The Option Investor Newsletter Tuesday 02-03-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Hope Minus Worry Equals Stagnation Futures Markets: Running the Clock Index Trader Wrap: Cisco deflates in after-hours Market Sentiment: Mixed Markets Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-03-2004 High Low Volume Advance/Decline DJIA 10505.18 + 6.00 10528.96 10457.11 1.82 bln 1414/1427 NASDAQ 2066.21 + 3.06 2071.44 2057.33 1.83 bln 1404/1635 S&P 100 563.36 + 0.60 563.69 560.89 Totals 2818/3062 S&P 500 1136.03 + 0.77 1137.44 1131.33 RUS 2000 579.15 - 1.39 581.19 578.29 DJ TRANS 2851.39 - 16.63 2880.30 2851.03 VIX 17.34 + 0.23 17.78 17.17 VXO 17.06 + 0.19 17.72 16.92 VXN 26.30 + 0.49 26.31 25.66 Total Volume 4,033M Total UpVol 1,644M Total DnVol 2,249M 52wk Highs 442 52wk Lows 13 TRIN 1.34 PUT/CALL 0.70 ************************************************************ Hope Minus Worry Equals Stagnation Traders today could easily identify the hopes and worries that affected markets, but had more difficulty predicting which would most fan market behavior. By the end of the day, the two revealed themselves to be equally matched, with markets stagnating near Monday's closing levels in a boring session that seemed to go on and on and on. The Dow closed up 6 points, the Nasdaq 3.06, and the SPX 0.77. Adv:dec ratios stood at 17:16 for the NYSE-traded issues and 15:17 for the Nasdaq-traded issues, with down volume ahead of up volume on both indices. A high TRIN persisted all day, indicating selling pressure, but there was no follow-through on that pressure except in specific sectors. Advancing sectors included the SOX, gaining 0.49 percent; the Natural Gas Index, gaining 0.51 percent; the Utility Index; gaining 0.57 percent; the Pharmaceutical Index, gaining 0.70 percent; and the Dow Jones Home Construction Index, climbing 1.57 percent. Declining sectors included the Oil Service Sector Index, falling 1.20 percent; the Morgan Stanley Healthcare Index, falling 1.99 percent; and the Airline Index, declining a steeper 2.92 percent. Autos fell as January sales reports trickled in. Ford (F) reported a 5 percent decline in sales from year-ago level, with the decline in line with expectations, according to some. GM reported that January sales fell 2 percent, with expectations having been for an increase in sales. Ford fell 1.65 percent on strong volume and GM declined 1.72 percent on almost double average daily volume. Where prompted the hope today? Hope arose from the CSCO earnings due after the bell, with that hope fanned by some CSCO suppliers and competitors having reported good news during this earning season. With memories of other post-CSCO-earnings rallies, those hopes burned bright. After the bell, CSCO reported Q2 net sales of $5.4 billion against expectations of $5.2-5.3, depending on the source. Headlines announce that the company expects Q3 sales of $5.45-5.56 billion. CSCO reported Q2 earnings per share of $0.18 GAAP, with expectations being for $0.17. As Jonathan Levinson pointed out on the Market Monitor after hours, however, that $0.18 was before an accounting charge. CNBC trumpeted CEO John Chamber's statement that it was "clear that the global economy is improving." However, CNBC commentators also mentioned FDRY's pummeling the day after it reported in-line expectations, with FDRY considered a lesser competitor of CSCO's. At the time of this writing, CSCO traded at $25.17, down $1.24 from the 4:00 close, but be careful of trusting what you see in after-hours trading periods. Analysts will be paying particular attention to margins, for example, and tomorrow morning should see a slew of statements, either negative or positive, from those analysts. Cramer was already characterizing Chambers' statements as more cautious than Juniper's CEO's, and if that attitude carries through to other market watchers, CSCO may indeed trade lower. Tuesday's worries proved equally easy to identify. Concerns about the budget-deficit, the dollar's weakness ahead of this week's G7 meeting in Florida, the discovery of a ricin-laced envelope in a U.S. Senate office, the timing of rate hikes and their likely impact on interest-rate-sensitive sectors, and sector downgrades all worked to dampen those brightly burning hopes. Bear Stearns downgraded the U.S. machinery sector due to the specter of higher interest rates and the reality of a slowdown in new orders in January, with Caterpillar (CAT) and Honeywell (HON) declining 0.58 percent and 1.33 percent, respectively. Goldman Sachs downgraded the semiconductor sector to a neutral rating from its previous attractive rating, and also downgraded some semiconductor companies on valuation concerns. Among Applied Materials (AMAT), KLA-Tencor (KLAC) and Novellus Systems (NVLS), all subjects of the GS downgrade, only NVLS ended lower on the day, however, as the SOX recouped some of its recent losses. Other worries cropped up during the day. The Fed's Bank of Chicago President Michael Moskow spoke before a Chamber of Commerce in South Bend, Indiana, reportedly saying that U.S. economic slack might continue for some time and that the job market remained a key area of weakness. At 10:00, the release of the Challenger report revealed that U.S. layoff announcements were up 26 percent in January. Challenger says that January always sees layoffs accelerate, a point Jim Brown has made in his commentaries, too, but this doesn't engender much faith in a stronger jobs number on Friday. Weakness in SOHU, a Chinese Internet-related stock, after its earnings report may have hit AMZN, too, dropping the company's stock more than 3 percent and the INX, the CBOE Internet Index, 1.60 percent. The worries couldn't entirely dampen the CSCO-inflamed hopes, though. The day might have been much different without those hopes. During the overnight session, the Nikkei set the tone for a negative open with an early heart-stopping plunge almost 300 points from the day's high. Plummeting from 10,800 toward 10,500 support in early trading, the Nikkei managed to claw its way back to a 10,641.92 close, but still closed lower by 134.81 points or 1.25 percent. Various forces led to that decline, including worries over the dollar's further slippage against the yen, reports of new deaths due to avian flu, and the typical February pattern that sees Japanese banks sell some of their stock holdings. News of the ricin-laced envelope found in a U.S. Senate office began to circulate during that overnight session, too. European markets also helped set the stage for a lower open, with the FTSE 100 down 0.18 percent, the CAC 40 down 0.83 percent, and the DAX down 0.95 percent as the U.S. markets opened. When our markets steadied, so did European markets. All erased some of those early losses, but only the FTSE closed in positive territory. Not being a tech-heavy or export-reliant index, the FTSE 100 outperformed