The Option Investor Newsletter Wednesday 01-14-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Let the Fireworks Begin Futures Wrap: Dollar and Equities Advance Index Trader Wrap: Dynamic! Traders Corner: The Final Selection Process Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 01-14-2004 High Low Volume Advance/Decline DJIA 10538.37 + 53.19 10548.51 10428.67 1.94 bln 1905/ 942 NASDAQ 2111.13 + 14.69 2111.73 2094.32 2.08 bln 1854/1206 S&P 100 559.77 + 4.02 559.90 555.75 Totals 3759/2148 S&P 500 1140.52 + 9.30 1140.75 1121.22 RUS 2000 586.12 + 4.96 586.12 581.16 DJ TRANS 3031.61 + 12.33 3044.47 3017.99 VIX 16.75 - 1.29 17.30 16.40 VXO 16.70 - 0.17 17.10 16.26 VXN 23.17 + 0.12 23.44 22.77 Total Volume 4,434M Total UpVol 2,860M Total DnVol 1,480M 52wk Highs 906 52wk Lows 14 TRIN 0.71 PUT/CALL 0.66 ******************************************************************* Let the Fireworks Begin by James Brown Today was a big day in the U.S. stock markets. Investors translated yesterday's weakness as a buying opportunity and stocks soared at the open. Boosting the indices was plenty of economic news with the trade deficit numbers, the PPI, and the Fed's Beige book report. There was a midday lull as traders began to take some money off the table but by the afternoon buyers were back and stocks closed near their highs for the session. After the bell is when the real fireworks began and the show should continue tomorrow. Overseas markets were mixed. Asian stocks were generally weak with the NIKKEI up 13 points to 10,863 and the Hang Seng down 75 to 13,320. European bourses did better with the FTSE up 21 to 4461 and the DAX up almost 59 to 4055. Strength across the Atlantic didn't hurt U.S. stocks and the Dow Jones Industrials managed an 111-point gain to close at 10538. The NASDAQ managed a 14-point jump amid weakness in the semiconductors ahead of Intel's post-market earnings. The S&P 500 added 9 points to close at 1130. Selling was strongest in the XAU gold & silver index, down more than 4% as gold lost $3.50 to close at $420.50 an ounce. Oil service stocks also fell behind with a 1.6% drop in the OSX index as crude oil prices dropped 23 cents to $33.78 a barrel. Meanwhile investors were busy elsewhere buying the dip from yesterday. Homebuilders and healthcare stocks saw the strongest gains with defense, airlines and broker-dealers outpacing the broader indices. Overall market internals were pretty positive. The NYSE saw advancers crush declining stocks 19 to 9 and the NASDAQ reported winners outpacing losers 3 to 2. Up volume was almost three times down volume on the NYSE. It was a much closer race on the NASDAQ with up volume hitting 1158 million shares versus 865 million in down volume. Chart of the DJIA: Chart of the NASAQ: One benefit to the dollar's decline has been a rise in U.S. exports. The month of November showed a 59 percent jump in civilian aircraft sales. These sales combined with a strong increase in consumer goods and food translated into a 2.9 percent jump in monthly exports to $90.6 billion. This marked the highest level of exports in three years and helped narrow the trade gap to just $38.0 billion in November, an 8.6 percent decrease, which completely caught economists by surprise. The U.S. trade gap has been a growing concern among economists and politicians alike. The first 11 months of 2003 have already hit a new record at $446.8 billion, surpassing 2002 levels. However, the unexpected improvement in November combined with Alan Greenspan's comments yesterday that it could be managed set investors in a good mood this morning. This morning's Producer Price Index (PPI) also underpinned today's stock market action. The Labor Department reported that December's PPI index rose 0.3 percent while the core PPI, excluding food and energy, dropped 0.1 percent. Economists had been expecting a rise in the PPI and the core PPI after November's big decline but were surprised to see the core rate of inflation drop again. Overall 2003 witnessed the fastest rise for inflation in several years but most experts feel the climb has been mild and Wall Street believes the FOMC has it under control. About midday the Federal Reserved released their Beige Book report, which showed optimistic trends across the nation's twelve districts and "modest improvements" in the labor markets. Retail sales were strong and factory utilization was improving but loan demand appeared flat. This coincides with recent earnings reports from some regional banks who warned that 2004 might be soft until loan demand improves. The Beige book also reported that travel and tourism was up and that housing numbers were strong. An hour after the Beige book report the afternoon rally began as investors started to repositions themselves in eager anticipation for this evening's earnings bonanza. The biggest announcement came from chip behemoth Intel Corp (INTC). Wall Street was estimating that Intel would turn in profits of 25 cents a share on revenues of $8.64 billion for the quarter. The headline number was 33 cents a share on revenues of $8.74 billion. By first accounts this was a blow out number and some of the financial media is reporting that this is Intel's best quarterly profit since Q3 of 2000. However, drilling down into the details reveals why the stock was trading lower after hours. The real earnings number may be closer to 27 cents. Intel had already told analysts that earnings would reflect a $200 million tax benefit but that benefit turned about to be about $620 million or about 9 cents a share. The $420 million difference is worth about 6 cents a share so that 33 cents becomes 27 cents. Yet if we remove the tax benefit completely Intel's profits were just 24 cents a share and below the 25 cent estimates. Even so the 24- cent number would be an improvement over Q4 last year where Intel reported profits of 16 cents on revenues of $7.16 Billion. Looking ahead Intel is guiding first quarter revenues in the $7.9 billion to 8.5 billion range but analysts were already expecting $8.24 billion. This isn't the glowing report that investors were hoping for and Intel's expectations that gross margins might dip to 60% from its current 63.6% is far from inspiring. Overall Intel tried to put a positive spin on the quarter saying that business is beginning to see early signs of an I.T. turnaround and stronger spending patterns by corporations. Commenting on the fourth quarter Intel's CFO Andy Bryant said growth was worldwide with strength in emerging markets and steady demand from mature markets like N. America and Western Europe. Investors were also eager to hear from Yahoo! (YHOO). Analysts were expecting YHOO to turn in profits of 11 cents a share on revenues of $495 million. What YHOO reported was a net profit of 11 cents a share on revenues of $663.9 million. However, if