1.15 55-dma: 1.14 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 2142 2282 Decliners 688 788 New Highs 210 145 New Lows 15 26 Up Volume 1490M 1545M Down Vol. 218M 192M Total Vol. 1733M 1766M 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 ----------------------------------------------------------------- ------------------------------------------------------------ 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 Thursday 12-11-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ZMH Dropped Puts: NUE, PNRA, THO Call Play Updates: BCR, QLTI, UTX New Calls Plays: QCOM, SNDK Put Play Updates: AVID, KSS, NSM, XL New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Zimmer Holdings - ZMH - close: 65.90 chg: +0.22 stop: 64.49 We're going to let go of ZMH early. The stock remains above support at $65.00 and we have not been stopped out. We've chosen to close the play because it did not participate in the rally today. Every sector but the oil service group was up and it was a perfect chance for ZMH investors to buy at support near $65. Instead the stock made a new lower high after peaking at $68 last week. More patient traders should feel free to hold it, just watch your stop losses. ZMH may yet surprise to the upside. Unfortunately, we have limited resources and believe there are better opportunities at this moment. Picked on November 30 at $65.92 Change since picked: - 0.02 Earnings Date 10/22/03 (confirmed) Average Daily Volume: 1.8 million Chart = PUTS: ***** Nucor Corp. - NUE - close: 53.10 change: +0.30 stop: 54.00 NUE nailed our stop to the penny on Thursday morning, before price action reversed and the stock sold off into the close. Whether being out of the play is a good thing or not remains to be seen, but that's what stops are for -- to limit the damage in a play that isn't performing. NUE failed to break down like we were expecting and yesterday's sharp rise definitely had us on the edge of our seats today. Aggressive traders that didn't get stopped out today can live life on the edge and hope for continued weakness into the weekend. We're sticking with our discipline and taking our lumps tonight. NUE is a drop and a disappointment in its inability to perform. Picked on December 2nd at $52.66 Change since picked: +0.44 Earnings Date 1/22/04 (unconfirmed) Average Daily Volume = 689 K --- Panera Bread Co. - PNRA - cls: 38.40 chng: +0.84 stop: 38.50 Can you say bear trap? Just when it looked like a breakdown was in progress, PNRA got a new lease on life yesterday from a Raymond James upgrade. That was all that was needed to shoot the stock back up through the 10-dma on heavy volume. Without even giving the bears a chance to catch their breath, PNRA shot higher this morning, tripping our stop right at the open and after that it didn't really matter what happened. The stock did end a dime below our stop, but it really doesn't count. Buying volume has been brisk the past couple days and daily Stochastics have now turned firmly skyward. It's time to let this failed play go. Picked on December 4th at $36.50 Change since picked: +1.90 Earnings Date 1/29/04 (unconfirmed) Average Daily Volume = 766 K --- Thor Industries - THO - close: 59.20 chg: +5.50 stop: 56.01 Wow! Talk about a delayed reaction. Yesterday morning THO announced a stock split and the stock did nothing. Actually, it lost ground. Today Baird upgrades the stock to an "out perform" and shares soar more than 10% on VERY strong volume. Something here doesn't add up but it doesn't matter. We are very happy to announce that THO was NEVER triggered and the play remains unopened. More aggressive bears might want to watch and see if THO can break overhead resistance at $60 and its 50-dma. Picked on December 04 at $xx.xx Change since picked: + 0.00 Earnings Date 12/01/03 (confirmed) Average Daily Volume: 236 thousand 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 ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** C R Bard - BCR - close: 78.43 change: +0.47 stop: 76.49 *new* Yesterday's candle did not look very encouraging. The stock shot higher at the open and almost touched $80 before quickly fading as traders sold into strength. This failed rally under resistance at $80 had painted a large bearish-engulfing candlestick, which can commonly been seen as a reversal when at the top of a trend. Fortunately, there was no follow through and BCR held up above the 77.50 level. While this might look like a bullish entry point we're surprised that BCR did not bounce higher today with such a strong market. We would suggest new positions only be considered on a move above $80. We are raising our stop loss to 76.49. There was some news out yesterday for BCR. The company declared that their quarterly dividend would be 23 cents per share payable on January 30th to shareholder on record as of January 19th. Picked on December 08 at $78.01 Change since picked: + 0.42 Earnings Date 10/15/03 (confirmed) Average Daily Volume: 322 thousand Chart = --- QLT Inc - QLTI - close: 19.08 chg: +0.85 stop: 17.49 *new* Once again bulls have come to the rescue and lifted shares across the market from support. Shares of QLTI had pulled back from the $20 level (a failed rally) to the $18 region, which had been previous resistance. We all know that broken resistance usually becomes support and vice versa. We would have liked to have seen more volume on the 4.66% gain today but we're not complaining. The close over $19 looks strong and QLTI could be ready for its next leg higher. We're going to raise our stop loss to $17.49. Picked on December 07 at $18.86 Change since picked: + 0.22 Earnings Date 10/23/03 (confirmed) Average Daily Volume: 1.1 million Chart = --- United Tech. - UTX - cls: 89.27 chng: +1.00 stop: 87.25 Another day and another new high. The DOW finally managed to close above 10,000 and UTX certainly did its part by tacking on a full dollar to close at a new all-time high. With the stock trading in blue sky territory, the rising channel is really the only metric we can use right now for determining how high is high. Another bullish factor from Thursday's session was that UTX managed to close above the midline of the rising channel ($89.10) for the first time in a month, hinting that perhaps the stock is finally ready to take a serious run at the top of the channel, now at $92.50. As we've noted in recent updates, we aren't advocating new momentum entries at this point, as UTX is so close to our upside target of $91-92. Aggressive traders still looking to play can consider a dip and rebound from the $88 area as a viable entry setup. Just remember, that we're working with a very tight stop now, as we've raised it to $87.25, just under the intraday support that held through last week's consolidation. Picked on November 23rd at $83.90 Change since picked: +5.37 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 1.84 mln ************** NEW CALL PLAYS ************** Qualcomm, Inc. - QCOM - close: 50.14 change: +1.39 stop: 47.50 Company Description: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why we like it: It seems every time a major technical problem arises, some event occurs to prop that stock or index up just when it is most needed. A couple weeks ago, it looked like QCOM's uptrend was in danger of breaking, with the stock falling below the 50-dma and threatening to break below the bottom of the long-term rising channel. Then a week ago, the company made positive comments about strong chip demand and the new number portability boosting first quarter earnings. That was all the bulls needed to hear and the stock exploded higher, gapping up more than $3 and never looking back. That gap took QCOM back into the upper half of the rising channel and even in the midst of the serious NASDAQ weakness earlier this week, the stock never came close to falling back into the lower half of the channel. The real kicker came this afternoon when QCOM broke out above $50, a level it hasn't been able to crest since the end of 2001 and this looks like a significant milestone. The next significant resistance to contend with is up at $55. What remains to be seen is whether it will be a slow, plodding rally within the rising channel, or if QCOM will break out in the near- term to take a strong run at that level. The optimum entry will be a slight pullback into the $48.50-49.00 area, where a rebound would confirm new support at old resistance. Traders looking to enter on strength will want to use an entry trigger of $50.50, just over today's intraday high. In either case, we're recommending a tight stop at $47.50, which is just below the bottom of last Thursday's gap. Suggested Options: Shorter Term: The January 50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. While we've listed the December $50 strike, with expiration just over a week ago, that option should only be considered by very aggressive traders. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 55 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 looking for more insulation from time decay will want to use the April 55 Call. Our preferred option is the January $50 strike. ! Alert - December options expire next week! BUY CALL DEC-50 AAQ-LJ OI= 9928 at $1.05 SL=0.50 BUY CALL JAN-50*AAQ-AJ OI=18291 at $2.15 SL=1.00 BUY CALL JAN-55 AAQ-AK OI= 8938 at $0.55 SL=0.25 BUY CALL APR-55 AAQ-DK OI=13947 at $2.10 SL=1.00 Annotated Chart of QCOM: Picked on December 11th at $50.14 Change since picked: +0.00 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 9.22 mln --- Sandisk Corp - SNDK - close: 63.00 chg: +2.67 stop: 59.50 Company Description: SanDisk, the world's largest supplier of flash memory data storage card products, designs, manufactures and markets industry-standard, solid-state data, digital imaging and audio storage products