the others in afternoon trade, climbing off its midday low and closing up 9.20 points or 0.21 percent, but just under 4400 resistance. The CAC 40 saw a late-day climb that erased some of its losses, but it still closed down 0.73 percent and below the day's two resistance levels at 3640 and 3660. The DAX closed down 0.35 percent, but also closed below the day's resistance, at 4060. Before the bell-earnings included reports from Colgate-Palmolive (CL), Spring FON (FON) and Sprint PCS (PCS), with each beating expectations by 2 cents, according to one report, but those reports didn't do much to prop up the markets. CL closed higher by 3 percent, FON dropped 0.28 percent, and PCS dropped 1.33 percent, each moving on big volume. That's what happened today. What's likely to happen tomorrow and the rest of the week? If GM and CSCO after-hours trading can be trusted, we could see a down day tomorrow, with both trading lower as this report was prepared. GM announced this afternoon that it had received a Wells notice from the SEC, with its CEO and CFO reportedly now expected to face civil charges due to possible problems with sales practices and disclosures. However, not putting much faith in what I see after-hours, I think it remains possible that many indices may remain in a holding pattern ahead of Friday's unemployment and nonfarm payrolls numbers. Let's take a look at several charts to see what would have to occur to change that holding pattern. Jeff Bailey will be covering the indices in more detail in his report, so this will be an overview only, and one that's complicated by the fact that my charting service was not delivering daily charts as this report was prepared. I've switched to 720-minute ones, but the charting service balked at following those back past October, too. I've removed the moving averages, as they're erroneous. The Dow rises off last week's low in a pattern that resembles a bear-flag climb, with that bear-flag climb possibly forming the right shoulder of a H&S formation. Even if that formation is valid and is eventually confirmed, the completion of the pattern might require a day or two for prices to round over into that right shoulder. Annotated Daily Chart for the Dow: Note the confluence of the H&S neckline and top-line support from the Dow's former regression channel, however. Bears will need to exert strong downward pressure to break through that converging support. RSI and stochastics already reveal a propensity to turn up and the MACD histogram has stopped declining. This remains a bearish formation of a type that was once considered reliable, but lingering bullish fervor could keep this one from confirming, just as that bullishness has kept others from confirming in recent months and weeks. However, take a look at the TRAN, the Dow's sister index. Was that a H&S that fell to its target straight from the head without ever forming a right shoulder? Annotated Daily Chart for the TRAN: The TRAN sometimes leads the Dow, so that the Dow's possible H&S should perhaps be given some credence this time. Before bears start salivating, however, the Dow's failure so far to confirm the TRAN's plummet with a plummet of its own could be seen by some as bullish divergence between the sister indices. If the Dow continues to hold up for another week or so, relief may send the Dow higher again as the H&S formation is rejected. Much may depend on the reaction to CSCO's earnings tomorrow. In Japan last night, some credited a negative outlook on Olympus with a snowball effect, sending all tech-related stocks lower, and the Dow does also include some tech stocks. In addition, many tech-related indices perch precariously on the respective regression-channel support. Recent declines have been ugly, but they're always ugly as the tech-related indices have fallen to the bottom of their respective regression channels, and somehow the bounce always occurs. Annotated Daily Chart for the NDX: Since the NDX has always bounced from the bottom of this channel, the presumption remains that it will this time, too. However, I'm watching for a fall beneath last week's NDX low of 1474.13 to signal that the NDX may be beginning to break out of its regression channel. As is evident from the minimal data the charting service reveals tonight, the NDX does sometimes violate that channel before climbing again. Support lies at 1460 and again, stronger, at 1450, so unless momentum gets the NDX moving to the downside, tech bulls will soon gain confidence and bid this up again. It's been a while since I last wrote a wrap. I had planned to include a weekly OEX chart from that wrap complete with the original annotations, but the snafu in my charting service doesn't allow me to do that. Those original annotations had included the comment that if the OEX could climb above 523.50, it would see no real resistance again until 550. I'd commented that at the time, I wasn't seeing anything particularly bearish in the OEX action, in that it had climbed above 487, consolidated, and then begun another move higher. I still am not looking for a market collapse, but I do worry about the speed at which the SPX and OEX zoomed higher in December. Those gains need to be consolidated and new support confirmed before traders feel confident of buying into the market. A prolonged period of consolidation can perform this function, but so can a pullback. The TRAN has shown us what can happen to the downside, and December's climb has shown us what happens when bearish hopes are dashed and bulls gain the power. Trade carefully, using stops appropriate for your account management practices. Expect to be whipsawed out of some trades. Tomorrow morning sees the release of December's factory orders and January's ISM services number, with both released at 10:00. Because the GDP number has already given us a glimpse of factory orders, the number doesn't usually prove to be a market-moving number. Expectations are for a gain of 0.3 percent, although estimates range all the way up to a 1.5 percent gain. Factory orders were down 1.4 percent in November. January's ISM services or non-manufacturing number is estimated at 60 percent, although estimates range down to 59 percent, with any number over 50 representing an expansion. December's number was 58 percent. Reaction to CSCO earnings and jitters over the upcoming G7 meeting and Friday's employment numbers will probably outweigh any reaction seen due to these numbers, however. Linda Piazza *************** FUTURES MARKETS *************** Running the Clock Jonathan Levinson The US Dollar Index got slammed overnight, drifting higher today. Treasuries moved strongly higher, metals and the CRB advanced, and equities drifted without direction, closing mostly unchanged in positive territory at the cash close and then fell in the last 15 minutes of trading. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. Chart of the US Dollar Index The selling that began at yesterday's cash close accelerated throughout the night and bottomed over 1% below yesterday's high, reaching 86.50 in the early morning. A meandering bounce brought the index to the 86.80 level, where it was trading as of this writing. Metals were firm throughout the session, and the CRB added .89 to close at 261.85, led by strength in cocoa, copper, platinum and natural gas futures. Daily chart of April gold April gold put in a higher high and higher low from yesterday, holding above 399 and reaching as high as 405. Chicago Fed President Moskow made some comments about the low risk of inflation, which coincided with the noontime selling that trimmed some of the morning gains in gold and silver. Nonetheless, today's action was what bulls trading the upturn in the 10-day stochastic wanted to see. Trendline support remains 395 (tested yesterday), with price confluence and Fibonacci support next at 392. Gold closed higher by 1.20 at 400.40, March silver +.042 to 6.09, XAU -.12 to 95.93 and HUI +.99 to 216.57. Daily chart of the ten year note yield Ten year notes moved higher today despite the fed's allowing 3.25B in overnight repos to expire unrefunded. Ten year note yields (TNX) dropped 5.1 bps to close at 4.1%, a 1.23% decline for the day. The closing print is Fibonacci support, below which 4.065% is the next support area. The daily cycle upphase is still in progress but is hesitating, and the twin upside doji spikes last week may have been the top of the cycle. We won't know until the next sell signal, and it hasn't printed yet. Daily NQ candles The NQ went net nowhere today, closing near the middle of a narrowing range. A lower high at 1499 and slightly higher low (by half a point) at 1483 printed, but most of the trades occurred in a small range than that. Clearly, energy or "cause", to use Tom O'Brien's pet term, is building for the next move, and it's either going to be an upside break or a bear wedge distribution breakdown. The daily cycle downphase continues, but it's now 4 days that have been spent going nowhere in either a distribution or accumulation. The Macd histogram on this timeframe is suggesting the beginning of a pull higher, and on the daily chart, either a bounce or a secondary drop is easily imaginable from here. Support is 1480, resistance 1500, followed by 1510. NQ closed lower by .17% at 1486.50. 30 minute 20 day chart of the NQ The NQ behaved today as any symbol that finds itself in a coiling wedge or pennant, frustrating both traders and their indicator as the price attempts to squeeze into the apex. 1496 resistance was broken only briefly and held on a closing basis. An upside break tomorrow will target 1510, but more importantly the 1515-20 confluence area that now coincides with upper wedge resistance. To the downside, first support is at 1475, followed by 1460 and 1440. On a cycle basis, the pennant has compressed the oscillators and rendered them mostly useless, and I suggest watching for a break of upper or lower resistance before choosing a direction. Daily ES candles ES dropped 1.50 to finish at 1433, leaving a doji star verging on a bullish hammer. It was enough to give ES bulls a little uptick in the ongoing daily cycle downphase, and squeezed shorts at the top of the recent flag's range (see 30 minute chart below). As on the NQ, it's either going to break higher or lower, with resistance at 1442, then 1449, support at 1130, 1126, 1122 and 1115-1118. Is the 1122 area going to serve as a head and shoulders neckline, or is the "smart" money enticing shorts into bearish positions to provide fuel for the next squeeze higher? We won't know until either support or resistance breaks. The daily cycle downphase is still intact, and the downtrend off the high still hasn't been broken. One strong buy program could change that, and everyone knows it. 20 day 30 minute chart of the ES The pennant was even more extreme on ES. I've guestimated the downtrend resistance line, but you get the rough idea. 1136, 1142-3, 1149 are upside resistance. The 30 minute upphase got even less traction than the preceding downphase did this morning, so anything can happen from here. I believe that the break out of the apex will be directional and should provide more than a 10 minute move for traders to chew on. Patience is a virtue unless you have a strong feeling about which way it's going break. 150-tick ES This intraday chart says it all. There wasn't enough strength to even give us a touch of the outer Keltner bands in either direction. Daily YM candles YM lost 15 points, closing at 10473. Three's nothing to add, with the YM closing right on the upper primary channel trendline. 20 day 30 minute chart of the YM An interesting thing happened today: the dollar tanked overnight, driving up metals. It recovered during the day, trimming some of their gains. Despite the USD Index' being lower by nearly a percent as of the cash close today, equities were unchanged and treasuries were higher. The Fed drained a significant amount, but everything rose. I wondered in the Futures Monitor whether this was the Bank of Japan intervening again, and it might well have been, as the anticipated effects of the repo drain and dollar rise were notably absent. For trading purposes, this is a question to leave open. Pricewise, the current range is going to break anytime, and short of using a strangle or other hedging technique, directional traders are either scalping the narrowing range or waiting for a break to follow. I'm looking forward to tomorrow bringing us our break. ************************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 ******************** Cisco deflates in after-hours Shares of technology bellwether Cisco Systems (NASDAQ:CSCO) $26.41 +0.80% fell to $25.28, or 4.2% in after-hours trade despite the company reporting quarterly earnings that beat Wall Street's estimates by a penny. In what had been a tightly traded range for the NASDAQ-100 Tracking Stock (AMEX:QQQ) $36.93 -0.10% in today's session, the Tracker fell to $36.72, or -0.56%. Cisco (CSCO) reported second-quarter EPS of $0.18 (excluding an $0.08 per share accounting charge), on revenues that rose 14.5% year-over-year to $5.4 billion, which was above consensus estimates for revenues of $5.28 billion. On the company's conference call, CSCO's Q3 guidance was for revenues to be up 1%- 3% quarter over quarter and 18-20% year-over-year, which for yearly revenues would equate to approximately $5.452-$5.560 billion, which was above consensus of $5.368 billion. What appeared to disappoint investors in after-hours trade was CSCO saying gross margins were seen between 67-69%, where overall margins were seeing some negative impact from its wireless LINKSYS business (contributed $165 million in revenue, which was a 39% sequential increase), where competition remained fierce. Gross