The Option Investor Newsletter Thursday 01-15-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Confusion Reigns Futures Markets: Dollar Upphase Index Trader Wrap: Thinking about a 4-day weekend Market Sentiment: Sell The What? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-15-2004 High Low Volume Advance/Decline DJIA 10553.85 + 15.50 10592.74 10477.18 2.21 bln 1597/1650 NASDAQ 2109.08 - 2.10 2121.61 2088.10 2.22 bln 1646/1516 S&P 100 560.42 + 0.65 562.96 556.96 Totals 3243/3166 S&P 500 1132.05 + 1.53 1137.11 1124.50 W5000 11036.78 + 13.80 11080.04 10959.60 RUS 2000 586.36 + 0.24 587.31 579.30 DJ TRANS 3018.48 - 13.10 3032.01 3001.04 VIX 15.56 - 1.19 17.31 15.49 VXO (VIX-O)16.23 - 0.47 17.31 16.04 VXN 22.64 - 0.53 24.03 22.18 Total Volume 4,827M Total UpVol 2,413M Total DnVol 2,200M 52wk Highs 921 52wk Lows 12 TRIN 1.00 NAZTRIN 0.88 PUT/CALL 0.58 ************************************************************ Confusion Reigns Good news, Bad news and news overload all combined to confuse investors on Thursday. The earnings parade began with some tech leaders and while the earnings were good the guidance was questionable to some. Techs crashed, soared and crashed again as volatility returned to the stock market. Expectations for more tech earnings after the close today kept a floor under the afternoon selling. After yesterday's news you would have expected the opposite. Earnings runs appear to be alive and well. Dow Chart - Daily Nasdaq Chart - Daily The markets are in "hold your breath" mode as we await the various earnings announcements. With each release there is the normal rapid fire trading as winners and losers quickly exchange shares while the talking heads on TV weigh the opposing benefits of each line item on the announcement. The magnitude of the tech announcements over the last two days has left tech investors in a daze. There were four big techs last night, IBM this morning and four more techs tonight. The consensus of opinion on tech earnings appears to be the 4Q was a decent quarter with strong buying in December. The general guidance is positive with comments like "starting to see a pickup in IT spending" and several firms have raised their outlook. If everything is so positive then why did the markets end flat today? First we need to review the economics for the day. You could not have asked for better results in most cases but there are still some questionable signs about the recovery that worry analysts. Jobless Claims continued to fall at 343,000 and a drop of -11K for the week. The four-week moving average fell to 348,000 and the first time under 350K since early 2001. Continuing claims also fell to 3.13 million and that suggests we may be seeing some hiring. If historical trends continue we should see a pickup in Nonfarm Payrolls soon. In 1992 during the last post war recovery we saw a sharp pickup in new jobs once claims fell under 350K a week. Still far too soon to draw conclusions but we are on the right track. The Consumer Price Index only rose +0.2% in December and the Core rate rose only +0.1%. This makes the core inflation rate for all of 2003 only +1.1% and a 40-year low. The index should slow again for January after the impact of mad cow on our beef prices. The headline inflation rate of +1.9% is a 16-year low. The Fed is on track with the claim of no inflation in sight despite the rapid acceleration in commodity prices. However, inflation tends to appear suddenly and you can bet it will not stay at multi-decade lows for long if this recovery really catches fire. But, that is a problem for the post election Fed. The NY Empire Manufacturing Survey soared to 39.2 and a record high. This was well above the consensus estimate of 34.5. The manufacturing industry in New York suddenly seems to be exploding with 86% of survey respondents reporting new orders last month. Shipments have increased for five consecutive months. Prices paid jumped to 28.2 from 12.5 but prices received only rose to 3.9 from -1.0. Seeing a trend here? You can sell anything if you give it away. With costs rising but prices remaining low it will put a squeeze on profits if it continues. The employment component fell slightly but the average workweek jumped to 19.0 from 6.6. This suggests the need to add employees in the future now that hours are rising. The Philly Fed Survey echoed the results in the NY Survey. The headline number jumped to 38.8 from 30.2 when the consensus was looking for a slight decline to 29.0. This was the highest reading since 1993. Contrary to the NY Survey there were some larger signs of inconsistency. Employment fell along with the average workweek. The six-month outlook also fell. Unfilled orders fell to 10.7 from 15.5. New Orders dropped slightly and shipments fell to 33.1 from 39.6. The only component that rose materially was prices paid which again suggests a profit squeeze. The bottom line was an increasing manufacturing environment but increasing at a slower rate. The weak components could have been due to a seasonal influence but we have to wait until February to find out. The MAPI index of future business activity rose to 77 for December and suggests that manufacturing activity is about to surge. This was the highest number on record for the entire 31 years of the index. Typically the MAPI index predicts business conditions 3-6 months in the future. The MAPI index is a quarterly index and the prior number for the quarter ending in September was 68. The advance shipments component jumped to 91 for December. This projects shipments for the 1Q of 2004. Backlogs rose to 67% from 51% in Sept. Unlike the NY and Philly surveys the MAPI survey is a forecast based on the last quarter where the others are current conditions surveys. The monthly retail sales for December came in at +0.5% and below consensus of +0.8%. If you take out autos the increase was only +0.1%. This was not an exciting December but we already knew that from the weekly numbers. Were it not for the reported surge in the week before Christmas it would have easily been negative. While on the surface it looks bad it is deceiving. The headline number compares sales to the prior month. If you compare it to the prior December you get a healthy +6.7% growth. It is all in how you report it. It was the best fourth quarter for non-auto sales since 1999. Surprised? Oct/Nov were still seeing the cash from tax rebates and mortgage refinancing. Had it not been for December dragging down the numbers the quarter would have been much higher. This will create some seriously tough numbers for comparisons in 2004 for both the 3Q and 4Q. Economic reports due out Friday include Business Inventories, Industrial Production and Consumer Sentiment. What a day for stock news! I am not going to rehash the earnings from last night except to show how investors voted their approval. INTC -0.33, YHOO -0.30 and a big recovery from a -2.50 intraday loss. QLGC -2.68 and AAPL -1.35. The losses would have been a lot bigger had it not been for IBM and their strong earnings and guidance. This reversed the tech sector depression helped lead the markets back from the depths. IBM posted surprisingly strong results and by changing their release date after the close on Wednesday caught everybody off guard. Services contracts, which had been rumored to be a weak point in December, soared and beat estimates by a wide margin. The backlog of service orders rose to a monster $120 billion. IBM earned $1.56 per share with estimates only $1.50. Only $1.50? Obviously any company would be thrilled to earn $2.7 billion. For the first time in years IBM gave a long term outlook and suggested analysts were light on estimates. That put the squeeze on those suggesting that IBM was mired in problems and on those short the stock. The only real problem for those results was the currency translation issue. IBM reported a +9% jump in revenue to $25.9 billion. If you remove the currency impact that number drops to only a +1% gain at $23.9 billion. That is nearly a $2 billion windfall because of the low dollar. Obviously investors did not care that the headline numbers were so grossly misstated because IBM rose +3.71 to 94.05. Revenues from global services, 44% of IBM total revenue, increased +8% to $11.4 billion. However, the revenue gain for services was ENTIRELY due to currency translation. Software revenues grew +12% on the surface but only +2% without the currency benefit. Despite the strong earnings