The Option Investor Newsletter Sunday 01-04-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Happy New Year, I Think Futures Market: Key Reversal Day Index Trader Wrap: New Highs Editor's Plays: So Far So Good Market Sentiment: A Mild Hangover Ask the Analyst: Dow Dogs barked loud in 2003 Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 01-02 WE 12-26 WE 12-19 WE 12-12 DOW 10409.85 + 85.18 10324.6 + 46.45 10278.2 +236.06 +179.48 Nasdaq 2006.68 + 33.54 1973.14 + 22.12 1951.02 + 2.02 + 11.18 S&P-100 549.99 + 7.21 542.78 + 2.52 540.26 + 8.48 + 8.27 S&P-500 1108.48 + 12.21 1096.27 + 7.61 1088.66 + 14.52 + 12.64 W5000 10777.86 +115.48 10662.4 + 82.96 10579.4 +114.94 +111.88 RUT 560.85 + 5.75 555.10 + 8.22 546.88 - 0.71 + 8.58 TRAN 3008.16 + 8.49 2999.67 + 12.24 2987.43 + 4.02 + 72.83 VIX 18.22 + 0.83 17.39 + 0.97 16.42 + 0.01 - 0.68 VXO 17.94 + 1.36 16.58 + 0.53 16.05 + 0.10 - 1.39 VXN 24.51 + 0.56 23.95 - 0.94 24.89 - 0.97 - 1.19 TRIN 1.01 0.79 1.02 1.02 Put/Call 0.76 0.86 0.80 0.75 ****************************************************************** Happy New Year, I Think by Jim Brown The Dow surged at the open on Friday on relief that there were no terrorist events over the holiday. The first economic present of the new year came in the form of the ISM report and investors cheered once again while any shorts from before the holiday were squeezed out of the market. A new year and already a new high. Happy New Year! Dow Chart Nasdaq Chart The ISM report lost no time in putting investor fears to rest that the economy had softened in the fourth quarter. The index rose to 66.2 from 62.8 and well over consensus estimates of 61.0 on the strength of surging new orders. This is the highest ISM since July 1950. New Orders surged to 77.6 from 73.7 and Employment rose to 55.5 from 51.0. This is the 2nd month over 50 for employment after 38 months in decline. Orders were higher than production for the fourth straight month. Only 10% of those surveyed saw a decline in production. There was no bad news in this report and investors should have breathed a huge sigh of relief. The questionable economics over the last two weeks were suddenly history and the hope for a fourth quarter earnings surprise began to firm. The good news pushed the Dow to a new high at 10527 and a level not seen since March 2002. The Nasdaq soared to 2022 and a level not seen since January 2002. The excitement was short lived and sellers started to appear around noon. The reasons were many and the end result was a Dow close -118 points below the highs for the day but still above the current psychological 10400 level. One of the reasons for the Dow decline was IBM. A Bear Stearns analyst predicted IBM would miss its December quarter bookings by as much as $2 billion. IBM had blessed a $14 billion estimate in mid-October but the Bear analyst is now expecting only $12 to $13 billion. IBM has not helped the situation with a refusal to comment on the $14B estimate earlier this month with a "timing remains uncertain on various deals" dodge. IBM lost -$1.13 on Friday. Russell Chart Other big cap Dow stocks with large drops were MMM, PG and WMT. The Dow finished with a -44 point loss while the Russell closed with a +4 point gain. If you remember we saw a rotation out of small caps and into blue chips over the first three weeks of December as some fund managers shifted assets into highly liquid issues. The funds benefited from the gains in the Santa rally and were positioned in the liquid issues if they decided to exit. Apparently some did decide to exit early on Friday as shown by the index imbalances. Helping them decide to take the plunge was an almost constant news of flight cancellations somewhere on terrorist fears. 11 flights have been cancelled in the last four days. The urge to hold 2003 profits over the weekend with these kinds of fears proved too much for some even on the positive ISM news. Also helping the decline was a worry that the spotlight is now back on the Fed. With the prior Fed comments being based on expectations for slow and steady growth the ISM spoiled the outlook with the fastest growth in manufacturing in over 20 years. Bonds were hammered on the positive implications and analysts were tripping all over themselves to raise GDP estimates for the 4Q. The first look at the 4Q GDP will be Jan-30. If the economy has suddenly gone from a sputtering four cylinder to a purring V12 then the Fed's "considerable period" qualification may be in jeopardy. The head Fed is speaking on Saturday in San Diego on the U.S. economy and current monetary policy risk. The bond groupies will be all ears. Fed funds futures were expecting a 25 point rate increase by July but that assessment could change very quickly based on his speech. The next Fed meeting is a two-day affair on Jan-27/28th. Conveniently two days before the GDP report. Demonstrating the rate fears were the home builders which took a serious hit. CTX -3.25, RYL -3.56, PHM -2.67, HOV -4.16 and NVR -33.25 to name a few. Financial stocks also took a hit on the worry about a rate change ahead. It is hard to draw any real conclusions for 2004 based on one low volume day with lots of terror news. Friday was just a blip on the radar screen not a trend change. There were some disturbing chart patterns but it was just one day. The Dow may have broken 10525 but the important event was the closing hold above 10400. This level has been support for the last three days and it remained support. This is key because institutions could have chosen to sell in volume but didn't. Total volume across all exchanges was only 3.3 billion and it was 5:3 in favor of advancers despite the negative finish on the Dow, S&P, OEX and Wilshire. The headlines do not always tell the story. The real story was the pullback to support with continued terror fears. It could have been much worse but support held. The wild card here is of course the light volume. This was a retail day, not an institution day. Retail traders were putting their year end bonuses to work and buying stocks in the beaten down sectors. Drug stocks soared after being ignored during the tech rally in the fourth quarter. This could be a double-edged sword. Drugs are defensive and the surge today could be seen as a move into safety in advance of a potential January dip. Before I get into my outlook for next week I need to clear up something. I got a couple emails over the last couple weeks saying I was too bearish and I should not be telling people the market will crash in January. Excuse me? I am not trying to be bearish and I am not telling anybody the market will crash in January. I apologize if it came across that way but I guess one persons profit taking dip is a crash for others. Secondly, I don't know if the market is going to dip in January any more than anybody else does. I do expect it to dip based on historical trends. I do not expect it to crash. Assign your own meanings to the terms dip and crash based on my outlook below. I analyze the market, compare it to current and historical trends and draw conclusions. I report these conclusions, good and bad, and explain my rationalism behind them. As an investor you should take these conclusions and compare them to your market view and make your own decisions. Finally, if I were bearish then my picks in the Top-50 & Top-20 should reflect that. They are all long plays. My outlook for January is based on historical trends. Over the last six years those trends have been for a January high to be established in the first 3-5 days. This has been followed by a drop of between -550 and -1050 points over the next several weeks. Obviously a drop of -550 points would barely break 10,000 and would be insignificant to the current market. Hardly a crash. Should the market reach the other extreme from the 10527 high on Friday it would push us right back to decent support at 9500 and would still be less than a 10% correction. Still no crash. So where does reality actually lie? That correct answer today would be worth millions. What would you do on Monday if you knew in advance that the Dow would hit 9500 in two weeks? Unless you are Osama and know of an impending attack that answer will remain hypothetical. I will try to be as specific as possible with my current outlook. The reasons for a profit taking dip remain the best Dow year since 1996, best S&P since 1998 and third best Nasdaq year in history. This does not even take into consideration that the first three months of the year were down. We recovered the earlier losses and rebounded to those gains after the March lows. There is considerable profit on the table and funds coming out of a bear market need to show some gains and produce some new marketing materials showing those gains. Up until Friday the good economic news was priced into these gains. The December ISM may have given them one more up leg or maybe not. The worry about the Fed accelerating their rate schedule could offset the ISM bounce. Funds also know that these profits could go up in smoke in an instant if a major attack did appear. Also, many "analysts" think the current market is very overbought citing a current PE of 38 for the Nasdaq. In short there are plenty of reasons for some profit taking ahead. Offsetting the potential for profit taking is the hope that the Jobs Report next Friday will be a blowout based on the ISM gains. One more positive economic point for the recovery and one more negative for the Fed if it came to pass. Add in the lack of any serious earnings warnings and very few warnings in general and the 4Q earnings appear to be on track to surprise to the upside. Factor in the coming $165 billion in first quarter tax stimulus and the stars are aligned for a continued gains according to the bulls. You can decide which scenario you like best and invest accordingly. However, if recent January trends repeat the Dow could easily test 9500 before January is over. Does that mean I am bearish? No, it just means that historically we could test 9500 before the end of January. I personally think it will produce a significant buying opportunity for 2004. I think investors should consider it an opportunity and not a dip or crash. Dow Chart - Weekly To balance the scales today we need to look at the upside potential as well. The Dow has taken out resistance on almost a daily basis for the last three weeks. Since 10,000 was broken the Dow has been on a constant upward march. The last two days of December saw a plateau reached and held at 10400 and despite the intraday selling on Friday that level still held. Moving up from here could be a problem. The 10525 level reached on Friday is exactly the downtrend resistance line from Jan-2000. There is even more significant horizontal resistance at 10650 which was the high for all of 2002. Were it not for the current very extended conditions my outlook might be more positive but I believe we are going to have a tough time moving above the 10650 level without some profit taking first to create that next buying opportunity. S&P Chart - Weekly Wilshire 5000 - Weekly Next week is full of economic reports but the only one that really matters is the Jobs Report on Friday. We may get some volatility on the others but it is only a prelude to the Friday report. What we are likely to see is simply a very volatile market in general as both the bulls and the bears are scared to commit to a position. Friday was a throw away day with most fund managers on vacation after a long year. Next week is going to be a pivotal week as those managers come back to work to implement their plans for 2004. They will first have to wade through the inflow of year end retirement cash and decide how/when to put it to work. Index funds do not have that luxury. They receive cash and spend it. Their goals are a lot different as they only have to mimic the market and not time it. This year-end cash inflow to index funds normally provides the liquidity needed to produce those early January highs. The hold at support on Friday could be the launch point for a Monday bounce. I am sure many retail traders could not bring themselves to go long on Friday with continuous newscasts about flight cancellations. If we make it to Monday with no event those traders will breathe a sigh of relief and step up to the line if conditions are positive. I am sure you can see there are a lot of "ifs" for next week and odds are good we could move quickly in both directions. We will be sending our first Top-50 Stocks for 2004 newsletter update on Monday night to everyone who signed up for the special. We will update entry points, exit points and our outlook at regular intervals as each play progresses. Sunday is the last day for the year-end renewal special. Because of the time critical nature of the Top-50 Stocks for 2004 and the Top-20 Lottery Picks we have loaded the CD to the web and we will send the link to anyone who signs up on Sunday. We will follow up with the actual CD by Priority Mail. We want you to be ready to take advantage of any potential buying opportunity in our immediate future. SUNDAY IS THE LAST DAY but anyone who signs up on Sunday will get the link by close of business on Monday. Don't miss out on this opportunity to begin 2004 with a profitable entry. https://secure.sungrp.com/04renewal/ Enter Very Passively, Exit Very Aggressively! Jim Brown ***************************** 2003 Year End Renewal Special ***************************** TIMING IS CRITICAL! SUNDAY IS THE LAST DAY! 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? https://secure.sungrp.com/04renewal/ Sunday is the last day for the year-end renewal special. Because of the time critical nature of the Top-50 Stocks for 2004 and the Top-20 Lottery Picks we have loaded the CD to the web and we will send the link to anyone who signs up on Sunday. We will follow up with the actual CD by Priority Mail. We want you to be ready to take advantage of any potential buying opportunity in our immediate future. SUNDAY IS THE LAST DAY but anyone who signs up on Sunday will get the link by close of business on Monday. Don't miss out on this opportunity to begin 2004 with a profitable entry. https://secure.sungrp.com/04renewal/ ************** FUTURES MARKET ************** Key Reversal Day Jonathan Levinson The first session of the New Year saw a relief rally take equities to new highs before failing to close in negative territory for key reversal day as defined by Murphy in "Technical Analysis of Financial Markets". This bearish engulfing session sets up one of the more bearish setups but also one that we’ve seen fail on other occasions in 2003. Gold miners and the CRB were firm while the US Dollar Index moved sideways below Wednesday’s closing levels. 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. 15 minute chart of the US Dollar Index The US Dollar Index did not bounce Friday but it did not collapse either, distinguishing Friday from every other day this week. Rising support off Wednesday’s low is just below 86.60, but with the weekly trend down and given the speed and ferocity of the recent down spikes, I would tend to be very careful with bullish US Dollar Index plays (ie bearish foreign currency positions). The CRB gained 2.47 to close at 257.76, led by strength in wheat, lean hogs and corn. Daily chart of February gold I was unable to get quotes for gold Friday on the ECBOT, to which trading has been transferred, but Bloomberg reported it down 1.10 to 416.10. The XAU and HUI were positive throughout the session, holding up nicely against the decline in the broader equity markets. The technical picture on gold has not changed this week, with the weekly cycles very extended to the upside but making new highs. The weekly candle print, still within the tenacious bearish rising wedge, is a doji cross. The light volume this week and the lack of sharp pullback makes it a difficult candle to characterize, as it’s either indicating distribution or consolidation at the highs- this uncertainty is born out by the upper and lower doji tails, with neither bulls nor bears willing to commit, price closing in the middle of the week’s range, just below multiyear highs. Daily chart of the ten year note yield The Fed drained on Friday, the first day this week that it did not add substantial amounts of intervention money via its open market operations. Bonds got sold very hard, the worst day for ten year treasuries since October, with the yield adding 11.6 basis points (a 2.72% gain) to close at 4.373%. The move confirms the daily cycle upphase, and blew though all trendline resistance. Bollinger resistance at 4.1% is the next resistance level to watch. Daily NQ candles The daily NQ broke to minor new 52 week highs at 1483 but dropped to Wednesday’s low before bouncing to close in shallow negative territory, up for the week. Like the gold market, the NQ is looking extended but not yet on a sell signal, still within its daily cycle upphase. Bollinger resistance suggests that upside should be limited within this daily cycle upphase, but we can’t know for certain until the next downphase has commenced. The price trend has been rising and continues to do so, but after two weeks of solid advances, bears are betting on downside from here. With gains of the past two weeks on light volume, support is not as firm as it would otherwise be, but the absence of material bad geopolitical news and the persistence of 1460 support could fund a relief rally on Monday. 1460 is first support, followed by the 22 day EMA at Fibonacci support at 1440. 30 minute 20 day chart of the NQ The 30 minute NQ launched a 30 minute downphase on a bearish oscillator divergence, and the result was a sharp sell spike that stopped at the day low of 1460.50. Wednesday’s range was engulfed by the selling, but not on a closing basis, with NQ holding easily above 1460 support. Rising trendline support was broken, but the broader trend is still positive, and it will be on even this short 30 minute timeframe until preliminary support at 1440-42 is broken. Resistance is at 1475, followed by 1482-3. While it's tempting to view Friday's failure as a significant failure at The Top, it's simply not worth gambling on the failure of a well developed uptrend having occurred at X minute on X day. The safest approach is to buy support and sell resistance, and to heed the broader indicators. With the VXO well above its recent sub-15 prints below but still extremely low at 17.94, long positions at support should only be attempted with tight stops. What the VXO, bullish percents and Investors Intelligence sentiment readings are telling us is that the bottom of a drop could be very far below us, but what price is and has been telling us is that it wants to go higher. A bear would favor short trades at resistance, bulls can buy support. In either case, in this low volatility environment, tight active stops are a necessity. Daily ES candles The ES closed lower by all of 1.75 but almost 10 point its day and 52 week high. Rising channel trendline support held back the decline at 1103.50, just below 1105 support from last week. The daily cycle oscillators grew yet more extended, Bollinger resistance was again tested, and the declines were again minor. Whether this spells washout or rally when the heavy volume returns to the market on Monday is anyone's guess. Risk reward favors downside, price trend favors upside. Seasonality is also a tossup, as traders may have been waiting to take capital gains on the 2003 rally. Support is at 1105, followed by 1094-96 below, resistance at 1112, followed by 1115 and 1118. 