margins for the recently completed quarter were 68.5% compared with 68.7% during the prior quarter. Chief Executive John Chambers said during a conference call that for the second straight quarter he is more optimistic regarding business conditions than he was three months prior. Still, Mr. Chambers cautioned investors that some business leaders remain "surprisingly cautious" toward capital spending and hiring. Earlier today, outplacement firm Challenger, Gray & Christmas said announcements, or planned layoff announcements by U.S. corporations jumped 26% in January (compared to December) to 117,556, the highest since October. John Challenger, CEO of the company said, "We typically see higher job cuts in January as companies set into motion business plans an employment needs for the year." January's layoffs were 11% lower than January 2003's 132,222 and 53% lower than January 2002's 248,475, but continued to suggest a slow pace of recovery for the U.S. labor markets. It should be noted that the Challenger report only addresses announced layoffs and other job reductions, not hirings. Sectors seeing the largest number of announced layoffs were consumer product companies (22,775), financial services (15,157), and retail (14,016). Market Snapshot / Internals - 02/03/04 Close The major indices saw a rather flat trade during today's regular session, where NASDAQ's A/D breadth was negative throughout. NASDAQ A/D breadth has shown negative closing results for 5 of its last 6 sessions and suggests bulls have been less aggressive with their buying of 4 and 5-lettered stocks. While the NYSE finished with positive A/D breadth, its last 6 sessions of trade have finished with positive breadth 3 times, where positive breadth has been just about equal to today's. The number of new highs at both the NYSE and NASDAQ are about half those number seen just a week ago when the NYSE was steadily above the 400 number of new 52-week highs, while NASDAQ averaging roughly 300. Both the NYSE and NASDAQ show their 5-day average NH/NL ratios below their 10-day, which depicts a near-term lack of bullish leadership. Current 5-day/10-day comparison at the NYSE is 97.4%/98.4%, while NASDAQ's 5-day/10/day comparison is 94.5%/96.4%. Pivot Analysis Matrix A tight range of trade was seen for the major indices with the S&P 100 Index (OEX.X) 563.36 +0.10% high of the day marked by its WEEKLY Pivot. While the QQQ does see a lower trade in this evening's after-hours, I will still note correlative resistance beginning to look formidable at the $37.50 level, where tomorrow's DAILY R2 and WEEKLY Pivot are highly correlative, and MONTHLY Pivot of $37.43 is also quite close. This may be a level where QQQ bears define a near-term level of resistance, and where QQQ bulls begin to see a short-term trading target if considering any near-term bullish trades. Traders should keep in mind that on Friday, January nonfarm payrolls are scheduled to be released before the opening bell, where this data will be of great focus by market participants. Current economists' forecast is for the economy to have added 165,000 jobs after December's disappointing 1,000 addition. As I update the pivot matrix this evening, I'm noting that today's 09:05-03:00 U.S. Dollar Index (dx00y) 86.85 -0.77% trade had the day's low of 86.61 coming at our MONTHLY Pivot. A time check shows this low came at 10:23 AM EST. This may be an important observation for gold equity traders as the intra-day high on the AMEX Gold Bugs Index ($HUI.X) 216.57 +0.45% was 219.72, which came at 10:25 AM EST. With the U.S. deficit getting great attention as well as reports of ricin being found at a U.S. Senate Office, I would have thought gold equities, and gold itself, would have found a much stronger bid in today's trade. Gold has been trying to firm around the $400/oz. level in recent sessions where this support may be correlative with the WEEKLY Pivot in the U.S. Dollar Index (dx00y) 87.06. S&P 100 Index Chart (OEX.X) - Daily Intervals The OEX found its daily range marked by the MONTHLY Pivot as support and WEEKLY Pivot as resistance. Stochastics have turned higher from "oversold" as the OEX show three sessions of higher lows, while still within a relatively tight range of 560-567. S&P 500 Index Chart (SPX.X) - Daily Intervals I've noted where the e-mini S&P 500 futures (es04h) are currently trading after things appear to be settling down after Cisco's (CSCO) earnings. MACD still advising near-term caution to bulls, while Stochastics recover from "oversold." I would currently take a break back below 1,122.38 for the SPX to show a lower low after its recent 52-week high. Dow Industrials Chart (INDU) - Daily Intervals I'm making note of today's downgrade of Caterpillar (CAT) $77.04 -0.58%, which is one of the heavier weighted Dow components, which has been a real drag on the Dow of late. I'm thinking Bear Stearns' downgrade follow some selling by their clients ahead of the actual downgrade. Bear Stearns says their research shows that the heavy equipment and machinery stocks peaked two months ahead of interest rate spikes that took place in 1994 and believes CAT is fairly valued. Intel (NASDAQ:INTC) $31.40 +3.56%, which doesn't carry nearly the weight of CAT as it relates to the INDU looks to have started to bounce after its recent declines from $34.50, which started on 01/09/04. Keep an eye on CAT as a 3.5% bounce would have much greater impact on the INDU than that of INTC. NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals Today's volume in the QQQ was light and most likely had traders cautious ahead of Cisco's (CSCO) earnings. I would have to think there would be major support found at or just above the $36.00 level, which was a major level of resistance this past fall, when broken to the upside, the QQQ rallied to a high of $39.00. It has been light volume declines in the QQQ that has found some impressive "oversold" bounces, and I'll update volume patterns in the QQQ tomorrow. 