The Option Investor Newsletter Monday 12-22-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Markets Shrug Off Terror Alert Futures Wrap: Another day, another rally Index Trader Wrap: See Note Sunday's Ask the Analyst: Day trading is a different mindset Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-22-2003 High Low Volume Advance/Decline DJIA 10338.00 + 59.78 10338.00 10255.26 1.50 bln 1783/1040 NASDAQ 1955.80 + 4.78 1958.74 1941.62 1.25 bln 1585/1480 S&P 100 542.28 + 2.02 542.28 538.66 Totals 3368/2520 S&P 500 1092.94 + 4.28 1092.94 1086.14 RUS 2000 549.37 + 2.49 549.37 544.86 DJ TRANS 3005.27 + 17.84 3005.63 2982.40 VIX 16.94 + 0.52 17.31 16.61 VXO 16.20 + 0.15 16.91 16.10 VXN 24.75 - 0.14 26.36 24.70 Total Volume 3,140M Total UpVol 1,963M Total DnVol 1,130M 52wk Highs 662 52wk Lows 19 TRIN 0.82 PUT/CALL 0.98 ******************************************************************* Markets Shrug Off Terror Alert by James Brown The markets shrugged off the government's announcement to elevate the terror alert level to "orange", its second highest rating. The Dow Jones Industrials saw some initial strength and then pulled back to spend a good portion of the day in a narrow 25- point range above the 10,250 level. A strong afternoon buying spree lifted the DJIA to a 59-point gain and its highest close since May 17, 2002. The S&P 500 also enjoyed another new 19- month high but the NASDAQ continued to lag behind. Year to date the INDU and the S&P 500 are up about 24 percent while the NASDAQ is up 46 percent. Investors are locking in gains from the NASDAQ's tremendous year and rotating into big cap, highly liquid cyclical stocks, which are more heavily concentrated in the DJIA and SPX. Contributing to the Dow's gains were big moves in General Motors (GM), McDonald's (MCD) and Honeywell Intl (HON). Overall 22 of the 30 Dow components closed in the green. The strongest buying was seen in homebuilders, broker-dealers, defense stocks and software. Lagging the markets were declines in natural gas, retail stocks and the airlines; the latter closed relatively flat despite the terror warnings. Foreign markets did not seem too concerned over the raised alert level and the Asian markets closed higher with the NIKKEI up almost 90 points to 10,372 and the Hang Seng up 116 points to 12,487. The FTSE followed with a small gain of its own but the German markets were down despite comments that the rise in the dollar had not yet hurt German exporters. Gold futures rose $1.40 to $411.30 an ounce and crude oil for February delivery dropped over a dollar to $31.90 a barrel. Market internals for U.S. exchanges were mixed but generally positive. Stocks were strong on the NYSE (think Dow and plenty of S&P components) where advancers out paced declining stocks almost 18 to 10. The advance-decline line on the NASDAQ spent most of the session in negative territory but pulled it out by the close with nearly 16 winners for every 15 losers. Again we see buyers in the NYSE with 419 new highs but only 116 new highs on the NASDAQ. Up volume was nearly 2-to-1 down volume on the NYSE while just 7-to-5 on the NASDAQ. Chart of the DJIA: Chart of the NASDAQ: It truly is a testament to the strength in the markets to pull out yet another gain on top of last week's rally after the Department of Homeland Security raised the terror alert rating to "high" or "orange" status. It hasn't been this high since May. Homeland Security Secretary Tom Ridge said that the most recent information suggest that Al Queda and those in their network were planning attacks that could be more devastating than those of September 11th. The DFI and DFX defense indices climbed on the news. Considering that this is the Christian and Jewish holiday season in the U.S. I'm surprised that the alert level wasn't raised sooner. It's probably a good thing for the economy that it was not. While I doubt the "orange" alert status will deter desperate shoppers it may slow down some of the more casual spending from consumers with nothing better to do during Christmas break but cruise the malls. It will be interesting to hear next month if retailers report a drop in traffic during the last week and a half of December. Speaking of retail the titan of retailing, Wal-Mart (WMT), did not have good things to share this morning. WMT reported that same-store sales are tracking toward the low end of their 3 to 5% range. It has not been a good month for WMT. On December 1st the company warned that the holiday season was not off to as strong a start as they had hoped. Yes, sales were up and Black Friday produced another new record for one-day sales volume but management had been expecting more. The company warned again in mid-December that weekly sales were tracking toward the low end of their range. In response investors took the stock from $56 near Thanksgiving to $50.50 about a week ago. Propping up the stock today, despite WMT's guidance, were comments from Goldman Sachs. The Goldman analyst believes the worst may be behind the company and its "underperformance may nearly be over." Adding to today's bullish sentiment was another Wall Street firm, UBS, who released their monthly investor optimism index. UBS said optimism rose for the second month in a row, hitting 104 in December, up from 93 in November. Bears will shake their heads in collective disbelief but from those surveyed by UBS at least 75 percent believe that stocks will do better in 2004 than they did in 2003. That's pretty optimistic. I wonder what they'll be thinking in January or February after the expected first quarter correction occurs? One of