and strong gain in stock price I would not be surprised to see some weakness ahead as the numbers are reviewed. The gains on Thursday were obviously on strong short covering due to the headline number. Traders did not suddenly decide to buy 20 million shares just because they beat estimates by six cents on currency translation. I read the earnings report forward and backward and I cannot find ANY statement of how much of the EPS was due to currency translation. I guess they would rather we not know. Keep an eye on IBM over the next couple weeks. After the bell today we saw earnings from JNPR, SUNW, CREE, RMBS and TMTA. All met or beat estimates. CREE beat estimates by +2 cents and raised guidance. The chip sector had started the day out in the hole after Intel and a sector downgrade by SG Cowen. Smith Barney removed Intel from their focus list and added to the opening depression. CREE helped to change that sentiment with their guidance. CREE upped guidance for the current quarter to 17-19 cents per share when analysts were only expecting 15 cents. RMBS beat the street by three cents and said revenue for the current quarter would be slightly higher. TMTA posted a loss of -13 cents after items and inline with estimates. They guided analysts to a loss of 11-12 cents for the current quarter. The big guns were SUNW and JNPR. SUNW posted a smaller than expected loss but they refused to give any guidance. They said that business was pretty much on track and they had seen some upside surprise in the 4Q. CFO McGowan said the +14% sequential growth was the best quarter since 1998. The markets did not react strongly to Sun's earnings due to the lack of guidance. Scott McNealy did take a shot at IBM and their optimistic outlook. He said IBM must have a lot of economists on staff whose salaries are getting bundled into the price of IBM products. He said he couldn't see the future and unlike IBM he cannot predict future economic recovery. JNPR was the star of the after hours earnings show. They beat estimates by +2 cents and said they expect to easily beat analyst estimates for the 1Q. Whoa! JNPR said they expect to make +8 cents for the 1Q and that is +3 cents over current estimates. The conference call was positive and very upbeat. It is 1999 all over again except that customers are buying only what they need when they need it and that is keeping the sales healthy on an ongoing basis. JNPR has recently signed some big contracts and has partnered with Lucent to produce products helping them both. Business is good but they are trying not to get too excited just in case it changes. JNPR was the leading reason for an upsurge in futures after the close and they were still moving up at 8:PM. Intel said they were seeing an uptick in enterprise purchases and IT budgets were increasing. IBM suggested they were finally seeing the first signs of a real IT recovery. They had said last quarter that they were not. CREE upgraded guidance and JNPR hinted that they might double the estimates. Sure looks like the bulls are back. Happy days are here again seems to be the common thread from tech earnings, manufacturing surveys and inflation gauges. The Fed is on hold for the rest of 2004 or so the current conventional wisdom says. Bonds are moving up again and yields on the ten year note closed at 3.97% and a 3-month low. What is wrong with this picture? Even with all the good news the Dow gained barely +15 points and the Nasdaq finished in the red. That is actually good news considering the gap and crap at the open. The less than expected guidance from last nights earnings prompted a sell the news event that knocked the Dow back below 10500 and the Nasdaq back to 2088 before the buying began. The morning drop was swift and the afternoon rebound was strong but slower. Unfortunately the internals do not show the same strength. Volume was equally split between advancing and declining and it was heavy. Advancing and declining issues were even. The Dow, Nasdaq, Russell and Wilshire all set new 52-week highs by a handful of points but pulled back again at the close. The pullback was no surprise with more tech earnings on tap. After the morning drop I was surprised the pullback was not stronger on fear of those earnings. We are poised to breakout of the recent resistance highs. It is the third week of January and we have traded generally within 100 points of 10500 for the entire month. There has been no historical January dip and time is running out. Friday is option expiration and Monday is an exchange holiday. Next week is a massive deluge of earnings but we already know what they are going to say. All the factors are in place for a strong surge or a strong drop. Neither direction is a sure thing. The churning at the resistance highs is a potential sign of distribution. It represents indecision and proven by the return of volatility. This is good because it means the entire investing public is no longer bullish. There is a growing undercurrent of confusion. If you bought stocks over the last three months expecting strong earnings in January then you got your wish. Now what? So far the guidance has been for continued growth and those that were planning on selling the bounce are now thinking about holding until April. Those that were on the sidelines hoping for a nice dip to buy are trapped. Chase the new highs or continue sitting out? Tough question. I know the minute I go long the top will be in place. If I remain short we will go higher. Millions of others are thinking the same thing tonight. This is creating a very shallow bottom. You saw the drop on Tuesday to under Dow 10400. It was bought with reckless abandon once traders were sure it was not going deeper. Buyers are waiting. The only plateau we have not crossed to the upside is the Dow highs from 2002. The actual intraday high was 10673 but there was nearly a month of range bound trading between 10500 and 10650. Dow 10600-10650 is generally considered the critical resistance range from that period. Ironically we have traded for all of January in the same general range between 10500 and 10600 with only a couple minor dips to the downside. We have not yet tested 10600 completely with all four attempts to move over 10580 turned back. This means the jury is still out on any move higher. Until that 10600-10650 level is behind us we are still trapped in a range. The January expiration cycle could have had something to do with the gains since Tuesday's lows. In December we saw the same thing. The markets had gone higher than expected and option sellers were trapped with shorts that had to be covered. Countless traders probably rolled those positions forward thinking they could escape the trap for sure during the January dip. With no dip in January the trap is squeezing ever tighter. With Friday an expiration day and Monday a holiday there is no way to predict market direction. I am watching futures rise as I type this and it looks like we are going to gap open again tomorrow assuming GE earnings before the bell are not unbelievably bad. Since they almost never miss or warn I can't imagine that will happen. The three economic reports are probably not serious market movers considering the good news we have already seen this week. That leaves us watching for expiration gyrations with some possible profit taking before the close. On expiration Friday in December we had a gap open, intraday slump and a strong rally into the close. January expiration is a tossup and a day best watched from the sidelines. Entering new plays could be very risky. There is also the risk of being long over a three day weekend. Sounds like a good day to plan your trades for next week instead. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Dollar Upphase Jonathan Levinson The US Dollar Index strengthened today, and commodities valued in US Dollars, most notably gold, silver and natural gas, got slammed along with foreign currencies. That was the extent of the anticipated "binary trade", as equities rockets both higher and lower intraday, finishing near unchanged, while treasuries advanced slightly. 