The Option Investor Newsletter Wednesday 01-07-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Techs Lead Again Futures Wrap: Nasdaq Volatility Crash Index Trader Wrap: Rotation! Traders Corner: An Organized Approach to Trade Selection Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 01-07-2004 High Low Volume Advance/Decline DJIA 10529.03 - 9.63 10539.46 10466.29 2.23 bln 1502/1359 NASDAQ 2077.68 + 20.31 2078.09 2047.02 2.27 bln 1819/1282 S&P 100 559.31 + 1.56 559.31 554.35 Totals 3321/2641 S&P 500 1126.33 + 2.66 1126.33 1116.45 RUS 2000 574.62 + 4.73 574.62 567.84 DJ TRANS 3034.06 - 3.20 3038.90 2999.97 VIX 15.50 - 1.23 16.75 15.50 VXO 14.85 - 0.49 16.14 14.75 VXN 21.91 - 0.85 23.01 21.81 Total Volume 4,903M Total UpVol 2,859M Total DnVol 1,958M 52wk Highs 812 52wk Lows 13 TRIN 0.86 PUT/CALL 0.69 ******************************************************************* Techs Lead Again by James Brown The Santa Claus rally has morphed effortlessly into a strong "January effect" and the trend from mid-December remains unbroken. Charging to the forefront was the NASDAQ composite, which closed at 29-month highs (best since August 2001) on the backs of strong gains for the networking and disk drive sectors. Lending strength to the Dow and the NASDAQ 100 was component Intel, which jumped 3.3% on an upgrade. Bonds rallied as well after comments from US Treasury Secretary John Snow rallied the dollar, if only for the day. Market internals were mostly bullish. The NYSE saw 15 advancers for every 13 decliners. On the NASDAQ there were 18 winners for every 13 losers. Up volume outpaced down volume and overall volume remained relatively strong with more than 2 billion shares trading on each exchange. Disk drives and networking stocks saw the heaviest buying today but airline stocks also turned in a good performance. Out performers also included defense issues, biotech stocks and broker-dealers. I did note that European bourses were mostly negative as was the NIKKEI but the Hang Seng posted another triple-digit gain. Profit taking also slowed crude oil, which slipped 8 cents to $33.62 a barrel and February gold futures, which dropped 90 cents to $422.30 an ounce. Chart of the DJIA: Chart of the NASDAQ: Intel was one of the market leaders today and shares added $1.09 or 3.3 percent to close at $33.99. The move was powered by positive comments from an analyst at Sanford Bernstein. The firm upgraded the stock from "market perform" to "out perform" and raised their 2004 earnings estimates from $1.20 to $1.27 and its price target to $42. They believe that seasonal price swings in chips will lead to a better than expected first half in 2004. Combine these comments with growing expectations for semiconductor sales to soar 17% to 20% in 2004 and it's easy to see why investors are moving money into the group. On a side note, Intel announced this morning that it would be investing $200 million into a fund designed to "accelerate" digital home innovation. Another tech stock leader today and responsible for the strong gains in the NWX networking index is Nortel Networks (NT). Shares of NT soared 19 percent on volume of 138 million shares (average volume is just 17 million). Driving the rally was an announcement that Verizon Communications (VZ) had chosen NT to equip them for VoIP (Voice over IP), the next big thing in telecom this year. Dollar amounts were not disclosed but the huge move today is clear evidence that the markets are excited about VoIP and happy to see businesses spending money again. The news prompted Merrill Lynch, Smith Barney and UBS to upgrade shares of NT. The markets were also encouraged by positive comments from personal products producer Procter & Gamble (PG) who announced that Q2 earnings (quarter ending Dec. 31st) would be above current analyst estimates by high as 4 cents a share. The surge in profits is due to the early flu season and higher sales of cold remedies in their Vicks and NyQuil lines. Current consensus is for net profit of $1.26 a share and PG will announce their results on January 28th. Disappointing investors today was software company JDA Software (JDAS) who warned that last quarter's earnings would miss. Estimates had been for $0.10/share and now the company expects to break-even or maybe hit $0.01/share due an inability to close some deals before the quarter ended. The stock fell 16.5% to close just above its simple 200-dma. Earnings are expected around January 20th. Meanwhile Circuit City, the No 2 consumer electronics retailer, announced more bad news with total December sales falling 1 percent and same-store sales falling 2 percent. The company continues to fall behind larger rival Best Buy despite a three- year restructuring program to make them more competitive. Traders following the story can look for BBY to report on their own December sales tomorrow. Elsewhere in the business world today the financial media was abuzz with conjecture that Andrew Fastow, the former CFO for Enron Corp, and his wife Lea would cop a guilty plea. Prosecutors are hot after Jeff Skilling and Ken Lay and the rumor mill is suggesting that the Fastow's would plea bargain for lighter sentences in exchange for their testimony. Plus, word was circulating on Wall Street that NY State Attorney General Elliot Spitzer would sue former NYSE head Dick Grasso for part of his outlandish $140 million pay package. Tomorrow investors will get to see just how strong the 2003 holiday season was when retailers turn in their December same- store sales figures in the morning. Economists will also be looking for the weekly jobless claim numbers. Last week's figures were lower than expected so current estimates are for a small rise to 345,000. Thursday night will be the official launch of earnings season with Dow component Alcoa (AA) who is estimated to earn 34 cents, up from 16 cents last year. Meanwhile the real event this week has yet to occur with the December jobs report due out on Friday. Economists are looking for a gain of 148,000 new jobs, up from 57,000 in November. Unemployment is expected to hold steady at 5.9 percent. Barring any huge surprises in the Friday jobs report don't be surprised to see the current trends remain intact. Investors are holding on to their positions until earnings season hits full swing next week. That's when we can worry about any "sell the news" reactions. ************ FUTURES WRAP ************ Nasdaq Volatility Crash Jonathan Levinson The US Dollar Index rallied off the lows today, with comments John Snow and speculation about ECB intervention. Treasuries added to yesterday's gains, gold and silver fell, and equities traded choppily as the short and 30 minute cycles battled it out, the Nasdaq and NDX volatility indices setting new record lows as the NQ and ES broke to new year highs in the last hour of trading. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. 