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 **************** Mixed Markets - J. Brown The major averages ended mildly in the green on Tuesday but once again the closing numbers don't tell the whole story. Trading was mixed with the major sector indices split down the middle between winners and losers. Out performing today were the homebuilders as bond yields slipped lower. Drug stocks were also a winning sector, which may be a clue to investor sentiment since drugs are typically seen as safe haven stocks. Airlines continued to under perform as the XAL index dropped another 2.9%. News of more deaths in Asia from the avian flu virus is making investors cautious and the markets didn't react well to a $325 million debt offering by Delta. Internet stocks under performed as Amazon.com plunged another 6.9% toward its 200-dma, marking its fifth decline in six days. Healthcare stocks and oil services equities also felt the pinch. The market internals clearly expressed the markets indecision. On the NYSE advancers tied decliners 14 to 14. On the NASDAQ losing stocks edged past winners 8 to 7. Down volume was stronger than up volume by 10 to 7 on both exchanges. Whether you have a bullish bias or a bearish one the fact that stocks failed to sell-off on the ricin news belies the markets underlying strength. If you missed the headlines a powdery substance coming from an envelope(s) in the offices of Senate Majority Leader Bill Frist was confirmed as the deadly ricin poison. It may not be market moving news but it does affect investor psychology. In the financial world the big event tonight was CSCO's earnings report that came out after the closing bell. The networking company beat net income estimates and revenue estimates but sold off in after hours trading. If investors choose to accept John Chambers' positive comments at face value then we could see a bounce in tech stocks tomorrow. Tomorrow will also bring more economic data. The ISM services index is due and economists are looking for a bump from 58 in December to 60 in January. We'll also see the Factory orders report where economists are looking for a +0.2% rise in December following November's 1.4% drop. There will also be an increased focus on Friday's non-farm payrolls report and conjecture about what might result from this Friday's G7 summit. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10701 52-week Low : 7416 Current : 10505 Moving Averages: (Simple) 10-dma: 10559 50-dma: 10257 200-dma: 9490 S&P 500 ($SPX) 52-week High: 1155 52-week Low : 788 Current : 1136 Moving Averages: (Simple) 10-dma: 1139 50-dma: 1099 200-dma: 1021 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 795 Current : 1491 Moving Averages: (Simple) 10-dma: 1514 50-dma: 1464 200-dma: 1326 ----------------------------------------------------------------- Volatility indices have been able to maintain their recent gains but we haven't seen any major breakouts that might indicate a change in investor mentality. CBOE Market Volatility Index (VIX) = 17.34 +0.23 CBOE Mkt Volatility old VIX (VXO) = 17.06 +0.19 Nasdaq Volatility Index (VXN) = 26.30 +0.49 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.70 730,466 408,402 Equity Only 0.58 655,186 379,015 OEX 1.49 11,413 17,032 QQQ 2.95 21,347 63,044 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 76.5 + 0 Bull Confirmed NASDAQ-100 72.0 - 2 Bull Correction Dow Indust. 90.0 + 0 Bull Confirmed S&P 500 86.2 - 1 Bull Confirmed S&P 100 87.0 + 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: 1.06 10-dma: 1.03 21-dma: 0.99 55-dma: 1.04 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 1412 1404 Decliners 1426 1635 New Highs 210 135 New Lows 12 8 Up Volume 776M 708M Down Vol. 1032M 1038M Total Vol. 1820M 1828M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 01/27/04 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 Commercials are beginning to hedge their bullishness from two weeks ago but the changes are mild. In the mean time small traders have become even more bullish with a strong decline in open short positions. Commercials Long Short Net % Of OI 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% 01/27/04 417,089 410,930 6,159 0.7% 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 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% 01/27/04 143,089 87,828 55,261 23.9% 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 In contrast to the larger S&P contracts above, commercial traders dramatically increased their long positions in the e-minis but remain overall net short. Small trader pared back some of their exuberance from the previous weeks. Commercials Long Short Net % Of OI 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%) 01/27/04 291,166 334,618 (43,452) ( 6.9%) 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 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% 01/27/04 154,485 60,556 93,929 43.7% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There is little change to report in the commercial positions while small traders are hedging their bets almost 50/50. Commercials Long Short Net % of OI 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% 01/27/04 43,704 40,951 2,753 3.3% 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 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%) 01/27/04 10,137 10,715 ( 578) ( 2.8%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials have reached their most bullish stance in four weeks on the Dow and in perfect timing the small traders are at their most bearish over the last month. Commercials Long Short Net % of OI 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% 01/27/04 16,536 8,404 8,162 32.7% 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 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%) 01/27/04 7,240 12,372 ( 5,132) (26.2%) 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 Tuesday 02-03-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ABK, DHR, ESRX, GENZ, HSIC, IBM, IMDC, MWD Dropped Puts: TEVA Call Play Updates: EASI, QLGC New Calls Plays: AVID Put Play Updates: None New Put Plays: KSS **************** 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: ***** Kohls Corp - KSS - close: 45.00 change: +0.57 stop: 45.05 It boggles the mind. Almost no one expects KSS's same-store sales numbers, expected on Thursday, to be any good. The company didn't have the best holiday season and analysts believe that apparel retailers in general had a poor January with the only sales fueled by steep markdowns. So why is KSS trading higher and breaking through resistance at its 40-dma, 50-dma and the $45.00 level? That's a good question that we don't have an answer for. It is believed that a few months down the line KSS will have easier year over year comparisons because last year's numbers were so bad. Whatever the case, we are stopped out at $45.05. Picked on January 27 at $44.05 Change since picked: + 0.95 Earnings Date 02/26/04 (unconfirmed) Average Daily Volume: 4.6 million Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Ambac Financial Group - ABK - close: 76.83 chg: -0.06 stop: 71.99 The insurance sector has been pretty strong the last four days and shares of ABK are following suit. Yesterday we saw ABK continues its surge higher by breaking out above resistance at $75.00 on decent volume. Plus, the markets had four insurers report earnings last night after the bell (AFL, NFS, PFG, RE) and overall the numbers were strong. It's encouraging to see ABK hold onto its gains but don't be surprised to see shares dip a little in profit taking. We'd consider new entries on a dip between $75-76. Picked on February 1 at $74.77 Change since picked: + 2.06 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 476 thousand Chart = --- Danaher Corp - DHR - close: 91.47 cls: -0.37 stop: 