you remove the traffic acquisition costs (paid by its Overture division) revenues are reduced to $511.3 million for the fourth quarter. This is still above analyst estimates and well above 2002's Q4 revenues of $285 million. Looking ahead YHOO is forecasting Q1 revenues of $475 to $505 million compared to consensus estimates of $492 million with earnings at 11 cents per share again. While this is positive news it wasn't enough to excite any buyers and shares fell strongly after hours. In other news YHOO announced an agreement with Chinese Internet portal Sina.com (SINA) to join forces for an online auction service for Chinese users. Earnings news from Apple (AAPL) was also taking a bite out of this evening's headlines. Wall Street was looking for AAPL to beat estimates of 14 cents a share. Apple reported profits of 17 cents a share ($63 million) on revenues of $2.01 billion. However, if you back out a $3 million after-tax investment, that number becomes just 16 cents a share. Overall it was a strong quarter compared with last year's Q4 $8 million loss (-2 cents/share). It also proves the success of Apple's iPod and iTunes products. Apple's CEO Steve Jobs said the company shipped 829,000 Macintosh computers, 733,000 iPod's in the quarter and that their iTunes online music store accounts for 70 percent of the legal music-download market. Apple guided higher for the first quarter predicting 8 to 10 cents a share on revenues of $1.8 billion, which is better than analyst estimates of 7 cents on $1.7 billion but it wasn't enough to stop some after market profit taking. There were of course dozens of other companies reporting earnings after the bell tonight but overshadowing their announcements was news that J.P.Morgan Chase & Co (JPM) would acquire Bank One (ONE) for nearly $60 billion. Rumors had been circling that the two were in merger talks and the Wall Street Journal broke the story right after the close of trading today. The new entity would become the nation's second largest bank, based on assets, behind Citigroup. Shares of ONE rose 10 percent after hours while JPM slipped 4 percent. As a Dow component, JPM will be a negative impact on the index tomorrow. There was also merger news circling around the on again off again relationship between AT&T Wireless (AWE) and Cingular Wireless. The two companies had discussed a merger over a year ago and never reached a conclusion. Speculation that they two will be more agreeable among today's more competitive marketplace pushed shares of AWE up 17 percent to $9.99. In other business news Andrew Fastow, the former CFO for Enron Corp, has pleaded guilty to accounting fraud. Reports have been circling around Andrew and his wife Lea Fastow who have been trying to arrange a plea bargain so that one of them would be free to watch over their two children. It appears they finally came to an agreement with prosecutors. Lea will plead guilty to a single count of filing a false tax return and serve five months in jail and an additional five months under house arrest. In exchange for Andrew's guilty plea the government has agreed to drop 96 of the 98 charges against him on the condition that he cooperate in their other investigations (namely against Ken Lay and Jeff Skilling). Mr. Fastow will also forfeit $23.8 million in assets and spent the next 10 years in jail. It's hard to estimate what kind of affect this type of news will have on the marekts, if any, but the fact that the government is making progress in the case and that some of the key people will spend time behind bars could be a positive for investor sentiment. Tomorrow is going to be another crazy day. As I have been suggesting for days now investor reaction to these much- anticipated earnings announcements has been to "sell the news". Standouts in tomorrow's earnings parade will be Bank of America (BAC) and Sun Microsystems (SUNW). Yet dwarfing them both will be a surprise announcement from IBM. IBM had been expected to announce earnings on January 20th but the company changed their mind and said they'd be ready tomorrow. Big Blue is now expected to report at 7:30 AM ET on Thursday. Analysts are estimating earnings to be $1.50 a share on revenues of $25.02 billion. Rumors have been circling for several days now that the company might miss based on poor performance from its services division and SAP's recent sales miss and Accenture's earnings miss don't inspire a lot of confidence (unless IBM is just stealing customers from them). IBM's earnings report is such a market event it will most likely dwarf Thursday's economic events with the weekly jobless claims, the CPI report, the Empire manufacturing survey and the monthly retail sales numbers. A few traders have suggested that IBM's eagerness to report might be hiding a positive earnings surprise but that could just be wishful thinking. Buckle your seat belts. Tomorrow could be volatile. ************ FUTURES WRAP ************ Dollar and Equities Advance Jonathan Levinson The US Dollar Index climbed today, and bonds and equities climbed with it. Precious metals and the CRB declined, as did foreign currency pairs. A quiet session 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. Daily chart of the US Dollar Index The US Dollar Index advanced today, trading both sides of the 86 level throughout the session. The gain was enough to print the first buy signals seen in many weeks on the daily cycle oscillators. A strong dip tomorrow could cancel the signal, but from here it looks like the real deal. Silver, gold and the CRB all pulled back, with silver, heating oil and sugar leading to the downside, with the CRB dropping .39 to close at 268.02. Daily chart of February gold February gold got clocked in the early morning, spiking to 415 on my datafeed despite the sub-413 print on Prophetcharts. That spike low was just that, and the contract corrected almost immediately to the 420 level, above which it spent the remainder of the session. That said, the bounce never recovered the broken lower wedge trendline, and today's move looks like the start of the correction about which I've been warning but hoped not to see. Sell signals have printed on the daily cycle oscillators, and below 420, 412 and then 400 are the next significant supports. XAU dropped 4.12% to 101.43, HUI -4.79% to close at 228.25. Daily chart of the ten year note yield Bonds started out weak but reversed around the same time that Governor Bernanke was speaking, finishing the session deep in the green with ten year note yields dropping 4.2 bps to close at 3.986%, a 1.04% move on the day. 3.92% is the next support on this strong downphase in the yield. Daily NQ candles Perhaps it was merely uncertainty over INTC's earnings scheduled for release after the close, or something more significant, but NQ was the laggard today, rising less than its non-tech peers and adding .62% or 9.50 to close at 1538. Nevertheless, the sell signals on the daily cycle oscillator were "undrawn", as the lower rising channel trendline held as support again, with the NQ printing a bullish hammer for the day. It stopped right at resistance below 1540, with resistance at the rally highs up to 1545-50. A break above this triple top resistance would likely ignite a short covering stamped. 