the biggest stories of the day was Ford Motor Co (F). The company said it will take a $1.6 billion charge in Q4 in strong part due to their Viseon (VC) spin-off's healthcare costs but told Wall Street that its full year 2003 earnings outlook should improve fueled by "continued cost savings" and strong sales from their redesigned F-150 pickups. The optimistic earnings guidance from Ford lifted Dow component and larger rival General Motors (GM) to a 4% gain and a new 52-week high. It wouldn't be a Monday without some merger news. This week's merger falls in the drug sector. Drug behemoth Pfizer (PFE) has agreed to buy Esperion Therapeutics (ESPR) for $35 a share in cash. The $1.3 billion deal sent shares of ESPR to a 52% gain, closing at $34.53. ESPR has been developing some new treatments involving "good" cholesterol or HDL. It's a strong defensive move by Pfizer, who makes Lipitor, the best-selling drug on the planet. Lipitor works by lowering LDL or bad cholesterol. The PFE-ESPR deal wasn't alone today. Provident Financial (PFS), the New Jersey-based holding company for Provident Bank, announced plans to buy First Sentinel Bancorp (FSLA) for $642 million in cash and stock. Tomorrow does bring a few economic reports into the picture for any traders not yet on holiday vacation. Economists will be looking for the November personal income numbers to rise 0.4 percent while November spending is expected to rise 0.7 percent. We'll also get the revised reading on the University of Michigan's consumer sentiment numbers for December. Economists are looking for an upward revision from 89.6 to 91.0. Lastly, we'll hear the final revised growth rate for the third quarter, expected to remain unchanged at 8.2%. Historically the last two weeks of December are up as the Santa Claus rally comes to pass. Most traders are on holiday and these low volume days tend to float higher both on last minute window dressing and retail trading. However, the DJIA is up more than 700 points from its Thanksgiving low near 9600 without much of a rest. Thus, the index is very extended and overdue for a pull back. It would not surprise me at all to see some minor selling, at least in the INDU and the S&P 500. We should still have another three weeks of bullish optimism so short-term traders might want to focus in on their favorite stocks to trade and look for the dip. ***************************** 2003 Year End Renewal Special ***************************** TOP 50 STOCKS for 2004 SPECIAL INVESTOR GUIDE What better bonus could we give you than the potential to double or triple your money in 2004? Each Option Investor analyst picked their favorite stocks for 2004 out of our universe of 4500 and applied their technical and analytical skills to deciding how best to profit from them. Some will be straight stock ownership, some long term calls or puts and some with various combinations of strategies. There are actually more than 50 stocks presented as there were so many profitable picks we added a few extra. As an additional bonus Jim has put together his TOP 20 LOTTERY PICKS FOR 2004 These are cheap options with great potential for achieving a profit of 200%, 300% or much more. Also included are options on stocks he feels are take over candidates in 2004. TIMING IS CRITICAL The Special Investor Guide will be provided on CD and will be mailed by priority mail to you before Christmas. Because we at Option Investor feel strongly that there will be a significant dip in January we have planned these strategies to capitalize on that dip. We want you to have plenty of time to review the stocks and strategies including the full color charts and graphs over the holidays. We want you to be prepared to take advantage of the January dip and start 2004 off from a profitable position. Don't miss out on this highly profitable renewal bonus. Additional Bonuses Every annual renewal subscriber will also receive: TWO 2004 Option Expiration Calendar Mousepads One for home and one for the office. Also available are the: 2004 Stock Traders Almanac Video on Successful Option Trading By James Bittman In order to get your The TOP 50 STOCKS for 2004 Special Investor Guide before the holidays you MUST renew immediately. Do not miss out on these profitable opportunities! Click here to renew: https://secure.sungrp.com/04renewal/ We are not responsible for late delivery of the Special Investor Guide for renewals after December 20th. We will still send it Priority Mail but you will not receive it until three days after your subscription is received. ************ FUTURES WRAP ************ Another day, another rally Jonathan Levinson The markets traded in their own bullish world today, ignoring all manner of otherwise bad news to rally in a charge led by the YM, which posted new 52 week highs along with the ES. Bonds and the dollar pulled back, gold advanced, and the CRB sank on weakness in energy futures. Opening weakness again proved to be the day's best trading opportunity, as the market tantalized bears with slow but slight pullbacks within the wider daily uptrend. 