87.99 The sideways churn in the markets these last couple of days have given DHR a chance to digest some of its recent gains after rebounding from its 50-dma. Traders can watch for a potential retest of the $90.00 level as support and use the bounce as a new entry point. More conservative traders may feel better waiting for DHR to clear its short-term trend of lower highs by crossing above the $93.00 level. DHR's Vice President made a presentation this morning at the Thomas Weisel Tech 2004 conference but there didn't appear to be any stock-moving news in the presentation. Tomorrow DHR's President and CEO will be presenting at the Lehman Brothers Industrial Select conference. Picked on January 30 at $91.01 Change since picked: + 0.46 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand Chart = --- Express Scripts - ESRX - cls: 70.00 chng: +0.72 stop: 65.50*new* Soaring through the stubborn $70 resistance level this morning, it looked like ESRX had finally managed the elusive breakout we've been waiting for. But with a lack of strength in the overall market, the stock lost momentum and fell back at the end of the day to end right at $70. While it was disappointing to see ESRX unable to hold all of its intraday gains, the stock did manage to eke out a new recent closing high and the bullish trend is still intact. Another encouraging point is the way price has rebounded the past two days on the brief forays below the 10-dma (currently $68.99), proving that average continues to act as support. Rebounds from above $68 still look like the best entry point, as we patiently wait for ESRX to make its way up to our initial target at $72. The clock is ticking, but there are still three weeks until the company's earnings report, so buy the dips to support and hold on through the volatility. Raise stops to $65.50, which will be below the 50-dma by tomorrow. Picked on January 13th at $68.32 Change since picked: +1.68 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 1.09 mln Chart = --- Genzyme Corp. - GENZ - close: 57.09 change: +1.12 stop: 53.00*new* After a couple weeks of volatile consolidation, the bulls finally gained the upper hand today, with GENZ breaking out over the $56 level to close above $57 for the first time since the end of 2001. It would be nice to see volume running a bit stronger, but it seems clear that the bulls are intent on driving the stock through the $57-58 resistance level and making a run at the 2001 highs in the $60-61 area, which just happens to be our target for the play. The initial move from $50-55 appears to be the first leg of the rally and today's breakout above resistance gives a bullish resolution to the consolidation flag pattern and provides a measurement objective $5 above the $56 breakout, or $61. Isn't it nice to have our target confirmed like that? A pullback and rebound from the $55-56 is probably our last shot at a decent entry into the play, as from here on out the play should be about maximizing gains. To that end, we're raising our stop to $53 tonight, as that will be below the 20-dma by tomorrow. Picked on January 20th at $53.00 Change since picked: +4.09 Earnings Date 2/19/04 (unconfirmed) Average Daily Volume = 2.86 mln Chart = --- Henry Schein - HSIC - close: 71.36 chg: +1.33 stop: 68.00*new* Headlines continue to be scarce for HSIC but that didn't stop buyers for bidding up shares this afternoon. The recent consolidation above the $69.00 level may be over. Today's rally looks like a decent entry point for new positions while momentum traders may want to wait for HSIC to clear its recent high at 72.26. We are going to inch up our stop loss to 68.00, about 25 cents below the simple 50-dma. Picked on January 22 at $70.65 Change since picked: + 0.71 Earnings Date 03/04/04 (unconfirmed) Average Daily Volume: 334 thousand Chart = --- Int'l Bus. Machines - IBM - cls: 99.99 chng: +0.60 stop: 95.50 Does that count as an activated trigger? When we initiated coverage of IBM, we set an entry trigger at $100, and the stock finally pushed through recent resistance to hit that mark exactly in the final hour, before closing just a penny off that mark. We'll say yes, that our trigger has been satisfied, with the understanding that there is likely to be a near-term pullback in the morning as the market seems to have disliked something it heard in CSCO's earnings report after the bell. Look for a rebound from above $99 to provide a slightly better entry point tomorrow or else wait for a decisive move over the century mark. Based on the price action of the past couple weeks, support really should hold above $97, so we shouldn't see our $95.50 stop threatened, especially with the 20-dma ($95.69) now above that level. Picked on February 1st at $99.23 Change since picked: +0.76 Earnings Date 4/15/04 (unconfirmed) Average Daily Volume = 5.52 mln Chart = --- Inamed Corp - IMDC - close: 51.70 chg: +0.36 stop: 48.00 Another of our bullish plays in the medical equipment and supplies industry, IMDC, is slowly creeping higher. Granted it appears that bulls are having to fight for today's gains. The short-term up trend remains and shares continue to offer traders a bullish entry point here above $50.00. If you're more of a patient investor, then wait to see if IMDC dips again toward the $50.00 level and buy the bounce. Picked on February 01 at $51.54 Change since picked: + 0.16 Earnings Date 02/24/04 (unconfirmed) Average Daily Volume: 682 thousand Chart = --- Morgan Stanley - MWD - close: 57.78 chg: -0.27 stop: 56.75 Last week the XBD and MWD both saw a sharp decline. The selling in MWD stopped at its simple 50-dma and price support at $56.76. Shares of MWD immediately began to bounce higher as did the XBD to a lesser degree. Now it seems like the rally is fading. MWD's intraday high on Monday failed at its 10-dma and today it traded in a very tight range for most of the session. Likewise we're seeing the bounce in the XBD broker-dealer index begin to stall. Are bulls merely catching their breath? Or is this a prelude to another decline? We're currently very cautious on MWD and do not suggest new entries at this time. If you're feeling bullish on the sector then consider Goldman Sachs (GS), which out performed today with its own rebound above the $100 level. Picked on January 15 at $59.81 Change since picked: - 2.03 Earnings Date 03/18/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = ************** NEW CALL PLAYS ************** Teva Pharmaceutical - TEVA - cls: 64.66 chng: +1.42 stop: 61.00 Company Description: Teva Pharmaceutical Industries Ltd. is a global pharmaceutical company producing drugs in all major treatment categories. Teva has utilized its production and research capabilities to establish a global pharmaceutical business focused on the growing demand for generic drugs and on the opportunities for proprietary branded products for specific niche