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 spent the session moving higher, its first day of this upphase spent entirely above the 86 level. It reversed course along its intraday uptrend above 86.60, but was firm as of this writing. We have buy signals and a new upphase on the daily cycle oscillators, with resistance in the 88-89 area above. The CRB dived, dropping 3.27 to close at 264.75, led lower by natural gas, heating oil, silver and gold futures. Daily chart of February gold Gold and silver got clocked today, with gold down double digits and spending much of the session below 410, finishing lower by 11.10 or 2.64% at 409.30. An ugly 3 black crows formation shows downside acceleration, and the daily cycle downphase is so far sharp and strong. I've outlined preliminary support below, with the bottom rung at 368 as the downside bear wedge target. I don't know whether that level will get tested or not, but a mistake that I've made in the past has been impatiently rushing into positions about which I had felt bullish. The HUI and XAU bounced from their intraday lows, and it's possible that gold will continue trending higher either from here or from upper support levels. However, there are fresh sell signals on the extended daily cycle oscillators and a sharp, textbook bear wedge breakout. Bullish on gold as I am, I remain cautious here. For the day, XAU dropped 4.03% or 4.09 points to close at 97.34, HUI -4.07% or 9.28 to close at 218.97. Daily chart of the ten year note yield Bonds extended their rally today, helped along by a net surplus of 4.25B in various duration repos. Ten year note yields dropped 1.5 basis points to 3.971%, a .38% drop for the day, inching ever closer to support at 3.90%. The daily cycle downphase remains well-established here, and a steady advance in treasuries is underway. Daily NQ candles The NQ had a wide ranging doji day as the herd dashed first lower, and then ran almost straight to the day and rally highs before fading lower in the last hour. NQ finished lower by .50 at 1537. Lower rising trendline support was tested and briefly broken on the spike to 1516, but the breach didn't last long. The close near unchanged leaves traders holding a question mark as to whether the current sideways fade within the rising channel is a bull flag or the beginning of the end. So long as support above 1515 holds, the bulls will continue to sit pretty, despite the daily cycle rollover that has bears on the edge of their collective seat. While rising channel support is now no lower that 1520, 1515 support has been persistent for the past week. 30 minute 20 day chart of the NQ The 30 minute cycle continues to vacillate here in the range that is either a bull flag consolidation or a distribution top. A third test of the highs was rejected again today, and the 30 minute cycle oscillator again aborted its downphase and then lagged the sharp price bounce, again setting up a potential bearish divergence. Until the lower support at 1515 or resistance at 1550 breaks, the signals on this timeframe will continue to be uncertain and short-lived. I expect a break of either end of the range to be good for a decisive, directional move. Is the run in the dollar bullish for equities? Is the rally over or about to start a next wave up? These are the questions hanging in the balance of the current 35 point NQ range. Daily ES candles The ES printed a bullish doji candle, traversing a 13.5 point range but printing a higher low and higher high. For the day, it gained 2 points to close at 1133.25. The expected short covering rally on a break of 1133 didn't occur, with a reversal starting from new 52 week highs. Neither upper nor lower channel trendlines were tested, and closing print was closer to the top of the daily range than it was to the bottom. Unless the ES moves higher tomorrow, sell signals appear imminent on the daily cycle oscillators, but I'm not inclined to hang too much weight on that until we see a breakout move above the 1140 level or below 1118. The oscillators are merely telling us that a downphase is due, and that if it doesn't start soon, the markets will be trending higher. As seen in the steep correction in gold this week, the move can happen fast, and ES is now less extended here than was gold at the beginning of the week. Bulls need to be careful, and I personally expect this break to the downside, but until 1118 falls, the uptrend remains indisputably intact. 20 day 30 minute chart of the ES It looked like an upside break from a consolidation beneath the highs, right up until it keeled over. The 30 minute chart shows the uncertainty resolved to the upside, but the lack of followthrough leaves the question open. Resistance is now in the 1136-40 area, with support at 1130, 1123 and 1118. The 30 minute cycle has been unreliable for more than confirmation of short cycle moves, because the range is too narrow to permit direction moves to develop from its signals. That said, ES left off on a 30 minute cycle upphase, which favors strength into tomorrow's open. As with the NQ, I await a break of either the upper or lower range to guide us as to the next extended directional move. 150-tick ES The upturn in the Keltner channels confirms the 30 minute cycle upphase currently in progress, and the short cycle oscillators are also headed higher. Keltner support at 1127 should not be broken heading into tomorrow's session. Daily YM candles The YM finished at 10552, up 42 or .40%, the strongest of the equities. Its daily cycle downphase has been good for no more than a sideways drift, and my analysis is the same as for ES and NQ. This range is either a bull flag consolidation or a distribution top, and a break of 10600 or 10300 will decide the matter. 20 day 30 minute chart of the YM The US Dollar Index continues to hold the key to the current market action, with bonds strengthening alongside the dollar, while commodities weaken. Equities continue to defy this intermarket analysis, but the usual op-ex machinations this week confuse the matter. There's a good possibility of tomorrow printing a narrow day as option writers jockey for position around preferred strike prices. On the other hand, with maximum pain strikes mostly lower, I'd expect any surprise moves to be to the downside. I'm hoping that next week provides us with a definitive range break against which to measure the dollar rally's impact on the equity indices. As the dollar is looking bullish from here at the start of a daily cycle upphase, any continuing strength in equities would imply the next wave of upside for stocks. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Thinking about a 4-day weekend After a whipsaw session that found the major indices being jerked around and finishing relative unchanged, I'm thinking about a 4- day weekend. Markets will be closed on Monday in observance of Martin Luther King Jr. Day, and with equity option expiration on the plate for tomorrow, those traders that didn't get enough rest during their Christmas to New Years holiday break, might think about taking tomorrow off. After two unsuccessful attempts to Toll Bros. (NYSE:TOL) $39.50 +1.07% bullish and getting stopped out just after the open, and later in the day shorting the QQQ at $38.25 to get stopped out minutes later at $38.36, I'm thinking a visit to the chiropractor tomorrow to check out a case of whiplash is a good idea. Economic data released today, though mostly ignored due to what I truly feel was index option expiration, had various economic indicators showing positive signs. December consumer prices rose a tepid 0.2%, which was in line with economists' forecast, but up from November's -0.2% decline. The core rate, which factors out the more volatile food and energy components edged up 0.1%, also matching economists' forecast, and offsetting November's 0.1% decline. The continued lack of any meaningful inflationary, or deflationary indicators at the producer and consumer levels, combined with a bounce in the dollar had gold and gold stocks under strong selling pressure again today. The AMEX Gold Bugs Index ($HUI.X) 97.34 -4.03% closed at a 2-month low. The U.S. Dollar Index (dx00y) 86.55 +0.6%, hardly a picture of technical strength, now approaches its trending lower 21-day SMA (01/14/04). Gold did see some late session firming after the December U.S. Treasury Budget showed a -$16.2 billion deficit, which was wider than economists' forecast of $13.0 billion. The budget deficit is currently $21 billion larger than a year ago. Treasuries caught a slight bid on the news, with the benchmark 10-year Treasury YIELD ($TNX.X) finishing down 1.5 basis points to close at 3.971%. The regional New York Empire State Index improved for the ninth month in a row, rising to 39.2 (consensus 35.0) from December's upwardly