20 day 30 minute chart of the ES The toppy but still rising daily cycle upphase caught some drag from the 30 minute cycle downphase, launching from a bearish divergence against the higher price highs. Rising wedge support was broken by what looks and felt like an impulsive downside move. The end of day stick-save took the shape of a bear wedge or pennant, what Linda refers to as a "b" distribution move, but with the short cycle oscillators trying to bounce and the 30 minute oscillators closer to a trough than to a peak, there is sufficient evidence to justify a bounce on Monday. Again, the market will tell us, and the support and resistance levels above are the ones to watch. 100-tick ES A wavelet bounce (bottom panel oscillator) ended at the close, with the short cycles (prior 3 panels and red Keltner envelope) trying to assemble themselves into the next upphase. Daily YM candles Nothing to add on the YM, which bounced higher and dipped lower than its peers. Support is at 10380 and 10360, resistance at 10480 and 10500. 20 day 30 minute chart of the YM As noted in my analysis of the NQ, the market is and has been tempting shorts with signs of imminent reversal and downside disaster for weeks. I find the low volume, low volatility rise of the past 2 weeks combined with the possible deferral of cap gains until after year end to be the most compelling bearish story. But, the market is going up, or rather has been going up, and the details aren't important from an account management perspective. I have been urging traders to exercise caution and not to force their trades, and Monday is going to be an important application of that dictum. The market is either going to go higher or lower, and support or resistance identified here could easily get steamrolled by a huge trending move. Those levels are decision points, the most likely spots I see for at least a pause and possibly a reversal of the cycles I follow and trade. If those levels fall, don't be a deer in the headlights of a trending move. Let the stop take you out or reverse course. We are there in the Futures and Market Monitors to follow what the markets are doing, in realtime. See you there. ******************** INDEX TRADER SUMMARY ******************** New Highs Jonathan Levinson Friday's decline left the indices with minor losses for the day and significant gains for the week, with the Dow dropping .4% or 44 points for the day, closing at 10,409.85. The SPX dropped .3% or 3.44 to close at 1108.48, while the Nasdaq added .2% or 3.31, closing at 2,006.68. The failure at new 52 week highs on Friday left a gravestone doji rejection for the week, but given the positive closes for the week, the pattern is suspect. The Dow is up .8% for the week, the SPX 1.1% and the Naz 1.7%. For the year, it's 24.8%, 26% and 50.3% respectively. The past week's gains took place on very light holiday volume, as did the previous week with abbreviated and closed sessions leaving holes in the charts. As a result of the low volume, price swings were exaggerated and volatility actually rose from its subterranean lows of prior weeks even as the indices advanced. Bonds got sold aggressively during the past week, as did the US Dollar Index, and the relief rallies for equities on the blessed absence of geopolitical disasters are nevertheless subject to intermarket uncertainty, as bulls and bears alike wonder how long an equity rally will be able to run in a rising rate/ declining dollar environment. That said, there were powerful incentives for the markets to sell off during the past week, but the bulls were unshakeable, resisting the threat of terror attacks, mad cow outbreaks, the massive failure of Parmalat and the subsidiary fallout in bonds and derivatives for US lenders and investors, and fat bullish profits waiting to be taken. Weekly COMPX candles The Nasdaq rose along the lower wedge trendline, closing right on it but regaining a foothold after the previous week's close below it. The failure at now downsloping Bollinger resistance of 2030 is certainly not bullish, but the bounce of the past month has left preliminary buy signals on the ambiguous, bearishly divergent weekly cycle oscillators. If next week is positive, I expect the weekly cycles to give us a clear (for a change) buy signal and likely abort the bearish divergences in place since the summer. Once again, 1980 is a key support level, and while the oscillators are toppy, support has been firm and the uptrend persistent even for the Nasdaq. Weekly INDU candles The Nasdaq has kindasorta advanced for the past month, the Dow has been on a tear to the upside, cranking out a new 52 week high Friday above 10500. While that level failed to hold, it's nevertheless a monumental level given the sub-7300 print last March. While Prophetcharts displays this week's candle in red, it was nevertheless a .8% gain over last week. The weekly cycle oscillators are on buy signals, in an upphase within overbought territory, and while a correction was due today, it will continue to look corrective until the uptrend has been violated. I would want to see a move below 9600 before declaring the 2003 bull anything more than tired. Trendline support and price confluence at 9900 come first. Daily OEX candles The chart of the OEX since the November low is a sight to behold. Friday's decline of .79 or .14% nevertheless represented a marginal key outside reversal day, but did nothing more than validate the upper rising channel trendline. The uptrending daily cycle oscillators are very extended, and the odds favor a correction which may well have begun on Friday, but we won't know until the oscillators are pointed south. Support at 546 is the next target on the daily candles. 20 day 30 minute chart of the OEX The 30 minute chart shows a bearish stochastic divergence and the ensuing drop. The 30 minute cycle oscillators are in a solid downphase, and given how toppy the daily cycle oscillators have become, a high-volume selling spree on Monday could be sufficient to kick off the daily cycle downphase discussed above. That said, the OEX closed right above confluence support at 548, and until that level is broken, the uptrend remains substantially intact. Below 548 comes support at 542-44. Daily QQQ candles QQQ printed a bearish engulfing candle, engulfing Wednesday's print which had engulfed Tuesday's print. The absence of a significant drop following each of these outside reversals is impressive, and should be seen as a warning to bears. However, the fact that such has occurred during a daily cycle upphase is not bullish and could indicate that move is waning. QQQ failed at 36.79, dropping .06 net for the day. As on the OEX, the daily trend is still up, and while there's more upside room on the QQQ's daily upphase, the price action shows hesitation here at the highs. 36 had been strong resistance on the way up, and it should now provide strong support below. 36.60 is trendline resistance. 20 day 30 minute chart of the QQQ As on the 30 minute OEX, the 30 min QQQ is in a downphase that has so far delivered strong price traction to the downside, launching from a bearish Macd divergence. Confluence at 36.20 is first support, followed by 35.8-36. I expect that the 30 minute oscillators will be oversold and ready to bounce by 35.80, and if they do, the ensuing upphase will tell us a great deal about the rally- a lower price high will signal trouble, while a higher high will cause the daily cycle to begin trending in overbought. On the other hand, if 35.80 does not hold, then the daily cycle upphase should abort, and the bears will have the ball. As discussed in the Futures Wrap, Monday's return of high volume trading constitutes a wildcard, and I urge traders to remain limber, and to keep their stops in place. The market will tell us which direction it wants, and our job is to follow it, not to force. See you on Monday. ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ************** Editor's Plays ************** So Far So Good We are currently in a laddered DJX put play that we began on Sunday 12/21. The Dow was at 10278 at the time and the plan was to buy Feb-100 DJX puts at 103.00, 103.50, 104.00. I only wish I had been optimistic enough to add a 104.50, 105.00. If you filled the orders according to the schedule your position should look like this: 3 contracts DJV-NV at 103.00 for $1.50 each 2 contracts DJV-NV at 103.50 for $1.30 each 2 contracts DJV-NV at 104.00 for $1.05 each Average cost for seven contracts $1.31 each. We had another entry scheduled at 102.50 that was not triggered. CANCEL THAT ENTRY. Instead buy three more contracts at Monday's open for an estimated $1.00 to finish the position. This will give us an average cost of $1.21 for 10 contracts. The target exit for this play is Dow 9700. I know it is optimistic given the extreme levels the Dow has reached last week. Who would have thought we would see a spike to 10527? A drop from Friday's close of 10409 to 9700 is only -6.8% and well within the "normal" range of a profit taking dip. Especially a January profit taking dip. There is no stop loss on this play. With very strong resistance at 10525 and again at 10650 and the historical January dip potential I am going for broke on this one. We have a $1200 exposure with a potential target price around $3500. To just breakeven the Dow would only need to drop to 10200 or below. If you are squeamish about the exit set a stop loss once the 10300 level is broken. Exit for a loss at any point above 10500 if desired. Personally I would add more above 10500. I like this trade and I think we have an excellent chance of success. If you were not in it I would not hesitate to jump in next week. DJX Chart - Daily ******************************** Play Recaps Priceline.com (PCLN) Put play $18.78 http://members.OptionInvestor.com/editorplays/edply_121403_1.asp Powerball End of the line The Nasdaq rebound to a new high has not helped recover any of the profit we lost over the last four weeks. Once the small cap techs began losing ground our fate was sealed. The remaining time premium faded quickly and we are lucky to escape with the 36% profit shown below. Considering just four weeks ago we were at 95% profit it is even more frustrating. The original concept was to buy leaps last January and hold them for a year while knowing that some would do well and others would not. The small cap decline in December killed the play and I should have closed it then. I, like most optimists, hoped we would get a late December rally that would reflate the options. Unfortunately several of our stocks reported less than expected guidance and were quickly punished. I am ending it for the record as of Friday's close. Still profitable but well off the highs. I posted the chart from the Nov-28th high for comparison. I know many of you actually bought the portfolio in March when I discussed a second portfolio and you are much higher than the results shown below. Congratulations. The Top-20 Lottery plays in the end of year renewal special are quite different this year. We are buying each one at a specific entry point on the expected January dip. If they do not hit our entry point we will not play. They are also only 4-5 month options (April-May) and I am planning on getting out of them on April-15th. Shorter fuse, no summer slump and much clearer crystal ball. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 Powerball Chart The profit high of $1175 was hit on Friday November 28th. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** A Mild Hangover - J. Brown U.S. stock indices opened 2004 with a mild hangover from the New Year holidays as prices trended flat to down by Friday's close. Any traders not taking a holiday of their own were probably surprised that the extremely positive ISM manufacturing numbers didn't spark a stronger bullish response. The December ISM report unveiled the economy's factories are humming with a reading at 66.2. This is the highest level since December 1983. Most of you already know that any reading above 50 represents expansion and December report was the sixth month in a row to show economic expansion for the manufacturing sector. Despite the lackluster closing numbers the market internals were bullish on Friday. Advancers outpaced decliners 15 to 13 on the NYSE and 18 to 12 on the NASDAQ. Up volume outweighed down volume on both exchanges and strongly so on the NASDAQ. Traditionally the first several days of January are bullish but the market's been in need of a pull back for weeks now. It's going to be an interesting tug-of-war, especially with a week full of economic reports. Monday will bring the vehicle and truck sales numbers for December as well as the construction spending numbers. Factory orders and the ISM services index, probably the most important report of the week, will come out on Tuesday. There is a flurry of reports on Thursday and Friday but the most significant one should be the unemployment numbers. Overall I think investors are excited but cautious especially as we approach the up coming earnings season. Tread carefully. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10527 52-week Low : 7416 Current : 10409 Moving Averages: (Simple) 10-dma: 10357 50-dma: 9922 200-dma: 9250 S&P 500 ($SPX) 52-week High: 1118 52-week Low : 788 Current : 1108 Moving Averages: (Simple) 10-dma: 1099 50-dma: 1062 200-dma: 993 Nasdaq-100 ($NDX) 52-week High: 1479 52-week Low : 795 Current : 1463 Moving Averages: (Simple) 10-dma: 1449 50-dma: 1417 200-dma: 1277 ----------------------------------------------------------------- Wow! We're starting to see some big moves in the volatility indices. The VXO (old VIX) surged 6% and looks ready to move higher. The VIX looks ready to follow suit and the VXN is still stuck near its lows. CBOE Market Volatility Index (VIX) = 18.65 +0.34 CBOE Mkt Volatility old VIX (VXO) = 18.59 +1.08 Nasdaq Volatility Index (VXN) = 24.83 +0.34 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 650,305 490,925 Equity Only 1.89 545,682 288,114 OEX 1.38 21,680 29,874 QQQ 3.97 18,242 72,438 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 76.7 + 1 Bull Confirmed NASDAQ-100 73.0 + 3 Bear Correction Dow Indust. 86.6 + 7 Bull Confirmed S&P 500 84.0 + 1 Bull Confirmed S&P 100 84.0 + 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 0.82 10-dma: 0.88 21-dma: 1.01 55-dma: 1.07 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1515 1821 Decliners 1293 1225 New Highs 367 202 New Lows 16 2 Up Volume 790M 1147M Down Vol. 620M 404M Total Vol. 1440M 1574M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 12/22/03 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Was it a one-week blip? The surge in long positions by commercial traders have evaporated. Was a sudden change of heart or did they just get caught up in the holiday spirit? Of course there was an equally strong disappearing act in commercial short positions so maybe they're just confused. Small traders have really cut back on their shorts and in effect become extremely bullish. Commercials Long Short Net % Of OI 12/02/03 394,531 414,223 19,692 2.4% 12/09/03 396,882 420,859 23,977 2.9% 12/16/03 448,103 460,670 12,567 1.4% 12/22/03 400,066 405,240 (5,174) (0.6%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 12/02/03 154,788 85,776 69,012 28.7% 12/09/03 172,178 99,484 72,694 26.8% 12/16/03 172,947 113,704 59,243 20.7% 12/22/03 147,537 81,596 65,941 28.8% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Wow! The disappearing act in the full contracts (above) is nothing compared to the drop in contracts below. Commercial traders really reduced their outstanding long positions in the e-mini's and that's not a bullish development. Right on cue, the small traders cut back on their short positions. Commercials Long Short Net % Of OI 12/02/03 283,199 268,833 14,366 2.6% 12/09/03 294,006 288,385 5,621 1.0% 12/16/03 330,273 361,316 (31,043) (4.5%) 12/22/03 128,801 213,021 (84,220) (24.6%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 12/02/03 119,555 77,609 41,946 21.3% 12/09/03 142,173 76,171 66,002 30.2% 12/16/03 177,193 73,694 103,499 41.3% 12/22/03 125,248 43,482 81,766 48.5% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 We see the same contract evaporation in the NDX futures as well. Commercial long contracts lost 1/3 of their number but short contracts were cut in half. That actually sounds bullish. Commercials Long Short Net % of OI 12/02/03 35,569 48,552 (12,983) (15.4%) 12/09/03 39,612 51,443 (11,831) (13.0%) 12/16/03 61,343 73,153 (11,810) ( 8.8%) 12/22/03 40,277 36,452 3,825 5.0% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 12/02/03 21,594 9,429 12,165 39.2% 12/09/03 25,842 10,228 15,614 43.3% 12/16/03 28,676 15,197 13,479 30.7% 12/22/03 22,656 14,544 8,112 21.