using its patented, high density flash memory and controller technology. SanDisk is based in Sunnyvale, Calif. (source: company press release) Why We Like It: It has been a pretty amazing year for SNDK. Actually, we can just count the last eight and a half months. SNDK's earnings announcement in mid-April ignited a huge run. The company's net income of 33 cents a share had beat estimates by 15 cents with revenues up more than 88%. SNDK did it again in July with earnings of 52 cents, beating by 21 cents. They did it again in October when revenues soared 99% and the company beat estimates by 15 cents with net income hitting 60 cents a share. At the same time they guided higher for full year revenues and for Q4 results. Yes, it's been an incredible year because demand for their flash memory cards, useful for digital cameras, mp3 players and more has been white hot. Suddenly in December there were new concerns that demand for flash memory might begin to cool. Growth was still expected to be strong and certainly enviable compared to other tech sectors but just maybe the build up in supply could be a sign that sales were slowing. SNDK had been such a big winner in 2003 that the stock was hit with massive profit taking. The company tried to stem the tide by reaffirming their October projections but the selling didn't stop until SNDK hit the $60 region. The $59-60 level had been overhead resistance on the way up. Now it has become support on the way down. Coincidentally it also happens to be the 38.2% retracement level from the April to November run. We're going to speculate that today's bounce might have a bit farther to go. The trend in SNDK may have changed but nothing moves in a straight line. The stock dropped 20 points in a very quick time period and it could easily see a bounce back to the $70 level, which should now be resistance. This is an aggressive play on an oversold bounce but it allows us to limit our risk by placing a stop near the recent lows. Our first target is $70 and we'll use a stop loss at $59.50. Suggested Options: We like the January calls and our favorite is the JAN-60 strike. BUY CALL JAN 60*SWQ-AL OI= 3991 at $6.20 SL=4.00 BUY CALL JAN 65 SWQ-AM OI= 3056 at $3.60 SL=1.80 BUY CALL APR 65 SWQ-DM OI= 926 at $7.30 SL=5.00 Annotated Chart: Picked on December 11 at $63.00 Change since picked: + 0.00 Earnings Date 01/14/04 (unconfirmed) Average Daily Volume: 3.8 million 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. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Avid Technology - AVID - cls: 47.54 chng: +2.01 stop: 50.25 After a couple of big down days in sympathy with the rest of the NASDAQ, AVID was due for a bounce. It got a big one today too, gaining more than 4.4% on strong volume, just like we've been seeing the past couple days on the downside. Is this a reversal or just the next bearish entry point? Only time will tell, but the price action near the $48.50 level should prove instructive. Once AVID broke below that level, it should now act as strong resistance. So not only would a failed bounce near that level make for a solid entry, it will also confirm that old support is new resistance. Above there, we have the 10-dma at $49.03 and then the 20-dma ($50.11) before the stock will be able to challenge our $50.25 stop. Due to the strength of the rebound off the $45 level, we want to avoid fresh breakdown entries below that level. Wait for rollover below resistance before adding new positions. Once below the $45 level, look for potential support near $43 on the way to our $40 target. Picked on December 7th at $48.46 Change since picked: -1.08 Earnings Date 1/15/04 (unconfirmed) Average Daily Volume = 637 K --- Kohl's Corporation - KSS - cls: 45.45 chng: -0.76 stop: 47.00*new* A pocket of weakness in a strong market. Now that's what we like to see in bearish play! Despite already being severely beaten down in recent weeks, shares of KSS just couldn't get with the bullish program on Thursday. Even a more than 2% advance in the Retail index (RLX.X) couldn't inspire the bulls and KSS ended the session down just over 0.5%. the 10-dma (now at $46.71) has been an amazingly consistent resistance barrier for nearly a month now and if it is broken, we'll know that we've overstayed our welcome. For that reason, our official stop on the play now moves down to $47. Sitting right above solid support in the $44- 45 area, this is not a setup that looks conducive to new entries. Our attention is focused on maximizing gains from the play now. While aggressive traders can certainly hang on for a drop down to the $42 area, we're recommending that more conservative traders take advantage of a dip into the $44-45 to harvest gains and move to the sidelines. Picked on November 18th at $48.75 Change since picked: -3.05 Earnings Date 2/12/04 (unconfirmed) Average Daily Volume = 4.34 mln --- National Semiconductor - NSM - cls: 39.95 chng: +1.63 stop: 42.00 While it wasn't necessarily what we wanted to see, it didn't come as any great surprise to see the Semiconductor index (SOX.X) bounce strongly from support, taking NSM along for the ride with a 4.25% advance. Recall from the initial writeup that NSM needed to print $38 to create a fresh PnF Sell signal. Isn't it interesting how it did just that yesterday and then proceeded with today's strong rebound? That rally brought NSM back to the site of the strong $40 support that was broken on Tuesday and now we'll get to see if it does its job as newfound resistance. A rollover below $41 can be used for new bearish entries, while momentum players will have to wait for a break below $37.50 (just under yesterday's intraday low) before playing. Maintain stops at $42. Picked on December 9th at $38.70 Change since picked: +1.25 Earnings Date 3/04/04 (unconfirmed) Average Daily Volume = 4.10 mln ---- XL Capital - XL - close: 72.80 change: +0.13 stop: 75.51 In this market the only think bears can be thankful for is relative weakness and XL qualifies. The IUX insurance index is breaking out to new one-year highs and the DJIA closes over 10K for the first time since May 2002 and XL manages a meager bounce from the $72 level. Traders might get another chance to short it at its 50-dma should the bounce continue tomorrow. Yesterday Prudential (PRU) reiterated their "over weight" rating on XL and suggested that investors buy the stock before the company announces its loss reserves charge in the middle of January. Shares didn't react to the comment. Picked on December 09 at $72.60 Change since picked: + 0.20 Earnings Date 01/28/04 (unconfirmed) Average Daily Volume: 1.2 million Chart = ************* NEW PUT PLAYS ************* None ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 12-11-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - QCOM Traders Corner: Are You Fashionably Late? Then You're Fashionably Gone! ********************** PLAY OF THE DAY - CALL ********************** Qualcomm, Inc. - QCOM - close: 50.14 change: +1.39 stop: 47.50 Company Description: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why we like it: It seems every time a major technical problem arises, some event occurs to prop that stock or index up just when it is most needed. A couple weeks ago, it looked like QCOM's uptrend was in danger of breaking, with the stock falling below the 50-dma and threatening to break below the bottom of the long-term rising channel. Then a week ago, the company made positive comments about strong chip demand and the new number portability boosting first quarter earnings. That was all the bulls needed to hear and the stock exploded higher, gapping up more than $3 and never looking back. That gap took QCOM back into the upper half of the rising channel and even in the midst of the serious NASDAQ weakness earlier this week, the stock never came close to falling back into the lower half of the channel. The real kicker came this afternoon when QCOM broke out above $50, a level it hasn't been able to crest since the end of 2001 and this looks like a significant milestone. The next significant resistance to contend with is up at $55. What remains to be seen is whether it will be a slow, plodding rally within the rising channel, or if QCOM will break out in the near- term to take a strong run at that level. The optimum entry will be a slight pullback into the $48.50-49.00 area, where a rebound would confirm new support at old resistance. Traders looking to enter on strength will want to use an entry trigger of $50.50, just over today's intraday high. In either case, we're recommending a tight stop at $47.50, which is just below the bottom of last Thursday's gap. Suggested Options: Shorter Term: The January 50 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. While we've listed the December $50 strike, with expiration just over a week ago, that option should only be considered by very aggressive traders. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 55 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 looking for more insulation from time decay will want to use the April 55 Call. Our preferred option is the January $50 strike. ! Alert - December options expire next week! BUY CALL DEC-50 AAQ-LJ OI= 9928 at $1.05 SL=0.50 BUY CALL JAN-50*AAQ-AJ OI=18291 at $2.15 SL=1.00 BUY CALL JAN-55 AAQ-AK OI= 8938 at $0.55 SL=0.25 BUY CALL APR-55 AAQ-DK OI=13947 at $2.10 SL=1.00 Annotated Chart of QCOM: Picked on December 11th at $50.14 Change since picked: +0.00 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 9.22 mln ------------------------------------------------------------ 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 ------------------------------------------------------------ ************** TRADERS CORNER ************** Are You Fashionably Late? Then You're Fashionably