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 broke back down below 88 in the morning and stayed there for the remainder of the session, once again catching the majority of dollar dip buyers flatfooted. Euro futures advanced again, as did CAD futures. The CRB dropped on extreme weakness in natural gas and oil futures, losing 3.99 to close at 256.88. Daily chart of February gold February gold had a good day, bouncing again at the lower rising wedge support line at 409.50 and exceeding Friday's high with a print at 412.20, closing higher by .70 at 410.60. The bearish oscillator divergence continues, but the bulls are doing an admirable job of supporting gold as it climbs ever higher toward the apex of the bear wedge. A break below 409.50 would constitute a bear wedge breakout, while a move above 415 is the first step toward invalidating it. Daily chart of the ten year note yield Bonds corrected today, with the ten year note yield (TNX) rising to test the broken lower rising pennant trendline in a "return to the scene of the crime rally". The TNX closed at 4.164%, for a gain of 3.1 bps. The move would be an expected test of former support, except that the daily cycle oscillators twitched upward on the move, and at current levels could be aligning for an early upphase. A break above the 4.2% level would likely confirm the turn. Support is at the lower Bollinger band, at 4.01%. Daily NQ candles Joe Granville's "News is for suckers" line was aptly demonstrated by today's helium-filled tape. The NQ did its best to roll over and die beneath Friday's doji, but such was the singleminded purpose of the YM buyers that all boats were lifted. The NQ squeezed out a 5 point gain. Action such as we saw today has been described to me by one trader as an institutional program of taking a large position throughout the day for a large client such as a pension fund, whereby the broker deliberately moves the market higher to exploit bonuses for morning buys filled at prices below the afternoon close. Perhaps, or perhaps not, but the pattern of intraday gap-down-then- haltingly-ramp-up, with the day low at the open and the day high at the cash close is becoming very tired and predictable. I'd play it to the long side, but frankly, the indices look so obscenely overpriced that I simply can't buy them at these levels, and have difficulty even covering shorts. Thankfully, the charts and oscillators provide us with decision points from which to evaluate and decide on how best to react. The NQ finally closed above 1430, and as expected, that level was sufficient to turn the daily cycle oscillators up on a buy signal, with a new upphase tentatively underway. I say "tentatively" because the NQ traded very heavy today, advancing as if dragged by the scruff of its neck. Above 1440, the resistance should thin somewhat, and above 1450 short covering could ignite a rally. 1425-30 is the only significant support to watch from here, with 1415 the next step below it. 30 minute 20 day chart of the NQ The 30 minute chart of the NQ shows upside pressure building (what O'Brien and Ord refer to as "cause"), and a break above 1435 should kick off the release (effect). The 30 minute cycle oscillator had been pinned as price resolved the 1425-30 congestion area, and ticked up when 1430 was finally cleared. 1445 is the upper pennant trendline, above which we should see a sharp breakout. If my thesis about institutional buy programs funding these moves (perhaps assisted by the Fed's whopping 5.25B overnight repo), then tomorrow should open weaker or fail shortly after the open. On the other hand, if this is short covering / Santa buying, then 1445 should fall tomorrow. Daily ES candles The ES added 7.50 to close at a new year high of 1093, above the upper rising bear wedge resistance line. The move turned the 10 day stochastic up in a trending move, and round number resistance at 1100 is the next significant stop, although I expect shorts to fight for every point here. With Bollinger band resistance computed at 1090.38, the ES should correct immediately, but failed resistance should provide downside support first at 1090. 20 day 30 minute chart of the ES ES made a 7.5 point gain, .69% compared with the YM's .90% and the NQ's .35%. The move broke the top of my generous regression channels, and obviously the trick will be whether the bulls can hold this level. The 30 minute cycles are dominating the daily here, with the young 30 minute upphase causing the daily oscillators to trend higher in overbought. On this shorter timeframe, it looks like we're lined up for an explosive blowoff tomorrow morning, but again, the tape has been anything but easy to read of late. Support is now at 1090, followed by 1088, 1085, and 1080. Resistance? Every point from here to 1100. 150-tick ES The short cycle oscillators are maxxed out and calling for an immediate correction, but these trend most easily. Given the strength on the 30 minute chart and Bollinger resistance on the daily, it's mostly a coin-toss as to which cycle will dominate. While I expected the indices to close at the highs based on the 3PM strength, the actual levels were still surprising. I would, however, respectfully suggest waiting for a downside break of 1090 before thinking too bearishly of the current setup. Top picking is tempting here at Keltner and Bollinger resistance of 1093, but only with tight active stops. Daily YM candles The daily YM tried but did not break through its upper rising bear flag trendline. Other than that, we had an outside bullish engulfing candle closing at the day and 52 week high. Not bearish, and again, a reverse falling knife for those who dare to try and catch it. 20 day 30 minute chart of the YM The 30 minute cycle oscillators point higher on the YM, again the strongest equity index today. For tomorrow, nothing would surprise me. A 200 point gap down open, flat or a gap up. With volume light, Christmas cheer in the air (if not in the store aisles), and markets responding to heightened terror alerts and earthquake news by buying equities at their year highs, the safest strategy may be to pour a tall, cold drink, put up the feet and watch the fireworks. The oscillators are as ambivalent as the fundamentals. Cash is a position. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_122203_1.asp ************************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 ************************************************************** ******************************************************************** SUNDAY'S ASK THE ANALYST (this column missed the Sunday Publication) ******************************************************************** Day trading is a different mindset From time to time I'll profile "day trades," or very short-term trades where a stock trader will try and capitalize on a short- term move, up or down, in a stock. Day trading may have gotten a bad name in recent years, as it became associated with how to lose money in a short amount of time. While you can lose your shirt in a hurry, the ones that lose money quick are the undisciplined day traders, that may not know when, or how to call it quits. This week's e-mail box was filled with different questions, and even some suggestions about recent stocks I've profiled for day trades. Before I go much further, let's talk quickly about the National Association of Securities Dealers (NASD) and the Securities Exchange Commission (SEC) as it relates to day trade. During the stock market declines of 2000, 2001 and 2002, many day traders lost a lot of money during the decline, after making a lot of money during the advance. It's not funny, but you can understand how a day trader, even an investor, lost some money during the market's decline. When day traders began buying stocks on margin and leveraging their account, only to see the stock they purchased fall further in price, day trader began receiving what is known as a margin call. Some traders, that couldn't come up with cash to meet the margin call, found the stock they had been holding being sold out of the account by the broker. What happened next was a lawsuit, where the trader sued his/her broker, for allowing the trader to lose his/her money. The common theme of the suit was that the trader wasn't aware of the risks, wasn't "financially suitable" to be day trading, and therefore it was the brokers fault, as if the broker handed the trader a loaded gun. Ah... America. One of the few places in the world where an individual can harm themselves, but then sue somebody else for the harm the individual inflicted on themselves. With the term "financially suitable" showing up in lawsuits, the NASD and the SEC took it upon themselves to protect day traders from themselves, and begin placing restrictions on a traders account, that might not be "financially suitable" to be day trading. What the NASD and SEC did, is have brokerages flag a trader's account as a "pattern day trading account," by having broker dealers monitor accounts that make 4 or more round-trip (in and out) day trades within any 5 business day period, provided the number of day trades represents at least 6% of the total trading activity during the same 5 business day period. Trader's accounts that were flagged as pattern day trading accounts are then required to maintain $25,000 in equity to allow unrestricted access to day trading buying power. Pattern day trading accounts with less than $25,000 will have day trading buying power limited to two times maintenance excess. In addition, a Day Trading Minimum Equity Call will be issued in the account. The call will remain open until the equity is raised to $25,000. Pattern day trader accounts with less than the $25,000 minimum equity requirement should consider limiting day trading activities to cash only transactions until the minimum equity amount is reached in order to avoid a Day Trading Buying Power Call. In essence, what the NASD and SEC have attempted to do, is limit the number of "small" or perhaps "financially unsuitable" day traders, with the thinking that a trader that can come up with $25,000 is suddenly "financially suitable" for what the NASD and SEC now consider a high risk strategy for profiting in the stock market. What I see the NASD and SEC actually doing is equivalent to not handing a loaded gun to the unsuspecting day trader, but now a grenade. Sure. The odds are greater that the trader that can deposit $25,000 in his/her account may have more money that a trader that deposits $5,000 in their account, but that doesn't mean one is any smarter, or disciplined than the other, and there is no guarantee to the broker that the trader with $25,000 isn't trading his/her last dollar. Most investors are familiar Bernard Ebbers, founder of now bankrupt Worldcomm, and some of the loans Worldcomm had given him to meet margin calls. Not only did Mr. Ebbers find a declining stock price creating problems, but despite his financial suitability, Mr. Ebbers didn't understand the implications of margin and the leverage allowed. While Mr. Ebbers was an INVESTOR in Worldcomm, there are many day trader from 2000-2002 that have also become investors in many stocks. A day trader's term for an investment is: a day trade that went wrong, and is now considered an investment until its price comes back to entry point. In other words... a day trader can become an investor if they lack discipline. All of the above gives the day trader and idea, that there is really two types of day traders. In the following commentary, I'm going to use the term "day trader" to represent the trader that may not have a minimum equity of $25,000. I'm going to use the term "pattern day trader" to represent the active trader that does have a minimum equity