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL This time it is the small traders that drastically reduced their short contracts. They probably got tired of losing money. Commercials followed suit. Commercials Long Short Net % of OI 12/02/03 21,128 12,379 8,749 26.1% 12/09/03 20,378 11,934 8,444 26.1% 12/16/03 23,509 13,880 9,629 25.8% 12/22/03 14,088 9,998 4,090 17.0% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 12/02/03 6,667 9,302 (2,635) (16.5%) 12/09/03 6,858 12,006 (5,148) (27.3%) 12/16/03 9,497 19,633 (10,136) (34.8%) 12/22/03 6,915 8,983 ( 2,068) (13.0%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** Dow Dogs barked loud in 2003 Will you be doing another update on the Dow Dogs for 2004? I profited immensely from that article this past year and would like to implement this strategy again in 2004. I'd also like to know what you think about the strategy of buying the 5 worst performing stocks and a different strategy I hear about on CNBC? This year, the Dow Dogs barked loud, but the "big dogs" or the 5 higher priced of the 10 Dow Dogs barked louder than the "smaller dogs." If you thought cats just meowed, then think again as Caterpillar's (NYSE:CAT) 81.58% rise had "the CAT" beating out the pack for this year's best performing dog. 2003 Dow Dogs Portfolio - Approx. $10,000 investment I set up a hypothetical Dow Dog portfolio last year (round shares, with approx. $1,000.00 for each stock), and here's the final tally (excluding dividends) of how the Dow Dogs performed in 2003. The Subtotal(s) and Total does not include dividends, commissions, or taxes. For those of you not familiar with the Dow Dog strategy, it is a simple investment strategy based on the 10 highest dividend- yielding stocks from the 30 Dow Industrials components, and is considered by many market theorists to be a value oriented investment strategy. I separated the portfolio into the "little dogs" and "big dogs," where the "little dogs" are determined by simply identifying the 5 lower priced of the 10 highest dividend yielding Dow Dogs. While the above portfolio I set up was not equally weighted in dollar investment for each stock (would create fractional shares). Dogsofthedow.com reports that an equally weighted dollar amount in each of this past year's 10 Dow dogs would have found a 23.6% net gain, with the "small dogs" gaining 18.7%. The Dow 30 stocks gained 28.7%, while the Dow Jones Industrial Average (INDU), which is a price-weighted index, would have gained 25.3% in 2003. (Does not include dividends, commissions, or taxes). When 2003's trade began, the average yield of the 10 Dow dogs was 4.2%, and ended this year with a 3.35% average dividend yield. The "small dogs" began the year with an average yield of 3.75%, and ended the year with a 3.60% average yield. The Dow Industrials Average (INDU) started the year with a 2.47% average yield, and finished 2003 with an average yield of 2.12%. One of this past year's (2003) biggest disappointments for the Dow Dogs was Eastman Kodak (NYSE:EK), which not only fell 26.74% on the year, but also told shareholders in 2003 that it was cutting its annual dividend from $1.80 per share, to $0.50. Who let that dog out? Woof!...Woof.......Woof!... Woof! Here's a recent 7-year history of how the 10 Dow Dogs, the 5 smaller dogs, the Dow Industrials Average (INDU), S&P 500 Index (SPX.X) and the Fidelity Magellan mutual fund have performed in each of the last 7 years, and the average gain over the past seven years. (Does not included dividends, commissions, or taxes). Dow Dog Strategy Comparison - Last 7 years I've highlighted in BLUE those "investments" that outperformed n one particular year, and highlighted in RED, the "investment" that under performed in a particular year. I'm limited by horizontal spacing and couldn't show other prior years of day, but I'm noticing some very SIMILAR percentage gains from 1997 and recently completed 2003. I was surprised to see that in 1996, the 10 Dow Dogs gained 24.5% (12/31/95 average yield 3.35%), the "small dogs" gained 22.8% (12/31/95 average yield 2.47%), while the Dow Industrials Average (INDU) gained 26.0% (12/31/95 average yield 2.28%). Is the Dow Dog strategy for you? Is this market doomed for a fall? Some market strategists (me included) feel 2004 could be another banner year for stocks, and perhaps the Dow Dogs strategy, based solely on dividend yield is poised to perform well. Recent tax legislation brought about by President Bush has had company's raising their dividends, while the lowering of tax rates for individuals may also have dividend paying stocks holding favor in 2004. I posted the 1995 average yields as a relative yield comparison benchmark for the following statistics. For 2004, based on the 12/31/2003 closing price values and current declared annual dividends, the Dow Dogs have an average dividend yield of 3.61%, which compares favorably to that found on 12/31/95. The small dogs, based on the 12/31/2003 closing price values and current declared annual dividends, have an average dividend yield of 3.64%, which also compares favorably to 12/31/95. Here's a look at how each of the Dow Industrials components performed this past year (2003), where I've sorted the small dogs to the top (lowest priced of 10 highest dividend yielding) and then the 5 big dogs, which round out the Dow Dog strategy. Dow Components - 2003 end of year tabulation This year's small dogs are T, SBC, GE, JPM and XOM, and the big dogs, which round out the Dow Dog portfolio are DD, MRK, C, GM and MO. Merck (NYSE:MRK) and Citigroup (NYSE:C) are new entrants for the 2004 list of Dow Dogs, while Caterpillars (NYSE:CAT) jump in price relative to annual dividend has it dividend yield not sufficient for the Dow Dog strategy. Despite Eastman Kodak's (NYSE:EK) price declines in 2003, the company's decision to cut its annual dividend also finds its dividend yield insufficient to qualify as a Dow Dog. As you can see, 25 of the 30 Dow components found gains this year. Not unlike the trader/investor that asked today's question, I too heard a Dow theorist on CNBC discussing his research on how his research showed that over time, the purchasing of the 5 worst performing stock for a prior year tended to outperform the following year. I scrambled to catch the stocks he named for his top 5 Dow picks, but did catch EK, T, MRK and SBC. He may have also mentioned JNJ, but I can't say for sure, as I only have 4 written down. However, looking at 2003's list of Dow decliners, JNJ may well have been the other stock mentioned. You know me, and I tend to shy away from trying to pick a bottom in a stock. I am not familiar enough with the strategy of buying the worst performing of the Dow stocks, with thought that they would rise back higher. But I suspect it may also be a value- based strategy that plays on investor psychology and the thought that a Dow component is a quality stock that will rebound back with its peers. You watch. Eastman Kodak (EK) will be this year's best performing Dow component, but I (Jeff Bailey) would be a little hesitant of the stock right now. The company is currently in a major restructuring of its business focus, and the decision to cuts it dividend, may have investors shying away from the stock until more clarity is provided as to how the company's restructuring is going. As such, I've dashed-red Wal-Mart (NYSE:WMT) and Microsoft (NASDAQ:MSFT) as two other under performers for 2003, where an investor interested in trying the investment strategy of buying an under performing 2003 Dow component might find as a suitable replacement for Eastman Kodak (NYSE:EK). Dow Dog theory is based entirely on the 10 highest dividend yielding stocks, while a narrower strategy in the small dogs is narrowed to investor psychology, where it is thought that investors tend to buy lower priced stocks. For example, give the average investor two different stocks from which to choose from, but with equal dividend yield, and investor psychology would have the investor preferring to buy the $25 stock over the $50 stock, simply because "value" is perceived in the $25 as its price is "cheaper." This psychology is then thought to create greater demand for the $25 stock, and have it price outperforming the $50 stock. Well.... as you can see from some of the data presented above, this isn't necessarily the case over the past 7 years is it? The Dow Dog strategy is VERY popular among LEAPs option investors, where a smaller amount of capital can be exposed to the strategy, but the smaller amount of capital required for an option, allows for greater diversification across a 10-stock strategy. I would STRONGLY suggest that a stock investor, understand the need for protective stops in a Dow Dog theory, where the general investment rule is to allow for a 10% stop loss. The advantage for a LEAPs option investor is that a stop in the option is not required, as long as the investor does NOT OVERLEVERAGE in the option contract. An EXCELLENT example of how OPTIONS can be utilized, if an options trader/investor knows how to trade an option, is this year's trade action in Caterpillar (NYSE:CAT). When Caterpillar (CAT) opened for trading on January 2nd it opened for trading at $45.95. A stock investor may have bought 100 shares of the stock at the open of trading for $44.95, and placed a 10% stop under the stock. While CAT didn't trade 10% lower, or to a 10% stop of $40.45, it came close on February 13th, when it traded a low of $41.24. After seeing what happened to some stock investors in 2001 and 2002, an investor may have sold CAT, without giving it the 10% room to the stop. However, a LEAPs option investor that bought 1 CAT $45 January 2004 LEAPs option for $2.70 per contract (I checked and option traded a high of $2.70 that day) would have risked $270.00 (excluding commissions), but bought a years worth of time for one of his/her Dow Dogs to perform. True, this is the EXTREME case for a stock that did VERY well, but you can perhaps see how an investor with approximately $2,700 and really begin to diversify themselves in a Dow Dogs Strategy, where it may take just one or two of the Dogs to pay off rather nicely. The downside to the LEAPs strategy, is that the LEAPs investor does not receive the stock's dividend. Well.... I'm running late on getting this to print. I'll put together another Dow Dogs portfolio like the one I did for 2003, and we'll check in on the Dow Dogs from time to time to see how they're doing. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- SONC Sonic Corp. Mon, Jan 05 After the Bell 0.30 WAG Walgreen Mon, Jan 05 -----N/A----- 0.25 ------------------------- TUESDAY ------------------------------ STZ Constellation Brands Tue, Jan 06 After the Bell 0.79 ------------------------ WEDNESDAY ----------------------------- MON Monsanto Company Wed, Jan 07 Before the Bell 0.01 RI Ruby Tuesday Wed, Jan 07 After the Bell 0.33 SDX Sodexho Alliance S.A. Wed, Jan 07 Before the Bell N/A ------------------------- THUSDAY ----------------------------- AA ALCOA Inc Thu, Jan 08 After the Bell 0.34 EMMS Emmis Communications Thu, Jan 08 Before the Bell 0.14 INFY Infosys Tech LTD Thu, Jan 08 After the Bell 0.51 LNR LNR Property Thu, Jan 08 Before the Bell 0.80 MSM MSC Industrial Direct Thu, Jan 08 -----N/A----- 0.22 RPM RPM International Inc Thu, Jan 08 After the Bell 0.29 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable ACET Aceto Corporation 3:2 Jan 2nd Jan 5th AAP Advance Auto Parts Inc 3:2 Jan 2nd Jan 5th JCI Johnson Controls, Inc 2:1 Jan 2nd Jan 5th CLBK Commercial Bankshares Inc 5:4 Jan 2nd Jan 5th NRGY Inergy GP, LLC 2:1 Jan 12th Jan 13th HRBT Hudson River Bancorp, Inc 2:1 Jan 15th Jan 16th TARR Tarragon Realty Investors 5:4 Jan 15th Jan 16th FRK Florida Rock Industries 3:2 Jan 16th Jan 19th -------------------------- Economic Reports This Week -------------------------- The first full week of 2004 is full of economic reports. Vehicle sales on Monday, ISM on Tuesday, Same-store sales on Thursday and that's just a few on the list. Plus, investors will be preparing for the next earnings season. ============================================================== -For- ---------------- Monday, 01/05/04 ---------------- Auto Sales (NA) Dec Forecast: 5.7M Previous: 5.6M Truck Sales (NA) Dec Forecast: 8.0M Previous: 7.8M Construction Spnding(DM) Nov Forecast: 0.5% Previous: 0.9% ----------------- Tuesday, 01/06/04 ----------------- Factory Orders (DM) Nov Forecast: -1.4% Previous: 2.2% ISM Services (DM) Dec Forecast: 60.8 Previous: 60.1 ------------------- Wednesday, 01/07/04 ------------------- None ------------------ Thursday, 01/08/04 ------------------ Initial Claims (BB) 01/02 Forecast: 345K Previous: 339K Wholesale Inventories (DM) Nov Forecast: 0.5% Previous: 0.5% Consumer Credit (DM) Dec Forecast: $4.6B Previous: $0.9B December Same-Store Sales reports ---------------- Friday, 01/09/04 ---------------- Nonfarm Payrolls (BB) Dec Forecast: 140K Previous: 57K Unemployment Rate (BB) Dec Forecast: 5.9% Previous: 5.9% Hourly Earnings (BB) Dec Forecast: 0.2% Previous: 0.1% Average Workweek (BB) Dec Forecast: 33.9 Previous: 33.9 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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. 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The Option Investor Newsletter Sunday 01-04-2004 Sunday 2 of 5 In Section Two: Watch List: Plenty to Watch Next Week! Put Play of the Day: WHR Dropped Calls: ADI, QCOM Dropped Puts: None ************************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 ************************************************************** ********** Watch List ********** Plenty to Watch Next Week! Diebold - DBD - close: 54.40 change: +0.53 WHAT TO WATCH: DBD offered a very strong run from its March lows like many stocks last year. Fortunately for DBD shareholders buying interest has kept the selling to a minimum during November and December. Three times investors bought the dip below the $52.50 level in the last several weeks and now the stock looks ready to retest its highs. Shares don't move that fast but the look strong. Chart= --- eBay Inc - EBAY - close: 63.00 change: -1.61 WHAT TO WATCH: It's usually a dangerous past time to short shares of EBAY but the stock is looking pretty tired here. After the big run from November's low near $50 it wouldn't surprise us to see it pull back to the mean between $57 (its 50-dma) and the $60 level. Trade carefully! Chart= --- Golden West Financial - GDW - close: 101.05 change: -2.14 WHAT TO WATCH: Banks were not the strongest sector on Friday and both the BIX and BKX indices look poised for more selling. Looking at GDW we see the third major failure under the $104 level in two month's time. If the stock breaks the $100 mark it may be a short-trip to $95 and potentially lower. Volume was pretty strong on Friday's decline. Chart= --- Thor Industries - THO - close: 55.29 change: -0.93 WHAT TO WATCH: Shares of THO have been stuck in a declining trend of lower highs since early November. It's simple 50-dma has finally turned lower and its MACD is ready to produce another new sell signal. Traders can watch for a drop under the $55 mark as a potential trigger. There is support at $52.50 but its simple 200-dma near $48 may be a siren call that the stock is unable to resist. Chart= --- USANA Health Sciences - USNA - close: 29.79 change: -0.81 WHAT TO WATCH: The consolidation in USNA looks like it's about to take a turn for the worse. Shares have broken the $30 level of support with a strong volume decline this Friday. Traders might want to keep an eye on it for a move to the $25 region. Chart= ---------------------------- RADAR SCREEN - more to watch ---------------------------- SINA $37.90 +4.15 - The Chinese Internet stocks were on the run again this Friday. SINA out performed its two fellows with a 12.29% gain and breaking above its 50-dma. A run to its old highs near $45 may be possible. NTES $40.91 +3.99 - NTES was just behind SINA with a 10.8% jump on Friday sending it above the $40 mark and its simple 200-dma. Volume was strong but watch out for its 50-dma under $45. SOHU $32.70 +2.79 - Of the three SOHU was the worst performer, up just 9.3%. The stock has been basing along its 200-dma for two weeks. Now shares have broken above their 50-dma. There is some resistance near $35 but don't be surprised to see it charge towards $40. SUNW $4.70 +0.23 - SUNW turned in a strong session. Traders bought the midday dip to $4.60. Speculative bulls might play this one with an eye on its summer highs. STX $19.31 +0.41 - Is STX on the rebound? Shares have reclaimed their simple 200-dma. Can they break above the 50-dma and the $20 mark? IOM $6.04 +0.06 - Computer storage device/hard drive stocks did pretty well on Friday. IOM actually lagged the sector index but Friday was the first close over the $6.00 mark in months. Could this stock have bottomed? Another hard drive stock to watch is WDC. FS $49.89 -1.26 - The bounce in FS appears to have petered out. The close under the round-number $50 mark is not a bullish one and its MACD is about to produce a new sell signal. Target a move to $45. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************* THE PLAY OF THE DAY ******************* Put Play of the Day: ******************** Whirlpool Corporation - WHR - cls: 71.18 chng: -1.47 stop: 73.50 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Analog Devices - ADI - close: 45.79 change: +0.14 stop: 44.00 While ADI did provide the rebound off the bottom of its rising channel that we were looking for, the fact that there was no follow-through has had us feeling nervous about it the play for the past few days. Once again, the bulls tried to drive the stock higher on Friday, only to have the stock knocked back near the $45.75 price magnet. Two weeks after initiating coverage, ADI has still been unable to post a close over the 50-dma. Rather than continue to wait and hope, we're going to pull the plug this weekend, focusing our attention on stronger plays. Picked on December 18th at $45.12 Change since picked: +0.67 Earnings Date 2/17/04 (unconfirmed) Average Daily Volume = 3.21 mln --- Qualcomm, Inc. - QCOM - cls: 53.62 chng: -0.31 stop: 52.00 Monday's sharp run at the $55 level looked really encouraging for our QCOM play, so we decided to let it ride and see if there was another upward surge in store. Indeed there was this morning, but it was quickly knocked back in the afternoon after once again failing to hit $55. Daily Stochastics are now tipping over from overbought, and with a solid gain in the play, we're taking the conservative approach this weekend and closing it out. Use any early strength on Monday to exit at a more favorable level. Picked on December 11th at $50.14 Change since picked: +3.48 Earnings Date 1/20/04 (unconfirmed) Average Daily Volume = 8.81 mln PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. 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The Option Investor Newsletter Sunday 01-04-2004 Sunday 3 of 5 In Section Three: Current Calls: DGX, GD, GILD, YHOO New Calls: None Current Put Plays: NSM New Puts: BBY, WHR ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Quest Diagnostic - DGX - close: 72.25 chg: -0.86 stop: 69.00 Company Description: Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable physicians, hospitals, managed care organizations and other healthcare professionals to make decisions to improve health. The company offers the broadest access to diagnostic laboratory services through its national network of laboratories and patient service centers. Quest Diagnostics is the leading provider of esoteric testing, including gene-based medical testing, and empowers healthcare organizations and clinicians with state-of-the-art connectivity solutions that improve practice management. (source: company press release) Why We Like It: We don't have much new to report on for DGX. Shares pulled back on Friday as the market slipped lower in mild profit taking. Traders can probably wait for DGX to pull back to the $70-71 levels and wait for a bounce there to gauge the next attractive entry point. The simple 50-dma should bolster support at the $70 mark so we're going to keep our stop loss at $69.00. A buying the bounce will make the $75 level (current resistance) a nice short-term target but the top of the channel is much higher. Suggested Options: We've only got two weeks left for January options now. It may be prudent to play the February strikes. Our suggested option is the Feb.70's. BUY CALL JAN 70 DGX-AN OI=1926 at $2.70 SL=1.35 BUY CALL JAN 75 DGX-AO OI= 728 at $0.40 SL= -- BUY CALL FEB 70*DGX-BN OI=1471 at $3.90 SL=1.95 BUY CALL FEB 75 DGX-BO OI= 598 at $1.30 SL=0.65 Annotated chart of DGX Picked on December 30 at $72.95 Change since picked: - 0.70 Earnings Date 01/22/03 (unconfirmed) Average Daily Volume: 836 thousand Chart = --- General Dynamics - GD - close: 89.66 chg: -0.73 stop: 84.99 Company Description: General Dynamics, headquartered in Falls Church, Va., employs approximately 66,900 people worldwide and anticipates 2003 revenues of $16.1 billion. The company has leading market positions in mission-critical information systems and technologies, land and amphibious combat systems, shipbuilding and marine systems, and business aviation. (source: company press release) Why We Like It: The last couple of weeks have been quiet ones for GD. Thankfully the holidays were terror-free. However, that means we could see a small pull back in GD as some defensive players exit their positions. This could give us a better entry point on a dip to the $86-87 levels. If GD breaks the $86 level we'd probably begin to worry. Let's not forget that it was just two weeks ago that the BAC analyst raised GD's price target to $95 and lifted the stock to a buy. We actually think GD may be able to trade higher. Currently its point-and-figure chart suggests a target closer to $124. We'd be happy with a move to $100. We're going to keep our stop loss at $84.99 for now but anywhere under $86 should work. Suggested Options: We like the