Gone! By Mike Parnos, Investing With Attitude What ever happened to the simple concept of respect? It's missing in action – or rather, inaction. Have you noticed that tardiness is so easily accepted and forgiven? I don't buy it. But then, I'm always early – for a date, a business appointment or even to a dental appointment. Why? Simple. It's a matter of respect – or, rather, a lack of it. You've heard the saying, "better late than never." Well, sometimes never is better. "Diss" & Dat When I make a one o'clock appointment with one of my private students, I'm there -- and I'm prepared. No questions. No excuses. Why? Because I respect them – and I expect the same in return. I respect their time plus I made a commitment. I will live up to my end of the bargain and expect them to reciprocate. If they're late, they're "dissing" me. In my dealings with people, I make it a point to under promise and over deliver. What motivation do I have to make an extra effort for someone who has "dissed" me? None. What does it take to be prepared and on time? Discipline and priorities. Do you see the parallel between life and trading? In life, irresponsibility leads to loss – of friends, relationships and respect. In trading, irresponsibility leads to loss of money. What are your values? How do you set your priorities? Examine your actions. They will tell the tale. Actions speak volumes. Intentions are meaningless. I've received emails about how traders weren't at their computer the crucial last few days of the option cycle. They didn't pull the trigger at the right time and had to settle for a smaller profit or even a loss on a trade. The last few days prior to expiration are not the time to go pick up your dry cleaning, take a power walk, or drive your kid to a piano lesson. You've had the better part of a month to make other arrangements. Many traders have to work. That makes it tougher. However, at work, one can certainly make phone calls during those critical days. Working traders will have to have exit orders in place and have the agility to change those orders if necessary as the market moves during the course of the day. Being a trader involves a commitment – one that you have to live up to. You can't afford to be a day late or you'll be more than a dollar short. Know The Rules Before You Play In Detroit, we have a chain of Speedway gas stations. Traditionally, they sell their gas at the best prices in the metro area. Over a period of time, local drivers have come to take for granted that posted Speedway prices are the best. They've been trained using Pavlovian conditioning methods. Those slightly more astute than a Beagle at the wheel may have noticed that, every so often, there are price spikes in gas prices. It's common knowledge that, as oil prices change, the prices at the pump change. However, it's just too much of a coincidence that these changes seem to happen at regular intervals -- on Thursdays, to be precise. Then, magically, on Saturdays the prices revert back to more competitive prices. Coincidentally, Thursdays and Fridays are prime gas buying days -- when many drivers gas up for weekend car trips. I'm betting that the extra $.10 per gallon, garnered weekly from Speedway's "conditioned" customers, goes straight to Speedway's bottom line. Multiply that by thousands of gallons and you have a nice piece of change. Let's Review. What have we learned here? That a degree of awareness will go a long way towards avoiding many of life's pitfalls and enables the recognition of life opportunities as they present themselves. Isn't it funny how this concept applies to your trading life as well? Are you missing out on trading opportunities? Are profits turning into losses? Examine your priorities. It may be time to take another look at your trading habits. Don't delay. There is only a short time left until option expiration. Remember, being late is not acceptable. It shows a lack of respect. For who? In this case, it's you. And, if you don't respect yourself, you can't expect to receive it from anyone else. _____________________________________________________________ DECEMBER CPTI PORTFOLIO POSITIONS SPX Iron Condor – 1071.21 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 1085. Max profit potential of $2,330. BBH -- Baby Iron Condor - $129.10 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 – 530.16 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 – 1417.00 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 -- $35.30 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 @ $35.30 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. ______________________________________________________________ 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. ------------------------------------------------------------ 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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