of $25,000. Equity isn't necessarily CASH. Oftentimes, a pattern day trader will have $25,000 or more in a mutual fund, where that mutual fund is held in his/her account, and will still be classified by his/her broker dealer as a pattern day trader, as the trader will actively trade individual stocks in that same account, using margin capability from which to trade from. However, for the sake of simplicity, the following discussions will assume the trader's equity is based on cash, not other securities held in the account. I strongly suggest every trader read and understand those documents your broker dealer has you sign, when you request margin being allowed for your account. The margin documents and pamphlets given to you by your broker, should outline the varying degree of margin leverage that various securities allow the trader to borrow against. One of the problems I (Jeff Bailey) have when profiling a day trade, is that I don't know what type of trader I'm dealing with. Are you a day trader, with less that $25,000 on deposit in your account, or are you the pattern day trader, with $25,000 or more in your account? One error I have made, according to some traders, is that a stock I profile for a day trade, with entry point, stop loss and target, has the target not being great enough to warrant the trade. Here is where I need to cover the topic of what most day traders (less than $25,000) may not understand, when it comes to intra- day trading of stocks, which is the mindset of what an intra-day trader is really trying to accomplish. The mindset of a successful intra-day stock trader is NOT to make a lot of money in one trade. Or at least, it shouldn't be the mindset of the intra-day trader. It is the INVESTOR that looks to make a lot of money in one trade. The mindset of an intra-day stock trader is to make a lot of money with a lot of trades. When I was trading proprietary money for the broker dealer I was trading for, it was common to trade the same stock 5 or more times during the same session. Remember the days when Rambus (NASDAQ:RMBS) or U.S. Robotics would trade a 6-point range in a day? A good intra-day trader could sometimes take 8 or 9-points out of these stocks in a given day. Before we ever start day trading, the mindset of an intra-day trader is much different than that of an investor. You can be a successful intra-day stock trader, even if you lose on 50% of your trades, and win on 50% of your trades. The key is for your winning trades to be greater than the losses. For example, if you will limit your losses to 0.25% and take profits at 0.50%, you can still trade 50/50 and make money (including commissions). Poor intra-day trader feel that they have to win 100% of the time, and that they are failing if they aren't winning on more than 50% of their trades. I will be honest and say that a day trader (less than $25K) may be at a disadvantage to the pattern day trader (more than $25K) when it comes to what I consider successful intra-day trading. After all, the day trader may not have the use of margin, should they make 4 or more round-trip (in and out) day trades within any 5 business day period, provided the number of day trades represents at least 6% of the total trading activity during the same 5 business day period. Once an intra-day trader has been classified as a pattern day trader, they have then either limited their purchasing power to the cash on hand in the account, or must come up with more cash to then meet the minimum $25,000.00 equity. Those than can't meet the minimum $25,000 equity, may then become limited to the number of stocks they can trade, where the LIMIT is the price of the stock they can trade. And this brings us back to the mindset of an intra-day trader. Each day, when the intra-day trader shows up for work (trading) they can only deal with what the market gives that day. The mindset of an intra-day trader knows that he/she has 6.5 hours in which to trade (09:30 AM EST - 04:00 PM EST) regular market hours. On a day where there may be no economic news, or corporate earnings, that trading day may be calmer, or less directional that others. On days like this, the intra-day trader most likely has the mindset that trading opportunities are going to be few, and intra-day volatility is unlikely and smaller trading gains would be expected. It is the narrow range of trade days, where I feel the pattern day trader ($25,000 or more) can still make good money, but where the probability of making money, not losing it, is going to be most likely found in larger priced stocks, not lower priced stocks. I consider lower priced stocks as being stocks that trade under $15.00 and even during a "news driven" trading session, at lower priced stock can move $0.50 against the intra-day trader (1.66% on a $15.00 stock), which for most intra-day traders, may be too much downside risk, where the $0.50 price fluctuation in that particular stock is not uncommon. In essence, as a general rule, lower priced stocks are deemed more volatile, and perhaps less predictable. While NO STOCK IS ENTIRELY PREDICTABLE, it is the higher degree of predictability, that a successful intra-day trader looks for. While some intra-day trader want more profiles of lower priced stocks (probably those with less than $25,000 in an account), there are equal number that want more profiled trades in higher prices stocks (probably those with $25,000 or more in an account). As a general observation, larger priced stocks will often-times trade more predictable, or at least be less volatile on an intra- day basis. Why would this be? Institutions