10 minute chart of the US Dollar Index The US Dollar Index stair-stepped its way higher, breaking back above the 86 level and holding it in a long-overdue bounce. The strength and suddenness of sellside campaigns in the USD has been frightening and constant, but given how oversold the dollar had become, there's ample evidence to justify the move. Euro futures were lower by as much as 10 bps, and the ECB is scheduled to make a rate announcement tomorrow. Gold and silver pulled back to recent support, while treasuries advanced, despite a 5-year note auction and only a small net addition of 2.5B from the Fed via its open market operations. The CRB was fractionally lower, holding the 26 level, with strength from cocoa, sugar and live cattle futures. Daily chart of February gold February gold held 420 support today, trading modestly lower for most of the session and finishing -2.40 at 421, with a session low of 420.40. Jane Fox noted in the Futures Monitor that the Chicago Board of Trade (CBOT) today announced that a new daily volume record set yesterday for mini-sized Gold futures, 2,648 contracts traded, breaking the previous record of 2,344 contracts set on November 25, 2003. Given that that high volume coincided with a bearish reversal day at a multiyear high, bulls need to be careful of a downtrend asserting itself here, as large volume reversals create the strongest support/resistance confluence levels. On the other hand, trading at current levels could be a consolidation just below the highs, just as November's volume spike saw higher highs to follow. In the meantime, the daily cycle oscillators remain deep within overbought territory and appear to be just commencing a rollover. 420 is trendline resistance, with confluence at 410. The XAU dropped 2.12%, the HUI -3.28%. Daily chart of the ten year note yield Treasuries had a good day today, testing but not breaking the lower support yield trendline on a drop of 3.1 bps to bring the TNX to a close at 4.246%. The daily cycle oscillators continues to show signs of tiring along its upphase here, and a break below the trendline should do it. There was a very well-received auction of 5-year treasury notes, generating a bid-to-cover ratio of 2.51, with a high yield of 3.26%, median yield of 3.24% and low of 3.2%. Dollar strength today lined up with weakness in metals, relative weakness in the YM, strength in the NQ and ES, and strength in US treasuries. Daily NQ candles The NQ added 12.50 or .83% to close at 1517 today, with NDX volatility closing at a new record closing low of 19.85, down 4.29% today, and the COMPX volatility index, VXN , doing likewise at 21.92, -3.69%. The NQ closed half a point below its session high, right on upper Bollinger resistance and upper rising channel resistance on the daily chart. The daily cycle upphase crept higher, and without the last hour's ramp higher, the picture might look different. The NQ was the equity leader all day, with smaller-cap higher-short-interest stocks leading the pack higher. 30 minute 20 day chart of the NQ The extremely low-volatility environment has the 30 minute cycle oscillators wreaking havoc as they switch directions after miniscule moves. It seems like a long time since either the Macd or the 300 minute stochastics have traversed their entire range before reversing. The rising support line was tested this morning on the dip that followed the cash open, but that support held and gave us a higher low for the day. On a cyclical basis, the outlook has not changed, with the daily and 30 minute cycle oscillators in gear to the upside, still waiting for what I expect to be a terminal blowoff move to complete the daily cycle upphase. Whether this comes from current or higher levels can only be guessed, but until it does, I'm inclined to believe that we will not have seen the top. Just as we warned of the perils of dip buying during the 2002 decline, top-picking remains tricky, countertrend trading in the current uptrend. Until market and external risk has been successfully eradicated, low volatility markets will imply future corrections, but in the meantime, we need to respect the uptrend. Buying support or shorting resistance remains the strategy, and I reiterate the need for tight stops on either side of the trade. Short trades are at risk of getting caught by buy-programs and bear-panics, while long trades are at risk of the correction implied by the toppy oscillators, bullish percents and bottomy volatility indices. Support is at 1507, 1497 and 1482. Daily ES candles The ES added 3.50 or .31% to close at 1125.50, breaking above the rising channel resistance line and closing with a bullish hammer as Bollinger resistance rose to 1132. The uptrend strengthened again today, with a retest of yesterday's lows holding at 1114.75. While I do not expect the rally to persist for long on a dollar reversal in light of last year's trend of falling dollar/rising equities, such occurred today. It's beginning to look like no matter what, equities go higher, period. With the VXO closing at 14.85 and the daily cycle oscillators on the verge of trending useless in overbought territory, I continue to smell a selloff behind every offer. But the current rising channel is steep and solid, and traders need to remember all the old maxims- the trend is your friend, and until this channel is broken with a print below 1100, dips will continue to look attractive... with tight stops. Short and hold using leverage in an uptrend is potentially lethal, so if you must, look to do so only with tight stops on a scalp basis. 20 day 30 minute chart of the ES The ES gave up its 30 minute cycle downphase after the briefest of pullbacks, always within the rising channel, closing right on Bollinger resistance. Support is now 1122, 1114, 1112, 1105 and 1096. I'm tempted to follow Linda's linguistic lead, and refer to resistance as "pause" levels. Jeff has discussed 1132, and that looks very reasonable from here. Again, I would expect a blowoff doji-type event to ring the bell at the top, but it doesn't have to be. 150-tick ES The short cycle upphase either completed at the close or will do so at the open tomorrow. With the 30 minute cycle nearing the top of its range and the short cycles maxxing out, I'd expect upside to be very limited from here, and would ordinarily call for a gap and crap open. But, if you've been following the market closely this week, you'll understand my hesitation to prognosticate about pullbacks. It *should* come at anytime, and soon. Note the R2 level generated by my charting app at 1127.25, another potential target. Daily YM candles 20 day 30 minute chart of the YM YM was the laggard of the group today, adding 3 or .03% to close at 10517. No other comments, except that the outperformance of the more heavily shorted weaklings, former writeoffs such as NT, JDSU, XING, etc., is a sign of speculative mania associated more closely with tops than with bottoms. To exemplify my point, I seriously doubt that the world sudden awoke to find renewed demand for networking capacity because of booming