The Option Investor Newsletter Thursday 01-29-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Buy The Dip? Futures Markets: Dollar Breakout, Metal Breakdown Index Trader Wrap: See Note Market Sentiment: Finicky Investors Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-29-2004 High Low Volume Advance/Decline DJIA 10510.29 + 41.90 10522.59 10417.85 2.43 bln 1171/2078 NASDAQ 2068.23 - 9.10 2087.33 2041.07 2.64 bln 1059/2131 S&P 100 563.10 + 3.61 563.33 557.36 Totals 2230/4209 S&P 500 1134.11 + 5.63 1134.39 1122.38 W5000 11045.72 + 28.80 11058.26 10932.72 RUS 2000 579.86 - 4.05 586.81 573.34 DJ TRANS 2971.99 + 4.30 2986.68 2948.35 VIX 17.14 + 0.36 17.66 16.79 VXO (VIX-O)17.11 + 0.01 18.01 16.93 VXN 25.20 + 0.04 26.24 25.05 Total Volume 5,521M Total UpVol 2,022M Total DnVol 3,415M Total Adv 2523 Total Dcl 4784 52wk Highs 271 52wk Lows 16 TRIN 0.85 NAZTRIN 0.90 PUT/CALL 0.80 ************************************************************ Buy The Dip? Some traders bought the dip as the indexes neared critical support but there was no V bottom blast off as many had hoped. The low of the day came around 2:PM with alternating buy/sell programs fighting for control. Is this the bottom or better yet, is this the correction we needed? Dow Chart - Daily Nasdaq Chart - Daily The morning started off with another drop of -1,000 in the Jobless Claims but with the prior weeks number revised up +2,000 the net result was a rise. Regardless of how you add it up it was just one more week without any jump in the numbers. This was the third week in the 343,000 range and the four week moving average came in at 346,000. The total insured unemployment rate is down to 2.5% from the peak at 3.0% in late May. We are going in the right direction but we are not going very fast. Forty-seven states saw a drop in claims for last week. Florida had the largest gain in claims due to numerous layoffs. The Employment Cost Index jumped +0.7% for the 4Q but it was less than analysts had expected at +0.9%. Wages dropped but health care benefit costs rose. The drop in wages and the outsourcing of jobs is helping companies tack on additional earnings but slowly depressing real income. It is a good thing inflation is very low or the middle to lower income workers would really be suffering. Wages grew by only +2.9% for the year while employment costs rose +3.8%. Benefit costs rose +1.2% in the 4Q and +6.3% for the year. The Chicago Fed National Activity Index came in at only +0.13 for December and well below the +0.68 for November. That November number was revised upward from +0.55 and indicated a stronger bounce in the middle of the quarter and a fall off in December. Output components only added +0.05 to the index and well off the +0.54 contribution in November. Employment fell for the 11th straight month. Only 44 of the 85 components were positive for the period. One analyst said the headline number of +0.13 clearly showed that the economic recovery was gaining strength thanks to strong productivity growth. Sorry, I see a significant drop from November and a barely breakeven ratio on the components. It was the fourth consecutive positive month although it was only barely positive. Let's count our blessings and not worry over what could be in the future. The Help Wanted Index dropped one point to 38 but should not be considered a negative event. It has been holding the 37-38 range since June. The negative connotation would be due to the lack of a gain. If advertising for employees is not picking up then the Jobs report next Friday could also be flat. Analysts would love to have seen even a small jump over 40 to suggest a pickup in employment activity but they will have to wait for at least another month. If the economy is improving you would think employment advertising should be showing at least a minor increase. This always causes analysts to suspect the economic growth is not as robust as they hoped. Next Friday we get the answer. There is always the chance that consulting firms, internet job firms, search networks and the flood of unsolicited resumes are taking away the need for those advertisements. To confirm that thought process the Labor Turnover Survey also out today showed that layoffs are down -14% from year ago levels. Job openings have increased by +1.8% and new hires are up +3.1%. This was only the second month since the survey began in 2000 that there was a year over year increase in job openings. According to the JOLTS numbers the bottom in the labor market was in Aug/Sep 2003 and hiring has been increasing, although slowly, since then. The catch with this report is the reporting period. This is a November period and light years behind the market in terms of revelance. Traders want to know what happened last week not three months ago. This does suggest that data from other more current sources like the ISM surveys will continue to show improvement in hiring and that improvement will eventually end up in the JOLTS data. There is also the problem with the type of new jobs being created. New Wal-Mart's, Starbucks, Home Depots and new fast food restaurants are creating new jobs faster than the jobs report is showing. This suggests that we are seeing the cheapening of the work force. (no offense to those readers in those professions) I am merely drawing a conclusion that although jobs are being created they are not the jobs most people would be excited about. The FOMC minutes for December came out at 2:PM and they are credited with the afternoon drop in the market. Not the actual minutes but the fear of the minutes as the drop came between 1:15-1:45. The minutes clearly described why the Fed removed the considerable period statement this month. They viewed it as restricting their flexibility to respond to changing conditions. The minutes were also more bearish in tone with greater worries that inflation could ramp up at any time and they wanted to be prepared to take a preemptive strike if need be. The members also expressed concern for the rising budget deficit and the eventual impact on the economy. Several members argued to remove the statement in the December meeting suggesting they were getting ready to raise rates and needed to clear the table for the next series of rate hikes. Ugly thought! Instead of an immediate drop they added the phrase associating it with economic conditions to warn the markets there was a change coming. As we know from the past six weeks the markets ignored the warning. That market stance of burying its head in the sand brought the Fed no choice but to change the statement to plain language at this weeks meeting. So much for the soft landing. We didn't listen and they had to hit us harder. The members also expected the unemployment rate to drop over the coming quarters as a result of the rising economy. Now we can see why they were shocked when the December Jobs report was barely positive. In general they are not really