revised 37.4 (prior 36.2). The Federal Reserve Bank of New York said respondents reported improved business conditions and continued optimism, with nearly all those surveyed expecting conditions to be the same or better six months from now. The new orders index rose to 36.13 in January from 35.19 in December, while shipments climbed to 41.73 from 36.66. Total retail sales for December rose 0.5%, which was below economists' forecast of +0.8% and November's downwardly revised +0.9% (prior +1.2%). Excluding autos, December sales rose a fractional 0.1%, also below economists' forecast for a 0.4% gain. Some comments I read regarding December's lackluster ex-autos data was that gift cards were very popular during the holiday shopping season, and retailers can not book the sales of gift card purchases until credits are redeemed by consumers. Without success, I did try to look for any forecasts for January retail sales, which might have economists factoring in gift card redemptions, but I could not find a current economic forecast. The S&P Retail Index (RLX.X) 377.79 +0.58% closed back above its rounding lower 50-day SMA, but just above the mid-point of its November high and December relative low. Retailing Dow components Wal-Mart (NYSE:WMT) $53.49 +0.65% edged up $0.35 per share, while Home Depot (NYSE:HD) $35.43 -0.11% slipped lower by $0.04 per share. I received a very good question from a trader/investor the other day regarding the recent buying in Treasuries, which has YIELD falling, and the relationship with a sharply lower gold trade. Is this a sign of coming negativity toward broader equities, and perhaps the economy. It might be, and I would only use these observations as a reason to be disciplined with bullish trading in broader equities at this time. Not that we shouldn't be with the bullish % indicators still at very high, but still very strong levels of bullishness. It has become somewhat obvious to this analyst (Jeff Bailey) that the Fed isn't going to move on interest rates, until one of two things happens. The first and foremost is that it sees some type of inflation, with the second observation being that the labor market shows steady improvement. I'm going back and looking at the AMEX Gold Bugs Index ($HUI.X) here tonight, and noting the recent highs of 258, from which the HUI.X appears to have double-topped at its December 2nd high of 258 and now witnessed a lower low. My economic calendar shows that on January 6th, November factory orders were released, and showed a -1.4% decline, which was slightly below the -1.5% decline economists had forecasted. While it is my belief that a market will accurately forecast, or predict future data, which will either positively or negatively impact trade, I'm simply benchmarking what appears to have been a key point of resistance in the $HUI.X with economic reports released to all market participants. On January 6th, the benchmark 10-year YIELD ($TNX.X) was trading 4.30%, and while its decline in YIELD, spurred by buying, does suggest a somewhat defensive posture from the bond market, it may well be based on reiteration of Fed policy that the Fed Fund rate is staying at 1.0% for "the foreseeable future." One of the dynamics I've noted in past comments, is that during the great bull market of the late 1990's gold fell sharply, while Treasury YIELDS rose, matching the rise in equities. The "killer" signal for equities decline seemed to be the continued pummeling of gold, and renewed buying in Treasuries at much higher YIELDS than found in recent months. With the brief conversation of gold and bond relationship being somewhat suspicious in that the major equity indices are not showing any real sign of meaningful weakness, we should still observe today's trade with the thought that it may have been highly manipulated due to index option expiration. I agree with those investors that this week's trade may have been somewhat influenced by index and stock expiration, which should keep traders and investors disciplined with our stops. I would use the recent sharp decline in gold, along with a lower Treasury YIELD trade as an alert for weakness in the major equity indices, but then be looking for some type of technical confirmation that weakness is actually being observed. Tonight I'm going to set a downside YIELD alert on my 10-year YIELD ($TNX.X) chart at its inflection point low of 3.912% from October 1, 2003, where if broken lower, may indeed be some type of signal from the bond market that we should be alert to. The reason I'm not overly concerned with some of the renewed interest that Treasuries are finding right now is that on September 30, 2003, the SPX traded a relative low of 990.36 and closed 1,132.05 today. I'm also monitoring the Pacholder High Yield Fund (PHF) $9.41 +0.10%, which is a closed-end "junk bond" fund, as it battles with $9.50, but 52-week highs. It's current YIELD based on last month's $0.075 per share distribution (pays monthly) is 9.56%. My thinking by following this security as a general representation of "junk bonds" is that if the market perceives downside risk, it doesn't care about a higher yield, if downside risk is perceived as high. The combined buying of Treasuries, which are backed by the full faith and credit of the U.S. government, with the observation of buying in a much riskier set of bonds (junk bonds) gives the impression that income investors see some type of acceptable risk/reward relative to where it currently seed Fed interest rate policy heading. Perhaps gold has started to say the same thing in recent weeks. Market Snapshot / Internals - 01/15/04 Close The major indices finished just about where they ended Wednesday's session and closing A/D lines were just about even. Volumes were brisk and heavy, which we might expect on an Index expiration. A quick review of my buy/sell premium chart on 5- minute intervals has me counting 5 buy program premium alerts and 6 sell program premium alerts during today's trade. This to me hints of some heavier institutional activity and not a surprise. Tomorrow it will be stocks' turn for option expiration, along with the QQQ, so I'd plan on some more volatility. NH/NL breadth remains very bullish, with the NYSE 10-day ratio now at 98.9% and NASDAQ NH/NL ratio at 98.6%. You can probably pick up on the intra-day volatility in the point change columns by the hour and it is notable how the INDU/SPX/OEX/RUT.X/QQQ all finished positive with an Index expiration, while the very broad NYSE and NASDAQ Composite finished fractionally lower. I make not of this, only because of some observations we have been making regarding some of the option action in the current month option contracts, combined with the Market Volatility Index (VIX.X) 15.56 -7.1% suggested we might well see index expiration have an impact into today's trade. This week I concentrated more on the SPX, and while today's close of 1,132.05 may be thought as "random" its close is right between our MONTHLY R1 and WEEKLY R1 and today's DAILY R1 correlation found in last night's wrap. I made two trading "mistakes" today. One at the open in TOL, as the SPX was nudging just above 1,133. I traded long and you can see from the intra-day internals what took place by 11:00 AM EST. Then later in the day, I "wised up" and when the QQQ rallied back to its correlative levels of pivot matrix resistance of $38.25, I shorted with a stop placed tight at the 52-week high, was promptly stopped out, before the QQQ fell back lower. I've been known to make a few trading mistakes that result in losses, and mistakes I seem to be willing to make time and time again is to initiate trades during option expiration. It won't be the first, it won't be the last, and when I do trade at option expiration, I expect volatility, but will always use a tight stop. Pivot Analysis Matrix - Today's e-mini S&P futures (es04h) settlement above my fitted retracement level of 1,113.25 gives a bullish bias into tomorrow's trade, and has me currently looking at a cash (SPX) 1,132.05 +0.13% trade potential to its WEEKLY R2 1,144.19 and correlative DAILY R2 of 1,143.83. I've noted in pink today's HIGH on the OEX was smack on its WEEKLY R1, and the trigger for upside potential to SPX WEEKLY R2 is an OEX break above that high, where OEX now shows some tentative (dashed green) early support at the MONTHLY R1 and DAILY Pivot. I marked today's LOW in the SPX and tomorrow's DAILY S1 as a level I think really needs to hold some support. It was this 1,125 level where the bulk of my observations regarding heavy option trading into index expiration was taking place. For me, this becomes a rather important near-term level of support if bullish traders are committing new bullish capital to these markets. The ONE thing I think traders need to be careful of right now, is that I really do think there has been some scrambling by institutions to "get long" in an attempt to square up on some calls written previously at 1,125 and above, which may create some artificial bullishness. What bulls need to be careful of is that this "artificial" bullishness, if it exists, doesn't unwind itself early next week after expiration. For bears, they've got the same problem tonight that has been a concern for months. 52-week highs and limited overhead supply of stock. S&P 500 Index (SPX.X) Chart - Daily Intervals 1,125, 1,125, 1,125 keeps showing up in recent sessions. Even that very short-term downward trend from the January 9th relative high, which was firmly broken to the upside late Wednesday, served support at 1,125 on a pullback test early this morning. With futures closing above my bullish bias level, I think there's enough upside emphasis to have the SPX trading 1,144-1,145 tomorrow. S&P 100 Index (OEX.X) Chart - Daily Intervals Here's a 10-minute interval chart which shows this weeks trade. I wanted to brink in the observation of the downward trend from the recent 52-week high, and when broken, how it serves support this morning. While the Pivot Levels give us levels to be looking for institutional program buying and selling levels, these basic trends give some insight as to what other market participants have been doing. My best guess is there were some shorts playing trend, maybe thinking of a 550 OEX settlement, but when trend is broken and overhead supply is limited, a bear will turn on a time and look to buy a retest of the trend. Dow Industrials (INDU) Chart - Daily Intervals Tomorrow's DAILY R2 at 10,656.82 adds another near-term level for resistance in the INDU. After we looked at a INDU point and figure chart earlier this week and saw a 3-box reversal (finally) it is now that I begin to wonder what is going to take place early next week when option expiration is over. If we're going to finally see a more meaningful pullback and digestion of gains after the bold move above 9,900, then I'd have to be looking for a spike higher, but a quick reversal back lower type of trade. With MACD fading a bit in a strong upward trend, and Stochastics providing some near-term bullishness, traders should be alert to such a trade. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals QQQ option expiration is tomorrow and despite a lower trade in INTC and YHOO, the Q's held tough on IBM's upbeat earnings and comments. An after-hours upside surprise and upward revisions to prior guidance gives the Q's a lift in after-hours. Aggressive bulls can play for a squeeze, and important support becomes visible at $37.55. Those bulls not willing to risk downside to $37.55, I saw some "bad ticks" lower at $37.95 today, which hinted to be of a near- term "floor" of support, which a bull could look to 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 ************************************************************** **************** MARKET SENTIMENT **************** Sell The What? - J. Brown Sell the News! I've been warning that investors are likely to sell the Q4 earnings news no matter how good the numbers are and that's exactly what we got today. Granted IBM was the exception this morning but investors were caught unawares by the surprise announcement when Big Blue was supposed to report next week. Fellow headliners Intel, Yahoo and Apple were all lower on the day but YHOO managed to pare its losses. Overall the markets were mixed. This heaviest selling hit the XAU gold & silver index again with a 4% loss on Thursday. This is the fourth consecutive day of losses. The index appears to have broken its rising channel and a number of gold stocks suddenly look like shorts breaking through support. Is it a bear trap or are gold bugs finally cashing in on the big ramp up in gold with a nascent bounce in the dollar forming? The XNG natural gas index was the second worst performing sector on the session with a 1.88% drop. The move doesn't look good for natural gas stocks as the rally appears to have run out of gas and the group looks ready to fall of a cliff. Other notable losers were the XAL airlines index and the OIX and OSX oil and oil services indices. The XAL took a hit after DAL dropped 5.59% on a downgrade from Deutsche bank. Meanwhile the OIX has been in a rocket-propelled rally higher and is finally starting to see some profit taking. Winners on the session were the NWX networking index (+1.77%), the BIX banking index (+1.55%), the XBD broker-dealer index (+1.21%) and the SOX semiconductor index (+1.61%). The NWX was up in anticipation of JNPR's earnings after the bell and the company beat estimates by 2 cents. Another strong day from Nortel (NT) and Lucent (LU) didn't hurt the sector any. The BIX was up on the JPM-ONE merger news and the XBD was up on the expectation for further consolidation and that means M&A fees. Evidently Intel did a good enough job with their post-earnings spin to give the SOX a lift even though shares of Intel closed lower. Today really was a toss up. The urge to sell on yesterday's earnings news was countered by last night's merger announcement and IBM's stellar earnings announcement this morning. Plus positive economic data with another week of lower initial jobless claims is a feel good boost for investor sentiment. The tug-of- war is evident in the NYSE advance-decline numbers with losers edging out winners nearly 8 to 7. The NASDAQ was closer with advancers nosing past decliners 16 to 15. Tomorrow we'll see more of the same but I believe investors may still have a bullish bias. GE's pre-market earnings report will influence the tone of the session and likely overshadow the handful of economic data with business inventories, industrial production, capacity utilization and the Michigan sentiment numbers. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10592 52-week Low : 7416 Current : 10553 Moving Averages: (Simple) 10-dma: 10507 50-dma: 10068 200-dma: 9353 S&P 500 ($SPX) 52-week High: 1137 52-week Low : 788 Current : 1132 Moving Averages: (Simple) 10-dma: 1124 50-dma: 1078 200-dma: 1005 Nasdaq-100 ($NDX) 52-week High: 1545 52-week Low : 795 Current : 1532 Moving Averages: (Simple) 10-dma: 1515 50-dma: 1439 200-dma: 1298 ----------------------------------------------------------------- Oh well...bears who had been hoping that the recent bottom in the volatility indices may have indicated a top are disappointed once again. The VXO appears to be channeling lower with a steady trend of lower highs. CBOE Market Volatility Index (VIX) = 15.56 -1.19 CBOE Mkt Volatility old VIX (VXO) = 16.23 -0.47 Nasdaq Volatility Index (VXN) = 22.64 -0.53 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.66 1,083,341 715,875 Equity Only 0.52 843,879 442,894 OEX 0.93 50,558 46,803 QQQ 2.20 42,812 93,989 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 77.4 + 0 Bull Confirmed NASDAQ-100 81.0 + 0 Bull Confirmed Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 87.0 + 0 Bull Confirmed S&P 100 85.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.15 10-dma: 1.00 21-dma: 0.94 55-dma: 1.05 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1397 1581 Decliners 1581 1459 New Highs 294 218 New Lows 8 3 Up Volume 1148M 1070M Down Vol. 982M 1079M Total Vol. 2164M 2198M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 01/06/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Was it a one-week blip? The surge in long positions by commercial traders have evaporated. Was a sudden change of heart or did they just get caught up in the holiday spirit? Of course there was an equally strong disappearing act in commercial short positions so maybe they're just confused. Small traders have really cut back on their shorts and in effect become extremely bullish. Commercials Long Short Net % Of OI 12/09/03 396,882 420,859 23,977 2.9% 12/16/03 448,103 460,670 12,567 1.4% 12/22/03 400,066 405,240 (5,174) (0.6%) 01/06/04 403,721 408,729 (5,008) (0.6%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 12/09/03 172,178 99,484 72,694 26.8% 12/16/03 172,947 113,704 59,243 20.7% 12/22/03 147,537 81,596 65,941 28.8% 01/06/04 142,844 83,518 59,326 26.2 Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Wow! The disappearing act in the full contracts (above) is nothing compared to the drop in contracts below. Commercial traders really reduced their outstanding long positions in the e-mini's and that's not a bullish development. Right on cue, the small traders cut back on their short positions. Commercials Long Short Net % Of OI 12/09/03 294,006 288,385 5,621 1.0% 12/16/03 330,273 361,316 (31,043) (4.5%) 12/22/03 128,801 213,021 (84,220) (24.6%) 01/06/04 175,489 240,865 (65,376) (15.7%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 12/09/03 142,173 76,171 66,002 30.2% 12/16/03 177,193 73,694 103,499 41.3% 12/22/03 125,248 43,482 81,766 48.5% 01/06/04 139,433 51,909 87,524 45.7% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 We see the same contract evaporation in the NDX futures as well. Commercial long contracts lost 1/3 of their number but short contracts were cut in half. That actually sounds bullish. Commercials Long Short Net % of OI 12/09/03 39,612 51,443 (11,831) (13.0%) 12/16/03 61,343 73,153 (11,810) ( 8.8% 12/22/03 40,277 36,452 3,825 5.0% 01/06/04 42,892 37,801 5,091 6.3% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 12/09/03 25,842 10,228 15,614 43.3% 12/16/03 28,676 15,197 13,479 30.7% 12/22/03 22,656 14,544 8,112 21.8% 01/06/04 8,035 17,911 ( 9,876) (38.1%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL This time it is the small traders that drastically reduced their short contracts. They probably got tired of losing money. Commercials followed suit. Commercials Long Short Net % of OI 12/09/03 20,378 11,934 8,444 26.1% 12/16/03 23,509 13,880 9,629 25.8% 12/22/03 14,088 9,998 4,090 17.0% 01/06/04 15,697 9,497 6,200 24.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 12/09/03 6,858 12,006 (5,148) (27.3%) 12/16/03 9,497 19,633 (10,136) (34.8%) 12/22/03 6,915 8,983 ( 2,068) (13.0%) 01/06/04 5,713 8,105 ( 2,392) (17.3%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Thursday 01-15-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: DLX Dropped Puts: CFC Call Play Updates: AMZN, APOL, DGX, GD, GILD, MXIM, STJ New Calls Plays: MWD Put Play Updates: ADBE, DIA New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Deluxe Corp. - DLX - close: 42.04 change: +0.03 stop: 40.50 To say the action in DLX has been boring would be misleading, because it implies "some" action. Since breaking above the apparent H&S neckline last week, the stock made one foray up to the 200-dma and since then has been comatose about the $42 level. DLX may go up, and it may go down, but with the increasingly tight range of the past week, it is becoming difficult to see which way the next move will go and when it might arrive. Trading blind is never a good idea, so we're going to pull the plug near par and look to replace the play with something that provides a bit of visibility. Picked on January 6th at $42.30 Change since picked: -0.26 Earnings Date 1/29/04 (confirmed) Average Daily Volume = 331 K Chart = PUTS: ***** Countrywide Financial - CFC - cls: 70.30 chng: -0.88 stop: 74.00 There's no nice way to say it -- Monday's dip below our $69.70 trigger on our CFC play was (in hindsight) a clear bear trap and the jaws slammed shut with yesterday's strong rally up to the 10- dma and only tightened on Thursday with the surge above the $74 level. Despite the fact that CFC did close fractionally below our stop, it is still too much of a stretch to say it makes sense to hold the play in the face of a rising market, strong financials and falling mortgage rates. We'll take our lumps here and drop coverage on CFC tonight. Picked on January 8th at $70.95 Change since picked: +2.71 Earnings Date 1/27/04 (confirmed) Average Daily Volume = 1.84 mln 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 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amazon.com - AMZN - close: 56.18 chg: +0.38 stop: 51.25*new* Anticipation in front of Yahoo's earnings yesterday was enough to push shares of AMZN up and over the $55.00 mark and our trigger at $55.01. The excitement continued after everyone ooh'd and ah'd over YHOO's strong revenue numbers. It is that pre-earnings excitement that should keep the rally alive for AMZN. Granted the stock looks short-term overbought up five days in a row and could be due for a dip but odds are that dip will be bought. We are expecting some resistance at $57.50 but the tease of AMZN turning in exceptional numbers with 2003 as the strongest year for online sales to date should be too much to hold the stock back for long. We're raising our stop loss to 51.25. Picked on January 14 at $55.01 Change since picked: + 1.17 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 10 million Chart = --- Apollo Group - APOL - close: 73.97 change: +0.96 stop: 70.00*new* We couldn't have asked for anything more from our APOL play, as the stock rose to kiss the $73 level yesterday and then blasted through that resistance this morning. As it pushed through $73.25, our entry trigger was satisfied and momentum traders had the all-clear signal. Rising to the $74.50 area early in the day, the stock then spent the remainder of the session relaxing off those highs and it looks like we could be setting up for the lower-risk entry on a rebound from the $73 area as old resistance acts as new support. Our stop was initially placed down at $68.50 to give APOL room to move before staging the breakout to new highs. Now that we have that hurdle out of the way, we can raise our stop to $70, which is just below the last mild dip. Note that the 20-dma ($69.98) will cross through that level tomorrow, providing one more level of protection for our stop. Picked on January 13th at $72.63 Change since picked: +1.34 Earnings Date 3/18/04 (unconfirmed) Average Daily Volume = 2.04 mln Chart = --- Quest Diagnostic - DGX - close: 76.78 chg: +0.91 stop: 72.50 *new* Finally! We've been waiting for shares of DGX to make a move and it occurred on Wednesday. The stock shot higher on zero news to breakout above resistance at $75.00. We got confirmation of that move with another decent gain today. The rally higher is certainly encouraging and there is little to slow the stock down between here and its next obstacle at $84.00 except round-number resistance at $80.00. We would be a little cautious on new entries and another bounce from the $75 mark may be a good bet. In the mean time we're going to raise our stop loss to $72.50. Picked on December 30 at $72.95 Change since picked: + 3.83 Earnings Date 01/27/03 (confirmed) Average Daily Volume: 836 thousand Chart = --- General Dynamics - GD - close: 92.33 chg: -0.73 stop: 89.50 Slow and steady is the ascent for shares of GD. We're not complaining though. The DFI defense index inched above its April-May 2002 highs this week and the group is climbing in "blue sky" territory. Actually, the trend in GD has been very orderly and the stock is still in a rising channel. Dips to $91 are probably the best entry point nowadays and conservative traders might want to consider stops under the $90 mark. We're going to leave our stop at 89.50 for now. Picked on December 21 at $88.78 Change since picked: + 3.55 Earnings Date 01/21/04 (unconfirmed) Average Daily Volume: 1.0 million Chart = --- Gilead Sciences - GILD - cls: 61.95 chng: +0.92 stop: 59.50*new* For more than a week now, GILD has been criss-crossing over the same territory, providing solid consolidation of the breakout over $60. We won't know until price action shows the answer whether this is consolidation before another upward leg or a near-term topping formation. But it does feel like a consolidation before another rally leg. Look how consistently intraday support is being found near the $60.50 level - there are definitely buyers lying in wait at that former resistance level. Those willing to buy dips will want to enter on successive dips near that level, while those looking to enter on strength still need to wait for the breakout over $64. Once clear of that resistance, look for next resistance at $66 at the top of the gap. We'll continue to target an ultimate move to $68, but remember that time is running out. GILD is set to report earnings on January 29th, so there's only 2 weeks left for the buyers to get the job done. Note that we've raised our stop to $59.50 tonight. That is just below strong support at the top of the broken