productivity in knowledge-based industries, unless it's to service all the call centers and IT jobs relocating to India. That said, this is just anecdotal observation on my part. I remain 100% suspect of this rally and smell a huge correction coming our way, but there is nothing more obvious than the price trend. It has been going up, and it is far more profitable, far safer, and far wiser to follow it and miss the first drop and catch all the rest of them than to try to short all the way up. If you need to short, do it with tight stops and be prepared to cover if you're wrong. See you tomorrow in the Futures Monitor. ******************** INDEX TRADER SUMMARY ******************** Rotation! I'll never think I know "everything" that is taking place in the markets, but as today's action unfolded as we thought it might as outlined in last night's Index Trader Wrap, where the path of least resistance did find the NASDAQ-100 Tracking Stock (AMEX:QQQ) $37.68 +0.91% leading a recovery from morning weakness and trading new highs, it is somewhat apparent that the "once leading" Dow Industrials (INDU) 10,529 -0.09% lags a bit as it battles the upper-end of our regression channel. While this market trades BULLISH, its also trading just like an inchworm moves! That right! The good old "inchworm analogy!" For those that haven't been with OptionInvestor.com all that long, a good article I think traders and investors might want to read is found in the Bailey's Basics section of the site, titled "The Market is my Inchworm." http://members.OptionInvestor.com/archive/intraday/2002/052302_3.asp Clear your head of UP versus DOWN right now, and close your eyes and envision how an inchworm moves. How does it move? An inchworm is about an inch long. It can only move in one direction one inch at a time. To get from point A to point B, it moves by fully extending itself, then as if some type of suction cup is attached to its chin, it coils its body, by allowing its tail to move toward its head. If the inchworm is going to move from point B to point C, it then has to anchor its tail, release its head, expand, until fully extended again. Where am I going with this? You observe, like I did today, that the NASDAQ-100 (NDX.X) +0.86% did extend itself further today, while the SPX +0.23% and OEX +0.27% edged up fractionally, while the INDU -0.09% traded fractionally lower. All of these major indices make up what we call a "market." There's duplication of stocks in all of them, but as traders and even as investors, I'm seeing significant signs of rotation, all which can be very healthy for a longer-term bull market, where the bull market can last longer, and be more POWERFUL than we as humans can ever comprehend! I'm not a biologist, I took a biology course in college, and I'm not sure what the internals of an inchworm is comprised of, but I envision it as being some sort of plasma material. I would think this plasma material moves no different that blood might in the human body. A blood cell at the top of my head right now, might be pumped down to my feet in the next couple of hours. Rotation! Maybe I should say "circulation!" I want to FOCUS ON THE NEGATIVE right now. The Dow Industrials (INDU). Why all of a sudden, does the INDU stall out for the past 3-days? I ask this of myself, and not just of you. How does the Dow Industrials (INDU) move? You and I know it is a PRICE weighted index, which is comprised of 30 stocks. This means the HIGHER PRICED components provide more influence in how the INDU moves. If each Dow component is a plasma/blood cell, then some are bigger than other right? Tonight I'm gong to go back to this past weekend's "Ask the Analyst" column, as I think I can PROVE that rotation can be healthy, and that it does take place. The Dow Industrials are easier to understand, as there are only 30 stocks that comprise it. Check this out. I established a portfolio of 2003's worst performing Dow components, simply to begin monitoring what a trader had asked about in regards to a strategy discussed, whereby a bullish investor bought the 5 worst performing Dow stocks of last year, as a perceived value play, that these 5 stocks might outperform the Dow Industrials itself in 2004, as they gravitated back toward the mean. This is somewhat similar to "rotation" or "circulation" of capital isn't it? How can I make an observation of circulation or rotation within the Dow? Since I know it is a PRICE weighted index, I thought I'd add another set of data, and see how the HIGHEST PRICED components, which are more heavily weighted, are performing. I also make the observation of how the Dow Industrials Index (INUD) itself, or as a whole (the inchworm) has performed since its December 31, 2003 close. This is what YOU and I may be contemplating on trading right now (buy or sell) / (demand or supply). Dow Industrials Component Breakdown - From 12/31/03 close The 5 Dow components at the top of the above table were last year's worst performing Dow stocks (% loss), where I placed a hypothetical $1,000 (no rounded shares) in each stock. This enables us to measure this group of stocks, where my observation is that these 5 stocks are currently up 2.99% since their December 31, 2003 close. I've labeled these stocks with the term "tail" as these were the weakest stocks in 2003. The next set of 5 stocks, were the 5 HIGHEST PRICED components at the end of 2003. In essence, these 5 stocks are weighted more heavily when it comes to how the Dow Industrials (INDU) moves, or fluctuates in price. These 5 stocks currently show a -0.44% decline for 2004, where my observation is that while the year is young, there has been some rotation away from these HIGHER priced stocks in the first four sessions of 2004. Note, these stocks are not labeled with the term "head" as these were not the leading percentage gainers of 2004, but the observation of these HIGHER priced stocks may be an important observation in understanding why the Dow is moving as it is. An finally, the benchmark, at the very bottom of the table is the Dow Industrials Index (INDU) itself, where for benchmarking purposes only, 1 "share" is entered as if purchased on the closing tick for December 31, 2003. Conclusion: Rotation is taking place, which appears to be bullish, based on the observation that the Dow Industrials (INDU) is up 0.72% year-to-day. Interpretation: The market, or market participants may indeed be putting bullish capital to work, where VALUE is perceived in the Dow Industrials, in the form of buying last year's worst performing stocks. It is uncertain if the buying is being created by bearish short covering, or overly bullish enthusiasm. Note: There is not a 4-lettered stock in the above table, which would indicate a NASDAQ listing. Those stocks noted above are listed on the New York Stock Exchange. Question: For those that have been subscribers the past two months, up until December 29, 2003, when the NASDAQ Composite (COMPX) 2,077.68 +0.98%, what broad