worried about inflation and could still see a potential deflationary period ahead. They view the risk to each direction as now equal. They just wanted to be ready to react if the inflation monster won the battle and sprang from the bushes. With capacity utilization still at 75% the odds of impending inflation are very slim. Bonds finished flat for the day and after the ramp job yesterday it is amazing we did not see a sell off. It is even more amazing when you consider there is $80 billion in new supply coming to market through next week. The government has to fund that deficit and somebody will get the interest. The market reaction to the Fed news both in bonds and equities was over done in the opinion of most analysts. However, while nobody thinks they will raise rates soon it is the discounting process that we are seeing now. When the Fed was seen to be on hold until 2005 the markets had factored in that lack of change for the next 6-9 months. That is exactly what the markets are supposed to do. They factor earnings, rates and economic prosperity for 6-9 months in advance. A change in one prompts a change in the others. We need to also remember that rate hikes do not come one at a time. The Fed is not going to raise 1/4 point and then go dormant for a couple years. They raise for a reason and every rate adjustment takes 6-9 months to work its way through the markets. Normal cycles involve 3-5 rate changes over an 18-month period. So, the markets are not just factoring in a potential rate hike in May, which is the new target, but they are factoring in the entire rate hike cycle which could begin in May. See, it really is a trend change in progress. The good news is the reason for the hikes. If the Fed does hike rates in May it will be because the economy has exploded fast enough to generate inflation. Think about that. We are currently crawling along in terms of economic growth that we can see as in job creation. However earnings are exploding. We are seeing raised guidance by the majority of companies and the body language of the confessors is positive. They are not hunkered down behind their figurative podium in flak jackets when they announce. They are generally proud of the results and optimistic about the future. This is a complete change from just six months ago. The bottom line is that the growth has to expand significantly from even the current level to invoke a rate hike and at the present rate that may not happen anytime soon. The message to the markets should be don't get yourself in a tizzy because nothing fundamental really changed. However, there was a major change in the tone of the stock market. We have had three major distribution days so far this week. Strong volume with declining volume substantially higher than advancing volume. New 52-week highs on Thursday were 274 and a level not seen since October 24th. The semiconductor sector crashed to a support level not seen since early December. The SOX broke its 50 dma at 515 and came within two points of next support at 500. Considering chip stocks were up the strongest of any sector over the last few months it is no surprise they were the hardest hit. In fact the SOX lows on Thursday were more than -10% off the January highs. A REAL correction! SOX Chart - Daily The Russell also took it on the chin with a -5% drop back to 573.00 from its 601 high from Tuesday. A -5% drop in three days is a significant hit. Putting it in perspective the Dow barely blinked. We saw a drop back to 10417 intraday on Thursday and close enough to 10400 to call it a successful test of support for me. That was only a -2.7% drop from its 10705 high from Monday. The real damage came from the Nasdaq, which dropped -112 points from its 2152 high on Monday. I say real damage because that was a -5% drop on a highly visible index. Remember this is on mostly better than expected earnings. The afternoon rebound on Thursday was simply an oversold reaction in front of the GDP report and not necessarily a sign that the worst is over. Ok, now what? The key is the GDP report on Friday morning. It also helps that we have the NY-NAPM, Chicago-PMI and Consumer Sentiment at the same time. If I had to take an unbiased look at just the indexes and predict a direction without factoring in the bullish sentiment I would expect at least one more down day in our future and maybe several. None of the major indexes have even come close to their real support at the 50 dma except the SOX. The levels for the respective indexes are: Current - 50-dma 579 - 558 Russell 1094 - 1134 Spx 2068 - 2005 Nasdaq 10510 - 10208 Dow 11045 - 10661 Wilshire 5000 The SOX is the only major index of note to break its 50 dma during this sales event. Based on simple technical analysis and recent historical trends the major markets should all test that level. But, we still have to factor in the bullish sentiment and economic conditions. Basically the conditions are good and the sentiment is still off the wall bullish. The economic conditions will be tested over the next six trading days with a barrage of reports ending in the Nonfarm Payrolls next Friday. These reports will either push the rest of the undecided sellers off the fence or convince the dip buyers to go shopping for bargains. The GDP on Friday is the first big motivator. The real consensus estimate is about +5.2% with the whisper numbers still running around +6.5%. We have to assume the Fed knew the GDP numbers in advance and factored them into their statement. If the GDP was weaker than expected would they have wanted to roil the markets only to have them tank again two days later when the GDP was released. Stranger things have happened but I am not expecting it. If we do get a decent GDP I would expect the markets to react favorably. Friday is also month end and I would expect some window dressing from funds with excess cash on hand. I would expect that window dressing to trigger some short covering from those who profited from the drop. A bad GDP will just add fuel to the profit taking fire. Obviously this is all speculation and anything is possible. We are well off the highs but also well above normal support. That gives us plenty of room to wander without breaking any real support or resistance levels. We can remain range bound within a broad range until after the Jobs report next Friday. I would then expect the markets to go directional once again. While I could rationalize a touch of the 50 dma on all the averages I would be very surprised to see it. When you consider I have been looking for a -500 point Dow pullback since Jan-1st that should give you some idea of my current mindset. I can see us moving lower, I would just be surprised if it was that much lower given the current sentiment. I have said all along there was a buying opportunity in our future and this is it. About the only thing that could ruin it for me would be a massive negative surprise in the economic reports. I am betting against that possibility and went long on the dip today. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Dollar Breakout, Metal Breakdown Jonathan Levinson The US Dollar Index broke above the trendline in place since the top of the November bounce high as gold broke below the rising support line in place since the August low. Equities and treasuries broke to new lows but bounced in the late afternoon to finish unchanged in the former case and lightly positive in the latter. 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. Chart of the US Dollar Index The US Dollar Index tested resistance at 88 before pulling back to the 87.55 level as of this writing. The move coincided with with weakness through most of the session in equities and treasuries that corrected in the last hour, and new lows for the move in gold, silver, the mining indices and the CRB, with that latter index getting smoked for 6.22 points to finish at 260.77, led lower by silver, gold and platinum futures. Daily chart of February gold February gold got croaked for 2.64% to close at 398.90, down 10.80 points and reaching a low of 396.20 before a weak bounce. March silver was sold for 3.02%, and the mining indices declined by an equivalent amount, XAU –2.34% to 94.05 and HUI –2.86% to 213.18. What was looking like a daily cycle bottom yesterday feel apart today, with an ugly downside gap printed below 410, the session high at 409.70. I've highlighted the downside support levels from here, and given the secondary USD Index resistance line indicated above, gold bulls can be looking for the nearly-oversold daily cycle oscillators to begin seeking a bottom. A failure of 392 would obviously change that interpretation and would likely correlate to an upside break of secondary resistance by the USD Index. Daily chart of the ten year note yield The Fed opened with a modest drain via open market operations, and then followed it up with a surprise 6B 7-day repo to bring the daily net back to positive. I credit this bonus liquidity with the doji top printed on the daily yield candle for the TNX, which finished the day flat, up 0.2 bp to close at 4.197%. A 26B two-year treasury note auction generated a below-average bid-to- cover ratio of 1.87. Resistance at 4.27% is followed by trendline resistance at 4.34%. The daily cycle oscillators continue to point north. Daily NQ candles NQ was the weakest of the equity contracts today, lagging the YM and ES which traded mostly in lockstep. The drop in the morning left a long doji tail on the daily candle reaching to within 2 points of the lower daily Bollinger band. This reversal pattern sets up support in that area, but the lower low and lower high confirms that the daily cycle downphase is in full swing. Lower channel trendline support is just above 1430, from which the broader uptrend would be tested as well as the more advanced daily cycle downphase. For the time being, the bias on this time frame remains to the downside, in conjunction with the oscillator downphase. For the day, the NQ gained 5 points to finished at 1499, +.33%. 30 minute 20 day chart of the NQ The NQ bounced after a number of false bottoms on the 30 minute cycle oscillators throughout the morning. The rapid drop in price from yesterday afternoon allowed the price to get ahead of the 10 day stochastic, and the result was a steep bullish oscillator divergence. The sharp bounce that resulted brought the NQ to shallow positive territory, failing at first resistance at 1500. Bollinger resistance on this timeframe at 1503 is just north of the session high of 1502.50. While we would ordinarily expect the bounce to follow through tomorrow morning, which it might well do, the strong daily cycle downphase is expected to keep a lid on the 30 minute minute cycle upphases and produce a pattern of lower highs. The steepness of that daily downphase will be determined by how quickly the current 30 minute upphase fails. With market moving news due at 8:30AM tomorrow, the morning should be action-packed, whichever way the current deadlock breaks. Next support is at 1492, followed by 1475-80. Note that it was a very heavy volume day for the Nasdaq, with 2.7B shares changing hands. 142.9M QQQ traded, setting up today's range as either a consolidation at relative lows, or more distribution on the way down. Tomorrow will tell the tale. Daily ES candles ES gained 1 to finish at 1130.25, the move completing a steep bullish doji hammer that closed right below yesterday's failed trendline. Like our dilemma with the heavy QQQ/COMPX volume, the daily ES print will prove to have been either a deadcat bounce/return to the scene of the crime, or a meaningful reversal from a higher low. Current resistance is at 1133-4, support at 1125, followed by 1115-18. 20 day 30 minute chart of the ES The 30 minute ES bounced from the same dramatic bullish stochastic divergence but failed at a lower high, also confirming the daily cycle downphase that kicked off just yesterday. Bulls have mild resistance up to 1135, followed by 1142 and 1149. The question is whether the steep oscillator divergence has already delivered its punch, or whether the bulls have enough to extend this 30 minute cycle upphase into something more meaningful. I suspect that it will be the reaction to tomorrow's news that breaks the cycle juxtaposition here, and I'd be more confidently bearish on the setup were it not for the persistent willingness of the daily cycle to trend in overbought territory over the past month. A move above 1135 will be confirmation that there's more to the 30 minute upphase than initially suspected, while another move below 1125 would abort this upphase and likely set up a test of more important support at 1115-18. 150-tick ES The short cycle oscillators had just rolled over as of 4:15PM, and are pointing toward a retest of Keltner support 1127.75. A move below that level would threaten the current 30 min cycle upphase. Daily YM candles YM closed unchanged at 10468, bouncing from the upper rising trendline on the primary ascending channel. Note that NQ has broken this channel already, and the question is whether the bearish oscillator divergence here portends a move to follow its lead. 20 day 30 minute chart of the YM I believe that the Fed's ongoing injections of open market liquidity is distorting what would otherwise be a clearer picture of the binary dollar trade in reverse. The morning opened with an extension yesterday's dollar up-everything down trade, and it wasn't until the Fed added that last surprise 7-day repo to bring the daily net to positive territory that bonds began to catch a bid. When bonds closed at 3PM, equities followed suit and finished slightly in the green. On a trading basis, we'll continue to follow the oscillators of the charts we trade, but for the moment, on an inter-market basis, I don't trust the countertrend (on a daily cycle basis) moves in