January and February strikes. We're now suggesting the February 85s as the best play. BUY CALL JAN 85 GD-AQ OI=3874 at $4.90 SL=2.50 BUY CALL JAN 90 GD-AR OI=3182 at $1.30 SL=0.65 BUY CALL FEB 85*GD-BQ OI= 992 at $5.90 SL=3.00 BUY CALL FEB 90 GD-BR OI= 934 at $2.65 SL=1.30 Annotated Chart: Picked on December 21 at $88.78 Change since picked: + 0.88 Earnings Date 01/21/04 (unconfirmed) Average Daily Volume: 1.0 million Chart = --- Gilead Sciences - GILD - close: 58.02 change: -0.26 stop: 56.00 Company Description: Gilead Sciences, Inc. is a biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases worldwide. The company has seven commercially available products. Its research and clinical programs are focused on anti- infectives, including anti-virals and anti-fungals. GILD endeavors to grow its existing portfolio of products through proprietary clinical development programs, internal discovery programs and an active product acquisition and in-licensing strategy. Products include Viread, Emtriva, AmBisome, Hepsera, Tamiflu, DaunoXome and Vistide. Why we like it: Breaking out of the top of its neutral triangle formation just far enough to trigger our play to live status on 12/23, GILD has spent the past several sessions gently drifting lower. The past 3 sessions have seen the stock find support near the 30-dma (currently $57.90), which is encouraging when combined with the fact that the daily Stochastics oscillator (5,3,3) has bottomed in oversold territory and is beginning to turn up. Additionally, the lower trendline of the neutral triangle has now risen to just above $57, reinforcing the support being found at the convergence of the 20-dma ($57.81) and 30-dma. This provides the setup for a favorable risk-reward entry on bounces from support. Target entry on a dip and rebound from anywhere between $57-58 in anticipation that our expected breakout will come to pass. Traders that want to see the proof in the price action before playing will need to wait for a rally through $60.50 (just above the 12/23 high) before playing. Maintain stops at $56. Suggested Options: Shorter Term: The January 55 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 February 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders looking for more insulation from time decay will want to use the February 60 Call. Our preferred option is the February $60 strike. ! Alert - January options expire in two weeks! BUY CALL JAN-55 GDQ-AK OI=2171 at $3.70 SL=2.25 BUY CALL JAN-60 GDQ-AL OI=9444 at $0.85 SL=0.40 BUY CALL FEB-60*GDQ-BL OI=7595 at $2.15 SL=1.00 BUY CALL FEB-65 GDQ-BM OI=2038 at $0.80 SL=0.40 Annotated Chart of GILD: Picked on December 21st at $59.40 Change since picked: -1.38 Earnings Date 1/29/04 (unconfirmed) Average Daily Volume = 3.85 mln --- Yahoo! - YHOO - close: 45.40 change: +0.37 stop: 42.00 Company Description: Yahoo! Inc. is a leading provider of comprehensive online products and services to consumers and businesses worldwide. Yahoo! is the No. 1 Internet brand globally and the most trafficked Internet destination worldwide. Headquartered in Sunnyvale, Calif., Yahoo!'s global network includes 25 world properties and is available in 13 languages. (source: company press release) Why We Like It: Do you remember a few months ago about the big expectations for a resurgence in online advertising in 2004? Well the talk is back and YHOO is a lead contender to benefit from just such a comeback for the online ad industry. We aren't the only ones bullish on YHOO. Goldman Sachs just upped their revenue and earnings projections for YHOO's fourth quarter of 2003 and their full year 2004 estimates. Many had expected the online shopping season to be blockbuster this year and so far the numbers look good, which should help YHOO's Q4. The stock performed reasonably well last week and has been slowly inching higher but we'd like to see more of a follow through on the reverse head-and-shoulder pattern that YHOO has created. If shares dip, then look for a bounce from the $44 level. Meanwhile, keep your ears open for any news on Monday, January 5th when YHOO's management is due for an appearance at the Smith Barney Citigroup Entertainment, Media and Telecom conference in Arizona. Suggested Options: We don't plan on holding YHOO calls longer than January's expiration so our favorite strike is the January 42.50's. BUY CALL JAN 40.00 YHQ-AH OI=11157 at $5.70 SL=3.25 BUY CALL JAN 42.50*YHQ-AV OI=11399 at $3.50 SL=1.75 BUY CALL JAN 45.00 YHQ-AI OI=22415 at $1.75 SL=0.85 BUY CALL FEB 40.00 YHQ-BH OI= 562 at $6.30 SL=3.75 BUY CALL FEB 42.50 YHQ-BV OI= 578 at $4.40 SL=2.25 BUY CALL FEB 45.00 YHQ-BI OI= 1488 at $2.90 SL=1.45 Annotated chart of YHOO: Picked on December 24 at $45.01 Change since picked: + 0.39 Earnings Date 01/14/03 (unconfirmed) Average Daily Volume: 12.3 million Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** National Semi. - NSM - cls: 38.64 chng: -0.77 stop: 40.50*new* Company Description: National Semiconductor Corporation designs, develops, manufactures and markets an array of semiconductor products, including a line of analog, mixed-signal and other integrated circuits (ICs). These products address a variety of markets and applications, including amplifiers, personal computers, power management, local and wide area networks (LANs and WANs), flat panel and cathode ray tube displays and imaging and wireless communications. The Company's operations are organized in five groups: the Analog Group, the Displays Group, the Information Appliance and Wireless Group, the Wired Communications Group and the Custom Solutions Group. Why we like it: Following the initial drop down near the $36 level, NSM began an excruciatingly slow trip back up to test the $40 resistance level, which we suspected would be a pivotal level after it broke in early December. That intuition must have been correct, as the stock did battle with that level as resistance for more than a week before truly rolling over on Friday. Losing just under 2% in the process, NSM reversed back under the 20-dma ($39.44) and closed near the low of the session, handily outpacing the 0.64% loss in the overall Semiconductor sector (SOX.X). We've been talking about rollover entries near $40 for a while now, so hopefully you got a piece of that entry point while it was offered. Traders looking to enter on weakness should now set their sights on a renewed break below $38, which was the level at which the initial PnF Sell signal was issued. We can expect NSM to still find some mild support near $36, but once below there, it ought to be a fairly straight shot down to our $32 target. Note that we're lowering our stop to $40.50 this weekend. If the bulls couldn't breach that level for the past 2 weeks, that tells us that a breakout over that level next week would be confirmation that the bulls have once again gained the upper hand. Suggested Options: Aggressive short-term traders can use the January 40 Put, while those with a more conservative approach will want to use the February 40 put. Our preferred option is the February 40 strike, as it is in the money and provides greater insulation against time decay. ! Alert - January options expire in two weeks! BUY PUT JAN-40 NSM-MH OI=2936 at $2.85 SL=1.25 BUY PUT FEB-40*NSM-MH OI=2936 at $2.85 SL=1.25 BUY PUT FEB-35 NSM-MG OI=1668 at $0.85 SL=0.40 Annotated Chart of NSM: Picked on December 9th at $38.70 Change since picked: -0.06 Earnings Date 3/04/04 (unconfirmed) Average Daily Volume = 3.52 mln ************* NEW PUT PLAYS ************* Best Buy Company - BBY - close: 50.82 change: -1.42 stop: 53.50 Company Description: Best Buy a specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. The company provides a broad selection of models within each product line in order to provide the customer with a meaningful assortment, offering more than 5800 products, not counting entertainment software titles. Growing its store count by 15% in fiscal year 2000, brought the grand total to more than 4000 in 41 states by year end. Why we like it: Finishing its holiday rally on December 1st, BBY was one of the first Retail stocks to end its upward trend as traders rushed to take profits. Hastening the stock's decline was the company's narrowing of its guidance on December 4th. The resulting decline broke below the bottom of the rising channel that had been in place for most of the year. Now more than $10 off its December high, one might be tempted to think that a base is building near the $50 level. But a quick look at the PnF chart tells a different story, as the Sell signal from December provides a bearish price target of $42. Take a look at the daily chart, and it is clear that the $42 level should be the site of strong support. That's quite a hefty slide from current levels though, so we're going to establish an intermediate target at $46, also the site of the 200-dma ($45.77). Friday's session delivered a 2.7% slide in shares of BBY, along with a close just above the intraday low. That pullback is particularly encouraging in that it exceeded the 2% loss in the Retail index (RLX.X), which itself staged an impressive bearish intraday reversal. A failed rebound back near $52, also the site of the 20-dma ($51.98) looks like the ideal entry point into the play, especially with the daily Stochastics (5,3,3) just starting to tip over from overbought territory. The first level of potential support to deal with will be found near $48.50, which provided enough support for a brief bounce twice in the latter half of December. Therefore, momentum traders looking to enter on weakness will want to see a drop below $48.50 before playing. The most recent rebound attempt topped out just below $53 and with the 100-dma ($53.33) just above there, we have a solid resistance zone we can use to protect our $53.50 stop. Look for continued weakness from the RLX index to confirm weakness in BBY before playing. Suggested Options: Aggressive short-term traders can use the January 47 Put, while those with a more conservative approach will want to use the January 50 put. We've also listed February strikes for those traders desiring greater insulation from time decay. Our preferred option is the February 50 strike, as it is currently at the money and provides more time until expiration. ! Alert - January options expire in two weeks! BUY PUT JAN-50 BBY-MJ OI=20245 at $1.30 SL=0.65 BUY PUT JAN-47 BBY-MW OI= 5123 at $0.50 SL=0.25 BUY PUT FEB-50*BBY-NJ OI= 237 at $2.55 SL=1.25 BUY PUT FEB-47 BBY-NW OI= 302 at $1.60 SL=0.75 Annotated Chart of BBY: Picked on January 4th at $50.82 Change since picked: +0.00 Earnings Date 3/17/04 (unconfirmed) Average Daily Volume = 4.20 mln ---- Whirlpool Corporation - WHR - cls: 71.18 chng: -1.47 stop: 73.50 Company Description: Whirlpool Corporation manufactures and markets a full line of major appliances and related products, primarily for home use. The company's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, room air-conditioning equipment and mixers and other small household appliances. Approximately 10% of WHR's unit sales volume is derived from purchases from other manufacturers for resale by the company. It also produces hermetic compressors and plastic components, primarily for the home appliance and electronics industries. Why we like it: Kicked off by the sharp drop in Existing Home Sales on Tuesday, the Housing sector really got kicked in the teeth last week, capped off by the 3.3% slide on Friday, which was partially related to the sharp rise in bond yields. That rise in yields will translate directly to increased costs for acquiring a house and will start to increase the pressures in the sector. Anyone who has tried playing the downside in Housing stocks over the past several months knows that it has been a losing game, as every dip is eagerly bought. So we thought we'd take another tack -- why don't we take a bearish shot at one of the many stocks that feeds into the whole home construction and purchase life cycle. Jumping immediately to our attention was WHR, as the stock has been trading in a predictable range from $66-73 for months. The reversal in the Housing sector kicked off the latest reversal on Friday, with the stock just topping $73 before dropping more than 2% to close just off its low of the day. The play is simple, as we want to enter as close to the top of the range as possible and ride the stock down as close as possible to the bottom of the range. Oscillators are the most effective when they are used in a trading range or on a stock that oscillates predictably. So the fact that the daily MACD and Stochastics gave fresh Sell signals on Friday only makes the play look that much better. A failed bounce below $72 will be the ideal entry opportunity if we can get it. Traders that would prefer to enter on weakness will want to enter on a break below the $71 support level. On the way down, we can expect WHR to find mild support near $68 enroute to the bottom of its range at $66, also our target for the play. Set stops initially at $73.50, just above the recent highs as well as the October high of $73.35. Suggested Options: Aggressive short-term traders can use the January 70 Put, while those with a more conservative approach will want to use the January 75 put. While February strikes are available, open interest is still quite low, so we've gone out to the March expiration cycle for those traders desiring greater insulation from time decay. The March $70 strike is our preferred option. ! Alert - January options expire in two weeks! BUY PUT JAN-75 WHR-MO OI=647 at $4.30 SL=2.75 BUY PUT JAN-70 WHR-MN OI=777 at $1.05 SL=0.50 BUY PUT MAR-70*WHR-ON OI=968 at $3.20 SL=1.50 Annotated Chart of WHR: Picked on January 4th at $71.18 Change since picked: +0.00 Earnings Date 2/05/04 (unconfirmed) Average Daily Volume = 601 K ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-04-2004 Sunday 4 of 5 In Section Four: Leaps: A Clean Slate Traders Corner: Get Out The Leafblower, It's Time To Turn Them Over Futures Corner: A New Year's Projection (Resolution) ************************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 ************************************************************** ***** LEAPS ***** A Clean Slate By Mark Phillips mphillips@OptionInvestor.com Finally, the calendar has rolled over to 2004 and everyone has a clean slate for the new year. The funds (mutual and hedge) have booked their gains for the year and now have to see if they can duplicate or better those results this year. No more just protecting gains, everyone is back in the hunt for profits. Why is that important? Because it should remove at least a portion of the artificiality of the equity market that we have impatiently endured since Labor Day. We saw a touch of encouraging market action on Friday, with an actual downward move in price as the intraday oscillators dropped out of overbought. While that is the natural course of market behavior, we haven't seen it on a consistent basis for several months. The afternoon weakness may have been caused by early profit-taking of the gains from 2003 or concerns over terrorism heading into the weekend or any other number of factors. To me it doesn't matter -- I'm encouraged by seeing a hint of normal cyclical market action. I say "hint of" because I am painfully aware that one day (or even one week) does not make a trend. Without a doubt, we'll have to take things one day at a time, but I fully expect 2004 to offer more rationality than we saw in the latter half of 2003. That expectation has nothing to do with my overall view for the markets this year though. Clearly, the big averages have run too far, too fast into the end of the year and they're due for some retracement in early January. That certainly lines up nicely with Jim's expectations for the seasonal decline of several hundred points in January. I don't normally put a lot of stock into historical/seasonal patterns because they are so closely associated with statistics, which are manipulable. It reminds me of a saying I learned from dear old mom. "There are three types of liars; liars, damned liars and statisticians." Those were some pretty wise words that have served me well over the years, especially as I am confronted by government statistics that are so clearly disingenuous. Nowhere is this more clear than in the pronouncements from the Fed and official government propaganda, er, I mean economic reports, stating that inflation is benign. At the same time, I look at the sharp rise in virtually every commodity, housing, health care and energy costs, not to mention the sharp rise in equities over the past 6 months. Is it any coincidence that the price of everything that is denominated in dollars is rising while the dollar continues to weaken to new multi-year lows against every conceivable currency, even the ruble? The only place we don't see inflation is in the price of manufactured goods. The majority of what we buy now comes from Asia, where labor costs are miniscule compared to what is available here in the United States. So those products that are imported continue to be quite cheap. Domestic manufacturers must remain competitive and thus cannot raise prices. There is no pricing power in the consumer marketplace, leaving us with the inescapable conclusion that in the manufacturing sector, inflation is benign. The problem is that if the cost for raw materials -- from energy to copper and steel to health care (a necessary expense related to domestic labor) -- is rising and companies cannot raise the prices for the manufactured goods, then profits will fall. Unless, of course, companies can find ways to reduce their cost structures. They've been engaged in that practice with a vengeance for the past 2 years, cutting employment to the bare minimum. Now hiring is beginning to pick up again, so the worst is over, right? Wrong! The dirty little secret of the employment picture is that the majority of jobs lost during the past couple years were in the skilled manufacturing, engineering, software, technical and skilled service areas. Guess what? When those jobs are re- activated due to increasing demand, they won't be re-activated here in the U.S. -- they're being moved overseas (predominantly to Asia) because of the more favorable cost structure. India is particularly attractive to employers, because of the heavy emphasis on English language skills. Place a call to customer service or technical support for Dell or Microsoft or Chevron for that matter and odds are good you are not speaking to a person here in the U.S. I don't view this development as either good or bad -- but it is reality. We can ignore it and hope it goes away, but we do so at our own peril. This seems to be what is happening with organized labor today. For decades, labor unions have been able to negotiate very favorable compensation packages for skilled and unskilled labor. But the net result is that salaries for this sector of the economy have risen further than is reasonable. Case in point is when I was an engineer at NASA, I was better paid than the onsite contract engineers. But I was paid significantly less than the contract mechanics and electricians, even those with less years of experience than I had. I had more education, more experience and more responsibility, yet my compensation was lower. That is the result of having a powerful body to lobby for your interests. Since leaving that world, the spread has only widened. I have never begrudged organized labor for