wedge, as well as the 20-dma ($59.74) and neither of those levels should be breached if GILD really does have upside potential. Picked on December 21st at $59.40 Change since picked: +2.55 Earnings Date 1/29/04 (confirmed) Average Daily Volume = 3.70 mln Chart = --- Maxim Integrated - MXIM - cls: 55.52 chg: +0.74 stop: 51.45 The chip sector rallied strongly ahead of Intel's earnings report and the sell off in shares of Intel after the news was highly expected. Fortunately, Intel's positive spin on the quarter was enough to keep the rally alive for MXIM. We're a little cautious on new positions but aggressive traders might want to consider bounces from the $53.50-54.00 range. Conservative traders may want to consider adjusting their stops toward the same range. There is no change in our stop. Picked on January 06 at $51.89 Change since picked: + 3.63 Earnings Date 02/05/04 (unconfirmed) Average Daily Volume: 5.4 million Chart = --- Saint Jude Medical - STJ - close: 63.63 change: +0.07 stop: 59.99 The slow upward drift for shares of STJ continues and hopefully we'll see a more decisive close over the $64.00 level soon. There was an interesting article detailing the general under- awareness of heart disease in woman. Heart attacks kill six times more women than breast cancer in this country yet only 20% of the ICD's given to patients are installed in women. The Dow Jones report went on to detail that the implantable cardiac defibrillator (ICD) market could see a growth spurt as women become more aware and doctors better diagnose how heart attack symptoms vary from men to women. Looking back to STJ we remain cautious until the stock can close above the $64 level. Picked on January 12 at $64.01 Change since picked: - 0.38 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.4 million Chart = ************** NEW CALL PLAYS ************** Morgan Stanley - MWD - close: 59.81 chg: +1.19 stop: 56.75 Company Description: Morgan Stanley is a global financial services firm and a market leader in securities, investment management and credit services. With more than 600 offices in 28 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations. (source: company press release) Why We Like It: The JPMorgan (JPM) and Bank One (ONE) merger has set the financial and broker-dealer sectors on fire. Okay, "on fire" may be melodramatic but there were a large number of new highs and breakouts today after last night's announcement. As a matter of fact the XBD broker-dealer index closed near its all-time highs. Pacing the leaders is MWD who broke out of its recent consolidation. The revival of M&A activity has been a cash cow for the major Wall Street firms like MWD and the momentum appears to be picking up steam. Case in point, China plans to have 9 IPOs this year worth upwards of $13 billion and MWD is considered a front runner for the underwriting. Plus, investors might be feeling a bit "safer" with MWD after the company's $50 million settlement last November with the SEC over some fraud charges. Those familiar with the case will remember that MWD failed to disclose some promotional "arrangements" with 16 funds in its Partners plan. We like the breakout today on strong volume and believe MWD can trade to the $65 level before hitting any major resistance. We'll start the play with a stop loss at $56.75. Suggested Options: We like the February and April 55 and 60 calls but our favorite is the February 55's. BUY CALL FEB 55*MWD-BK OI= 758 at $5.60 SL=3.25 BUY CALL FEB 60 MWD-BL OI= 4460 at $1.75 SL=0.85 BUY CALL FEB 65 MWD-BM OI= 1450 at $0.40 SL= -- BUY CALL APR 60 MWD-DL OI=18588 at $2.95 SL=1.50 BUY CALL APR 65 MWD-DM OI= 9255 at $1.00 SL=0.50 Annotated Chart: Picked on January 15 at $59.81 Change since picked: + 0.00 Earnings Date 03/18/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Adobe Systems - ADBE - close: 38.45 change: +1.30 stop: 40.00 The market action this week has been truly astounding, but all it goes to prove is that sentiment is still VERY bullish. Last week, ADBE gave one of the best bearish breakdown chart patterns we've seen for several months when it broke longstanding support at $37.50 and the 200-dma. But rather than continuing downwards, the stock clung to the underside of that 200-dma while the oscillators made their way towards oversold. Thursday's strong rebound does not bode well for our play, as it makes it very likely that our $40 stop is likely to be tested, perhaps as early as tomorrow. Use the $39 level as a gauge of strength before considering rollover entries ahead of the weekend. Both the 20- dma and the 30-dma are converged near this level and if price pushes through those measures of resistance, we'd suggest abstaining from new entries until price drops back below $38. Traders looking to enter on weakness will need to wait for a break to new lows to enter, and that means a drop below $36.25. Picked on January 11th at $37.12 Change since picked: +1.33 Earnings Date 3/11/04 (unconfirmed) Average Daily Volume = 3.33 mln Chart = --- Diamonds Trust - DIA - cls: 105.96 chng: +0.29 stop: 106.25 Was Tuesday's dip the best the bears could muster? If so, then it looks like our attempt to play the downside in the broad market using the DIA is doomed to failure. Following a $10 point rally, the DIA pulled back roughly $2, tested its 20-dma and rebounded strongly. We're now in the heart of earnings season and despite some disappointments, the market has continued to be resilient, with each dip finding fresh legions of buyers. Hitting an intraday high of $106.12 on Thursday, the play came very close to triggering our $106.25 stop. We were looking for a failed rebound from the $105 area to provide continuation entries after Tuesday's drop, but with price right back near its recent highs, it looks like the rebound is not going to fail. Aggressive traders can certainly consider new entries on a rollover from current levels, but it must be considered high risk until price finally punctures the 20-dma ($104.38). Momentum traders will want to wait for a break below $103.75 (just under Tuesday's intraday low) before playing. Picked on January 8th at $104.69 Change since picked: +1.27 Earnings Date N/A Average Daily Volume = 5.79 mln Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 01-15-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: The Volatility Continues Traders Corner: Wanted: Traders With The "Right Stuff" ********** WATCH LIST ********** The Volatility Continues ___________________________________________________________________ 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. ___________________________________________________________________ Black Box Corp - BBOX - close: 49.30 change: -0.30 WHAT TO WATCH: Networking stock BBOX had a very strong run from mid-December near $40 to over $51 a week ago. Shares were looking poised for a drop on profit taking but JNPR's positive earnings announcement tonight may have given BBOX a reprieve. BBOX might be an aggressive bullish play over $51.00 but we'll be watching it for a breakdown under $49.00 (48.50). Chart= --- Infosys Technologies - INFY - close: 92.90 change: -2.95 WHAT TO WATCH: Uh-oh. Indian software stock INFY has faded from the $101 level back towards $90 after breaking minor support at $95 today. The stock should have support at $90.00 (old resistance becomes new support) but it make take some faith to buy the dip. We'll be watching for a bounce from $90 but if INFY breaks its simple 50-dma (nearing $88) it will immediately become a short-term bearish candidate. Chart= --- United Online - UNTD - close: 20.02 change: +1.22 WHAT TO WATCH: It's been a very good week for UNTD. The stock has rallied strongly on volume from under its 200-dma to breakout above resistance at $19 and $20. The actual close above the $20 mark is encouraging but unfortunately the stock has run headlong into overhead resistance on its P&F chart. We're cautious and not willing to chase it right here but will be monitoring it ahead of its February 4th earnings report. Chart= --- Goldman Sachs - GS - close: 101.14 change: +1.76 WHAT TO WATCH: We strongly considered adding GS to the OI call play list this evening on its high volume breakout above the $100 level. The JPM-ONE merger news has set the broker-dealer sector to new highs as investors speculate on further consolidation in the industry. More mergers means more M&A fees for firms like GS. Bulls can probably target a move to $110 but look for some resistance at $105. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- LU $4.47 +0.40 - Lucent jumped almost 10% today on an upgrade from Lehman Brothers. Shares are up almost 60% YTD already. COF $67.10 +2.31 - COF is breaking out above resistance as the entire financial sector bursts higher on the JPM-ONE merger news. PVN $12.18 +0.49 - COF's smaller rival is also breaking out from its recent consolidation but PVN still has a lid on the stock price at $13.00. ************************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 ************** Wanted: Traders With The "Right Stuff" By Mike Parnos, Investing With Attitude Wanted: Option traders. Will train bright, well-grounded, astute, reality-based individuals who want to learn skills that will last a lifetime. Must have the "right stuff." Successful traders are made, not born. At the Couch Potato Trading Institute, there is a recipe for success. Ingredients include experience, reasoning ability, emotional detachment, maturity, awareness, common sense, self-discipline, courage, vision, introspection, a sense of humor, desire, commitment, and a work ethic. Now, that's the "right stuff." Not The "Right Stuff" It seems I offended somebody with my column last Sunday. Actually, it may have been a few somebodies, but who's counting? It wasn't intentional – just an innocent humorous reference that most secure, well-adjusted people would have either smiled at or fluffed off, but certainly never taken personally. The world, in general, has to learn to lighten up a bit – especially traders. There are times in life when one's sacred cows may be portrayed as ground beef. Them ain't "fightin' words." They're just words. Get over it. Life's too short. Pick your battles. When you lose your cool, you'll lose your money. It's a certainty. Remember when your children used to whine, "He called me a name?" Once we get past 8-years old, aren't we supposed to grow a slightly thicker skin? Some children demonstrate their inner strength when they chant, "Sticks and stones may break my bones, but names will never hurt me." It's worrisome when some adults don't display the same fortitude. That's simply not the "right stuff." The Successful Trader On the other hand, a successful trader must be able to put things into perspective, to have a sense of humor and to not take himself too seriously. He has to be able to assimilate information, qualify it, quantify it, recognize it for what it is, and either discard it as frivolous or put it to good use. Enough said. For those who DO have the "right stuff," let's get back to the tasks at hand -- learning and making money. _________________________________________________________________ A Nice Big Silver Lining OK, so we took a hit on a few positions. But, it appears two of our trades worked out very well. The XAU Iron Condor saw the index violate the range, but it bounced off nearby resistance and returned to the range to hopefully expire without incident. The XAU has moved down the last three days – a lot. But I think we'll be OK. Our OEX Credit Spread Boogie finished in comfortably profitable territory as we watch the market trend continue. Our 535/505 bull-put spread will expire out of the money – by more than 20 points. ____________________________________________________________ February Position Preview Here are a few things I'm looking at for potential CPTI trades for the February option cycle. Remember, February is a five-week option month. As of yesterday (Wednesday), I was seriously thinking about doing another Iron Condor on the XAU, but the gold/silver index has tanked something serious. We'll see where it ends up after Friday's close. The OEX Credit Spread Boogie worked out very nicely. At the moment, even though the trend seems rather extended, there's no end in sight. So, we'll probably initiate another position. I'm looking at a 560/535 bull put spread for a credit of about $6.50 – based on Thursday's closing prices. Also, check out the MNX index. It's a mini version of the NDX index that tracks the NASDAQ 100. The NDX has 25-point strike prices and is exciting to trade – a little too exciting for some. So, we should probably dial it down a little and take the more conservative path. The MNX, strangely enough, has some 2 1/2 point strike prices. At the moment, I'm looking at an MNX Iron Condor with a 142.50/140 bull put spread (20 contracts) and a 165/170 bear call spread (10 contracts). The credit should be about $800 for each side or about $1,600 for both. It's only a $5,000 exposure and a 22-1/2 point max profit range. I looked at the SPX options and, right now, they don't have any February strikes over 1175. With the SPX trading at 1132, that's not near enough room on the upside for an Iron Condor that would let us sleep at night. For a seemingly safe play, our old friend BBH might fill the bill. I'm considering an Iron Condor with $130/$125 bull put spread and a $145/$150 bear call spread. It's a 15-point range with a credit of about $1.10. Again, keep in mind that we're trying to make money using neutral strategies in a trending market. It ain't easy. We're hoping that the market will come to its senses and at least pause for a while. Also, keep in mind that if you're uncomfortable trading in this environment, it's perfectly OK to sit out a month. Me? I've got to put these "hypothetical" trades out there for "educational" purposes, of course. ____________________________________________________________ JANUARY CPTI POSITIONS Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor – 1532.00 We sold 5 NDX January 1500 calls and bought 5 NDX January 1525 calls for a credit of $3.70 (x 5 = $1,850). Then we sold 5 NDX January 1325 puts and bought 5 NDX January 1300 puts for a credit of $2.40 (x 5 = $1,200). The total credit was $6.10. Maximum profit range: 1325 – 1500. Potential profit: $3,050. Closed for $1,700 loss. Position #2 – SOX (Semiconductor Index) – Iron Condor – 550.65 We sold 10 SOX January 530 calls and bought 10 SOX January 540 calls for a credit of $1.40 (x 10 = $1,400). Then we sold 7 SOX January 440 puts and bought 7 SOX January 425 puts for a credit of $1.35 (x 7 = $945). Our total credit was $2,345. Maximum profit range: 440 – 530. Potential profit: $2,345. Closed for $3,255 loss. Position #3 – XAU (Gold/Silver Index) – Iron Condor – $97.34 We sold 10 XAU January $95 puts and bought 10 XAU January $90 puts for a credit of $.60 ($600). Then we sold 10 XAU January $110 calls and bought 10 XAU January $115 calls for a credit: $.60 (600). Our total credit was $1.20 ($1,200). Maximum profit range: $95 – 110. Potential profit: $1,200. Position #4 -- QQQ Diagonal Calendar Spread -- $38.14 I'm a glutton for punishment, but there's a little voice telling me that we should be positioned to take advantage of a pullback in the market. We're going to start out risking a buck and we have two additional months to sell against the March long puts to reduce our cost basis while we wait. It's a cheap speculation. We'll consider this an ongoing position. We bought 10 QQQ March $34 puts for $1.20 and sold 10 QQQ January $33 puts for $.20. We rolled out to the February $34 puts and our total debit is now only $.70. _____________________________________________________________ ONGOING POSITION QQQ ITM Strangle – Ongoing Long Term -- $38.14 We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. We're going to make money by selling near term puts and calls every month. Here's what we've done so far: October: Oct. $33 puts and Oct. $34 calls – credit of $1,900. November: Nov. $34 puts and calls – credit of $1,150. December: Dec. $34 puts and calls – credit of $1,500. January: Jan. $34 puts and calls – credit of $850. February: Feb. $34 calls and $36 puts – credit of $750. Note: We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! And it's a great cash flow generating strategy. OEX Credit Spread Boogie – 560.42 We sold 2 December OEX 520 calls @ $9.00 and bought 2 December OEX 545 calls @ $1.55. Total credit of $7.45 ($1,490). Exposure $17.55 ($3,510). Rolled out to five contracts of the January 535/505 bull put spread. In the process we took in an additional $280. Total potential profit of $1,770. Looking good. We want the OEX to finish above 535. __________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. ____________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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