bonds and equities today. A break above resistance by equities could change that as early as tomorrow, but unless and until that happens, I'm inclined to follow the daily chart oscillators. ************************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 ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_012904_1.asp ************************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 **************** Finicky Investors - J. Brown Yesterday the markets crater because the Fed removes its "considerable period" language. Today the markets rally after the Fed releases its minutes from last month's meeting that suggest they were considering a removal of this language back in December. No one ever said the stock markets moved on logic but this time it might make sense. The news yesterday was a great "excuse" to take some profits off the table. However, investor sentiment turned bullish again as they realized that the Fed's comments confirm that the economy really is improving and that means strong corporate profits. Tech stocks lagged the afternoon rally today but almost every sector moved up off its lows. Several sectors (transports, disk drives, natural gas, and airlines) pulled back to their simple 50-dma and either held support there or bounced. The hardware sector (GHA) did lose ground today but continues to build what looks like a bullish flag consolidation pattern. The software sector (GSO) produced a nice "hammer" candlestick that might suggest a one-day bullish reversal. Probably the most watched tech sector index is the SOX, which closed under its simple 50-dma but remains above round-number support at 500. If I had to bet, I'd bet on a bounce here tomorrow unless some chip company issues an earnings warning before the open. Financials were strong today with the banking index (BKX) pulling back to previous resistance before bouncing from the 980 level. The strongest sector was the biotechs (BTK). The BTK index added 2.35%. I also note that the DRG drug index looks bullish with a nice bounce from its short-term moving averages. Normally when the markets turn volatile drug stocks are commonly seen as "safe havens" to park your money. Utilities were also higher as investors seem reluctant to sell these higher-yielding dividend stocks. Two more sectors performing well are insurance (IUX) and healthcare (HMO). Both have managed to maintain the majority of the gains with only a slight pull back. It is notable that the gold & silver index (XAU) was the worst performer with a 2.32% drop and a close under recent support at 96. It was no coincidence that gold futures fell more than $16 to close under the $400 level for the first time in weeks. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10701 52-week Low : 7416 Current : 10510 Moving Averages: (Simple) 10-dma: 10578 50-dma: 10208 200-dma: 9458 S&P 500 ($SPX) 52-week High: 1155 52-week Low : 788 Current : 1134 Moving Averages: (Simple) 10-dma: 1140 50-dma: 1094 200-dma: 1017 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 795 Current : 1496 Moving Averages: (Simple) 10-dma: 1530 50-dma: 1457 200-dma: 1319 ----------------------------------------------------------------- Try as they might the volatility indices could not maintain any of their morning gains. The midday reversal suggests the rally might not be over yet for the markets. CBOE Market Volatility Index (VIX) = 17.14 +0.36 CBOE Mkt Volatility old VIX (VXO) = 17.11 +0.01 Nasdaq Volatility Index (VXN) = 25.20 +0.04 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.80 960,543 764,294 Equity Only 0.64 836,300 538,960 OEX 1.22 24,106 29,386 QQQ 1.74 56,817 98,948 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 77.1 - 1 Bull Confirmed NASDAQ-100 75.0 - 3 Bull Confirmed Dow Indust. 90.0 - 3 Bull Confirmed S&P 500 87.0 - 1 Bull Confirmed S&P 100 87.0 - 1 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: 1.01 10-dma: 0.92 21-dma: 0.95 55-dma: 1.03 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 1108 1085 Decliners 1752 2024 New Highs 166 113 New Lows 14 6 Up Volume 939M 793M Down Vol. 1378M 1811M Total Vol. 2369M 2611M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 01/23/04 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 Wow! We've seen a mild reversal in the commercial traders' positions. They've moved from mildly net short to mildly net long. That's an encouraging sign for more strength in the markets. Small traders have grown a bit more cynical with a slight increase in short positions but they remain net long. Commercials Long Short Net % Of OI 12/22/03 400,066 405,240 (5,174) (0.6%) 01/06/04 403,721 408,729 (5,008) (0.6%) 01/13/04 405,558 411,361 (5,803) (0.7%) 01/23/04 422,135 407,626 14,509 1.7% 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 12/22/03 147,537 81,596 65,941 28.8% 01/06/04 142,844 83,518 59,326 26.2 01/13/04 149,057 90,571 58,486 24.4% 01/23/04 141,107 100,090 41,017 17.0% 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 Commercials are starting to up their bets on the e-minis with almost 40K new longs and 44K new shorts. Small traders in turn reduced their bets but remain net long. Commercials Long Short Net % Of OI 12/22/03 128,801 213,021 (84,220) (24.6%) 01/06/04 175,489 240,865 (65,376) (15.7%) 01/13/04 196,858 263,845 (66,987) (14.5%) 01/23/04 233,867 307,122 (73,255) (13.5%) 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 12/22/03 125,248 43,482 81,766 48.5% 01/06/04 139,433 51,909 87,524 45.7% 01/13/04 191,241 62,711 128,530 50.6% 01/23/04 187,270 57,196 130,074 53.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There is very little change in commercial traders' positions here and the same holds true for the small traders. Commercials Long Short Net % of OI 12/22/03 40,277 36,452 3,825 5.0% 01/06/04 42,892 37,801 5,091 6.3% 01/13/04 41,829 38,547 3,282 4.1% 01/23/04 42,823 39,442 3,381 4.1% 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 12/22/03 22,656 14,544 8,112 21.8% 01/06/04 8,035 17,911 ( 9,876) (38.1%) 01/13/04 9,705 12,539 ( 2,834) (12.7%) 01/23/04 9,180 11,371 ( 2,191) (10.7%) 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 Commercials are also hesitant to make any big changes to their net bullish stance on the Dow. Meanwhile small traders grow a little more bearish. Commercials Long Short Net % of OI 12/22/03 14,088 9,998 4,090 17.0% 01/06/04 15,697 9,497 6,200 24.6% 01/13/04 16,501 8,724 7,777 30.8% 01/23/04 16,403 9,252 7,151 27.9% 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 12/22/03 6,915 8,983 ( 2,068) (13.0%) 01/06/04 5,713 8,105 ( 2,392) (17.3%) 01/13/04 6,496 9,970 ( 3,474) (21.1%) 01/23/04 6,068 10,183 ( 4,115) (25.3%) 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. 