tend to be more active (building positions, selling positions) in larger priced stocks than they are in lower priced stocks, and it is this institutional interest that creates higher volume flows, and may allow for a smoother trade, where the intra-day trader may not have as much RISK to their intra-day stop. One trader asked... "...is there any way you can do recommendation on highly liquid stocks? For example msft, csco, intc, etc., as it is so easy to get in and out. What this intra-day trader has come to realize is that while these stocks can show meaningful intra-day fluctuations, when the trade moves against the trader (RISK), the bid or offer isn't as likely to move away from the trader as there may be upwards of 40 market makers in the stock, where once the trader's stop is triggered, there is a higher probability that the intra-day trader can find a ready buyer for his/her order. Lower priced stocks may not offer this type of liquidity, especially if there is a larger order in front of yours, which has the bid or offer moving quickly away from the intra-day trader's stop. Remember... the mindset of a successful intra-day trader is to make a lot of money with a lot of trades, and to do this, losses must me kept small. What we should begin to take away from some of this is that larger priced stocks, like a Microsoft (NASDAQ:MSFT) $27.36, where an intra-day move of $1.00 or more is very uncommon, will more than likely be less RISKY than a $10 stock, where a $0.50 or $0.25 range becomes a RISKIER trade and possibly less predictable. Does the trade, as profiled, make sense? I may have made a wrong assumption with some recent day trade profiles where I profiled a day trade long in MSFT at $27.35, with a bullish target of $27.49. So true is the trader that may be trading 200 shares that sees this as a "no win" trade. If the stock does gain $0.14 to target, this would equate to a $28.00 gain. If roundtrip commission of $20 is paid to the broker ($10 buy/$10 sell) then this trade makes NO SENSE and should not be taken. However, the pattern day trader ($25,000) may take the trade, buy 1,000 shares, with thought of $120 net profit target in mind. A pattern day trader that makes four trades in a day with two $120 winners and two $60 losers, may see the day as being a successful day. Since I mentioned commissions, here too we should discuss the mindset of an intra-day trader. COMMISSIONS should NEVER be an overriding factor for the intra-day trader, especially when it come time to close the trade out. COMMISSIONS are a cost of doing business. I have witness some traders suffer some UGLY losses when they felt they shouldn't close a trade because doing so, including the COMMISSION would generate a net loss for the trade. I've seen traders buy 1,000 shares of a $25 stock at an intra-day break-out point, see the stock rise to $25.50, come close to his trading target, only to see the stock quickly reverse course and begin to look like the trader got sucked in on an artificial move higher, where the trader realized it, but didn't close the trade out because the closing commission cost would generate a loss for the account. Then at $24.50, the trader takes the $500 loss, and still pays the $10 commission. There are so many different items I would still want to cover when it comes to day trading as it relates to how to manage an intra-day trade. When I'm trading a stock, I'm watching the stock trade. What this allows me to do, is NOT have to use a hard stop, or a hard target. However, when I profile a day trade, I do profile entry, stop and targets. The stop is a level I think the stock should NOT trade, if the stock is going to achieve its target. I've mentioned before, that if you the trader can't monitor a stock on an intra-day basis, the I DO STRONGLY SUGGEST the use of a hard stop being placed with the broker dealer. If you have to go to a meeting, take the dog for a walk, then place a hard stop while you take care of the chores. However, when an intra-day trader has established a stop, be aware that it is YOU against the market maker. They aren't stupid. If you're trading a smaller priced stock, and you take the market makers offer for 1,000 shares at $12.00, and the market maker immediately sees an additional 1,000 shares show up as a sell market order at $11.85, you've just shown your hand to the market maker and he/she knows that your just looking for an intra-day trade. More than likely, if the stock isn't heavily traded, they'll help the stock trade lower by selling some of their inventory at the bid, down to your stop, stop you out, then sit the bid at $11.85, and look to buy the 1,000 shares you bought from him/her back at $11.85. When I was trading for a broker dealer, I would purposely trade thinly traded stock, monitor them on Level II, and try and pick out day trader activity, where the day trader was using hard stops. Market makers are a tricky bunch, and they'll use their clout to try and influence how a stock trades. You may monitor Level II from time to time when you're trading. When you're long a stock at $25.00 and the offer is 1,000 at $25.05, what does you mind think when suddenly the offer builds to 100,000 $25.05? Most of us would think... "oh crud, there's a big seller at $25.05, I'm out of here. Sell $24.99!" While a market maker that shows an offer of 100,000 shares has to honor that offer while its posted, it can also be an offer placed to simply try and influence intra-day traders to sell at the bid, and have price moving lower, where the market maker himself is looking to buy the stock. Ooooo.... there's some tricks these buggers will use when they're making markets in stocks. If intra-day traders don't help them out by showing them your hard stops, then all the better. Well... I've really just scratched the surface on day trading, but it gives us all some things to think about. Trust me when I say that when I profile an intra-day day trade in the market monitor, what I'm really looking for is a trade, based on current market conditions, that I feel stands a high odds chance of being profitable to the target defined. Rarely do I consider the stock's price, but I'm aware of what type of room must be given to a stop when the trade is initially profiled as it relates to the price of the stock, and how that stock tends to trade on an intra-day basis. One of the BEST tips I could ever give an intra-day trader is to have a list of 10 stocks that you become intimate with. That is... you have a good feel for how they trade. Your list of 10 stocks should not all be semiconductor stocks. Intel (INTC) and Applied Materials (AMAT) are 2 excellent choices for semiconductor stocks, that gives the trader an chip maker and chip equipment maker to trade. Some days, its the chip-makers that are moving, other days its the chip equipment stocks on the move. Don't just have tech in your list. Have a boring cyclical stock or two on your list. Once you get intimate with 10 stocks, then build your list further. One thing you'll find, is that there may be two stock (semiconductor) that just aren't trading much range and seem "dead" for a week or two. Don't keep trying to trade them. If its cyclicals that are of focus by the market, then get with the program and trade where the action is! Hey! Did all of you intra-day trader's see Jim Brown's note in the Market Monitor at OptionInvestor.com about him getting ready to test a voice component to the Market Monitor starting on January 6th? I didn't know this new feature was coming, and boy... I can talk a heck of a lot faster than I can type! Maybe I can voice over some different observations regarding intra-day trading too. Last note! Jim wanted me to remind all of you intra-day traders that like to have some longer-term trades/investments for either stocks or stock options in your investment strategy, that the OptionInvestor.com annual renewal special for our Top 50 Stock Picks for 2004 needs to be reserved by this weekend, if you want to get this CD of stock picks. Here's the link that explains this End-of-Year Renewal Special 2004. https://secure.sungrp.com/04renewal/index.asp Jeff Bailey ******************* 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 Monday 12-22-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: QCOM Dropped Calls: None Dropped Puts: XL Play of the Day: Call - QCOM Watch List: Keep An Eye Open Market Posture: Stampeding into Christmas ************************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 ***************** QCOM - call Adjust from $48.00 up to $48.70 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ XL Capital - XL - cls: 76.80 chng: +2.28 stop: 75.51 So much for that Head & Shoulders pattern! On Friday, XL looked like it was just about done forming the right shoulder, but today's nearly vertical move off the $74 level delivered a 3% gain and left the bears' heads spinning. There didn't appear to be any company-specific news to explain the move and the way volume built in the afternoon, the late-day gains look to have had a strong short-covering component. With our stop clearly broken and XL now having broken the 6-month descending trendline, there's no other rational choice but to cut our losses and drop the play here. Any open positions should have been stopped out today. Picked on December 9th at $72.60 Change since picked: +4.20 Earnings Date 1/28/04 (unconfirmed) Average Daily Volume = 1.18 mln ************************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 - CALL ********************** Qualcomm, Inc. - QCOM - cls: 52.25 chng: +1.22 stop: 48.70*new* 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: Helped along by the broad market rally on Thursday, shares of QCOM came roaring back from the sharp drop on Monday, using the 10-dma ($49.78) as the springboard for that advance. That rally brought the stock right back to the top of its rising channel and with options expiration clouding the picture on Friday, QCOM stalled at the upper channel line. Volume is likely to be light next week, but with the bulls feeling frisky, the stock just might be able to give us an early Christmas present of a breakout through that resistance. Momentum traders can consider new positions on a breakout over $52, while those looking for a better entry can target a dip and rebound from the $49-50 area, which should now be solid support. With the possibility that price action will be muted during the holiday-shortened week, we'll keep our stop set at $48. Why This is our Play of the Day It was over a week ago that we first speculated about QCOM finally being able to break out of its channel. With the weakness in the Technology sector last week, the stock needed to get a running start. But after a rebound from the 10-dma (now at $50.23), the stock shot higher last Thursday, ending right up against the upper channel line again. A slight dip on Friday set the stage for today's breakout, as QCOM pushed through resistance at $52 (also the site of the upper channel line) to close at a fresh 2-year closing high. We shouldn't expect any explosive moves so close to the holiday as volume should continue to decrease, but this looks like the beginning of