30 minute 20 day chart of the NQ NQ burned most of its 30 minute cycle upphase in the morning, and failed from a lower oscillator high. Once again, it got weak upside traction and then an equally weak downphase which aborted in the last hour, just like yesterday, ramping higher into the close. Resistance is at 1540, and then up 1550 following which the bulls could begin to sprint. The daily cycles don't favor such a move, but that's no comfort for those betting against it if price doesn't comply. Daily ES candles ES gained .87% or 9.75 points to close at 1141. It never tested the lower rising channel trendline, and closed just below the range of its rally highs. The sell signals on the daily cycle oscillators aborted, leaving the oscillators in trending territory deep in overbought. 1118-1120 remain key support, with resistance up to 1142, exceeded after the cash close but corrected as of this writing following the 4:30PM open. 20 day 30 minute chart of the ES The 30 minute ES is an excellent summary of the current battle between bulls and bears. The steeply rising trend (bullish) broke this week (bearish) but bounced from head and shoulders support (bullish, with bearish implications), and tested the rally highs, printing a nominal new high (bullish) but failed to hold it as of this writing (bearish). The 30 minute cycle oscillators have been tracking poorly recently, or at least the extended lulls lasting into the closing hour of the session have been resulting in fruitless up- and downphases waiting for the "real" move in the last hour. If the ES heads down from here, it will result in a solid bearish oscillator divergence, with the 300 minute stochastic weak against a new rally high. 150-tick ES The short cycle oscillators were maxxed out and commencing downphases as of this writing, and, being lined up in a synchronous downphase with the 30 minute cycle, the bears now have the ball. This fits perfectly with my comment at 15:03 in the Futures Monitor: "The uptick in the 30 min cycle and the upsloping Keltner channels gives us synchronous short cycle and 30 min upphases. The short cycle oscillators are close to entering overbought territory but are pointed north. This gives us a narrow but still significant window for a blast higher right here, and it should be good heading into the close. A failure to capitalize on it would be a bad sign for bulls, but I'd be surprised to see that. For the moment, the path of least resistance looks higher." This window is now closed, and the intraday cycles are lined up to the downside for the time being. Daily YM candles YM led to the upside, gaining .99% or 102 points, closing at 10515. Rising support was regained, but the daily cycle sell signals were not reversed as they were on the ES and NQ. 20 day 30 minute chart of the YM The most bullish action of the day was the persistence of the bids for equity futures despite the rally in the dollar. Where a falling dollar amid constant central bank intervention saw equities rally through 2003, a continuation of the buying on an uptick in the dollar, presumably as foreign buyers pile in, has extremely bullish implications. With the put to call ratio hanging below .60 for most of the session, I have great difficulty imagining the market rewarding the majority for a long time, but the lack of serious correction against the rising dollar was a definite victory for bulls. We'll see how they do against the synchronous daily (imminent but not confirmed, except on YM), 30 minute and short cycle downphases tomorrow. See you there. ******************** INDEX TRADER SUMMARY ******************** Dynamic! If the first two weeks of 2004 are going to be any indication of what lies ahead the remaining 50-week of this year, the word that will best describe 2004 is "dynamic!" Tonight's after the bell news and also sent traders scurrying and wondering what's next. In a blockbuster banking merger announcement, Dow component JP Morgan (NYSE:JPM) $39.25, the nations 2nd largest bank by assets ($792 billion), said it was buying Bank One (NYSE:ONE) $45.22 +1.36% in a deal valued at $60 billion. Bank One is the nations 7th largest bank if measured by assets ($290 billion). Shares of Bank One (ONE) jumped to $49.74 in after-hours trade, while JP Morgan (JPM) traded lower at $37.82. Bank One (ONE) is a component of both the more money center KBW Bank Index (BKX.X) 977.57 +0.81% and more regional S&P Banks Index (BIX.X) 336.71 +0.81%, while JP Morgan (JPM) is a component of the KBW Bank Index. The news may well fuel further bullish speculation in the group after last year's announced deal with Citigroup (NYSE:C) $50.00 +0.80% buying FleetBoston (NYSE:FBF) $43.08 +1.19%. "It's a huge deal that's going to create a lot of rumors in bank land tomorrow," said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners. "If it's priced at that level, both stocks will go down. If it's a merger of equal type deal it will be better received." The deal is the biggest for J.P. Morgan since Chase acquired J.P.Morgan in December 2000 for $33 billion. It would be the biggest financial services deal since the $70 billion deal combining Citicorp and Travelers Group in 1998. From commentary that I've heard and read tonight, the deal is being received much more favorably by Wall Street banking analysts than the Citigroup/FleetBoston deal, where many analysts felt Citigroup paid too much for fewer synergies. While JPM is a component of the price-weighted Dow Industrials, there was also a rather dynamic event that took place after the bell with IBM (NYSE:IBM) $90.31 +0.68 announced it was moving up it quarterly earnings announcement. IBM said it would announce quarterly earnings after tomorrow's close, instead of Tuesday, January 20th. CNBC co-host of Kudlow & Cramer, James Cramer said his research shows there's been a lot of January $90 call writers in the stock of late, and that tonight's news out of IBM most likely portends positive news of some sort, and that heavy seller of $90 calls, which thought that quarterly earnings took the stock out of play for gains much above $90 ahead of Friday's expiration may bring bulls back to the table to either save heavy losses in naked call writing, but also, institutional bulls in the stock that may want to save underlying positions in the stock, rather than risking upside gains should IBM have overly positive news to deliver in their quarterly