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 ************************************************************** 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. You may also fax the information to: 303-797-1333 ********** 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 01-29-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: CSC, ESRX, GENZ, HSIC, MBI, MWD New Calls Plays: DHR Put Play Updates: ADBE, KSS, NSM, QLGC 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: ***** None PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Computer Sciences Corp - CSC - cls: 45.25 chng: +0.00 stop: 43.50 As we suspected on Tuesday, CSC needed to fall back to firm support before the buyers would come back in and we got to see just where that support was today. Following another sharp drop on Wednesday, the stock continued to drop this morning, coming within striking distance of the 30-dma ($44.34) at its low before rebounding sharply into the closing bell, making up roughly half its intraday loss. That leaves a big doji of indecision for us, but it does confirm support in the $44.50-45.00 area, giving us the reassurance that old resistance is going to be defended by the bulls as new support. Today's rebound off the lows looked like a solid entry point and a continuation of the bounce tomorrow looks viable for new entries. Obviously the first key level of resistance to deal with will now be found near last week's highs just under $47 and traders looking to enter on strength will need to wait for that breakout before playing. Maintain stops at $43.50. Picked on January 25th at $46.54 Change since picked: -1.29 Earnings Date 2/11/04 (confirmed) Average Daily Volume = 1.22 mln Chart = --- Express Scripts - ESRX - cls: 69.49 chng: +0.15 stop: 65.00*new* Investors in ESRX got a bit of excitement yesterday as the stock finally pushed strongly through the $70 level before the broad market weakness took the bloom off the rose. The stock then pulled back to end near its lows of the day, but the dip buyers re-emerged today. The dip under $69 seemed to be all the pullback that would materialize and the buyers took advantage of it, resulting in a small pop at the end of the day. Note how the 10-dma ($68.67) has continued to act as intraday support and barring a deeper pullback near the 20-dma ($66.86) that may be the best we can do for an entry point. Even though the daily Stochastics are starting to weaken, they haven't yet given a sell signal and it is seeming increasingly unlikely that we'll see a pullback all the way to strong support at $66. There should now be strong support just under $68 and a rebound near there can also be used for entry. Note that we're still shying away from momentum entries, as ESRX's trading pattern just doesn't make such a strategy look viable. Stops should rise slightly tonight to $65, just under the 50-dma ($65.08). Picked on January 13th at $68.32 Change since picked: +1.17 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 1.22 mln Chart = --- Genzyme Corp. - GENZ - close: 55.66 change: +1.39 stop: 52.00*new* It seems like GENZ is attached to the $55 level with rubber bands, doesn't it? Stretch price to the upside and the stock snaps back to that price magnet. And any attempt to drive the stock lower meets with the same response -- a snap back to $55. While it is encouraging to see the stock fail to sustain yesterday's drop and bounce back over $55, the daily chart shows just how volatile price action has been, snapping repeatedly back and forth between resistance near $56 and support near $54. This volatile action is chewing up a lot of energy and so far it is unclear in which direction it will be resolved. But one thing we can say with confidence is that chasing the stock higher on apparent breakout moves is not a high-odds strategy. Buying the dips into the $53-54 support area is the best way to go right now, with the understanding that the volatile oscillations of the past 6 sessions are a sign of instability, increasing the risk of being in the trade. Because of that added risk, we're tightening our stop tonight to $52, which will finally be below the 20-dma ($51.92) by tomorrow. Picked on January 20th at $53.00 Change since picked: +2.66 Earnings Date 2/19/04 (unconfirmed) Average Daily Volume = 2.83 mln Chart = --- Henry Schein - HSIC - close: 70.57 chg: +0.71 stop: 67.50 Traders might note that HSIC held up reasonably well during the last few days of market volatility. Today's bounce off the $69 level looks like another tempting entry point for new bullish positions, especially with its close back over the $70 mark. The company also announced some good news with a new worldwide distribution agreement with Pentron Laboratory Technologies. Picked on January 22 at $70.65 Change since picked: - 0.09 Earnings Date 03/04/04 (unconfirmed) Average Daily Volume: 334 thousand Chart = --- MBIA Inc. - MBI - close: 62.73 chg: +0.56 stop: 59.99 It's almost time to move on in MBI. The pull back to $61.00 never materialized but neither did a continuation of its breakout. If you like to see the glass as half full then MBI's shown some decent relative strength lately with its sideways consolidation. Unfortunately, the company is set to announce earnings on Tuesday February 3rd so we'll likely close the play tomorrow. No new entries are suggested. Picked on January 20 at $62.93 Change since picked: - 0.20 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 572 thousand Chart = --- Morgan Stanley - MWD - close: 57.84 chg: +0.78 stop: 56.75 Wow! It doesn't get ANY closer than today. MWD followed the XBD broker-dealer index lower yesterday and shares of MWD dropped right to its technical support at the 50-dma. There was some brief weakness midday today for both and MWD traded to $56.76, one penny above our stop loss, before rebounding. The stock is now right above rising technical support and horizontal price support at $56.75-57.00. Traders might want to consider new positions here but look for some momentum in our direction (like a move over $58.00). You probably heard some positive news for MWD today and didn't know it. All day long the media has been talking about the American Express deal with MBNA to launch a new Amex card. This development was made possible by a September 17th court decision last year that said Visa/Mastercard could not prevent its member banks from offering competing cards. This allows the huge Visa/MC network of banks to offer AXP cards as well as MWD's Discover cards. Visa & MC have appealed the decision so there is a chance for it to be overturned but right now it's a market positive for MWD. Picked on January 15 at $59.81 Change since picked: - 1.97 Earnings Date 03/18/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = ************** NEW CALL PLAYS ************** Danaher Corp - DHR - close: 89.98 cls: +0.58 stop: 87.99 Company Description: Danaher, a leading industrial company, designs, manufactures, and markets innovative products, services and technologies with strong brand names and significant market positions. Driven by strong core values and a foundation provided