what they have achieved, but now I look at the global picture and fear that domestic labor may be in the process of pricing themselves right out of existence. If equivalent skills can be found in Asia for 10% of the cost, why wouldn't a domestic manufacturer move as much of its operations overseas as possible? It's about competition and fairness has no place in that equation -- only profits. I expect the trend of skilled jobs migrating to Asia to only accelerate in the years ahead and that doesn't paint a pretty picture for U.S. employment in any of the established industries except perhaps for health care services. While I know it is a politically unpopular view, I believe that labor unions to a large degree have outlived their usefulness and are now in the process of bringing about their own extinction. Businesses are interested in only one thing - profits. If the costs of doing business are too high in one geographic area, operations will naturally migrate to an area where they are more reasonable. There's a reason we're seeing so many labor disputes lately and it is because management is being squeezed between increased costs of production and an inability to pass that increased cost on to the consumer. The only viable solution is to cut the cost of production -- that involves first trying to gain concessions from current employees and than taking the more drastic action of beginning to eliminate domestic employment costs, replacing them with far less expensive labor overseas. It is a trend that is still in its infancy, but it is going to cause a lot of pain to established industries here in the U.S. in the years ahead. Either that, or organized labor is going to have to stop viewing management as the enemy and the two sides will have to work together towards their common goals of employment AND profitability. Looking at the breakdown of the "increased employment" in recent months supports this view, as the majority of the new jobs are being found in the administrative services, temporary employment, and food service industries. While I wouldn't denigrate any job, these are clearly lower on the food chain -- receiving lower wages for more service-oriented work. Service-oriented jobs don't necessarily support any sort of manufactured end product and with many of the jobs being created lower on the wage scale, we can see that just reporting the number of jobs created/lost on a weekly basis misses the mark of telling us what is really happening in the employment picture. We may be growing jobs, but the actual total wages earned may be lower. How is that going to support growth in GDP? As I see it, there are really only two viable sources of true employment growth that we can look at as having the capability to have a positive impact on the economy. The first is the area of self-employment. There is a huge shift away from fixed employees to using independent contractors in the business world. Many of my friends are self employed now and this is a trend that will only gain momentum in the years ahead, with individuals seeking greater control of their earning potential as well as greater flexibility in terms of when to work and when not to. The other key area of growth will be the area in which the U.S. has always been ahead of the rest of the world -- namely innovation and new technologies. Anyone that wants to sell the U.S. short and ignore American ingenuity (due largely to the diversity of people and ideas found here) is taking a huge risk. The new technologies will be discovered and exploited here, adding jobs to the overall economy, while those from the old economy (manufacturing and established technologies) make their natural transition to other lower-cost markets. The big question is whether the new job creation can outpace the old job migration, a question to which I do not have an answer. If I had to pick out one factor that I expect to be the dominant issue in the year ahead, I would have to zero in on the U.S. Dollar. The Dollar Index (DX00Y) lost nearly 15% last year, and that came on the heels of 2002's more than 12% loss. Measured against other currencies directly, the picture looks even worse. With the dollar hitting new all-time lows against the Euro and 11- year lows against the pound, it certainly exposes the grand lie of our current administration supporting a "strong dollar" policy, doesn't it. The big question is where the turning point will be. When do our foreign creditors start to shy away from gobbling up all of our Fed-issued debt and demand a higher rate of return for loaning money to the U.S., for what is becoming a greater and greater risk as our twin half-trillion dollar deficits (trade imbalance and budget deficit) continue to grow. The net result will be rising interest rates, which is not conducive to promoting strong business growth or continued consumer spending. How far will foreign central banks allow the dollar to fall before demanding (by showing weak interest in upcoming Treasury auctions, leading to falling bond prices and rising bond yields -- isn't the free market wonderful?) a greater return on their investment. I'm sure you notice that I've ignored the action of the Fed in this interest-rate equation and the reason why is that body is completely impotent at this point. The only tool left is further stimulation of the money supply by running the printing press closer to the redline. That will further weaken the dollar and exacerbate the problem. But Murphy is alive and well. So what if he conspires to make me look like a fool (as happens all too often) and the dollar actually begins to recover in the year ahead. The line in the sand is the 92 level on the DX00Y, and I don't think it is possible in the current fiscal climate for that level to be exceeded. But let's assume that I'm wrong there too and the DX00Y manages to work its way clear up to the 100 level, just below where it began 2003. Wouldn't that be a good thing? No, I don't think so. As I'm sure you recall from some of my recent articles, I've exposed the reality that all of the gains in the overall market since the initial pop off the March lows are due to currency effects. So if the trend of the dollar were to reverse, all that is going to do is reverse the illusory rally in the equity market -- assuming real stock values remain constant -- and that means a falling equity market. Dangers to the left and dangers to the right and us caught right in the middle. Unfortunately, this dismal view is independent of my view of the current rally being just a bull correction in an overall bear market. I view this rally as extremely long in the tooth, yet I can't shake the feeling that there is not a powerful downward leg in our future for 2004 -- at least not in parallel with what we saw in 2000, 2001 or 2002. I find it difficult to quantify why I feel that way, except for a strong intuitive feel that the economy and the market will be supported all the way into the November election. Beyond that point, all bets are off, and I suspect the following year could be extremely painful, resulting in new lows across all the major indices (except perhaps for the NASDAQ). This is not a majority view (which gives me some comfort), but I find myself at odds with several analysts and traders for whom I have a great deal of professional respect. Many of these individuals are expecting great carnage in 2004, and each of them can make a compelling technical or fundamental case for their positions. In the end, it is all idle speculation as to the long-term behavior of the market -- an activity that I prefer to leave to the psychotropically-induced visions of such special people as Harry Dent. Now that I've given my VERY big picture view, let's return to the land of reality in the here and now. We're likely to see some weakness in January and maybe into early February. The extent of that weakness and the subsequent strength of the rebound should tell us a lot about what to expect for the balance of the year. Let's hope that somewhere in there we will see the VIX move back up to at least 25, bringing normal ebbs and flows to the market, rather than the artificial action that has prevailed for the past several months, with the VIX drilling to new multi-year lows. I'm all talked out on this topic, so let's delve into the individual plays we're tracking and see what sense we can make of the action over the holiday period and what might be in store just ahead. Portfolio: WMT - We could have chalked up all of last week as meaningless drift if it weren't for WMT's steep plunge on Friday, in line with the drop in the rest of the market and the 2% slide in the Retail index. The stock had been creeping up towards resistance in the $53.25-53.50 area and pushed towards the top of that range on Friday morning before being sold right back to the bottom of its range of the past couple weeks near $52. With daily oscillators just turning bearish, WMT looks like it should break below $52 next week and make a run at that lower trendline, now just over $50. We'll still want to take advantage of that drop to harvest gains on the play and I'll make mention of any significant developments in the Market Monitor next week. Maintain stops at $54 for now. SBUX - It may be slow, but at least it is consistent. SBUX finally pushed above the top of its month-long consolidation last week and even broke out to a new high on Friday before getting pummeled back with the rest of the market. There's nothing here that causes any undue concern and we should view any pullback into the $30-31 area as a viable entry point for those that may have missed the opportunity last year. Raise stops to $28. Even though that is still above the 200-dma, I can't envision any price movement that could occur in the next 2 weeks to challenge that level -- and even if it did happen, I think you'll agree we'd want to be out of the play. QQQ - The bulls pulled it off and closed the year with the NASDAQ over 2000 and the QQQ handily above $36. The big question now is "what next?" Personally, I still favor the downside for the next several weeks and similar to the DOW and S&Ps, the measure of what to expect for the rest of the year is likely to come from the depth of the decline over the next several weeks and how strong the buying interest is at the end of that decline. For traders not yet in this play, I view current levels as an excellent place to enter the fray, using our stop at $38 for protection. More conservative traders could wait for a break of the rising trendline (currently $34.70) before playing, but that will likely give up a fair portion of the initial move potential down to the 200-dma (currently $31.75). Our best-case expectation for the play is for a drop to strong support at $30, but that size of a pullback will probably require some sort of external catalyst, which is currently unknown to me. DJX - The DJX pushed right up to take out our $104 stop on Monday and then trolled sideways until the excitement on Friday that looks an awful lot like a key reversal session. Maybe the January selling has gotten off to an early start? Only time will tell, but the conditions still look ripe for a broad market short on the DJX. So with the current play dropped on Monday, I'm moving the DJX right back onto the bearish Watch List. See the Drop writeup below for full details. Watch List: SMH - Our patience was rewarded last week, as the SMH finally clawed its way back up to the $42 level. The only remaining question is whether it truly is the entry point I think it is. For better or for worse, we logged a new Portfolio position for the SMH this week, with full details below. NEM - Gold and gold stocks continue to vacillate near their highs, but this feels just like a local top. I have great expectations for both the yellow metal and the mining stocks over the next year or two, but this is not the point at which I think new entries are advisable. No matter how I turn the charts, I just can't make a technical argument for entering our NEM play at current levels. We need to see a more protracted pullback first and the recent dip near $46 just wasn't enough to get the job done. The necessary pullback will likely be accompanied by a near-term rebound in the dollar. Both moves are likely to be transitory and will set up a much more favorable entry into our NEM play, preferably near strong support at $40, but possibly as high as $42. QCOM - Nothing substantial transpired with our QCOM play last week, except that it got even more extended. It is continuing to hold near its highs, although potentially a pullback inside the rising channel could occur next week. There's no way to take a bullish position here and expect anything but a loss on a longer- term position. Wait and watch is the prescribed course of action for now, so QCOM remains on HOLD. EK - Beginning to work its way higher, EK actually stabbed the $26 level early on Friday before pulling back sharply into the close. While aggressive shorter-term traders might have taken that as a bearish entry point, it's not what we're after. Our entry target is for a rally failure near the top of the September gap near $27, which ought to coincide with a rejection from the vicinity of the 200-dma (currently $27.19). HD - While trying to make some significant upward progress, HD was stymied on Friday by the broad market weakness after the initial pop higher and more directly by the continued selloff in the housing sector. But that's alright, we can wait for our entry target to be satisfied, right? Continue to look for that failed rally in the $37-38 area at the top of the long-term falling channel. SNDK - The recent rise in SNDK stalled out near $62 aqnd the stock has been drifting sideways for over a week. It appears that a sort of equilibrium is being found near current levels, and it remains to be seen whether we'll get that desired entry point down near the $50 level. Should the normal January profit taking occur, then it looks like it is still quite possible, so I'm not willing to modify the plan of action. As noted a couple weeks ago, this is an aggressive play, so we need to wait for it to come to us, rather than trying to chase it higher. Radar Screen: GENZ - Getting a lift from the rest of the market again last week, GENZ is now testing the $50 level and getting within striking distance of the critical $52 level. At the same time, the weekly Stochastics are making rapid progress towards overbought territory, so perhaps there is hope for this one turning into a real play afterall. There's no need to rush things though, with several weeks still to go before those weekly Stochastics will top out. Until then, watching from the sidelines is still the best course of action. Closing Thoughts: We got a hint of more rational action in Friday's session and with volume returning to normal levels again next week, we'll get to see if it was a fluke or a taste of what the future holds. In either case, I think we've got a selection of plays that ought to perform well here as we kick off a new trading year. And I'll be hard at work trying to identify worthy candidates to add to the mix over the weeks and months ahead. Best Wishes For A Profitable 2004! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: SBUX 11/24/03 '05 $ 30 ZOS-AF $ 4.30 $ 5.50 +27.91% $ 28.00 '06 $ 30 WSP-AF $ 6.40 $ 7.40 +15.63% $ 28.00 Puts: WMT 10/03/03 '05 $ 55 ZWT-MK $ 5.10 $ 5.90 +15.69% $ 54.00 '06 $ 55 WWT-MK $ 7.20 $ 7.30 + 1.39% $ 54.00 QQQ 12/09/03 '05 $ 32 ZWQ-MF $ 2.65 $ 1.70 -35.85% $ 38.00 '06 $ 32 WD -MF $ 3.70 $ 2.65 -28.38% $ 38.00 SMH 12/30/03 '05 $ 40 ZTO-MH $ 4.90 $ 5.10 + 4.08% $ 45.00 '06 $ 40 YRH-MH $ 6.60 $ 6.80 + 3.03% $ 45.00 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 10/05/03 $40 JAN-2005 $ 40 ZIE-AH CC JAN-2005 $ 35 ZIE-AG JAN-2006 $ 40 WIE-AH CC JAN-2006 $ 35 WIE-AG QCOM 11/16/03 HOLD JAN-2005 $ 50 ZLU-AJ CC JAN-2005 $ 45 ZLU-AI JAN-2006 $ 50 WLU-AJ CC JAN-2006 $ 45 WLU-AI SNDK 12/21/03 $50-51 JAN-2005 $ 45 XWS-AK CC JAN-2005 $ 40 XWS-AJ JAN-2006 $ 45 YSD-AK CC JAN-2006 $ 40 YSD-AJ PUTS: EK 12/21/03 $27 JAN-2005 $ 25 ZEK-ME JAN-2006 $ 25 WEK-ME HD 12/21/03 $37-38 JAN-2005 $ 35 ZHD-MG JAN-2006 $ 35 WHD-MG DJX 01/04/04 $105 DEC-2004 $ 100 DJV-XV DEC-2005 $ 100 YDK-XV New Portfolio Plays SMH - Semiconductor HOLDR $41.73 **Put Play** Ever since topping out in early November, the Semiconductor sector has been lagging the advance in the rest of the Technology market, moving lower in a lower high and lower low manner. There are two possible scenarios at play here - either the Semiconductor index is resting up for another strong bullish run while building a bull flag pattern, or it is beginning to exhibit relative weakness. Based on both the clear weakness on the weekly oscillators and the lack of price weakness in recent weeks, we think the latter is actually the case. While it hasn't yet given a Sell signal on the PnF chart (that will require a trade at $38), the SMH does look to be running out of steam. One metric we can use is that the bullish price target generated on the PnF chart last spring was for a rally to $44. That goal has been achieved and now it remains to be seen whether there is some tangible downside to be had for us bears. After the lower high in early December, we started looking for a viable entry point and a failed rally in the $42-43 area looked like the best setup we were likely to get. Sure enough, the SMH finally made it up to that level last Tuesday (giving us our entry point) and then consistently was turned back from that level throughout the week. It was nice to see the week end with price back under the 50-dma (currently $41.67), but to have real confidence in the downside, we'll need to a break back under $40 and then the December lows just above $38. Conservative traders may want to wait for SMH to trade $38 (giving that PnF Sell signal) before considering entries, and then enter on the next failed rally. We're a bit earlier with the strategy we've chosen here, but I think we've got an attractive risk/reward ratio working in our favor. Our downside target will be for a move to the $34.50 area, which should coincide with the 200-dma, currently at $33.75. Our initial stop is set at $45, just over the November highs. BUY LEAP JAN-2005 $40 ZTO-MH $4.90 BUY LEAP JAN-2006 $40 YRH-MH $6.60 New Watchlist Plays None Drops DJX - $104.50 This is getting downright annoying! Twice last year, I tried picking a top in the DOW and both times I was early. The net result was another losing trade, as the market plowed through a level of resistance that I deemed to be impenetrable -- at least not without some retracement. It just goes to prove that there are no absolutes. We entered the play on the first touch of $100, and rather than stimulating a round of profit-taking, that touch led to another 500-point rally before the profit taking that ensued on Friday, long after we were stopped out of the play. As I stated in previous commentary though, this is a play that I believe deserves consideration for another round. We had to stick with our discipline and exit the play when our $104 stop was hit early last week. But that doesn't preclude us from taking another shot at the downside in the DOW, a move that is way overdue. So DJX is being recycled right back onto the Watch List this weekend. The DJX is banging up against the top of its rising channel that has held since early April, we've just had an uninterrupted 900 point rally in the past 6 weeks and there ought to be a good round of profit taking over the next 6 weeks or so. Simply put, the risk/reward ratio is quite favorable for another attempt at a bearish play from current levels. But I'm not going to succumb to the chase mentality here. Our entry strategy will be to wait for another foray over $105 and that's where we'll take the plunge, setting our stop at $107, above both the descending trendline from the highs in early 2000, as well as the highs of early 2002. Our initial downside target will be the 50-dma near $99, but with the very real potential for a more protracted decline to the $95-96 area. ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Get Out The Leafblower, It's Time To Turn Them Over By Mike Parnos, Investing With Attitude When you turn over a new leaf, there's no telling what you might find. At the very least, there will be slimy creatures that you normally find in the bottom of a Tequila bottle or in powder form at a holistic pharmacy. How long has that leaf has been in place? What's hiding under that leaf? When you move the leaf, everything is exposed for the world to see. We're not talking about Adam's leaf. He dropped his leaf and, two kids later, the whole family was thrown out of the Garden of Eden. I hope it was fun because that's a heavy price for a little procreation. Losing Baggage At The Airport Ain't All Bad We all have baggage. The real world is no different than the trading world. In a new relationship, both people bring baggage – plenty of it. It may not be visible immediately, but once some of the leaves are moved, watch out! In life relationships, baggage may take the form of credit card debt, an ex-spouse or two, or perhaps a mother at the end of a very short umbilical cord. Some have all three. Now that's scary! In the trading world you might be a buy-and-holder, a put or call buyer, or someone who trades based on advice from brokers or uncle Manny. You know uncle Manny. He's the one with a metal plate in his head. When he walks through the kitchen, all the magnets from the refrigerator fly at him. Before these people can learn the right way to trade, they need an exorcism. When I get a new student, he's going to think he joined the Marines. At boot camp, the Marines will break you down to the bare essentials and build you back up into a lean mean fighting machine. I hope to create lean mean intelligent traders – who are armed with logic, an arsenal of strategies, and the courage to pull the trigger when necessary. First, they need to flush away the remnants of their baggage and start with a fresh bowl. So, it's the beginning of a new year. It's time to turn over that leaf, bare your trading souls and take a long hard look in the mirror – as scary as that may sound. As a student of the Couch Potato Trading Institute, you're being provided the wisdom of the ages (OK, maybe a slight exaggeration). But, you must admit, it's pretty good stuff. Learn it. Use it. ______________________________________________________________ Thoughts On Our QQQ ITM Strangle – The QQQs hit a high of $36.79. CPTI students were asking how far we should go until we adjust the ITM Strangle. Currently, the range is $29 to $39. Here is the thinking process when evaluating a position and deciding on making (or not making) adjustments. What are we risking by not adjusting now? The further the QQQs move up, the deeper the short call goes in the money, the less ability we will have to make money the following month when we roll out the short call. The short call will be expensive to buy back and the next month option will be almost all-intrinsic value. For instance: As of Friday's closing prices, the QQQs were $36.36. Our short January $34 call would cost $2.55 to buy back. If we rolled it out to the short February $34 call, we'd take in about $2.85. That's a credit of only $.30 of time premium. What needs to be weighed here is whether to take the $.30 on the call side or wait for that "overdue" pullback that may never come. When we're buying back the January $34 call for $2.55, we're paying $2.36 of intrinsic value plus $.19 of time value. Over the next two weeks, we know that $.14 of the $.19 will erode away. Time premium in the February $34 call will also be eroding, but at a much slower rate. On the put side, we're faced with a similar scenario. It would cost about $.15 to buy back the short January $34 put. This $.15 is all time value and will erode away entirely over the next two weeks. Today, we could buy it back and roll it out to the February $34, currently selling at $.45. That would provide us a credit of $.30. Adding the $.30 on the call side and $.30 on the put side would give us a $.60 credit for the February option cycle. It's acceptable, but if the QQQs pull back – even a point or two – we could easily double the $.60 credit for the February cycle. Is it worth the wait? Since our CPTI portfolio positions are also educational vehicles, we'll hold on and ride the wave further. I know it's a little like picking a direction, but the risk is minimal – and maybe we'll all learn something. In upcoming columns we'll take a look at the positives and negatives of rolling out to different strike prices – other than the ones that were sold short the month before. ______________________________________________________________ The Check-list Is In The Mail -- Soon CPTI students love checklists. It's always nice to have something that makes our life a little easier. That's the purpose of our checklists. I'm currently working on a checklist that will aid in the calculations of our monthly ITM Strangle rollouts and potential range change adjustments. I'll keep you posted when it will be ready for distribution. Up Up And Away I will be on a short trip and not have access to my OI email from Monday through Thursday of this week. Don't hesitate to send your questions and/or comments. I will begin responding on Friday when I return. _____________________________________________________________ JANUARY CPTI POSITIONS Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor – 1463.60 We sold 5 NDX January 1500 calls and bought 5 NDX January 1525 calls for a credit of $3.70 (x 5 = $1,850). Then we sold 5 NDX January 1325 puts and bought 5 NDX January 1300 puts for a credit of $2.40 (x 5 = $1,200). The total credit was $6.10. Maximum profit range: 1325 – 1500. Potential profit: $3,050. Position #2 – SOX (Semiconductor Index) – Iron Condor – 504.85 We sold 10 SOX January 530 calls and bought 10 SOX January 540 calls for a credit of $1.40 (x 10 = $1,400). Then we sold 7 SOX January 440 puts and bought 7 SOX January 425 puts for a credit of $1.35 (x 7 = $945). Our total credit was $2,345. Maximum profit range: 440 – 530. Potential profit: $2,345. Position #3 – XAU (Gold/Silver Index) – Iron Condor – $109.48 We sold 10 XAU January $95 puts and bought 10 XAU January $90 puts for a credit of $.60 ($600). Then we sold 10 XAU January $110 calls and bought 10 XAU January $115 calls for a credit: $.60 (600). Our total credit was $1.20 ($1,200). Maximum profit range: $95 – 110. Potential profit: $1,200. Position #4 -- QQQ Diagonal Calendar Spread -- $36.36 I'm a glutton for punishment, but there's a little voice telling me that we should be positioned to take advantage of a pullback in the market. We tried this in November – January and we ended up losing a dime. Sooner or later we're going to be right. So, let's give it another try. We're going to start out risking a buck and we have two additional months to sell against the March long puts to reduce our cost basis while we wait. It's a cheap speculation. We'll consider this an ongoing position. We bought 10 QQQ March $34 puts for $1.20 and sold 10 QQQ January $33 puts for $.20. Our total debit: $1.00 ($1,000). _________________________________________________________________ ONGOING POSITION QQQ ITM Strangle – Ongoing Long Term -- $36.36 We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. We're going to make money by selling near term puts and calls every month. Here's what we've done so far: October: Oct. $33 puts and Oct. $34 calls – credit of $1,900. November: Nov. $34 puts and calls – credit of $1,150. December: Dec. $34 puts and calls – credit of $1,500. January: Jan. $34 puts and calls – credit of $850. Note: We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! And it's a great cash flow generating strategy. OEX Credit Spread Boogie – 549.99 We sold 2 December OEX 520 calls @ $9.00 and bought 2 December OEX 545 calls @ $1.55. Total credit of $7.45 ($1,490). Exposure $17.55 ($3,510). Rolled out to five contracts of the January 535/505 bull put spread. In the process we took in an additional $280. Total potential profit of $1,770. Looking good. We want the OEX to finish above 535. _________________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. ____________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************** FUTURES CORNER ************** A New Year's Projection (Resolution) by Keene Little I've been doing a little end-of-year review to see what I've learned from the past year. The bottom line is that I've learned it's very hard to pick a top. But I can't say my New Year's resolution will be to no longer try to pick a top. That's what I do--I try to identify turning points and trade them. I follow Elliott Wave Theory to do the bulk of my technical analysis and as most Elliotticians this past year, I got skunked waiting for the top. I missed a lot of the rally, and I got stopped out a lot trying to short the "top". The EW pattern kept showing a complete count and it was backed up by other technical indicators that showed bearish divergences, overbought indicators, excessive bullishness, low VIX, etc. However, the market just kept climbing after minor pullbacks and after blowing me a big raspberry. I continue to believe we're very close to the top of this rally, but I admit that at this point I'm uncomfortable every time it looks like we're at a top. I've been conditioned to believe we're really not going to see a decline (call me jaded), and my trade Friday demonstrated that. I shorted what looked like a perfect top and then covered early because I've been conditioned to think any hesitation means another rally is coming. Therefore, this year-end review is necessary to help me stay objective--to trade objectively not emotionally. Over the recent past I've talked about and posted several daily charts that show the ascending wedge, or ending diagonal, that has been forming since the rally from early August 2003. In the EW count, this ending diagonal looked to be the last leg, wave-5, of the move up from March 2003. Ending diagonals are typical as the last wave when you've had a move that has gone too far too fast. So it seemed logical that the EW count was showing the rally was coming to an end. Unfortunately, ending diagonals are one of the more difficult patterns to count--it's filled with corrective (overlapping) movements, both up and down, and corrective patterns are very difficult to predict turning points and therefore to trade. These corrective moves are labeled (a)- (b)-(c) in the SPX daily chart below. Once price went above the trend line that marked the top of this ending diagonal (the top purple line), it looked like a classic "throw-over" that typically marks the last move in these ending diagonals. But now with the rally continuing, the throw-over has just kept going. At some point one has to ask the question when does a throw-over become a breakout? I've been asking that question a lot lately. One look at the SPX daily chart shows a throw-over that has clearly exceeded a "normal" amount. Don't ask me to define normal (especially in this market!). Like all other technical analysis, you need to use some subjective analysis and when looking at an EW pattern, it has to pass the "smell" test in order to give the count some credibility. The EW pattern I've been following is starting to get smelly. No EW rules have been violated so it's still valid, but it's worrying me. I don't want to lose sight of the meaning of this corrective rally--it is yet another sign this rally is not the start of a new bull market, so expecting a top, soon, is the right thing to do. As for going long, the overlapping nature of the rally made it incredibly difficult to gain confidence that the market had much more rally potential, and this has been going on for the past 5 months. Hence the frustration for those of us who "missed" the rally. We've had plenty of good short signals with all the bearish divergences, but we know how well they've panned out this year. I've been looking at different labels for this rally so that I can try to get a clearer sense of where this is going. There are several possibilities but it appears it's going to be one of those times it won't become obvious until it's in the rear view mirror. One thing to remember is that the kind of correction that we're forming (correcting the 2000-2002 decline) could actually make new highs (so above DOW 11,750) and STILL be just a correction. In other words, we will still be due another, and stronger, leg down in this secular bear market that will take us to new bear market lows. But that doesn't help us in the immediate term. For now I'm not drastically changing the labels of my wave count and looking at the SPX 120-min chart shows some trend lines and an initial fib target of 1123. I was expecting a pullback first, and the drop into Friday's close might have been it. The correction might go sideways on Monday before getting the next high. It's even possible we've already seen the high and we'll start the decline next week. This chart shows my projection for early next week. If the market blows through this 1123 level, which means the DOW would be approaching 10,600, then I'm going to start thinking more seriously about a much stronger rally ahead of us. I was going to show some charts with more bullish counts but I thought that might only confuse the picture. But it's possible to count the wave structure such that we've started a 5-wave move from the November 21st low and that we're only completing the third wave of it now. That would mean a correction, which could be steep, and then another push higher, possibly into the middle or end of January. But even with this more bullish count, it shows we're very close to the top of this market. So we need to watch the declines from here to tell us if it's corrective or impulsive. If it begins to look corrective, then we'll take a look at the more bullish potential. I mention the more bullish potential only to give a heads up that you should be careful with bearish positions. Option positions may see a lot of time decay waiting for this market to get started to the downside. It's interesting to note on the DOW daily chart the downtrend line from January 2000 through the high in May 2001. This is currently running through about 10,575. This is also the location of a fib projection for a potential wave count that would help explain this corrective advance from August. And as can be seen in the chart, this area is also the top of the up-channel that has contained price action since last April. Looking in a little closer, the DOW 120-min chart shows the trend lines containing the rally during most of December: The top of this channel also lines up with the long-term downtrend line from January 2000. Again, the rally may have finished on Friday, but this 10,575 area looks too inviting for the market to not at least attempt to touch it. As with the SPX, if we blow through this area to the upside, then I will need to relabel my wave count but I think it's currently premature to do that. As noted on the chart, once the decline gets underway, we'll be able to tell from its structure whether it's corrective or impulsive, which will in turn give us a better clue as to whether or not we've made a top. One look at the NDX daily chart and it doesn't take a lot of convincing to see that this is one ugly overlapping mess: No impulsive action in there since early summer. This EW pattern can be labeled several different ways and not be wrong. I show one potential count which shows a triangle 4th wave finished in early December and that we're in the final 5th wave. This lines up with the other indexes. I show the two possible scenarios if we have a little more rally ahead of us. The first is to 1497 which is a fibonacci target by two degrees of the EW pattern (see the 60-min chart below for the same target). Instead we might get a little larger pullback before launching higher in what I believe would then be the last high. This would also line up the oscillators to potentially show a bearish divergence, which it currently does not show. The NDX 60-min chart zeroes in on the potential short-term action: Again, using trend lines and fibonacci targets, I can see 1497 as being the top of the rally. Depending on the pullbacks (corrective or impulsive) and if we rally much higher than 1500, I will then be looking at the higher fibonacci target of 1520 area. But before that level was reached, I would expect to see a larger pullback first. So, this was a long-winded way of saying the short-term holds a little (a lot?) more upside potential in my book (I'm thinking 10,575 for the DOW, 1123 for SPX and 1497 for NDX). This is by no means a given, just a potential target. But, to keep things in perspective and just to give you an idea of further rally potential, the 50% retracement of the 2000-2003 decline in the SPX is 1160, and the 78.6% retracement (the "line in the sand") for the DOW is 10,775. But it's also possible that the market peaked as of Friday morning's high. This pattern remains incredibly difficult to predict and trade due to its overlapping nature. This is highly unusual behavior in the market for the length of time we've been in this kind of corrective pattern, but it's looking like we're very close to the end of it. In the meantime, the worst thing we can do is force trades because we're anxious to trade. When we start back down, and start to see some impulsive waves down, we will again have a much easier time trading. Be patient and save your capital. You don't want to be in the position where the market will finally be easier to trade but you've run out of trading capital. Let's all have a good year together. As a final note, the interesting thing about the near-term targets (10,575/1123/1497) is that they project to be hit by early Tuesday, January 6th. Those who follow cyclical studies will note that for the past two years the market has made major turns at 68-day cycles (2 times 34, 34 being a fibonacci number). The next cycle date is January 6th. Have a great weekend and let's see what we can do together with this market. I'll see some of you on the Futures Monitor early Monday morning. Keene Little ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Sunday 01-04-2004 Sunday 5 of 5 In Section Five: Covered Calls: Understanding Market Trends Naked Puts: Q&A With The Editor Spreads/Straddles/Combos: A New Year Begins! Market Posture: Anyone's Game ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************* COVERED CALLS ************* Trading Basics: Understanding Market Trends By Mark Wnetrzak One of our readers asked for my thoughts on the potential for a "January Effect" in the coming weeks. Attn: Markw@OptionInvestor.com Subject: Buy small-caps now? Hi Mark, I have been reading about the "January Effect" in my Traders Almanac and I was curious as to your opinion on this strange yearly occurrence. One note I read said that it is based on tax-selling (for losses against capital gains), which generally affects small-caps more than large caps, but it also mentioned that the effect has been less evident in recent years because the market has factored this process into share values. Another thing I found out is that the tax year for most mutual funds ends in October, so much of the tax-based selling in that group is over long before December arrives. Any thoughts on this subject? Thanks, FB Regarding the "January Effect" and market trends: Indeed, it's that time of the year to start thinking about the historical trading relationship between small-cap and large-cap stocks. Some experts refer to this phenomenon as the "January Effect" and although the change is sometimes barely noticeable, generally the big-cap stocks outperform smaller issues from the middle of November through December, due to profit-taking in lower priced shares. As the new year approaches, many investors transition to small-cap companies and the trend reverses. The historically strong performance of small-cap stocks in the first few months of the year is well known and easily proven. The less obvious cycle in November and December is often more profitable as the majority of market players don't use the trend to their advantage, thus leaving the effect intact for those who are aware of its existence. Some of the traders that participate in this strategy are debating whether or not the recent market rally has skewed the cycle this year but regardless of the final outcome of the "January Effect" in 2004, history suggests the first five days of this month will determine the market's direction in the coming year. In fact, January has predicted the annual course of the S&P 500 Index with remarkable accuracy, achieving a perfect record of forecasting the market's direction in odd-numbered years. Since 1950, almost every time the month of January has ended negative, a bear market followed, and there is no reason to discount the trend this year. With that outlook in mind, investors would be wise to monitor the activity in the market closely over the next few weeks, before committing to any long-term positions. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield NGEN 7.50 11.69 JAN 7.50 0.90 0.90* 19.8% NEOL 17.71 17.96 JAN 17.50 1.00 0.79* 6.8% WIND 7.48 9.15 JAN 7.50 0.50 0.52* 6.5% DGIN 25.08 25.10 JAN 25.00 1.10 1.02* 6.2% CE 13.50 14.74 JAN 12.50 1.80 0.80* 5.9% SANM 12.56 12.56 JAN 12.50 0.70 0.64* 5.9% ACF 15.58 15.87 JAN 15.00 1.15 0.57* 5.7% ELNK 10.33 10.51 JAN 10.00 0.70 0.37* 5.6% TKTX 15.35 15.60 JAN 15.00 1.25 0.90* 5.5% PCS 5.06 5.62 JAN 5.00 0.30 0.24* 5.5% SKX 7.54 8.16 JAN 7.50 0.40 0.36* 5.5% UTHR 23.20 23.48 JAN 22.50 1.75 1.05* 5.3% NTIQ 12.53 13.54 JAN 12.50 0.85 0.82* 5.1% VTS 10.05 10.60 JAN 10.00 0.55 0.50* 4.6% UAIR 6.20 6.21 JAN 5.00 1.40 0.20* 4.5% RHAT 18.88 18.37 JAN 17.50 1.90 0.52* 4.4% MYGN 12.75 13.58 JAN 12.50 0.85 0.60* 4.4% MYGN 12.76 13.58 JAN 12.50 0.95 0.69* 4.2% CNH 15.27 16.63 JAN 15.00 0.95 0.68* 4.1% CHTT 18.06 18.79 JAN 17.50 1.20 0.64* 4.1% EMBT 15.98 15.69 JAN 15.00 1.65 0.67* 4.1% RHAT 17.49 18.37 JAN 15.00 3.00 0.51* 3.8% OSTK 20.90 19.14 JAN 17.50 3.80 0.40* 3.4% XING 10.66 9.55 JAN 10.00 1.35 0.24 1.9% * Stock price is above the sold striking price. Comments: Well that wasn't a very auspicious market day for the first trading day of the new year, or the January barometer. (The theory behind the January barometer is that the direction of the S&P 500 during the month of January foretells the trend for the entire year). Next week should be exciting indeed! As for the covered-call portfolio, Nanogen (NASDAQ:NGEN), a new candidate for this week, exploded higher at Monday's open and probably would've required a "leg-in" (buy the stock and sell the call later) approach, which still would have created some call-seller's remorse as the stock raced higher all week. Two stocks that were previously worrisome; Qiao Xing (NASDAQ:XING) and Myriad Genetics (NASDAQ:MYGN) finished the week on a bullish note. Hopefully, the upside activity will carry through into next week. Positions Previously Closed: None NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield PLUG 7.48 JAN 7.50 PQL AU 0.30 586 7.18 14 9.1% ARRS 7.52 JAN 7.50 AQC AU 0.30 683 7.22 14 8.4% CHU 10.05 JAN 10.00 CHU AB 0.35 4307 9.70 14 6.7% FMKT 7.74 JAN 7.50 FAQ AU 0.45 670 7.29 14 6.3% NGEN 11.69 JAN 10.00 QEM AB 1.95 1110 9.74 14 5.8% HPC 12.58 JAN 12.50 HPC AV 0.40 1299 12.18 14 5.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** PLUG - Plug Power $7.48 *** Fuel Cell Speculation *** Plug Power (NASDAQ:PLUG) designs, develops and manufactures on- site electric power generation systems utilizing proton exchange membrane (PEM) fuel cells for stationary applications. Plug is focused on fuel-cell systems with electrical output of 1 to 100 kilowatts (kW), fueled by natural gas, liquid petroleum gas (LPG) and hydrogen gas, for a variety of stationary applications. The company is developing an architected technology platform from which it expects to offer multiple point products, ranging from direct current (DC) back-up power for telecom applications, to alternating prime power for residential and light commercial applications. Plug Power has been forging a Stage I base near $5 for over a year and recently has started to move higher on heavy volume. Investors can use this short-term position to speculate on the company's future share value. JAN-7.50 PQL AU LB=0.30 OI=586 CB=7.18 DE=14 TY=9.1% ***** ARRS - Arris Group $7.52 *** Stepping Higher *** Arris Group (NASDAQ:ARRS) develops and supplies equipment and technology for cable system operators and other broadband service providers. The company specializes in developing advanced cable telephony equipment, enabling the delivery of converged services (voice, video and data) through broadband local access networks, and designing and engineering hybrid fiber-coax architectures. The firm's complete solutions for Internet protocol and optical transport allow broadband service providers to deliver a range of integrated voice, video and data services to their subscribers. The company's product offerings are divided into three categories: broadband, transmission, optical and outside plant, and supplies and services. Arris continues to recover from last year's low and has now made another 52-week high on robust volume. Investors who have a bullish outlook for the company can use this short-term position to establish a reasonable cost basis in the issue. JAN-7.50 AQC AU LB=0.30 OI=683 CB=7.22 DE=14 TY=8.4% ***** CHU - China Unicom $10.05 *** China Speculation! *** China Unicom (NYSE:CHU) is a telecommunications operator in China, offering a wide range of telecommunications services, including cellular, international and domestic long-distance, data, Internet and paging services. The controlling shareholder, Unicom Group, has the exclusive license to offer CDMA cellular services in China and has constructed CDMA networks nationwide. The company has leased capacity on the network and operates the CDMA network in the cellular service areas. We simply favor the volume-supported move on Friday that suggests China Unicom's consolidation phase is ending. Investor's who agree can profit from that outcome with this short-term speculative position. JAN-10.00 CHU AB LB=0.35 OI=4307 CB=9.70 DE=14 TY=6.7% ***** FMKT - FreeMarkets $7.74 *** Bottom Fishing *** FreeMarkets (NASDAQ:FMKT) offers software, services and information to help companies improve their sourcing and supply management processes and enhance the capabilities of their supply management organization. The company's customers are buyers of industrial parts, raw materials, commodities and services. FreeMarkets' solutions combine software, services and information to address the global supply management market. The company serves its customers from 18 locations in 14 countries on five continents. FMKT has been forging a Stage I base for over a year and the stock's share price has recently moved above its 150-day MA. The stock appears poised to move higher in the coming sessions and traders who believe the issue is destined for a future rally can profit from upside movement in FMKT with this position. JAN-7.50 FAQ AU LB=0.45 OI=670 CB=7.29 DE=14 TY=6.3% ***** NGEN - Nanogen $11.69 *** New Patent = Rally Mode *** Nanogen (NASDAQ:NGEN) develops and commercializes molecular diagnostics products and tests for the gene-based testing market for sale primarily in the United States, Europe and the Pacific Rim. By integrating microelectronics and molecular biology into a core proprietary technology platform, Nanogen seeks to establish the open-architecture design of its primary products, the NanoChip Molecular Biology Workstation and the NanoChip Cartridge (collectively, the NanoChip System) as the standard platform for molecular identification and analysis. The firm also develops specific reagents and other commercial applications for the NanoChip System. The company continually conducts research and development by itself and also with its subsidiary and third parties, to improve the NanoChip System and to extend its technology to other applications such as biodefense, forensics and drug discovery (protein kinases). Early last month, Nanogen about doubled after the company said it received a patent for a method to build nanodevices; atom or molecule-sized electronic devices. We simply favor the break-out on heavy volume and speculators who believe the firm's shares are destined to move higher can "target-shoot" an entry point in the issue with this short-term position. JAN-10.00 QEM AB LB=1.95 OI=1110 CB=9.74 DE=14 TY=5.8% ***** HPC - Hercules $12.58 *** On The Move! *** Hercules (NYSE:HPC) is a manufacturer and marketer of specialty chemicals and related services for various business, consumer and industrial applications. The company's principal products are chemicals used by the paper industry to increase product performance and enhance the manufacturing process; water-soluble polymers; specialty resins, and polypropylene and polyethylene fibers. The primary markets Hercules serves include pulp and paper, food, personal care, paints and coatings, construction materials, adhesives, pharmaceuticals and oil and gas drilling and recovery. The company operates through two segments and four divisions. The performance products segment is comprised of Pulp and Paper and Aqualon. The engineered materials and additives segment is composed of FiberVisions and Pinova. Hercules recently broke through resistance around $12 (which should now offer support) and made another new 52-week high. Investors can use this short-term position to speculate on the future movement of the company's stock price. JAN-12.50 HPC AV LB=0.40 OI=1299 CB=12.18 DE=14 TY=5.7% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield RMBS 30.55 JAN 30.00 BNQ AF 2.00 20136 28.55 14 11.0% WFII 15.06 JAN 15.00 QUU AC 0.60 430 14.46 14 8.1% REGN 15.05 JAN 15.00 RQP AC 0.55 153 14.50 14 7.5% TRDO 22.51 JAN 22.50 UNC AX 0.70 78 21.81 14 6.9% THER 20.20 JAN 20.00 UKT AD 0.80 2153 19.40 14 6.7% NSCN 25.36 JAN 25.00 QKN AE 0.95 1326 24.41 14 5.3% EDO 25.01 JAN 25.00 EDO AE 0.60 132 24.41 14 5.3% FLEX 15.05 JAN 15.00 QFL AC 0.35 34401 14.70 14 4.4% TIVO 7.87 JAN 7.50 TUK AU 0.50 8727 7.37 14 3.8% ***************** NAKED PUT SECTION ***************** Options 101: Q&A With The Editor By Ray Cummins One of our new readers offered some excellent questions about the different sections of the newsletter. Attn: Contact Support Subject: New to the newsletter Ray, Last week I signed up for the annual subscription and I have been looking at some of your articles since put-selling is one of my portfolio strategies. The first question I have is about the naked puts listed on Wednesday and Sunday. Are there any big differences between the two sections? It seems like Sunday's stocks are a bit lower priced but I didn't see any other major difference between the two. Also, I was wondering if you had a guide to using the web-site; something like explanations of the various play lists and strategies as well as details about the specific resources available for traders. Anyway, it looks like a lot of information to take in but I expect to be "in the money" when the end of next year rolls around! Thanks, WE Hello WE, One comment we probably receive more than any other (at the OIN) relates to the "overwhelming" amount of information on the website. In fact, the complaints in this area has been so numerous that we are finally starting to create a comprehensive description of all the sections and the supporting resources that readers can use in their search for candidates in the various stock & option trading strategies. Of course, this task will take some time to complete but when it is done, the information will be at this link: http://www.OptionInvestor.com/websiteguide/index.asp Regarding your question about the mid-week and week-end sections: When I first started publishing plays on Wednesday, there was a considerable difference between the positions offered in the "Premium-Selling," "Conservative," and "Supplemental" play-lists. However, I think it is safe to say that over the last year or so, all of the sections have migrated towards a point where they are simply groups of candidates to help you "narrow the field" with regard to possible trades. Indeed, the positions in the mid-week (Premium-Selling) section are generally above $20 and the plays published in the week-end edition of the OIN may be somewhat more conservative (for newer traders?), but I would treat all of them with the same caution and prudent consideration that I afford any issue when performing due-diligence on a potential portfolio holding. As the disclaimer says: "The following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook." One thing I have learned over the years: Readers who understand that we simply provide tools, resources and candidates for stock and option trading are rarely disappointed with their subscription to the OIN. Ray SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield MERX 24.75 24.85 JAN 22.50 0.60 0.60* 4.0% 10.5% THER 18.77 20.20 JAN 17.50 0.45 0.45* 3.8% 9.5% PDLI 16.65 18.42 JAN 15.00 0.45 0.45* 3.4% 9.0% SOV 23.70 23.67 JAN 22.50 0.90 0.90* 3.6% 8.5% PLMD 26.45 26.69 JAN 22.50 0.50 0.50* 2.5% 7.6% MERX 24.45 24.85 JAN 20.00 0.40 0.40* 2.2% 7.6% BLTI 17.19 19.15 JAN 15.00 0.25 0.25* 2.5% 7.3% SHRP 32.39 32.20 JAN 30.00 0.55 0.55* 2.7% 7.2% IPG 15.45 15.52 JAN 15.00 0.40 0.40* 3.0% 7.1% IMCL 40.01 39.98 JAN 35.00 0.55 0.55* 2.3% 6.9% SLXP 21.50 22.09 JAN 20.00 0.60 0.60* 2.7% 6.8% ATVI 18.65 18.79 JAN 17.50 0.30 0.30* 2.5% 6.6% JNS 15.91 16.70 JAN 15.00 0.35 0.35* 2.6% 6.6% NPSP 32.64 31.36 JAN 30.00 0.80 0.80* 2.4% 6.2% BLTI 14.01 19.15 JAN 12.50 0.30 0.30* 2.1% 5.9% WEBX 20.18 20.32 JAN 17.50 0.30 0.30* 1.9% 5.7% AAII 25.00 25.11 JAN 22.50 0.30 0.30* 2.0% 5.6% RMBS 30.66 30.55 JAN 20.00 0.40 0.40* 1.8% 5.3% AAII 25.01 25.11 JAN 22.50 0.45 0.45* 1.8% 4.9% EMMS 27.17 27.59 JAN 25.00 0.50 0.50* 1.8% 4.7% * Stock price is above the sold striking price. Comments: The 2003 holiday season came to an end Friday with stocks closing mixed despite favorable economic data. Investors enjoyed the first positive year for equities since 1999 and all of the major averages participated in upside activity. Our portfolio excelled (as it should in a bullish market) and thankfully, there were very few unfavorable surprises. Looking forward, share values should continue to rise gradually throughout the coming months. Of course, there will certainly be a necessary consolidation and even some rotation into specific groups, but the overall trend remains "bullish" for the foreseeable future. Among the new plays, Therasense (NASDAQ:THER) did not offer the target credit due to its gap-up at the opening bell on Monday. However, the available credit was viable for conservative traders. NPS Pharmaceuticals (NASDAQ:NPSP) is the only issues on the "watch" list. Previously Closed Positions: None WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield CYD 32.22 JAN 30.00 CYD MF 0.65 1407 29.35 14 4.8% 12.5% JNPR 19.68 JAN 19.00 JUX MT 0.40 1950 18.60 14 4.7% 11.4% PDLI 18.42 JAN 17.50 PQI MW 0.35 529 17.15 14 4.4% 11.2% SIL 21.10 JAN 20.00 SIL MD 0.30 209 19.70 14 3.3% 8.5% BDY 26.72 JAN 25.00 BDY ME 0.35 876 24.65 14 3.1% 8.2% SMMX 21.15 JAN 20.00 OFU MD 0.25 220 19.75 14 2.8% 7.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** CYD - China Yuchai $32.22 *** China Rally Resumes! *** China Yuchai International (NYSE:CYD) is a medium-duty diesel engine manufacturer in China that also produces diesel power generators and diesel engine parts. The company owns a major interest in Guangxi Yuchai Machinery and owns, through various subsidiaries, 76.4% of the outstanding common shares of Yuchai. Yuchai primarily makes and sells diesel engines for medium-duty trucks in China. Yuchai's primary products are its 6105QC and 6108 medium-duty engines, which are used in medium-duty trucks. In addition, Yuchai also offers the 4-Series light-duty engines and the 6112 heavy-duty engines. Besides diesel engines, Yuchai produces a limited number of diesel power generators and diesel engine parts. China-related stocks are "hot" again and traders can profit from additional upside activity in the group with this position. JAN-30.00 CYD MF LB=0.65 OI=1407 CB=29.35 DE=14 TY=4.8% MY=12.5% ***** JNPR - Juniper Networks $19.68 *** Rally Mode! *** Juniper Networks (NASDAQ:JNPR) is a provider of Internet infra- structure solutions that enable Internet service providers and other telecommunications service providers to meet the demands resulting from the growth of the Internet. Juniper's Internet routers are designed and purpose-built for service provider networks and offer performance, scalability, interoperability and flexibility, as well as lower complexity and cost compared to legacy alternatives. Juniper's proprietary software is designed for the Internet protocol network routing, operations and control requirements of service providers and is an integral embedded component of its product family system architecture. Last week, Juniper Networks was awarded a multi-year contract by Science Applications International to supply all edge and core IP/MPLS routers under the Defense Department's new Global Grid Bandwidth Expansion project, which is considered the next step in the development of the Internet. Investors were happy with the news as they pushed the issue to a 2-year high. Traders can establish a cost basis below $19 in the issue with this position. JAN-19.00 JUX MT LB=0.40 OI=1950 CB=18.60 DE=14 TY=4.7% MY=11.4% ***** PDLI - Protein Design Labs $18.42 *** Biotech Speculation! *** Protein Design Labs (NASDAQ:PDLI) is engaged in the discovery and development of humanized monoclonal antibodies for the treatment of various diseases. The firm's areas of disease focus include oncology and inflammatory and autoimmune diseases and the company has several humanized antibodies in clinical development for inflammatory bowel disease, psoriasis and asthma. PDLI is fully integrated from research through clinical development and it conducts many activities in support of the clinical development program, including pre-clinical studies, process development and antibody manufacturing. The company also has significant research activities aimed at the discovery of new antibodies that may be useful for the treatment of certain cancers and autoimmune and inflammatory diseases. PDLI recently settled a patent dispute with Genentech (NYSE:DNA) related to a licensing master agreement signed between the two firms in 1998 and the current stock price reflects the renewed optimism among investors since that event. First Albany analyst David Webber also recently upped his outlook for the stock to "buy" from "neutral" and traders who think the bullish activity will continue for the next two weeks can profit from that outcome with this position. JAN-17.50 PQI MW LB=0.35 OI=529 CB=17.15 DE=14 TY=4.4% MY=11.2% ***** SIL - Apex Silver Mines $21.20 *** Hedge With Silver! *** Apex Silver Mines (NYSE:SIL) is engaged in the exploration and development of silver properties in South America, Mexico, Central America and Central Asia. The firm has a diversified portfolio of privately owned and controlled silver exploration properties. It has rights to or controls over 100 silver and other mineral exploration holdings, divided into 34 property groups, located in or near the traditional silver producing regions of Bolivia, Mexico, Peru, El Salvador and Kyrgystan. The firm's exploration efforts have recently produced its first development property, the San Cristobal Project in southern Bolivia. San Cristobal's probable reserves total 219 million tons of ore containing over 450 million ounces of silver, as well as 7.8 billion pounds of zinc and 2.9 billion pounds of lead. Gold and silver have certainly become popular with the decline of the U.S. dollar and investors who are interested in hedging their portfolios with a stock in the Metals and Mining group should consider this position. JAN-20.00 SIL MD LB=0.30 OI=209 CB=19.70 DE=14 TY=3.3% MY=8.5% ***** BDY - Bradley Pharmaceuticals $26.72 *** On The Rebound! *** Bradley Pharmaceuticals (NYSE:BDY), along with its subsidiaries, markets over-the-counter and prescription pharmaceutical and health related products. The company's product lines include dermatological brands, marketed by its wholly owned subsidiary, Doak Dermatologics, and nutritional, respiratory and internal medicine brands marketed by its Kenwood Therapeutics division. Bradley is actively promoting products in dermatology and gastroenterology, and, to a lesser extent, nutritional markets. All of its product lines are manufactured and supplied by a group of independent contractors that operate under the firm's quality control standards. Its products are marketed primarily to wholesalers, which distribute the products to retail outlets and healthcare institutions throughout the United States and selected international markets. BDY shares have been "on the rebound" in recent weeks and the issue appears to be a good candidate for a bullish position in the drug sector. JAN-25.00 BDY ME LB=0.35 OI=876 CB=24.65 DE=14 TY=3.1% MY=8.2% ***** SMMX - Symyx Technologies $21.15 *** Next Leg Up? *** Symyx Technologies (NASDAQ:SMMX) develops and applies high-speed combinatorial technologies to the discovery of materials for chemical, life science and electronics applications. The firm provides research services to its partners through its Industry Collaborations business, offers access to select instruments and software through its Discovery Tools business and licenses its discovered materials and methodologies through its Licensing business. The company is applying its technology to discover materials for industrial customers in the chemicals, sciences and electronics industries. The company's discovery efforts encompass a broad range of materials, including catalysts for the manufacturing of chemicals, polymers for life sciences and phosphors and other materials for electronics uses. Apparently, Symyx has recently been labeled a "nanotechnology" company and Exxon-Mobil may be interested in its products. If that's the case, the issue certainly has upside potential as "nano" stocks are enjoying lots of interest among speculative investors. JAN-20.00 OFU MD LB=0.25 OI=220 CB=19.75 DE=14 TY=2.8% MY=7.2% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield NOVN 15.46 JAN 15.00 NPQ MC 0.35 45 14.65 14 5.2% 12.5% ADLR 20.49 JAN 20.00 UAH MD 0.45 60 19.55 14 5.0% 12.0% TELK 23.02 JAN 22.50 ZUL MX 0.50 45 22.00 14 4.9% 11.8% IDCC 21.05 JAN 20.00 DAQ MD 0.40 2430 19.60 14 4.4% 11.2% HILL 15.65 JAN 15.00 HCQ MC 0.30 1960 14.70 14 4.4% 11.0% ABS 22.75 JAN 22.50 ABS MX 0.45 380 22.05 14 4.4% 10.5% XMSR 26.80 JAN 25.00 QSY ME 0.45 8017 24.55 14 4.0% 10.4% MRO 33.25 JAN 32.50 MRO MZ 0.60 1201 31.90 14 4.1% 9.9% METHA 12.99 JAN 12.50 QME MV 0.20 19 12.30 14 3.5% 8.9% UTHR 23.48 JAN 22.50 FUH MX 0.35 20 22.15 14 3.4% 8.7% MERX 24.85 JAN 22.50 KXQ MX 0.25 60 22.25 14 2.4% 6.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A New Year Begins! By Ray Cummins Stocks ended mixed on the first day of trading in 2003 after an early rally on bullish manufacturing data was curtailed by valuation concerns and national security issues. The Dow Jones industrial average fell 44 points to 10,409 on weakness in 3M (NYSE:MMM), IBM (NYSE:IBM), Wal-Mart (NYSE:WMT) and Boeing (NYSE:BA). The tech-heavy NASDAQ Composite added 3 points to end at 2,006, in spite of losses in the semiconductor sector. The Standard & Poor's 500 Index fell 3 points to 1,108 as declines in retail and banking shares offset gains in basic material and transportation stocks. In the broader market, the number of advancing stocks outnumbered decliners almost 2 to 1 on both the NYSE and the NASDAQ. Volume was much as expected, given the holiday season. On the Big Board, 1.14 billion shares changed hands while 1.65 billion shares traded on the technology exchange. Bonds retreated further with the yield on the 10-year treasury note closing at 4.37%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position or to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status CME 70.63 72.90 JAN 60 65 0.50 64.50 0.50 Open NCEN 39.62 38.42 JAN 30 32 0.45 32.93 0.45 Open SII 40.22 41.46 JAN 35 37 0.25 37.25 0.25 Open CYBX 32.70 32.04 JAN 25 30 0.50 29.50 0.50 Open INTU 52.16 52.28 JAN 45 47 0.25 47.25 0.25 Open TRN 31.36 30.86 JAN 25 30 0.75 29.25 0.75 Open AA 37.30 37.55 JAN 32 35 0.30 34.70 0.30 Open MTH 65.37 64.97 JAN 60 65 0.45 64.55 0.42 Open NFLX 51.07 54.83 JAN 40 43 0.25 42.25 0.25 Open SCHN 59.28 60.75 JAN 45 50 0.55 49.45 0.55 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CERN 39.22 38.51 JAN 50 45 0.55 45.55 $0.55 Open MDC 64.06 61.82 JAN 70 65 0.60 65.60 $0.60 Open CL 49.19 49.62 JAN 55 50 0.65 50.65 $0.65 Open KLAC 55.55 56.44 JAN 65 60 0.55 60.55 $0.55 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The bearish position in Research in Motion (NASDAQ:RIMM) has previously been closed for a loss. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status OSX 89.45 93.57 JAN 80 85 4.40 84.40 0.60 Open ACDO 31.77 32.67 JAN 25 30 4.40 29.40 0.60 Open DRIV 25.01 22.56 JAN 20 22 2.15 22.25 0.35 Closed IMCL 40.76 39.98 JAN 30 35 4.50 34.50 0.50 Open MCHP 32.90 33.62 JAN 25 30 4.40 29.40 0.60 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss The bullish position in Digital River (NASDAQ:DRIV) should have been closed by conservative traders when the issue fell below the break-even price ($22.25). PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status SYMC 32.42 34.74 JAN 37 35 2.15 35.35 0.35 Open? Symantec (NASDAQ:SYMC) remains on the "watch" list as the issue tests resistance near the sold (call) strike at $35. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status IDCC 19.00 21.05 JAN 25 15 0.20 0.25 Open? NE 36.09 35.61 JAN 37 35 0.10 0.50 Open? PTEN 31.34 32.95 JAN 32 30 (0.10) 1.45 Open? UTHR 23.20 23.48 MAY 30 17 (0.10) 0.10 Open Patterson-UTI Energy (NASDAQ:PTEN) has already reached the target gain and Noble (NYSE:NE) achieved a favorable "early-exit" profit in less than one week. United Therapeutics (NASDAQ:UTHR) moved into "profitable" territory for the first time during Monday's sharp rally. SYNTHETIC (BEARISH) ******************* No Open Positions CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max. Play Symbol Price Price Option Option Debit Value Status CEPH 46.34 49.00 FEB-50C JAN-50C 0.70 1.00 Open FISV 38.28 39.06 MAR-35P JAN-35P 0.70 0.60 Open Cephalon (NASDAQ:CEPH) is trading near maximum profit and any upside movement (to the sold strike at $50) should increase the overall credit in the position. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ATN 17.93 19.64 JAN 17 17 2.40 2.75 Open MYL 25.32 25.12 JAN 25 25 2.25 2.10 Closed ACL 59.19 59.82 JAN 60 60 3.00 2.80 Open Mylan Labs (NYSE:MYL) became an "early-exit" candidate last week when the issue retreated to the sold strike at $25. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance, and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** SINA - SINA Corporation $37.90 *** China-dot-com Rally! *** SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. SINA generates revenue through advertising, various fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $37.90 PLAY (slightly aggressive - bullish/credit spread): BUY PUT JAN-30.00 NOQ-MF OI=3365 ASK=$0.15 SELL PUT JAN-35.00 NOQ-MG OI=1674 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$34.40 ***** SOHU - Sohu.com $32.70 *** On The Rebound! *** Sohu.com (NASDAQ:SOHU) is an Internet portal in China. The firm's portal consists of sophisticated Chinese language Web navigational and search capabilities, 15 main content channels, Internet-based communications and community services, and a unique platform for e-commerce and short messaging services. Each of the company's interest-specific main channels contains multi-level sub-channels that cover a range of topics; news, business, entertainment, sports and careers. The firm also offers free Web-based e-mail. Sohu.com offers a universal registration system, and the company's portal attracts consumers and merchants alike. One of the key features is a proprietary Web navigational and search capabilities that reflects the cultural characteristics and thinking and viewing habits of the People's Republic of China Internet users. SOHU - Sohu.com $32.70 PLAY (slightly aggressive - bullish/credit spread): BUY PUT JAN-25.00 UZK-ME OI=1462 ASK=$0.10 SELL PUT JAN-30.00 UZK-MF OI=1431 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$29.35 ***** YHOO - Yahoo! $45.40 *** Internet Sector Leader! *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 200 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the firm also provides many business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. YHOO - Yahoo! $45.40 PLAY (less conservative - bullish/credit spread): BUY PUT JAN-40.00 YHQ-MH OI=16525 ASK=$0.25 SELL PUT JAN-42.50 YHQ-MV OI=12477 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$42.25 ***** CTX - Centex $104.40 *** Homebuilding Sector Slump! *** Centex Corporation (NYSE:CTX) is a multi-industry company with operates in six principal business segments. Conventional Homes operations involve the construction and sale of single-family homes, town homes and low-rise condominiums, and the purchase and development of land. Investment Real Estate operations involve the acquisition, development and sale of land, and the development of industrial, office, retail and mixed-use projects. Financial Services operations involve the financing of homes, home equity and sub-prime lending, and the marketing of insurance coverage. Construction Products involves cement production and distribution, and the production, distribution and sale of gypsum wallboard, concrete, aggregates and recycled paperboard. Contracting and Construction Services involves the construction of buildings. Centex HomeTeam Services is involved in pest and termite control, lawn and landscape care, electronic security, alarm monitoring and home-wiring services. CTX - Centex $104.40 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-115.00 CTX-AC OI=1737 ASK=$0.20 SELL CALL JAN-110.00 CTX-AB OI=1328 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$110.50 ***** IACI - InterActiveCorp $33.26 *** In A Trading Range? *** InterActiveCorp (NASDAQ:IACI), formerly known as USA Interactive, is a multi-brand interactive commerce firm transacting business worldwide via the Internet, television and the telephone. Their portfolio of companies collectively enables direct-to-consumer transactions across many areas, including home shopping, tickets, personals, travel, teleservices and local services. During 2002, InterActiveCorp completed two major transactions that together transformed the company. The firm acquired a majority interest in Expedia.com and it accomplished the contribution of its entertainment businesses to Vivendi Universal Entertainment, a joint venture controlled by Vivendi Universal, S.A. The firm's business is organized into three groups: Electronic Retailing; Information and Services, and Travel Services. IACI - InterActiveCorp $33.26 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-37.50 QTH-AU OI=5628 ASK=$0.10 SELL CALL JAN-35.00 QTH-AG OI=11413 BID=$0.35 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$35.25 ************* RYL - The Ryland Group $85.08 *** Triple-Top Formation? *** The Ryland Group (NYSE:RYL) is a homebuilder and mortgage-finance company. The company has built more than 190,000 homes during its 34-year history. Ryland homes are available in more than 260 new communities in 21 markets across the United States. In addition, the Ryland Mortgage company has provided mortgage financing and related services for more than 165,000 homebuyers. The company's operations span all the significant aspects of the home-buying process, from design, construction and sale to mortgage financing, title insurance, settlement, escrow and homeowners insurance. RYL - The Ryland Group $85.08 PLAY (less conservative - bearish/credit spread): BUY CALL JAN-95.00 RYL-AS OI=758 ASK=$0.20 SELL CALL JAN-90.00 RYL-AR OI=1104 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$90.45 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** ATRS - Altiris $36.84 *** New "All-Time" High! *** Altiris (NASDAQ:ATRS) offers a range of Web-enabled solutions that empower organizations to easily manage desktops, notebooks, handhelds, and Windows, Linux and UNIX servers throughout the IT lifecycle. Altiris provides fully integrated, complete systems management solutions for client and mobile, server, and asset management. The company automates, simplifies, and reduces the cost and complexity of IT lifecycle management with a rapid return on investment. ATRS - Altiris $36.84 PLAY (less conservative - bullish/debit spread): BUY CALL JAN-30.00 QJI-AF OI=29 ASK=$7.20 SELL CALL JAN-35.00 QJI-AG OI=54 BID=$2.70 INITIAL NET-DEBIT TARGET=$4.40-$4.45 POTENTIAL PROFIT(max)=12% B/E=$34.45 ***** AMZN - Amazon.com $51.90 *** Premium-Selling Only! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN - Amazon.com $51.90 PLAY (less conservative - bearish/debit spread): BUY PUT JAN-60.00 ZQN-ML OI=2486 ASK=$8.30 SELL PUT JAN-55.00 ZQN-MK OI=18284 BID=$3.80 INITIAL NET-DEBIT TARGET=$4.40-$4.45 POTENTIAL PROFIT(max)=12% B/E=$55.55 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** XMSR - XM Satellite Radio $26.80 *** Cheap Speculation! *** XM Satellite Radio (NASDAQ:XMSR) is America's #1 satellite radio service. With nearly 930,000 subscribers, XM is on pace for 1.2 million subscribers later this year. Broadcasting live daily from studios in Washington, DC, New York City and Nashville, Tennessee at the Country Music Hall of Fame, XM provides its loyal listeners with 101 digital channels of choice: 70 music channels, more than 35 of them commercial-free, from hip hop to opera, classical to country, bluegrass to blues; and 31 channels of premiere sports, talk, comedy, kid's and entertainment programming. Compact and stylish XM satellite radio receivers for the home, the car, the computer and even a "boom-box" for on the go are available from retailers nationwide. In addition, XM is available in more than 80 different 2004 car models. XMSR - XM Satellite Radio $26.80 PLAY (very speculative - bullish/calendar spread): BUY CALL FEB-30.00 QSY-BF OI=3377 ASK=$1.15 SELL CALL JAN-30.00 QSY-AF OI=24203 BID=$0.35 INITIAL NET DEBIT TARGET=$0.70-$0.75 INITIAL TARGET PROFIT=$0.30-$0.55 *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** MATK - Martek Biosciences $65.74 *** Probability Play *** Martek Biosciences (NASDAQ:MATK) develops and sells products made from microalgae. Microalgae are microplants. The firm is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. MATK - Martek Biosciences $65.74 PLAY (speculative - neutral/debit straddle): BUY CALL MAR-65.00 KQT-CM OI=957 ASK=$5.20 BUY PUT MAR-65.00 KQT-OM OI=6 ASK=$4.40 INITIAL NET-DEBIT TARGET=9.25-$9.50 INITIAL TARGET PROFIT=$3.45-$5.25 - or - PLAY (very speculative - neutral/debit strangle): BUY CALL MAR-70.00 KQT-CN OI=1604 ASK=$3.10 BUY PUT MAR-60.00 KQT-OL OI=219 ASK=$2.50 INITIAL NET-DEBIT TARGET=$5.30-$5.40 INITIAL TARGET PROFIT=$1.85-$2.95 ***** ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ************** MARKET POSTURE ************** Anyone's Game by - Nich Sheldon Today's closing bell saw 14 indexes in the red and 13 in the green. If this were any indication of where the markets are headed for 2004, then we would surmise that it's anyone's game. The INDU Dow Jones Industrial Average, SPX S&P 500 Index, OEX S&P 100 Index, and the NDX Nasdaq-100 Index all dipped on the first day of trading for 2004. However, none of these big dogs lost more than half of a percentage point. The TRAN Dow Jones Transportation Index gained 0.03 percent by market close. The DDX Disk Drive Index drove higher on Friday, gaining +2.58 percent. Today's close was just beneath the 50-DMA, which has acted as strong resistance for over a month and a half. A break of this mark and we could see a retest of 140. If the DDX fails to climb over the 50-DMA we could see a dip back to 120. The second largest gains were produced by the NWX Networking Index, which tacked on 2.32 percent. Also noteworthy is the fact that the NWZ set a new 52-high on today's bullish activity. The GSTI Hardware Index gained +1.54 percent and broke out of its recent 5-point consolidation pattern. The index remains in short- term over bought territory, and its stochastics suggest potential profit taking over the next few sessions. The only other index to gain more than 1 percent on the day was the INX CBOE Internet Index. The INX added +1.25 percent but continues to struggle with resistance near the 170 level. Leading the decliners was The DJUSHB DJ US Home Construction Index, which faltered -3.29 percent. The 50-DMA acted as support today, helping the Home Construction Index from falling even lower than its nearly 20-point decline. The RLX S&P Retail Index fell through its 10 & 50-DMA's today, as it dropped -2.08 percent. The RLX found support at the 20-DMA and today's decline helped bring the index back to neutral territory on the stochastics indicator. The BIX S&P Banks Index was the last index to fall more than one percent with a drop of -1.20 percent. The 4+ point drop knocked the index back down to it's 10-DMA and into neutral territory. Most of the BIX index technical oscillators are suggesting further consolidation. ********** 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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