earnings. Shares of IBM jumped to $91.61 over the New York ECNs. But there's always some negative news to be delivered, which makes these markets so dynamic. Shares of Intel (NASDAQ:INTC) $33.90 -0.59% fell to $32.45 in after-hours trade after the company reported quarterly EPS of $0.27 per share (ex-items), which was 2-cents better than consensus estimates, on revenues that rose 22.1% year-over-year (+12% from last quarter) to 8.74 billion (consensus $8.64 billion). The negative after-hours reaction seems to be coming from INTC's comments regarding forward looking gross margins of 60%, which fundamental analysts say is at historical peak levels. What I'm (Jeff Bailey) getting from these fundamental comments and some downside reaction, is that INTC has squeezed just about all costs it can from the system, and further growth now become more dependent on sales, where some fundamental analysts see the stock fairly priced at current levels. Internet conglomerate Yahoo! Inc. (NASDAQ:YHOO) $48.39 -0.84% fell to $46.55 in after-hours trade when the company reported Q4 (December) earnings of $0.11 per share, which was in line with consensus of $0.11. YHOO said revenues jumped 78.9% year-over- year to $511.3 million versus the $495.5 million. Forward guidance has YHOO seeing Q1 (March) revenues of $475-$505 million, which surrounds consensus of $495 million and fiscal 2004 (December) revenues of $2.12-2.25 billion, also surrounding current consensus of $2.18 billion. Positive and negatives I'm hearing from the fundamental side is that they are impressed with the revenue side of things, but disappointed that YHOO wasn't able to send more money to the bottom line. The NASDAQ-100 Tracking Stock (AMEX:QQQ) $38.08, which gained 13- cents during its regular session fell to $37.77 in extended hours. The S&P Depository Receipts (AMEX:SPY) $113.50 +0.83% gained $0.94 during its regular session and saw trade at its WEEKLY R1 of $113.40, but has slipped to $113.09 in extended hours. Meanwhile, the Dow Diamonds (AMEX:DIA) $105.67 +1.12% gained $1.17 by the close and also saw trade at its WEEKLY R1 of $105.63, but has slipped fractionally lower at $105.51 in extended hours. I make note of the SPY and DIA trades at WEEKLY R1s, as they are the first index-related securities in our pivot matrix to trade these levels, and may once again be viewed as "leadership" type indices. Market Snapshot / Internals - 01/14/04 Market internals at the A/D lines snapped back strong today and NH/NL indications continue to show bullish leadership at both the NYSE and NASDAQ. One thing I do see is rather steady volume at the NYSE in recent session, but today's 2.07 billion shares traded at the NASDAQ, while brisk, is the lowest volume levels seen since traders returned from an extended Christmas-New Years holiday. I may well be seeing this NASDAQ volume only because I've sensed some "lack of interest" in trading the QQQ this week, but here too, with NASDAQ volumes edging lower to the 2.0 billion mark, it may well be that other market participants aren't as interested in 4-lettered stocks as they are the 1, 2 and 3-lettered variety at the NYSE. One thing I made a note of late, just prior to the closing bell, was that while today's 111.19-point gain in the Dow Industrials (INDU) is an impressive snap back after a 3-box reversal on its point and figure chart, the INDU's point and figure chart, which is designed to chart more meaningful fluctuations of 150-point moves, did not quite get a trade at 10,550, as its session high of 10,548.51. All I (Jeff Bailey) do at this point is make the observation, and simply understand that as of tonight's close, there just wasn't enough demand to get the reversal back higher, and only makes me (Jeff Bailey) a cautious bull. For traders to get a feel for selling and buying, in combination with the point and figure charts, I like to use the analogy of a thinking about trying to shove a carrot into a blender/juicing machine. Yesterday's observation was that the INDU showed a 3-box reversal, which indicated meaningful selling. Try to sense that as the blener/juicer blade has been at HIGH revolution in recent weeks, but the 3-box reversal lower was SELLERS shoving a carrot has hard as they could into the blender. Now think about today's gains in the context of that SELLING pressure being eases, the blender/juicer now lets the motor and the blade come back up to HIGH revolution. The question now is.... are there any more carrots? I'm very proud of one e-mail I received from a trader, that picked up on EXACTLY the point I wanted to try and get across last night. He wrote... Now that the DOW has a 3 box reversal, is it probable(?) that the other indexes will follow? My thinking is that by creating a column of O's and then turning up into a new column of X's, there would be some rational relative point that each would give a sell signal. If the DOW were turn up into a column of X's without the others forming a column of O's, a downturn would have the DOW's sell signal coming at a much higher (relatively) level.Is this thinking plausible or are things more independent than I think? This trader now begins to sense the supply/demand relationship of what drives market prices! He's got the "inchworm" thought process down exactly as it should be. He's building a test for early signs of any type of observable near-term shift from STRONG demand, turning toward SUPPLY beginning to outstrip the recent STRONG DEMAND build. This trader is "on alert" and looking for signs that recent gains are at risk. It is ENTIRELY probable and plausible that we begin seeing, what the trader above is sensing. That's one of the things I LOVE about point and figure charts. I DARE any trader to hand chart a few favorite stocks or indices that you follow more closely, and after HAND charting them for a week or two, tell me, or any of your trading buddies, that you don't have a MUCH BETTER FEEL for how that security is trading than you do right now. It's so darned fast and easy, it's ridiculous! Look at today's high and today's low, check the direction (X's or O's) the chart was in at the prior day's close, and make your chart entry. NASDAQ-100 Tracking Stock (AMEX:QQQ) - $0.25 box Last night I showed the NDX point and figure chart. Here... if I change the box size (scale) on the QQQ to $0.25, it looks pretty darned similar to the NDX chart. One e-mail I got today was from a trader that said he's had a $20,000 lesson while trading the QQQ. Don't laugh! I know traders that learned with $50,000 before they stopped what they were doing, back tested "what went wrong" on a point and figure chart, made the adjustments, and then got back on the right track. I DARE any trader to go buy some graph paper like Charles Dow used, set it up at $0.25 box increments, and start hand charting the QQQ. I