market index continue to trade new 52-week highs, after the NASDAQ Composite first traded the 2,000 level on December 3, 2003? You would be correct if answering with .... the NYSE Composite (COMPX) 6,525.30 -0.24%. Do you see where we're going? The very broad NYSE was "the head" for the bulk of December, and now it looks as if BULLISH rotation takes place to the NASDAQ Composite (COMPX) 2,077.68 +0.98%. It is uncertain, or undeterminable if the rotation is from new bullish buying, or bearish short covering. Now... I profiled a BEARISH trade in the QQQ with a February $36 put, prior to the QQQ breaking above $36.00 and to new 52-week highs. I know from short interest reading on December 15, 2003 that short interest in the QQQ was at annual highs, which has me somewhat suspicious that there are bears doing some buying. I was WRONG to profile a QQQ February $36 put (as of today's close), but I am currently satisfied with recent bullish comments and profiling of QQQ swing trades, as I (Jeff Bailey) made an attempt to get back on the right side of the MARKET's trade. How can an overall bullish market continue to build? As it relates to how an inchworm moves (up the tree, or down the tree) it appears that December's "tail" or the NASDAQ is moving toward December's "head" and should the head be able to anchor itself, another expansionary move could occur, in the direction of trend. Market Snapshot / Internals - 01/07/04 Close Volume levels remained brisk as the first full week of post- holiday trade reaches a mid-point, where intra-day A/D breadth comparisons between the NYSE and NASDAQ continue to suggest bullish rotation toward NASDAQ stocks. NYSE and NASDAQ NH/NL readings - 12/01/03-01/07/04 Observations noted in our Dow Industrials component analysis may be present in the daily NH/NL breadth readings at both the NYSE: and NASDAQ. In the 5th column from the left, I've placed a pink box around some higher number of new lows in the NASDAQ, where we see this number diminishing. New highs at the NASDAQ have been building, and suggests bullish leadership returning. This bullish leadership would be measured from the NSDQ NH/NL 10-day average ratio at the far right column, when the 10-day average showed a 3-box reversal back up from a 90% reading to 96%. The NYSE NH/NL 10-day Avg. ratio (8th column from left) has been in a column of X as depicted by the color green. 5-day average ratios are shown to give a similar observation of a 5-day to 10-day moving average crossover. The 10-day average ratio is very similar to how a point and figure (supply/demand) chartist charts the bullish % indicators. The chart's full range is from 0% to 100%. Higher ratio readings give the observation of bullish leadership. I've marked the daily NH columns with "head" and NL columns with "tail" as if to visualize an inchworm, which based on observation, usually moves with head pointed toward direction of travel. Current observation is that the inchworm is moving higher, or in investment terms ... bullish. Traders are correct in their thought that markets will rise, and markets will fall. Leadership can turn from bullish to bearish. The answer to the question of how long the current leadership can persist is one that has never been answered. Pivot Analysis Matrix - I want to quickly follow up on some of last night's comments regarding the pivot matrix. The S&P Banks Index (BIX.X) 339.02 -0.3% session low of 337.61 did find intra-day support at its MONTHLY Pivot (337.88) and WEEKLY S1 (337.11) correlations, where coincidentally, the SPX/OEX found their session lows. I did not highlight in pink the SPX/SPY lows, but both were very close to the 1,118 and 112 levels observed last night. I've highlighted today's low in the QQQ of $37.07. Late last night, I continued to do some investigating in the QQQ, trying to disprove my bullish thoughts. It was purely by chance that I saw the NASDAQ 100 Volatility Index (VXN.X) 21.91 -3.73% had dropped sharply in yesterday's trade, and remembered reading a comment that bulls were buying calls in exuberant fashion. However, my checks last night showed that the January $37 puts were the most actively traded option in Tuesday's trade, which had me writing in last night's Market Monitor, that this might have been a bullish "tell" for today's trade, not unlike analysis in our 12/17/03 Index Trader Wrap "Watch out for this tomorrow" where we had picked up on similar option activity just prior to an option expiration. http://members.OptionInvestor.com/Itrader/marketwrap/iw_121703_1.ASP Our analysis at that time was that for the VXN.X to fall, with put option volume being heavy, it may not have been overly bullish traders in calls, but perhaps covered put sellers that were short the underlying QQQ, about to call its quits as the trade moved against them. Again... by selling puts, a trader is OBLIGATING themselves to buy the underlying back at $37.00. It has been my market training that it is institutions that tend to SELL options, while the "retail trader" is often found buying puts and calls as risk in the option is certain to capital exposed. I make the observation that today's lows in the QQQ were $37.07, where when tied to the more active selling in Jan $37.00 may hint of a $37.00 floor in the QQQ. By NO MEANS is a bullish trader now to assume the work "floor" means buy with reckless abandon and become complacent. However, yesterday's option activity, combined with decline in the VXN.X, and today's price action is very similar to what was noted the evening of 12/17/03, but more importantly.... 12/18/03! NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals One path of near-term resistance in the MONTHLY R1 was taken out to the upside with some conviction in today's trade. In the Pivot Matrix I did "dash green" the MONTHLY R1 and DAILY S1 as tentative support and these two levels can be tied in with the MONTHLY 19.1% retracement of $37.29 and MONTHLY R1 of $37.36. On a 5-minute bar chart, I noticed that when the QQQ pulled back from between 02:20 PM EST and 02:25 PM EST, the QQQ kissed $37.36 then traded higher into the close. This action at $37.36 may make sense as it relates to how an institutional computer "thinks" and manages inventory. At 52-week highs, it is my thought that bullish inventory (supply) may be low, and when that level is taken out, then inventory must be replenished (demand). Eventually, at some point in the future, supply will outstrip demand, but it wasn't today. S&P 500 Index Chart - Daily Intervals I'm running way short on time and past deadline, but a bull would not want to see the SPX much below the 1,105 level in my opinion. I showed a futures chart if the e-mini's, and they too are approaching a "zone of resistance" at the SPX 1,130 level, where trader would be alert to some selling. No sign of weakness that I can find in this chart, but some rotation taking place I'm sure. To get a MONTHLY R2, I'm thinking the S&P Banks Index (BIX.X) needs to get back in gear. Again... everything has made a VERY nice run, but if looking for further strength near-term above MONTHLY R1, then the BIX.X is a sector I'd be monitoring. Dow Industrials (INDU) Chart - Daily Intervals "Out of nowhere" the INDU found support below the psychological 10,500. Still bumping against a zone of resistance at the upper- end of our bullish regression channel. This doesn't mean the INDU can't break higher, but may hint that some bullish profits are being taken, or rotation to lower priced components that aren't having as much bullish impact as HIGHER priced components in the price-weighted INDU. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** An Organized Approach to Trade Selection by Mark Phillips mphillips@OptionInvestor.com Last week, I introduced what I think is the best online trade- screening tool. A more accurate description would be to call it the best STARTING POINT in the trade selection process. There is a great scanning tool on the StockCharts site (www.stockcharts.com), with numerous pre-defined scans. The scans are broken down into three main categories; Technical Indicators, Candlestick Patterns and P&F Alerts. The top-level page with all the pre-defined scans can be accessed from this link (http://stockcharts.com/def/servlet/SC.scan), giving us plenty of options to choose from. Some traders are big moving average fans, choosing to zero in on 50-dma/200-dma crossovers. Others may want to use crossovers on the MACD or trade a specific candle pattern. The scans provided encompass all of those options and quite a few others. It is the P&F scans that I find the most useful though, as it gives me a good view of the supply/demand relationship, where price action remains the sole focus. Scroll towards the bottom of the Predefined Scans page to find all the P&F Scans and then pick the one you want. For our discussion here today, I'm going to use the Triple Top Alerts scan. We've still got a very bullish market, so let's stick with the overall market trend as long as it lasts. Note that the results of the scan are broken down by exchange, so we can pick just NYSE stocks or just NASDAQ stocks if we prefer, or we can just click on the number under the "Total" heading to get them all. Since I can see that there are over 300 Triple Top Alerts on today's scan, I'm going to select just the NASDAQ stocks, of which there are still 119. Clicking on the "119" brings up another page that lists all of the NASDAQ stocks that are currently on a Triple Top Breakout. Clearly going through that many charts would take way too much time, but we can quickly sort the list to remove the wheat from the chaff. The list of stocks can be sorted by any of the fields listed, but my preference is to eliminate the less desirable candidates by sorting on the closing price. All we have to do is click on the "Close" link/header on top of the column that shows the closing price and the list of stocks will be sorted by closing price, with the highest price stocks at the top. Click "Close" again and the list will be re-sorted, with the lowest price stocks at the top. See how easy that is? Sometimes, I'll sort by volume, as that will push all the low-volume stocks to the bottom of the page. My basic criteria for considering a stock "tradable" is that it needs to be above $20 and have volume over 300K. Over the years, I've built up a list of stocks that I am familiar with and I confine my trading activities to those stocks. I've found that I am better able to evaluate a trade when I have an understanding of the way that particular stock tends to trade. Of course, even that list is rather cumbersome if I am going to look through the charts of each stock on a daily basis. That's where the screening tool comes in. After sorting the list by closing price, I'll scan down the list looking for those that are on my master list. I keep a notepad next to the computer and just jot down the symbols under the heading "Triple Top". Looking at today's list, here are a few that are on my master list, as well as the Triple Top list: CEPH, BBOX, YHOO, UTSI, CSCO and NVDA. As you can see, this quick 5-minute scan narrowed the field of more than 100 stocks down to only a half-dozen that I then know I want to seriously investigate. Conveniently, the list cuts a broad swath through the technology sectors, covering Biotechs (CEPH), Internets (YHOO), Networking (BBOX, UTSI, CSCO) and Semiconductors (NVDA). That sets the stage for the sector evaluation to follow. But first, I need to take the time to review the daily/weekly/intraday charts of each of the stocks. This isn’t an in-depth study, but a cursory view that gives me a feel for whether the stocks are overbought or just beginning their move, whether volume has been strong or weak and the proximity of important moving averages and support/resistance. All I have to do is jot down a couple notes on each one and then I'm ready to move on to the next step, that of evaluating the sector. Not surprisingly, this exercise starts with a view of the PnF chart of each of the sectors represented in my list of stocks. That means for today's list that I need to take a look at the Internet index ($INX), the Semiconductor index ($SOX), the Networking index ($NWX) and the Biotechnology index ($BTK). A quick perusal of each of those PnF charts shows me that the $INX, $NWX and $SOX indices are all in the midst of solid upward moves, while the $BTK has had a slight pullback, but overall is still looking strong. So the net result is that my 10-minute scan yielded 6 stocks that I'm familiar with, all of which look strong on the PnF charts, with each of their respective sectors also looking strong. That's a great leg up for that day's research, don't you think? The next step is to actually bring up the real-time charting program (eSignal, Qcharts, TC2000, Tradestation, etc.) and look at the charts in more detail. This is where we would look at the relative strength of the individual stocks relative to their indices, evaluate support and resistance on both the stock and the index, and try to determine entry points, stop levels and evaluate risk and reward. But that's an exercise that we'll have to leave for a future visit. I've run out of time to get this in for publication tonight, so I must cut this short. Hopefully this gives you some insight into how a very basic screening tool can be applied to ferret out a handful of solid trade candidates, so that our time is spent doing concrete evaluation and research, not in going bleary-eyed from looking at chart after chart after chart, ad nauseum, trying to separate the few winners from the sea of mediocre choices. The computer should be a tool to help streamline our work process, not make it more tedious. Stockcharts.com has done a great job of helping us put the computer to use in that manner. So dive in and get some experience playing with the different scans available on the site and we'll delve into the final stage of the selection process next week. Have a great week! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 01-07-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: GD Dropped Calls: None Dropped Puts: None Play of the Day: Call - GD Spreads, Combinations & Premium-Selling Plays: A Great Start! Watch List: New Highs and Old Supports Market Posture: Watching the Paint Dry ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** GD - CALL Raise To 85.90 from 84.99 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** General Dynamics - GD - close: 91.00 chg: +1.90 stop: 85.90 *new* -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) - Most Recent Update (Tuesday, Dec. 23, 2003) - The quiet continues for shares of GD as well. There is nothing new to report. No headlines, no big price moves. The DFI defense index has pulled back to the bottom of its narrow, rising channel (and 10-dma). We could witness a more significant pull back soon. On Sunday we mentioned that we're expecting GD to pull back to the 86-87 levels. Well, we're still waiting. The daily MACD indicators is in the process of producing a sell signal while its RSI and stochastics already point lower. Be patient if you're still looking for an entry point. - Play of the Day Comments - The strength in both the DFI and DFX defense sector indices were bolstered by a strong day for GD, which climbed more than 2 percent. The early morning rally came on strong volume and late afternoon action suggested more buying is expected tomorrow. Now that GD has cleared resistance in the 90-91 area it has a clean run toward the 95-96 region. - Suggested Options - Traders can look at the February and May strikes. We're suggesting the February 85s or 90s as the best play. BUY CALL FEB 85*GD-BQ OI=1009 at $6.80 SL=4.00 BUY CALL FEB 90 GD-BR OI= 869 at $3.20 SL=1.65 BUY CALL FEB 95 GD-BS OI= 186 at $1.10 SL=0.55 BUY CALL MAY 90 GD-ER OI=3678 at $5.10 SL=3.25 BUY CALL MAY 95 GD-ES OI= 180 at $2.85 SL=1.45 Annotated Chart: Picked on December 21 at $88.78 Change since picked: + 2.22 Earnings Date 01/21/04 (unconfirmed) Average Daily Volume: 1.0 million Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Great Start! By Ray Cummins The stock market is off to a great start in 2004 and traders are already looking at the early results as a precursor to the trend for the year. On Wednesday, equities closed mixed with the blue-chip average in the red while the hi-tech index climbed higher. Altria Group (NYSE:MO), ExxonMobil (NYSE:XOM), and 3M (NYSE:MMM) helped pull the Dow 9 points lower to 10,529. On the technology exchange, an upgrade of Intel (NASDAQ:INTC) boosted the NASDAQ, which rose 20 points to end at 2,077. The broad S&P 500 closed up 2 points at 1,126 despite sharp declines in oil and gold stocks. Winners had a slight edge over losers on the Big Board and the positive breadth was somewhat more pronounced on the technology exchange. Total volume on the NYSE was 1.7 billion and 2.2 billion on the NASDAQ. In the U.S. bond market, treasury prices were nearly unchanged. The 10-year note closed up 6/32, with its yield at 4.25%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 01/06/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ONXX JAN 22 22.00 29.87 0.50 5.66% 2.27% QCOM JAN 45 44.25 54.23 0.75 3.64% 1.69% RMBS JAN 20 19.50 33.90 0.50 6.56% 2.56% FARO JAN 17 17.05 30.83 0.45 9.13% 2.64% FLML JAN 20 19.70 29.20 0.30 5.33% 1.52% FRX JAN 55 54.25 61.71 0.75 3.73% 1.38% MGAM JAN 35 34.25 42.80 0.75 6.50% 2.19% MSTR JAN 45 43.85 55.26 1.15 7.00% 2.62% NCEN JAN 33 32.88 38.23 0.50 4.42% 1.52% NFLX JAN 40 39.40 59.61 0.60 5.50% 1.52% PLMD JAN 20 19.75 27.28 0.25 4.61% 1.27% AAPL JAN 20 19.65 22.09 0.35 8.32% 1.78% FARO JAN 22 22.10 30.83 0.40 9.05% 1.81% FCS JAN 22 22.25 25.42 0.25 5.76% 1.12% IMDC JAN 43 42.42 45.97 0.95 10.97% 2.24% OSTK JAN 17 17.15 18.99 0.35 10.56% 2.04% YHOO JAN 42 41.85 47.24 0.65 7.21% 1.55% Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CECO JAN 45 45.60 44.95 0.60 6.85% 1.32% CRDN JAN 45 45.40 39.22 0.40 5.27% 0.88% PPDI JAN 27 27.80 27.85 (0.05) 0.00% 1.08% CRDN JAN 40 40.30 39.22 0.30 6.73% 0.74% QLGC JAN 55 55.55 52.36 0.75 7.56% 1.35% The majority of positions in the bearish "premium-selling" portfolio are on the "early-exit" list. Qlogic (NASDAQ:QLGC) and Ceradyne (NASDAQ:CRDN), at the $45 strike, are the only plays that remain open. With any luck, maybe one position will survive the recent bullish activity?!? Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status NBIX 53.83 54.55 JAN 45 50 0.70 49.30 0.70 Open NE 37.01 35.83 JAN 32 35 0.30 34.70 0.30 Open? WGO 60.60 69.70 JAN 50 55 0.50 54.50 0.50 Open DNA 91.20 92.34 JAN 80 85 0.60 84.40 0.60 Open DIGE 38.47 39.24 JAN 30 35 0.70 34.30 0.70 Open MRO 31.06 34.09 JAN 27 30 0.35 29.65 0.35 Open GPRO 36.47 34.10 JAN 30 35 0.75 34.25 (0.15) Closed LRCX 32.30 33.68 JAN 25 30 0.45 29.55 0.45 Open Gen Probe (NASDAQ:GPRO) became an "early-exit" candidate Monday when the issue gapped below the sold (put) strike on a downgrade by Merrill Lynch. Noble (NYSE:NE) remains on the "watch" list and should be closed on any further downside movement. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status POWI 31.41 33.97 JAN 40 35 0.75 35.75 0.75 Open? MERQ 46.03 50.73 JAN 55 50 0.80 50.80 0.07 Open? MXIM 47.10 51.89 JAN 55 50 0.75 50.75 (1.14) Closed CERN 37.85 38.50 JAN 45 40 0.55 40.55 0.55 Open OSIP 32.25 32.62 JAN 40 35 0.55 35.55 0.55 Open On Tuesday, Maxim Integrated Products (NASDAQ:MXIM) became the latest victim of the NASDAQ rally. Bearish positions in Capital One Finance (NYSE:COF) and Cognizant Technologies (NASDAQ:CTSH) have previously been closed for small losses. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** ASKJ - Ask Jeeves $22.05 *** Rally Mode! *** Ask Jeeves (NASDAQ:ASKJ) is a provider of Internet-wide search, providing consumers with authoritative and fast ways to find relevant information to their everyday searches. Ask Jeeves deploys its search technologies on Ask Jeeves (Ask.com and Ask.co.uk), Teoma.com, and Ask Jeeves for Kids (AJKids.com). In addition, to its internet sites, Ask Jeeves syndicates its monetized search technology and advertising units to a network of affiliate partners. The company is based in Emeryville, California, with offices in New York, Boston, New Jersey, Los Angeles, London and Dublin. ASKJ - Ask Jeeves $22.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 20 AUK MD 1283 0.25 19.75 10.8% 1.3% * SELL PUT FEB 17.5 AUK NW 97 0.35 17.15 5.0% 2.0% SELL PUT FEB 20 AUK ND 241 1.00 19.00 8.7% 5.3% ************** CECO - Career Education $46.56 *** Trend Reversal! *** Career Education Corporation (NASDAQ:CECO)) is the world's largest on-campus provider of private, for-profit postsecondary education and has a rapidly growing presence in online education. CEC's Colleges, Schools and Universities Group operates 51 campuses in the U.S., Canada, France, the United Kingdom and the United Arab Emirates and offers master's degree, bachelor's degree, associate degree and diploma programs in the career-oriented disciplines of visual communication & design technologies, information technology, business studies, culinary arts and health education. The Online Education Group's AIU Online Division offers master's degree, bachelor's degree and associate degree programs in information technology, business administration, visual communication and education. CECO - Career Education $46.56 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 40 CUY MH 2798 0.25 39.75 6.2% 0.6% * SELL PUT JAN 42.5 CUY MV 507 0.40 42.10 8.1% 1.0% SELL PUT JAN 45 CUY MI 929 1.05 43.95 17.6% 2.4% ************** IMDC - Inamed $49.80 *** Premium-Selling Only! *** Inamed (NASDAQ:IMDC) is a global medical device company that develops, manufactures and markets a diverse line of products that enhance the quality of people's lives. The company has three principal product lines: breast aesthetics, consisting primarily of breast implants and tissue expanders sold largely for use in plastic and reconstructive surgery; facial aesthetics, consisting primarily of collagen and other dermal fillers sold largely to dermatologists and plastic surgeons, and obesity intervention, consisting of products for use in treating severe and morbid obesity. The company also offers collagen products for use by medical manufacturers. IMDC - Inamed $49.80 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 43.37 HCZ MW 2162 0.50 42.88 10.9% 1.2% * SELL PUT JAN 45 UZI MI 211 0.70 44.30 13.5% 1.6% ************** NFLX - Netflix $62.24 *** New All-Time High! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. NFLX - Netflix $62.24 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 55 QNQ MK 3134 0.35 54.65 5.9% 0.6% * SELL PUT JAN 60 QNQ ML 1851 1.45 58.55 18.3% 2.5% ************** NTES - NetEase.com $45.07 *** Recovery In Progress! *** NetEase.com (NASDAQ:NTES) is a China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. The NetEase Web sites, operated by a company affiliate, organize and provide access to 18 content channels through distribution arrangements with more than one hundred international and domestic content providers. In addition, the NetEase Internet sites offer a variety of products and services, including Instant Messaging (Popo), Dating, Love, Alumni and Personal Home Page. These products and services enable users to communicate about interests and areas of expertise. At the end of March 2003, the number of registered users of NetEase Web sites reached 114 million with the average number of daily page views over 370 million. NTES - NetEase.com $45.07 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 40 NQG MH 2585 0.30 39.70 6.9% 0.8% * SELL PUT JAN 45 NQG MI 1117 1.90 43.10 29.1% 4.4% ************** OVTI - OmniVision $60.55 *** Consolidation Complete? *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. OVTI - OmniVision $60.55 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 55 UCM MK 1323 0.40 54.60 6.4% 0.7% * SELL PUT JAN 60 UCM ML 1873 1.70 58.30 20.4% 2.9% ************** SEPR - Sepracor $26.14 *** A Big Day! *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. SEPR - Sepracor $26.14 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JAN 25 ERQ ME 2890 0.55 24.45 17.0% 2.2% SELL PUT FEB 20 ERQ ND 281 0.40 19.60 4.8% 2.0% * SELL PUT FEB 22.5 ERQ NX 316 0.90 21.60 7.9% 4.2% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** COCO - Corinthian Colleges $60.73 *** On The Rebound! *** Corinthian Colleges (NASDAQ:COCO) is one of the largest for-profit post-secondary education companies in the United States. The firm serves the large and growing segment of the population seeking to acquire new, career-oriented education to become more qualified and marketable in today's demanding workplace environment. The company had more than 43,200 students enrolled as of June 30, 2003. At year-end 2003, the company operated 69 colleges and two training centers in 21 states, including 18 in California and 12 in Florida. COCO - Corinthian Colleges $60.73 PLAY (conservative - bullish/credit spread): BUY PUT FEB-50.00 UCS-NJ OI=240 ASK=$0.40 SELL PUT FEB-55.00 UCS-NK OI=520 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$54.35 ************** KOSP - KOS Pharmaceuticals $45.30 *** Next Leg Up? *** KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty pharmaceutical company engaged in the development of proprietary prescription products for the treatment of chronic cardiovascular and respiratory diseases. The company manufactures its marketed products, Niaspan and Advicor, and markets such products directly through its own specialty sales force and through a sales force provided by a contract sales organization. Their cardiovascular products are based on controlled-release, once-a-day, oral dosage formulations. The company's respiratory products in development consist of aerosolized inhalation formulations to be used mainly with its proprietary inhalation devices. KOSP - KOS Pharmaceuticals $45.30 PLAY (conservative - bullish/credit spread): BUY PUT FEB-35.00 KQW-NG OI=346 ASK=$0.45 SELL PUT FEB-40.00 KQW-NH OI=1149 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$39.40 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** CFC - Countrywide Financial $73.00 *** Profit-Taking Underway! *** Countrywide Financial (NYSE:CFC), formerly Countrywide Credit Industries, is a holding company that originates, purchases, sells and services mortgage loans through its major subsidiary, Countrywide Home Loans. The company's mortgages are principally prime credit first-lien mortgage loans secured by single one- to four-family residences (prime credit first mortgages). The firm also offers home equity loans and sub-prime credit loans. CFC, through its other wholly owned subsidiaries, offers products and services that are largely complementary to its mortgage banking business, including lender-placed mortgage insurance, insurance brokerage, mortgage-backed securities brokerage and underwriting, brokerage of bulk servicing transactions, loan processing and servicing in foreign countries, and retail banking. The company conducts its business through four segments: Insurance Segment, Capital Markets Segment, Global Segment and Banking Segment. CFC - Countrywide Financial $73.00 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JAN 75 CFC AO 1570 0.80 75.80 8.7% 1.1% * SELL CALL FEB 80 CFC BP 723 1.20 81.20 3.5% 1.5% ************** HOV - Hovnanian Enterprises $80.30 *** Sector Slump! *** Hovnanian Enterprises (NYSE:HOV) constructs and sells single-family detached homes and attached condominium apartments and townhouses in more than 196 new home communities in New Jersey, Pennsylvania, New York, Virginia, Maryland, North Carolina, Texas and California. The firm offers a wide variety of homes that are designed to appeal to first-time buyers; first- and second-time, move-up buyers; luxury buyers; active adult buyers, and empty nesters. In addition, the