by the Danaher Business System, Danaher's associates are pursuing a focused strategy aimed at creating a premier global enterprise. (source: company website) Why We Like It: Danaher, Danaher...hmm...probably not familiar with its name but you might know Danaher for its Craftsman tool line it makes for Sears. The company announced earnings this morning and they were better than expected. Net income was $1.06 a share but after backing out a one-time 9-cent gain its 97 cent results beat estimates by 2 cents. Revenues were up nearly 17% to $1.49 billion, also better than estimates. We normally don't like to play a stock this close to earnings, even after the report, but shares offered a perfect bounce from the bottom of its rising channel, technical support at its 50-dma and price support at $88.00. What could propel investors to buy the stock now that the earnings news is out? DHR plans to complete its acquisition of two medical device companies in the first quarter (Radiometer and Gendex) and the company raised its earnings guidance for the first quarter. DHR had previously guided Q1 earnings to 72-77 cents a share. Analysts had them pegged at 78 cents. Now DHR believes its first quarter net income will be in the 76 to 81 cent range. We do feel the need to mention that while this looks like a relatively lower risk entry near support DHR's P&F chart isn't offering the bulls much to go on. Its bullish vertical count of $87 has already been met and its P&F chart is showing a bearish high-pole warning. We want to protect ourselves and make sure we're catching DHR on a bounce so we plan to use a TRIGGER at $91.01 to open the play. Until DHR trades at or above this level we'll remain on the sidelines. Once activated we'll start the play with a stop loss just below today's low at $87.99. Our first target is $96 but if the channel holds up DHR might be able to hit $100. FYI: DHR's last split was in June of 1998. Shares are well above their previous split price so there is the possibility of DHR's management announcing a split as it approaches $100. Suggested Options: Short-term traders can choose the February or March options and longer-term players might want to look at June or Septembers. Our preferred strikes would be the March calls with the March 90s as our favorite. BUY CALL FEB 90 DHR-BR OI=1110 at $2.55 SL=1.25 BUY CALL MAR 90*DHR-CR OI= 863 at $3.90 SL=2.00 BUY CALL MAR 95 DHR-CS OI= 802 at $1.75 SL=0.90 Annotated Chart: Picked on January XX at $xx.xx <-- see TRIGGER Change since picked: + 0.00 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand 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: 36.11 change: -0.53 stop: 39.50 ADBE finally cracked the $36 support level on Thursday and did so on rising volume. That's the first real confirmation of weakness we've seen over the past couple weeks and it is truly encouraging. There was a slight bounce at the end of the day, but not enough to prevent the stock from posting its lowest close since mid-August. Unfortunately, there's a problem. ADBE came out after the closing bell and raised its EPS guidance for Q1 (from $0.33-0.36 to $0.36-0.42) due to stronger than expected revenues. Of all the nerve! That was enough to pop the stock as high as $39.60 in the after hours session, before price settled back to the $38 level. So what now? We'll have to wait and see how it all plays out tomorrow. Another failed bounce below the 20-pma ($38.09) can still be used for entry. But if price plows through the 50-dma ($39.19), then it's a safe bet that the jig is up for this bearish play. Maintain stops at $39.50. Picked on January 11th at $37.12 Change since picked: -1.01 Earnings Date 3/11/04 (unconfirmed) Average Daily Volume = 3.42 mln Chart = --- Kohls Corp - KSS - close: 43.40 change: +0.73 stop: 45.05 So far so good. Shares of KSS followed through on its Tuesday failed rally at $45 and broke its short-term up trend yesterday. Unfortunately, the midday market rebound today also influenced shares of KSS. Keep your eyes open for another roll over somewhere under $44. In the news KSS announced it would help launch a new clothing line from Daisy Fuentes, a fashion model and TV personality. This is probably good news for KSS but not something that's going to alter its share price today. Picked on January 27 at $44.05 Change since picked: - 0.65 Earnings Date 02/26/04 (unconfirmed) Average Daily Volume: 4.6 million Chart = --- National Semiconductor - NSM - cls: 36.91 chng: -0.27 stop: 39.00 So close! It was impressive that the Semiconductor stocks held up as well as they did over the past couple days, especially with Technology shares continuing to be weak. The SOX has broken below $515 support, but has yet to take out more critical support at the $500 level. At the same time, our NSM play dipped to within a few pennies of the $36 level before rebounding back near $37 at the end of the day. Recall that we need to wait for a break of the December 16th low ($35.89) before taking a position, as we've set an entry trigger at $35.85. The way NSM and the SOX are trading, it looks like a break under our trigger in NSM will be accompanied by the SOX dropping under $500, giving us a nice point of confirmation. Wait for the break before playing and then target a drop to initial support at $32. Maintain a tight stop at $39, because if NSM breaks back over that level, the odds of a breakdown arriving will be significantly diminished. Picked on January 27th at $36.73 Change since picked: +0.18 Earnings Date 3/04/04 (unconfirmed) Average Daily Volume = 3.37 mln Chart = --- QLogic Corp. - QLGC - close: 44.48 change: +0.17 stop: 48.50 It wasn't the dramatic breakdown we were hoping for, but QLGC did crack the $45 support level in the midst of yesterday's broad market selloff, falling all the way to $44. That level was tested numerous times today and held as support right into the closing bell. Is the stock heading lower? Looking at the daily chart, we can now see that indeed the $44 level has been the site of significant historical support and resistance in the past, so it may be a bit tougher to crack than we had first expected. That said, if the SOX continues to weaken, QLGC will likely continue its weak price pattern, heading down to test next support near $41-42. In light of the $44 support, our preference for new entries is on failed bounces below the $46-47 area. The 10-dma ($46.10) looks like it should reinforce that resistance and conservative traders may want to use a tighter stop on open positions -- maybe at $47.50, just over Monday's intraday high. We'll maintain our official stop at $48.50. Picked on January 22nd at $45.25 Change since picked: -0.77 Earnings Date 4/14/04 (unconfirmed) Average Daily Volume = 3.91 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 01-29-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Heavy Metals Traders Corner: Uncle Sam Is Getting A Little Too