profiled February $36 QQQ PUTS just below QQQ $36, as I thought I observed resistance. But when resistance was broken to the upside, I have since profiled two swing trade longs in the QQQ, and amazingly, both of them would have been profitable if taken. On the above chart, the first sign of any weakness would be a 3- box reversal to $37.50. If a supply/demand trader where to SHORT the QQQ, the first sign of renewed strength would be $38.50. This gives the trader/investor an observation of supply/demand in the QQQ right now. Where's resistance? I don't know, I'm left to guess. Where's support? Boy... I'd have to say $36-$36.25 where the QQQ launched like a Jack-in-the-box. Let's move onto the Pivot Matrix where we try and figure out where institutional computer SHOULD be selling, and where they SHOULD be buying. If you're a QQQ trader, what's your impression of supply/demand at tonight's close. Who, or what is currently in control? I (Jeff Bailey) have to say DEMAND (X). If you disagree, then you must also believe that SUPPLY (selling) was in control at $36.25, $36.50, $36.75, $37.00, $37.25, $37.50, $37.75, $38.00 and $38.25. Pivot Analysis Matrix Boom! Just like that, after the S&P Banks Index (BIX.X) traded WEEKLY S2 and began to look like it might be leading a decline in the pivot matrix for the SPX/OEX a potential catalyst appears with JPM buying ONE. I don't KNOW if this provides a new upside catalyst for the BIX.X, which could now lift the SPX/OEX to new highs, and correlative 1,133 SPX resistance, but its the place to be looking. I see BIX.X resistance lined up at 337-338 and the only way to get the BIX.X above those levels is with buying in banks, where roughly 25% of the SPX/OEX weighting comes from financials. While after-hours indications aren't necessarily a "true" market response, as all market participants aren't around to trade, I see NDX MONTHLY R2 and DAILY R1 as correlative resistance. Does everyone remember Friday's intra-day trade and recent session's trade? We KNOW there's some type of selling at/around this NDX/QQQ MONTHLY R2 don't we? That's the near-term level of resistance. IBM is not a component of the NDX/QQQ, but there may well be technology stock implications come tomorrow afternoon. Still, from tonight's after-hours trade, the NDX/QQQ doesn't appear to be getting any help out of INTC and YHOO. Also trading lower in after-hours is QLGC $50.36 (unch) at $46.07 and AAPL $24.20 +0.33% at $22.85. Both are NDX/QQQ components. Understand, that current after-hours trade may have quite a bit of the "near-term" downside being taken out of the stock already, so if looking short, don't get overly excited. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals With INTC and YHOO earnings out of the way, we might now begin viewing a range trade on the QQQ from $38.25-$37.55. I'm a tempted short, but stop has to go just above the highs. Biggest fear of the QQQ short has to be what IBM is going to day, and implications should the banks catch fire, send the SPX/OEX to new highs, and pulls Q's along for the ride. Using the QQQ PnF chart I showed earlier, I also point to the $36.33-$36.44 "zone" on the above chart, which is currently derived from the WEEKLY (blue) and MONTHLY (red) pivot retracement. Q's look kind of "neutral" don't they, but holding at the upward end of an incredibly bullish trend. S&P 500 Index (SPX.X) - Daily Intervals The focal point in the MATRIX as well as the SPX itself is the 1,131-1,133 level of near-term resistance. The SPX traded strong above its WEEKLY Pivot today, and the intra-day reverse head/shoulder pattern we discussed in our intra-day commentary saw the SPX not want to come back to 1,120.75 to develop the symmetrical reverse h/s pattern, as if buyers were too aggressive. The red downward trend was a trend I had placed on an intra-day basis from the January 8 highs, which was broken to the upside today. Again... sign that the overriding trend must still be more bullish than bearish. Dow Industrials (INDU) Chart - Daily Intervals Oscillators are "mixed" with Stochastics saying look for a bounce, while MACD is saying time for a rest. More heavily price weighted IBM trades up in after-hours, while smaller price weighted JPM and INTC trade lower. Bulls may let bears have it here with a strong round of buying, where yesterday's lows are now viewed as support, from which aggressive, but disciplines bulls will leverage from. 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 ************** The Final Selection Process by Mark Phillips mphillips@OptionInvestor.com Over the past couple weeks, we've spent some time detailing an organized and methodical approach to selecting plays, beginning with a convenient screening tool. I'm not going to retrace my steps over the ground already covered, so if you're just joining us, please catch up at the links below before proceeding. My Favorite Trade Screening Tool http://www.OptionInvestor.com/traderscorner/tc_123103_1.asp An Organized Approach To Trade Selection http://www.OptionInvestor.com/traderscorner/tc_010704_1.asp Now that everyone is up to speed, let's pick up right where we left off last week. Recall that we had found a handful of what looked like strong stocks, each of which were within sectors that were trading well. Combine that with an upwardly trending market and we've got the trifecta of desirable factors in our favor -- Market, Sector and Stock. Due to the fact that I just couldn't get everything crammed into last week's article, we have to make a compromise this week. Since a week has passed since we ran that screening tool, a week's worth of price action has also transpired. Without even looking at any charts, I know that some of those plays may have performed well, some may have gone nowhere and some may have performed poorly. But it is a given that the chart setup that looked good last week may not be attractive for a trade tonight. There are two ways to deal with it -- one would be to start the process all over again and come up with new candidates, but I don't think that will really serve our purposes here. The other choice is to drag the charts back one week for our analysis here - - in essence pretending that it is still January 7th. Some may say I'm cheating by doing the evaluation in hindsight with the results already known. And they'd be right. But we're not trying to establish that I'm a great play picker -- I have my share of winners AND losers. What we're trying to establish is an organized process for play selection. That said, let's drag those charts back a week and get to it! The stocks that percolated to the top of our list last week were CEPH (Biotechnology), YHOO (Internet) BBOX, CSCO and UTSI (Networking) and NVDA (Semiconductors). All of these potential plays are found in the Technology sector, which conveniently makes our