a breakout move towards the $55 level. Upside continuation tomorrow can still be used for momentum entries, while bargain hunters should continue to look for entries on rebounds from the $49-50 support area. We're tightening stops to $48.70 tonight, just under last Tuesday's intraday low. Suggested Options: Shorter Term: The January 50 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the April 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 will want to use the April 50 Call. Note that there are February strikes available, but we're sticking with the April options until the February strikes get some open interest. Our preferred option is the January $50 strike. BUY CALL JAN-50*AAO-AJ OI=20038 at $3.30 SL=1.75 BUY CALL JAN-55 AAO-AK OI=11576 at $0.80 SL=0.40 BUY CALL APR-50 AAO-DJ OI= 8815 at $5.30 SL=3.25 BUY CALL APR-55 AAO-DK OI=15792 at $2.85 SL=1.50 Annotated Chart of QCOM: Picked on December 11th at $50.14 Change since picked: +2.11 Earnings Date 2/04/04 (unconfirmed) Average Daily Volume = 9.23 mln ************************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 ************************************************************** ********** Watch List ********** Keep An Eye Open Omnicom - OMC - close: 85.85 change: +1.06 WHAT TO WATCH: After 2 1/2 weeks of consolidating in a very tight range from $83 to $85 OMC is finally breaking out to the upside. This could be an entry point for traders looking for a quick move to the $90 mark. It is also a tempting entry for a stronger move to heavier resistance in the 95-97 range. Advertising companies like OMC are looking forward to a good year in 2004 and investors are placing their bets. Chart= --- Starwood Hotels - HOT - close: 36.10 change: +0.20 WHAT TO WATCH: The long-term bullish trend of HOT from March to October was very strong. When shares finally broke down in profit taking investors bought the dip at $33.00. Actually, they've bought the dip at $33 three times now. Last week the stock broke out of its 2 1/2 month trend of lower highs on strong volume. The move above $36 looks tempting and traders can aim for the $38 level or its P&F price objective near $42. Chart= --- Stryker Corp - SYK - close: 82.77 change: -0.55 WHAT TO WATCH: We strongly considered medical device maker SYK as a bullish play over the weekend. The stock and sector are strong and SYK had just broken out to a new high. Technical oscillators were all bullish and volume had slowly been rising. Surprise! Today the company was subpoenaed by the U.S. Attorney's office to disclose information on their billing practices. While news like this is seldom a good thing the stock really didn't react very much to the news. We're going to keep an eye on it. Chart= --- Nike Inc - NKE - close: 67.30 change: +0.37 WHAT TO WATCH: Shares of NKE are trading near seven-year highs above the $67 level. After last week's earnings report the stock is on course to set newer highs. Management reported growth in revenues, improving margins, and strong expectations for 2004. We'd watch NKE for a bounce from $65 or a move above the current highs at $68.00. Chart= --- Caterpillar - CAT - close: 83.78 change: -0.97 WHAT TO WATCH: CAT turned in the second worst performance for a Dow component on Monday. We're really not surprised. The stock is very overbought and in need of a little consolidation. Bullish traders can look for a pull back to the $80 level, which should act as support. Coincidentally, CAT's 10-dma just peaked near the $80 mark. Chart= ---------------------------- RADAR SCREEN - more to watch ---------------------------- TWX $17.92 -0.18 - Despite the decline today shares of TWX appear to be stair-stepping their way higher. The $20 level is probably a good target. SRV $5.31 +0.02 - SRV is not a stock we'd play options on but stock traders might want to look at it. Shares are bouncing higher after two weeks of consolidation. The weekly chart suggests a possible move to $6.50. ************** MARKET POSTURE ************** Stampeding into Christmas by - Nich Sheldon Only three indices faltered below Friday's close today, yet none of them managed to lose more than a third of a percentage point. In fact the heaviest loss was taken by the RLX S&P Retail Index, which dropped -0.32 percent. The MACD looks ready to crossover into bullish territory but traders might want to wait for a strong move over 380 and its 50-dma before considering bullish plays in the retail sector. Besides the losses seen in the RLX, XNG Natural Gas Index (-0.14%) and the IUX S&P Insurance Index (-0.05%), the overall market sentiment was bullish. Several indices like the INDU, SPX, OEX, TRAN, BKX, BIX, UTX, DFI managed to set new 52-week highs by the closing bell. The DJUSHB DJ US Home Construction Index claimed the best gains on Monday, tacking on +1.55 percent and closing over 600 for the first time in nine trading sessions. Also noteworthy is the fact that the index has closed higher for the past five trading days. Traders should note that the stochastic indicator on the DJUSHB is nearing overbought territory. The Security Broker Dealer Index (XBD) took second place in terms of percentage points, as the index added on +1.43 percent. In third place, the DFI Defense Index rose +1.16 percent. Fourth, and the last index to claim more than one percentage point on Monday was the GSO GSTI Software Index. The GSO added +1.08 percent, before closing at its daily highs. ******************* 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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
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