Friendly ********** WATCH LIST ********** Heavy Metals ___________________________________________________________________ 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. ___________________________________________________________________ Freeport McMoran - FCX - close: 35.90 change: -1.27 WHAT TO WATCH: Gold traded under the $400 level for the fist time today in weeks. We've been suggesting gold stocks in the watch list or the radar screen as potential bearish candidates for days. FCX still looks like a bearish candidate but traders might want to use a trigger under support at $35.00, especially considering its late day bounce from its lows. If FCX breaks $35 the next support level is its 200-dma nearing 31.50. Aggressive traders might want to consider a failed rally in the 37-38 range as a potential entry point. Chart= --- Phelps Dodge - PD - close: 73.40 change: -0.75 WHAT TO WATCH: PD is another metal stock to watch but its primary product is copper. The expanding economy and rising commodity prices have driven PD to highs not seen in years. Traders have been buying pull backs to its simple 50-dma for the last several months and PD is getting close to another test of this moving average. Notable was PD's earnings report out this morning. The company beat estimates for net income and revenues, which soared more than 30%. Despite this news shares still fell back. Bulls can look for a bounce from the 50-dma, bears might want to look for a breakdown under $70.00. Chart= --- Caterpillar - CAT - close: 77.26 change: -2.36 WHAT TO WATCH: CAT is a Dow component that did not participate in the midday bounce today. The sell-off began three days ago when CAT produced a big bearish engulfing candlestick. We didn't play it because the company was announcing earnings. Earnings were good and CAT beat by 3 cents and guided higher but still the stock fell in a "sell the news" reaction. Yesterday's candle broke support at $80 and its 50-dma. Today confirmed the breakdown but now shares are short-term oversold. Normally previous resistance becomes new support so that means CAT should have new support in the 74-75 region. We'd look for a bounce back to $80. Then if shares begin to fail aggressive bears could target entries with a stop above $80. Chart= --- Nextel Communications - NXTL - close: 26.17 change: +0.10 WHAT TO WATCH: NXTL is certainly a stock to watch. Shares have drifted back to the bottom of its rising channel. They may have broken support at its 50-dma but NXTL still has support at $25.00. Some have rumored NXTL to be a possible bidder on AT&T Wireless (AWE). If NXTL does bid it may drive the stock lower. Bullish traders might want to look for a rebound back above the $27.00-27.50 region and target $30.00 or the top of the channel in the low 30's. Chart= --- Illinois Tool Works - ITW - close: 77.55 change: -2.11 WHAT TO WATCH: The breakdown in ITW is picking up steam. Three days ago it closed under its 50-dma. Yesterday it broke support at $80. Today it fell to $77 before bouncing off its lows. There is potential support in the $74-76 range but it may not hold. We'd look for a bounce and failed rally under the $80 level as a potential entry point for short-term bearish plays. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- MO $55.95 +0.30 - MO is building on its recent breakout above resistance at $55.00. MMM $79.52 -0.48 - The Dow may have bounced today but MMM did not. Shares went the opposite direction and broke support at $80; definitely not a bullish development. OXY $44.32 +0.00 - OXY looks very extended with hardly any pause in its bullish run. Now that run is looking tired. A move under today's low may be an aggressive entry for bearish positions. TIF $39.68 -0.30 - Tiffany is back under the $40 level but managed another bounce from support at $39.00. We're expecting a move to its 200-dma near 37.50. ************************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 ************** Uncle Sam Is Getting A Little Too Friendly By Mike Parnos, Investing With Attitude Uncle Sam wants you!! Actually, he doesn’t really want you – just your money. Why? Not to feed the hungry or to house the homeless, but to buy whitewalls for the next Mars explorer. After all, isn’t it more important to spend billions to explore Mars in style? Taxation, even WITH representation, isn’t all it’s cracked up to be – especially when only half the “represented” people get out and vote. With tax season approaching, I thought it appropriate to devote a little space to strategies on how to keep what we “represented” folks spent blood, sweat, and tears to earn with our trading. We owe it to ourselves to try to get Uncle Sam’s hands out of our pockets (we don’t really want to know him that well). I contacted the folks at TradersAccounting.com and they have provided me with answers to some of the common tax questions I get from traders. ______________________________________________________________ Tax Questions & Answers QUESTION: I had trading losses over the $3,000 limit (obviously not an accomplished CPTI student) for deductibility, is there anything I can do? ANSWER: One good thing is that the loss will carry forward for twenty years. What you might be thinking of is filing as a trader. As a trader, there is no limit to the deductibility of losses. When you file as a trader, the year's net losses are "ordinary losses" and are therefore not limited to the annual $3,000 "capital loss" limitation. Unfortunately, you would have had to file during the previous tax year in order to qualify as a trader for this year. Also, qualifying as a trader is a difficult proposition for the majority of all traders. You might be better served by setting up a legal entity for your trading capital. QUESTION: Is it OK to deduct all my educational expenses? ANSWER: If you qualify as a trader or are using a legal entity, YES! Here is the bottom line on deductible expenses: Just about any expense that helps your business is tax-deductible as long as it is ordinary, necessary and reasonable. These expenses can include but are in no way limited to: a) seminars and education b) subscriptions to financial magazines and newspapers c) trader guides and books d) dedicated telephone usage and long distance e) cell phone, pager and messenger fees f) cable fees g) on-line services h) real-time quotes, charting and analysis i) club memberships, dues and fees j) stock tip services & newsletters and news service fees k) office supplies, postage, bank charges and wire fees l) travel and automobile expense m) home office expenses n) maid service and cleaning o) restaurant meals had with fellow daytraders p) interest paid on loans for the purchase of the trader's positions (such "margin interest" is generally fully deductible because it is not subject to the regular "investment interest" limitation on IRS form 4952) QUESTION: How does the "wash sale" rule affect my