job a bit easier. Both currently and at this time last week, it could be accurately said that the NASDAQ market is/was strong, so that gives us the first piece of the puzzle - a bullish market. Next up, we need to look at each of the sectors, comparing them to see where the best strength exists. Relative strength analysis is the best way to approach this phase of the process, and Qcharts gives us a great ability by letting us ratio one security (or index) against another. If the chart is rising, than the first symbol is stronger. If it is falling, the second symbol is stronger. Pretty simple, eh? Relative Strength Chart of the BTK index vs. NASDAQ Composite I hope you don't need a great deal of convincing to see that we should immediately discard our Biotech play from consideration. No matter how good the chart of CEPH might look, that RS chart above shows the BTK index has been underperforming the overall NASDAQ for months and is continuing to do so. Relative Strength Chart of the INX index vs. NASDAQ Composite Now this looks a bit more tempting. Relative to the COMPX, the INX index has been in a broad trading range for the past several months and we just got a near-term breakout from a small bullish wedge. There's still significant resistance to deal with, but the trend is up. Relative Strength Chart of the NWX index vs. NASDAQ Composite Whoa Nellie!! The RS chart of the NWX index relative to the COMPX has been building a bullish wedge for the past 14 months and it broke out in a big way last Tuesday, continuing higher on Wednesday. This is clear, unambiguous strength! At this point, I'm heavily leaning towards a bullish play in the Networking sector, but we need to finish out the evaluation first. Relative Strength Chart of the SOX index vs. NASDAQ Composite It's hard to argue with the strength we see here. The SOX has been in a steady ascending trend relative to the COMPX since the late July. The recent bounce from the ascending trendline looks a bit anemic, but perhaps it is getting set for another strong upward surge like we saw back in late November. The SOX is a definite contender. At this point, it looks like it comes down to either a play on one of our Networking stocks or on our lone Semiconductor play, NVDA. One final comparison ought to narrow the choices just a bit further. We've been comparing everything back to a known constant, the COMPX. But now we need a head-to-head competition between the SOX and NWX to tell us right now, which one is the strongest. Relative Strength Chart of the NWX index vs. the SOX index Well, that's a no-brainer, don't you think? Clearly the recent strength in some of the more prominent Networking names is having a pronounced effect on the overall sector! Or is it the other way around? No matter. What is key to our discussion is that with the breakout in the NWX relative strength charts (vs. both the COMPX and the SOX), we need to be focusing our efforts in that area of strength. Recall that we had 3 Networking candidates to choose from - BBOX, CSCO and UTSI. Normally, we'd start this process by comparing each of those stocks back to the NWX index to see which one has the best relative strength. But we need to remember that it is the more speculative names like NT and LU that had seen the BIG moves just before we began our analysis. So the better approach will be to compare each of these plays to each other. That removes the spurious impact of the 20% gains in those more speculative stocks from our RS comparison. This is part of the process that is more subjective and is why we must remain cognizant of what else is happening in the market as we do our analysis. To further streamline our analysis, I'm going to cheat a bit and use the big boy on the block - CSCO - as our reference point, based on my intuition/belief/bias that it will turn out to be the strongest of the group. Relative Strength Chart of BBOX vs. CSCO Relative Strength Chart of UTSI vs. CSCO To me, that makes for a no-contest vote. CSCO clearly is showing strength relative to both of the other candidates. We've shown the charts a bit differently here, demonstrating that both BBOX and UTSI are weak compared to CSCO, but you get the picture. So now that we've made our decision, let's see how each of the stocks from our original list would have fared over the past 5 trading sessions. BBOX - Gain = $0.00 or 0.0% CEPH - Gain = $2.72 or 5.3% CSCO - Gain = $1.84 or 7.2% NVDA - Loss = $0.77 or 3.1% UTSI - Loss = $3.71 or 9.0% OUCH!!! YHOO - Gain = $0.72 or 1.5% Yowza! What do you know, there actually is something to this relative strength mumbo jumbo! On a pure dollar basis, CEPH turned out to be the best performer over the past week, but CSCO wasn't too far behind. But on a percentage basis, CSCO definitely takes the cake with a 7.2% gain. What I think is particularly instructive is the way the other two Networking stocks performed. BBOX ended right where it was a week ago and UTSI got pummeled for a 9% loss! Just like any other tool, from time to time, RS will let us down. But over the long haul, when combined with other reliable tools, relative strength studies will help to ferret out the higher odds places to be focusing our trading capital. I'm out of time to get this in for publication tonight, but hopefully, this has helped to give you an idea of how we can use a simple screening tool and then some relative strength studies to ferret out a winning trade here and there. 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 01-14-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: AMZN, DGX, GD Dropped Calls: None Dropped Puts: None Spreads, Combinations & Premium-Selling Plays: Another Strong Rebound! Watch List: Biotech, Healthcare, Memory & Financials. ************************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 ***************** AMZN (call) raise stop from 49.99 to 50.75 DGX (call) raise stop from 69.99 to 72.00 GD (call) raise stop from $88.50 to 89.50 ************* 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Another Strong Rebound! By Ray Cummins Blue-chip stocks led the equity markets higher Wednesday amid a surge in "old economy" issues. A brief rotation from technology shares was apparent as investors awaited Intel's (NASDAQ:INTC) earnings, while Honeywell (NYSE:HON) led a broad advance among industrial issues. The Dow industrial average ended up 111 points at 10,538 with Boeing (NYSE:BA), Alcoa (NYSE:AA) and American Express (NYSE:AXP) contributing much of the bullish momentum. The NASDAQ Composite climbed 14 points to 2,111 on strength in wireless services and Internet shares. The S&P 500 added 9 points to 1,130 as transportation, brokerage, homebuilding, retail apparel and restaurant shares moved higher. In the broader market, advancers outpaced decliners more than 2 to 1 on the NYSE and 3 to 2 on the NASDAQ. Total volume was 1.5 billion on the Big Board while 2.1 billion shares crossed on the technology exchange. Treasury yields drifted at three-month lows on the mixed batch of economic data. The benchmark 10-year note was up 8/32 at 102 5/32. Its yield rose to 3.98% compared to 4.01% at Tuesday's close. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 01/13/03 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 32.03 0.50 5.66% 2.27% QCOM JAN 45 44.25 59.44 0.75 3.64% 1.69% RMBS JAN 20 19.50 34.29 0.50 6.56% 2.56% FARO JAN 17 17.05 32.33 0.45 9.13% 2.64% FLML JAN 20 19.70 30.82 0.30 5.33% 1.52% FRX JAN 55 54.25 69.54 0.75 3.73% 1.38% MGAM JAN 35 34.25 47.05 0.75 6.50% 2.19% MSTR JAN 45 43.85 55.55 1.15 7.00% 2.62% NCEN JAN 33 32.88 42.57 0.50 4.42% 1.52% NFLX JAN 40 39.40 65.31 0.60 5.50% 1.52% PLMD JAN 20 19.75 27.83 0.25 4.61% 1.27% AAPL JAN 20 19.65 24.12 0.35 8.32% 1.78% FARO JAN 22 22.10 32.33 0.40 9.05% 1.81% FCS JAN 22 22.25 25.54 0.25 5.76% 1.12% IMDC JAN 42 42.42 45.50 0.95 10.97% 2.24% OSTK JAN 17 17.15 16.32 (0.83) 0.00% 2.04% YHOO JAN 42 41.85 48.80 0.65 7.21% 1.55% JCP JAN 25 24.70 25.95 0.30 5.63% 1.21% ASKJ JAN 20 19.75 24.06 0.25 10.83% 1.27% CECO JAN 40 39.75 49.01 0.25 6.18% 0.63% IMDC JAN 42 42.88 45.50 0.50 10.87% 1.17% NFLX JAN 55 54.65 65.31 0.35 5.91% 0.64% NTES JAN 40 39.70 47.07 0.30 6.88% 0.76% OVTI JAN 55 54.60 59.53 0.40 6.38% 0.73% SEPR FEB 20 19.60 26.39 0.40 21.62% 2.04% NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CRDN JAN 45 45.40 40.11 0.40 5.27% 0.88% CRDN JAN 40 40.30 40.11 0.19 4.26% 0.74% * QLGC JAN 55 55.55 50.36 0.75 7.56% 1.35% CFC JAN 75 75.80 70.30 0.80 8.69% 1.06% HOV JAN 85 85.45 73.82 0.45 4.91% 0.53% Career Education (NASDAQ:CECO) and Pharmaceutical Product Development (NASDAQ:PPDI) have previously been closed for losses. Ceradyne (NASDAQ:CRDN), at the $40 strike, should also have been closed by conservative traders. PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status NBIX 53.83 52.95 JAN 45 50 0.70 49.30 0.70 Open NE 37.01 37.75 JAN 32 35 0.30 34.70 0.30 Open WGO 60.60 69.50 JAN 50 55 0.50 54.50 0.50 Open DNA 91.20 90.25 JAN 80 85 0.60 84.40 0.60 Open DIGE 38.47 43.19 JAN 30 35 0.70 34.30 0.70 Open MRO 31.06 34.23 JAN 27 30 0.35 29.65 0.35 Open LRCX 32.30 34.30 JAN 25 30 0.45 29.55 0.45 Open COCO 60.73 62.54 FEB 55 55 0.65 54.35 0.65 Open KOSP 45.30 48.01 FEB 35 40 0.60 39.40 0.60 Open The bullish position in Gen Probe (NASDAQ:GPRO), although now profitable, has previously been closed to limit losses. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status POWI 31.41 32.02 JAN 40 35 0.75 35.75 0.75 Open MERQ 46.03 49.63 JAN 55 50 0.80 50.80 0.80 Open? CERN 37.85 37.51 JAN 45 40 0.55 40.55 0.55 Open OSIP 32.25 32.04 JAN 40 35 0.55 35.55 0.55 Open ANF 24.90 25.59 FEB 30 27 0.30 27.80 0.30 Open MANH 27.00 27.68 FEB 35 30 0.50 30.50 0.50 Open Bearish positions in Maxim Integrated Products (NASDAQ:MXIM), Capital One Finance (NYSE:COF) and Cognizant Technologies (NASDAQ:CTSH) have previously been closed for losses. 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CECO - Career Education $48.49 *** On The Rebound! *** 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 $48.49 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 40 CUY NH 1173 0.70 39.30 5.0% 1.8% * SELL PUT FEB 45 CUY NI 585 1.80 43.20 8.4% 4.2% __________________________________________________________________ ERES - eResearch Technology $33.16 *** Uptrend Resumes! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $33.16 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 27.5 UDB NY 19 0.50 27.00 5.1% 1.9% * SELL PUT FEB 30 UDB NF 82 1.10 28.90 8.1% 3.8% __________________________________________________________________ MICC - Millicom Cellular $78.20 *** Wireless Telecom Giant *** Millicom International Cellular S.A. (NASDAQ:MICC) is a global telecommunications investor with cellular operations in Asia, Latin America and Africa. The company has a number of cellular operations and licenses in countries around the world and the group's cellular operations have a combined population under license of over 500 million people. In addition, MIC operates a GSM clearing house, provides high-speed wireless data services in various countries and has a licenses to develop high speed wireless data services in other areas. MIC also has a major interest in Tele2 AB, an alternative pan-European telecom firm offering fixed and mobile telephony, data network and Internet services. MICC - Millicom Cellular $78.20 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 65 CQD NM 12 0.90 64.10 3.9% 1.4% TS SELL PUT FEB 70 CQD NN 263 1.90 68.10 6.3% 2.8% __________________________________________________________________ NTES - NetEase.com $48.11 *** 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. NTES - NetEase.com $48.11 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 35 NQG NG 480 0.30 34.70 2.5% 0.9% TS SELL PUT FEB 40 NQG NH 1037 1.10 38.90 7.4% 2.8% * SELL PUT FEB 45 NQG NI 529 2.60 42.40 11.4% 6.1% __________________________________________________________________ RMBS - Rambus $34.18 *** Pure Premium-Selling! *** Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip" interface solutions that enhance the performance and effectiveness of its client's chip and system products. These solutions include multiple chip-to-chip interface products, which can be grouped into two categories: memory interfaces and logic interfaces. Rambus' memory interface products provide an interface between memory chips and logic chips. In addition, the firm's logic interface products provide an interface between two logic chips. Rambus has two major memory interface products: Rambus dynamic random access memory and Yellowstone. Additionally, it offers a logic interface product for high-speed serial chip-to-chip communications between logic chips in a range of computing, networking and communications applications. RMBS - Rambus $34.18 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 25 BNQ NE 5962 0.50 24.50 5.6% 2.0% * SELL PUT FEB 30 BNQ NF 4678 1.75 28.25 12.8% 6.2% __________________________________________________________________ SEPR - Sepracor $26.79 *** Drug Sector Favorite *** 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 $26.79 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 20 ERQ ND 444 0.25 19.75 3.7% 1.3% TS SELL PUT FEB 22.5 ERQ NX 851 0.60 21.90 7.0% 2.7% * SELL PUT FEB 25 ERQ NE 475 1.25 23.75 10.1% 5.3% __________________________________________________________________ SINA - SINA Corporation $47.05 *** YHOO/SINA Auction Deal! *** 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. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $47.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 35 NOQ NG 1488 0.40 34.60 3.4% 1.2% TS SELL PUT FEB 40 NOQ NH 1588 1.25 38.75 7.9% 3.2% * SELL PUT FEB 45 NOQ NI 563 2.90 42.10 12.1% 6.9% __________________________________________________________________ SOHU - Sohu.com $36.90 *** China Internet Rally! *** 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 $36.90 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 30 UZK NF 946 0.70 29.30 6.7% 2.4% * SELL PUT FEB 35 UZK NG 406 2.25 32.75 12.2% 6.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CEPH - Cephalon $54.65 *** A New Trading Range? *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril for the treatment of partial seizures associated with epilepsy. CEPH - Cephalon $54.65 PLAY (less conservative - bullish/credit spread): BUY PUT FEB-45.00 CQE-NI OI=1736 ASK=$0.45 SELL PUT FEB-50.00 CQE-NJ OI=3893 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$49.35 __________________________________________________________________ NFLX - Netflix $65.10 *** 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 $65.10 PLAY (conservative - bullish/credit spread): BUY PUT FEB-47.50 QNQ-NS OI=398 ASK=$0.55 SELL PUT FEB-50.00 QNQ-NJ OI=2566 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$49.75 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CYD - China Yuchai $26.85 *** No Rally Here! *** 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. CYD - China Yuchai $26.85 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 35 CYD BG 3138 0.45 35.45 6.4% 1.3% * SELL CALL FEB 30 CYD BF 4666 1.30 31.30 12.0% 4.2% __________________________________________________________________ SNDK - SanDisk $65.25 *** Premium-Selling Only! *** SanDisk (NASDAQ:SNDK) designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions for applications in the consumer electronics and industrial/communications markets. The company's products are used in a number of rapidly growing consumer electronics applications, such as digital cameras, PDAs, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets. SNDK - Sandisk $65.25 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 80 SWQ BP 1609 1.10 81.10 6.4% 1.4% * SELL CALL FEB 75 SWQ BO 3650 2.00 77.00 9.0% 2.6% SELL CALL FEB 70 SWQ BN 4610 3.30 73.30 11.0% 4.5% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CKFR - Checkfree $27.60 *** Consolidation Underway? *** Checkfree (NASDAQ:CKFR) is a provider of electronic billing and payment services. The company operates its business through 3 independent but inter-related divisions including Electronic Commerce, Investment Services and Software. CKFR's electronic commerce services are primarily targeted to consumers through financial institutions and Internet portals. Checkfree is also a provider of electronic commerce and financial applications software and services for businesses and financial institutions. CKFR - Checkfree $27.60 PLAY (conservative - bearish/credit spread): BUY CALL FEB-35.00 FCQ-BG OI=510 ASK=$0.15 SELL CALL FEB-30.00 FCQ-BF OI=1085 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$30.50 __________________________________________________________________ ESV - Ensco International $27.45 *** Stuck In A Range? *** Ensco International (NYSE:ESV) is a global offshore contract drilling company that also provides marine transportation services in the Gulf of Mexico. The firm offshore contract drilling and marine transportation operations are integral to the exploration, development and production of oil and natural gas. The company is one of the leading international providers of offshore drilling and marine transportation services to the oil and gas industry. Ensco's business is segregated into two parts: Contract Drilling Operations and Marine Transportation Operations and its operations are concentrated in the geographic regions of North America, Europe/West Africa, Asia Pacific and South America/Caribbean. ESV - Ensco International $27.45 PLAY (conservative - bearish/credit spread): BUY CALL FEB-35.00 ESV-BG OI=0 ASK=$0.15 SELL CALL FEB-30.00 ESV-BF OI=10389 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$30.45 __________________________________________________________________ NVLS - Novellus Systems $41.68 *** Trading Range Top? *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $41.68 PLAY (less conservative - bearish/credit spread): BUY CALL FEB-47.50 NLQ-BT OI=1145 ASK=$0.50 SELL CALL FEB-45.00 NLQ-BI OI=2482 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=19% B/E=$45.40 SEE DISCLAIMER - SECTION 1 ********** Watch List ********** Biotech, Healthcare, Memory & Financials. ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Amgen - AMGN - close: 64.05 change: +0.30 WHAT TO WATCH: Biotech giant AMGN has been absent from the watch list for a while now. Shares have been consolidating under its simple 200-dma but the stock finally broke above this technical level today. There is plenty of resistance in the $64-65 region and more at $67.50 but DNA's positive earnings announcement today could have traders looking for a pre-earnings run up in AMGN. AMGN is due to report on Jan. 22nd. Chart= --- SanDisk Corp - SNDK - close: 65.25 change: -4.19 WHAT TO WATCH: Shares of flash-memory supplier SNDK were hammered for a 6% loss today after Morgan Stanley warned that competition in the memory markets was about to heat up. We made a note about SNDK's failed rally and reversal in the MarketMonitor and traders looking for a bearish play might want to use a trigger under the $65.00 level. An easy target would be the $60 mark. Chart= --- Pacificare Health - PHS - close: 63.27 +2.92 WHAT TO WATCH: A number of healthcare stocks out performed the markets today and PHS is one of them. Shares peaked near $70 at the first of the year and have drifted back toward support (previous resistance of $60). Investors stepped in to buy the dip and drove the stock up off the $60 level to close above its 50-dma. The company is expected to announce earnings on Jan. 21st and we could see a pre-earnings run up. Watch out for potential resistance at $64.00. MarketMonitor subscribers were alerted to the move earlier today. Chart= --- T C F Financial - TCB - close: 49.79 change: -0.00 WHAT TO WATCH: Shares of TCB closed unchanged today after breaking support at $50.00 yesterday. Regional banks have been under selling pressure after two of them announced earnings earlier this week and warned that 2004 may be challenging due to commercial loan growth. TCB is expected to announce earnings tomorrow. Should they disappoint or offer negative guidance traders might be able to catch a ride toward its 200-dma near $46. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- WFMI $70.85 +1.85 - Shares of Whole Foods soared to a new high today with little news to explain the move. This puts the stock above its rising channel. ******************* 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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