company provides financial services, including mortgage banking and title services to the homebuilding operations' customers. The firm does not retain or service the mortgages that it originates, but rather sells the mortgages and servicing rights to investors. HOV - Hovnanian Enterprises $80.30 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JAN 85 HOV AQ 1774 0.50 85.50 5.4% 0.6% * SELL CALL FEB 90 HOV BR 905 1.50 91.50 4.2% 1.6% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** ANF - Abercrombie & Fitch $24.90 *** Bearish Retailer! *** Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries as specialty retailers, operates stores selling casual apparel, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, Abercrombie, and Hollister Co. brands. The company operates over 450 stores in the United States. A&F's stores and point-of-sale marketing are designed to convey the principal elements and personality of each brand. Store design, furniture, fixtures and music are planned and coordinated to create a shopping experience that is consistent with the A&F lifestyle. ANF - Abercrombie & Fitch $24.90 PLAY (conservative - bearish/credit spread): BUY CALL FEB-30.00 ANF-BF OI=669 ASK=$0.15 SELL CALL FEB-27.50 ANF-BY OI=6384 BID=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$27.75 ************** MANH - Manhattan Associates $27.00 *** In A Trading Range? *** Manhattan Associates (NASDAQ:MANH) is a global leader in providing supply chain execution solutions. The company enables operational excellence through our warehousing and distribution, transportation and trading partner management applications. The firm's integrated solutions leverage state-of-the-art technologies, innovative supply chain practices and their domain expertise to enhance performance, profitability and competitive advantage. Manhattan Associates has licensed more than 870 customers from more than 1,300 facilities worldwide, which include some of the world's leading manufacturers, distributors and retailers. MANH - Manhattan Associates $27.00 PLAY (conservative - bearish/credit spread): BUY CALL FEB-35.00 MQR-BG OI=0 ASK=$0.25 SELL CALL FEB-30.00 MQR-BF OI=79 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$30.50 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** New Highs and Old Supports Legg Mason - LM - close: 80.81 change: +0.41 WHAT TO WATCH: Investment services firm Legg Mason has a pretty decent stock price of its own. Shares have rallied strongly from support near $75 and now the stock has broken above its simple 50-dma and the $80 level in just the last two days. Volume has been pretty decent for the last several days as shares climbed higher. There is some potential resistance at 82.50 but odds are good that LM is headed for the $85 level, which was tough resistance last November. Earnings for LM are expected on January 21st. Chart= --- Vimpel Communication - VIP - close: 77.79 change: +0.46 WHAT TO WATCH: Late last year VIP turned in a nice breakout over resistance at $70 after CSFB upgraded the stock from "neutral" to "out perform" and raised their price target to $80. Shares are almost at $80 now. The stock looks a little extended from its mid-December low but traders have been buying the dip (see intraday chart). Another bounce from $75 might be an aggressive entry point for bulls. Chart= --- Zebra Technologies - ZBRA - close: 66.75 change: +1.10 WHAT TO WATCH: The Santa Claus rally is still in effect for shares of ZBRA. The stock bottomed in mid-December near $60 and hasn't stopped. The recent pull back was met with new buying pressure near the $65 level. Wednesday's session proved to be a new all-time closing high for the stock. Momentum traders may want to keep an eye on this one. Aggressive players could play the current trend towards $70 with a tight stop under $65. Chart= --- Gtech Holdings - GTK - close: 50.50 change: +0.55 WHAT TO WATCH: Known for its online lottery systems, GTK has proven to be a good bet for investors. The stock recently bounced off the bottom of its rising channel and today's move broke resistance at $50.00. This looks like an entry point to ride its next leg higher. Chart= --- Pharmaceutical Research - PRX - close: 64.35 change: -1.08 WHAT TO WATCH: Last September shares of PRX soared after announcing it would begin shipping a new generic version of paroxetine. Unfortunately, the stock appears to have put in a multi-month top under the $75 mark. Shares have been consolidating the last several days just above the top of the gap, which traditionally acts as support or resistance. Should PRX break the $64.00-63.50 level odds are good it will fill the gap and hit the $59.00 level. Coincidentally, its simple 200-dma is quickly approaching the $59 mark. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- GPT $36.01 +0.28 - GPT has charged right back towards resistance at 36.50. If it fails here the stock will have formed a wide double-top. ************** MARKET POSTURE ************** Watching the Paint Dry by - Nich Sheldon Okay, watching paint dry is about as exciting as watching grass grow. Better yet, it's about as exciting as watching the trading session today. Bulls outnumbered bears -in comparison of the various sector indices - by a margin of 17:10. The DDX Disk Drive Index tallied the highest gains of the day, adding +2.95 percent by market close. Today's bullish activity marks the fourth consecutive up day for the index. Second on the leader board, was the XAL Airline index, which added 2.44%. The move follows yesterday's big rally that appears to have been fueled by the industry's recently announced its December traffic numbers. The NWX Networking Index tackled a +2.03 percent gain for Wednesday, extending its winning streak to eight consecutive days. Traders should note that there is some bearish/bullish convergence on the stochastics indicator. We suspect that 280 should serve as the next round number psychological resistance level, as this was the case in March of 2002. A break above this level and we wouldn't be surprised to see a run to 300. Gold Bugs witnessed the biggest Bear sighting on the day as the XAU Gold and Silver Index closed -2.11 percent lower. This is the second day of losses for the gold sector. Today's -2.34 point drop was too much to keep the index over the simple 10-DMA and we suspect that the index may consolidate back toward its simple 50- dma. The OIX Oil Index ended an eight-day winning streak as the index finally underwent some overdue profit taking. The OIX dropped - 1.37 percent by the closing bell but remains inside its rising channel. The past three times the OIX hit the 325-330 range (2002-04) we saw profit taking back to 310. We are interested in seeing if the simple 10-DMA (approximately 320) can hold as support for the index. Bearish traders could target a retest of 310 if 320 cannot hold as support. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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