covered call stock option? I wrote a covered call on Philip Morris that I expect will result in the stock being called away since the stock price is in the money. When that happens it will generate a capital loss for me. I plan to buy the stock back as it is at a much lower price and moving up. To be able to take the capital loss and be able to re-buy the stock must I wait 30 days because of the wash sale rule? ANSWER: Yes, you need to observe the 30-day rule in order to take the loss. As the book says, " A loss sustained upon a sale or other disposition of stock or securities is not allowed if, within a period beginning 30 days before the date of the sale or disposition and ending 30 days after that date, the taxpayer has acquired, or has entered into a contract or option to acquire, substantially identical stock or securities." Reference: code section 1091. QUESTION: How are 1256 contracts taxed? ANSWER: While capital gains seem to be taxed differently (and in the case of futures and long term holdings they are), they all add to the total of your income. To figure out your income tax rate you would use the total of all income received during the year, including your trading. QUESTION: What is the rule for long-term capital gain rates and the trader? ANSWER: Long-term capital gains occur when you own a position for longer than 12 months and one day and sell it for a gain. This is considered a long-term capital gain and is taxed at a tax rate of 10% at the low end to 20% at the high end. If you trade 1256 contracts, (commodities & futures) all gain or loss is treated as 60% long term and 40% short-term capital gains and losses. If you trade options on "cash settled indexes" they too are taxed the same as 1256 contracts. This type of trading is certainly advantageous to the typical trader who may be trading in indexes but does not know of this benefit. QUESTION: Does trading the options on the QQQ, DIA or SPY get 1256 tax treatment similar to cash settled index options? ANSWER: Yes, the options on the QQQs and the other exchange-traded options of index stocks are subject to the provisions of IRS Code Section 1256. On the other hand, if you are just trading the QQQ tracking stock, you would report the transactions on your Schedule D as you would regular stocks. This answer may surprise a few of you. Unfortunately, there is an old article floating around the internet that offers conflicting opinions. The information we are sharing comes from a recent internal ruling by the IRS. The QQQ, SPX, XOI, etc - are types of non-equity options. Non- equity options are options that are not directly or indirectly related to a specific equity (stock). Most if not all publicly traded index options are non-equity options and get the 1256 tax treatment. section 1256 says that any gains or losses from the sale of these securities are subject to the 60/40 rule. 60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held. So, even if you only hold the option for a day, 60% of your gain will be considered long-term and taxed at the preferential long-term capital gains rate. Non-equity options are usually reported on Form 6781, unless they are used as a hedge. A hedge would be buying, for example, the QQQ, and then selling call options against them. ______________________________________________________________ Confirm, Confirm, Confirm . . . The above answers were provided by TradersAcounting.com. CAUTION: It’s important that you consult your own tax preparer to confirm the above information. If you (or your tax preparer) have more specific questions, visit the TradersAccounting website and contact them. In upcoming columns I will provide additional questions and answers to tax question relevant to traders. ______________________________________________________________ FEBRUARY CPTI POSITIONS Position #1 -- OEX – Credit Spread Boogie – 563.10 With the market trending, let's not fight the tape. We're going to establish a bull put spread, take in some premium, and ride the wave into shore. We sold 3 OEX February 565 puts, and bought 3 OEX February 540 puts for a total credit of $6.80 (x 3 contracts = $2,040). This strategy requires $25 x 3 contracts = $7,500. We're only trading three contracts because, if the market reverses significantly, it might become necessary to close the bull put spread and establish a bear call spread that may be wider and would require more contracts. We need to preserve our money for a potential maintenance requirement. Position #2 – MNX (mini NDX index) – Iron Condor – 149.64 This index seems substantially safer than the highly volatile NDX. We're going to put on an Iron Condor with limited exposure. Because the market is trending, we skewed the strike prices slightly so that we have a little more cushion on the upside. We sold 10 MNX February 165 calls and bought 10 MNX February 170 calls for a net credit of $.40 x 10 contracts = $400. Then we sold 20 MNX February 150 puts and bought 20 MNX February 147.50 puts for a net credit of $.50 x 20 contracts = $1,000. Our total credit of $1,400. Our maximum profit range is 150 to 165. Our exposure is only $3,600 ($5,000 less $1,400). Maximum profit: $1,400. Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $94.05 The XAU has been temperamental of late. This is a low risk and relatively safe play with a wide range. Maybe we can make a couple of bucks. We sold 10 XAU February 90 puts and bought 10 XAU February 85 puts for a net credit of about $.70 (x 10 contracts = $700). Then we sold 10 XAU February 110 calls and bought 10 XAU February 115 calls for a net credit of about $.45 (x 10 contracts = $450). Our maximum profit range is $90 to $110 – a 20-point range. Our exposure is $3,850 ($5,000 less $1,150). Maximum profit: $1,150. Position #4 – OSX (Oil Service Sector Index) - $101.89 We're being cautious again here. We're reducing our potential income by expanding our safety range. We sold 10 OSX February 105 calls and bought 10 OSX February 110 calls for a net credit of about $.45. Then we sold 10 OSX February 90 puts and bought 10 OSX February 85 puts for a net credit of about $.75. Our total net credit of about $1.20 (x 10 = $1,200). Our maximum profit range is 90 to 105 – a 15-point range. Our exposure is $3,800 ($5,000 less $1,200). Maximum profit: $1,200. _____________________________________________________________ ONGOING POSITION QQQ ITM Strangle – Ongoing Long Term -- $37.24 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. Total credit: $6,150. 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. ___________________________________________________________ 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. ************************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 ************************************************************** ********** 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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc