Option Investor

Daily Newsletter, Monday, 12/22/2003

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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 

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.

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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 


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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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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


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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


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All types of Spreads and Buy Writes             888-281-9569
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QCOM - call
Adjust from $48.00 up to $48.70




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


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 

Live Broker and Online Trading Available     888-281-9569




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 

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 

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


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 

Live Broker and Online Trading Available     888-281-9569



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.



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.



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.



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.



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.


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.


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.


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