categories. Teva's active pharmaceutical ingredients business provides both significant revenues and profits from sales to third-party generic manufacturers and strategic benefits to the company's own pharmaceutical production through its delivery of significant raw materials. Why we like it: There's a powerful change underway in the Pharmaceutical sector, with the big Pharma stocks like Merck, Lilly and Pfizer feeling the pinch from increased competition. That competition is coming from the generic drug manufacturers, who in addition to horning in on the production of many blockbuster drugs of yesteryear, are developing and producing their own products. TEVA is a great example of the strength in this sector, as the stock has built a pattern of delivering a strong rally, consolidating and then delivering another strong rally. The last time the stock was on the move was the rally from March through June that took TEVA from the $37 area to $60. Since June, TEVA has been trading sideways in a broad consolidation flag between roughly $55-62. After completing its acquisition of Sicor, shares of TEVA shot higher on 1/22-23, making an initial push over the top of the months-long range. After a week of consolidation just under that $62-63 resistance, TEVA is on the move again and with the breakout of the past couple days, it looks like the bulls have had enough of this consolidation and are in the process of driving the stock to its next plateau. A quick look at the PnF chart shows the strength of the stock with a Bullish Catapult breakout. The late-November rally created a fresh Buy signal and that produced a bullish price target of $77. That lines up nicely with the measurement objective on the break from the long-term flag consolidation, which gives a bullish target of roughly $80. Of course, we don't need to capture the entire move, just a solid chunk from the middle. Besides that, we have a time limitation to deal with, as TEVA is set to report earnings on February 17th. With the breakout already underway, momentum traders can enter on further strength above the $65 level. But our preference is to wait for a slight pullback to confirm support in the $62.50-63.00 area before entry. We'll target a rally up to the $70 level as our objective for the play and use an initial stop at $61, just under the bottom of last week's consolidation. Suggested Options: Shorter Term: The February $65 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Longer-term traders can use the March $65 Call, while the more conservative approach. We've listed a limited number of strikes on TEVA due to limited strike selection with acceptable open interest. Our preferred option is the March $65 strike, which is at the money and should provide sufficient time for the play to move in our favor. BUY CALL FEB-60 TVQ-BL OI=5375 at $5.20 SL=2.75 BUY CALL FEB-65 TVQ-BM OI=1771 at $1.25 SL=0.60 BUY CALL MAR-65*TVQ-CM OI=3264 at $2.10 SL=3.50 Annotated Chart of TEVA: Picked on February 3rd at $64.66 Change since picked: +0.00 Earnings Date 2/17/04 (unconfirmed) Average Daily Volume = 2.66 mln ************************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 ******************* Eng. Support Systems - EASI - cls: 49.01 chng: -1.23 stop: 54.00 Proving the wisdom of using an entry trigger below support, EASI caught a bounce on Monday, surging almost to the $52 level before the bulls lost their nerve. The bearish price action that first drew us to the stock reasserted itself today though, with EASI opening at its high and closing just off the low. Key support continues to be just above $48 and until that level is broken, remaining on the sidelines looks like the best choice. In addition to horizontal support, there's the 100-dma ($48.46) propping up the stock, but once it gives way, we could see a rapid slide down towards next support at $45 and then on to our eventual target at $40. Our choice for entry is to jump on board as the initial breakdown takes place. More conservative traders can wait for a subsequent failed bounce below $50, but will run the risk of missing the move altogether. Maintain stops at $54 until the breakdown occurs, but after a sub-$48 close, we'll be looking to tighten that stop to just above $52. Picked on February 1st at $50.00 Change since picked: -0.99 Earnings Date 3/09/04 (unconfirmed) Average Daily Volume = 377 K --- QLogic Corp. - QLGC - close: 43.59 change: +0.69 stop: 46.50*new* It certainly hasn't been speedy, but QLGC is behaving itself rather nicely as it continues to work its way lower in the descending channel we pointed out over the weekend. Yesterday's bounce attempt was quickly turned back just below the 10-dma ($45.19), just below the top of that short-term channel, resulting in a sharp drop to close just under the $43 level. Since that produced a test of the bottom of the channel, a near- term bounce made sense and that's just what happened today, helping to alleviate the near-term oversold condition. QLGC has some work to do to make its way down through this near-term support, but our initial target at $41 is looking more achievable by the day. And if the SOX does break the $500 support level, then we could be looking at a breakdown to the $38 area. Use failed bounces below the top of the channel and the 10-dma to initiate new positions and lower stops to $46.50, which is comfortably above the top of last Friday's failed rebound. Picked on January 22nd at $45.25 Change since picked: -1.66 Earnings Date 4/14/04 (unconfirmed) Average Daily Volume = 3.94 mln ************* NEW PUT PLAYS ************* Avid Technology - AVID - close: 43.86 chg: +0.41 stop: 46.17 Company Description: Avid Technology, Inc. is the world leader in digital nonlinear media creation, management and distribution solutions, enabling film, video, audio, animation, games, and broadcast news professionals to work more efficiently, productively and creatively. For more information about the company's Oscar., Grammy., and Emmy. award-winning products and services, please visit: www.avid.com. (source: company press release) Why We Like It: A big volume drop that breaks multiple levels of support? What's not to like? The company recently reported earnings that beat the estimates on net income and revenues and investors still sold the news. Throw in a couple of broker downgrades and the stock drops even faster. We admit that the stock already looks oversold on a short-term basis and for many traders it may not be best to chase it. However, on a technical level the stock looks pretty weak and each intraday bounce in the last few sessions has been used to exit the stock. P&F chart fans will note that its current vertical count points to a $30.00 price target. We are going to try and protect ourselves by using a TRIGGER. Shares of AVID painted an "inside day" so we're going to use a TRIGGER at $42.87, just under yesterday's low. Until AVID trades at or below this level we'll sit on the sidelines. Don't be surprised to see AVID bounce. However, if we are triggered then we'll use a stop loss just above yesterday's high at $46.17 and above its simple 200-dma. We would expect the $40 level to offer some support but AVID can probably trade to the $38.00 region, which represents a 50% retracement of its big 2003 run up. Suggested Options: February strikes don't have much time left so we're going to suggest the March or June puts. Our favorite is the March 45s. BUY PUT MAR 45*AQI-OI OI=2168 at $4.10 SL=2.15 BUY PUT MAR 40 AQI-OH OI=3162 at $1.90 SL=1.00 BUY PUT JUN 45 AQI-RI OI= 648 at $6.30 SL=3.75 BUY PUT JUN 40 AQI-RH OI= 276 at $4.00 SL=2.25 Annotated chart: Picked on February xx at $xx.xx Change since picked: - 0.00 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 612 thousand Chart = ************************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 Tuesday 02-03-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Insurance, Drugs and Tech Traders Corner: SQUARE OF NINE ********** WATCH LIST ********** Insurance, Drugs and Tech ___________________________________________________________________ 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. ___________________________________________________________________ XL Capital Ltd - XL - close: 79.67 change: -0.23 WHAT TO WATCH: Insurance stocks have been pretty strong lately and given their string of positive earnings results they may continue to out perform. XL has earnings on February 12th and could see its own pre-earnings ramp up. Look for a breakout above resistance near $81.00. Chart= --- Merck & Co - MRK - close: 48.50 change: +0.43 WHAT TO WATCH: This Dow component appears to be on the rebound. The month of January has seen MRK try multiple times to breakout over resistance above 48.00-48.25 and it may have done it today. There is potential resistance at $50.00 and its 200-dma near 52.50 but it looks like a bullish play. Chart= --- Intel Corp - INTC - close: 31.40 change: +1.08 WHAT TO WATCH: We're surprised that the SOX held up so well considering Goldman Sach's downgrade of the chip sector last night to neutral. Contributing to the SOX's ability to hold above support at the 500 level was Intel's strong 3.5% bounce. There didn't seem to be any catalyst for the bounce other than INTC finally hitting support at $30.00 yesterday. The top of the recent trading range is $34.50. Chart= --- Cisco Systems - CSCO - close: 26.41 change: +0.21 WHAT TO WATCH: CSCO is the big tech stock earnings event this week and they announced after the close tonight. Estimates were for 17 cents a share on revenues of $5.2 billion. CSCO turned in 18 cents a share on revenues of $5.4 billion. Chambers had some positive comments on the global economy but the stock was trading lower after hours. It will be interesting to see if the weakness holds up tomorrow during the normal session. Currently CSCO has support at $25.50 and its simple 40-dma. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- SGP $18.34 +0.44 - SGP is another drug stock that appears to be attracting investor interest. Look for a move above the $18.50 level. PFE $37.71 +0.30 - Yesterday PFE broke out to a new high after the FDA approved two new drugs (one of which it is marketing). PFE came back to test resistance at $37.00 as support and bounced. FRX $76.03 +0.57 - We're detecting a theme here. FRX, another drug stock, has been climbing steadily and investors has been pushing shares higher with a trend of higher lows. LTR $54.59 -0.09 - Keep an eye on LTR. The company announces earnings in a few days and odds of a sell the news event are strong after 11 consecutive weeks of steady gains. TIF $38.90 -0.59 - A number of retailers will be announcing same- store sales data this Thursday. We don't know if TIF is one of them but analysts don't have high expectations for January. Meanwhile TIF is slipping lower towards support at its 200-dma. ************************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 ************** SQUARE OF NINE I believe it is important that we begin this discussion on the Square of nine analyses, first with a few thoughts. There is a lot of misinformation out there related to the theory of Gann analysis that is available to the novice trader. Many other ways of trading methodology include the use of Fibonacci, Andrews or Elliott may be related to some aspects of Gann, but be careful of many people out there that group some or all of the above methods under the umbrella of the Gann theory. They are totally misguided. Next you must have a basic understanding of price movement to be successful in trading. This knowledge is the foundation of analysis and everything else is built around it. Gann, Elliott, or even oscillators all present certain probabilities, but the only thing that is a certainty is what price action is telling you on the chart on your screen. The pattern in the movement of prices should justify the probability that your indicator is giving you the correct signal. Quoting Mr.Gann, “ Whenever price and time are squared, you can look for a change in trend.” The key word in his statement is “look.” This means that look for some evidence that the trend has changed before positioning yourself on that probability. In my style of trading, I use the CCI. But whatever you use be it MACD, Stochastics, RSI or your other favorite indicator, look for a divergence in the price and the oscillator when price action comes into play with one of the Square of Nines. The predictive strength of the Square of Nines I believe it can be a very powerful asset when trading stocks, bonds, options and futures. The Square of Nines is one of Gann’s best tools. It is called that because the numbers one through nine complete a square in the center of a diagram. To appreciate the Square of Nine in terms of it’s geographic origins, look at the diagram below and visualize it an a pyramid. The importance of the pyramids in mathematics and number sequence such as the Fibonacci’s forecasting can be found in scores of books but we will concentrate on the Square of Nine. The apex of the pyramid is the number one with four equal-sized triangular walls descending down to a square base. Each block in the pyramid is given a number and each block has a cousin, which is the exact same relative position on the other three walls. These related cousins are separated precisely by intervals of 90,180,270 or 360 degrees. If each of these blocks were a price, then possible turning points would be found when prices reached a point 90,180,270 0r 360 degrees away from the original starting price recorded. You may want to print out this table so you can follow along in the discussion below. Just as an example I will use a stock that is trading now at $15 because if I used a Gann Wheel where the ES or the YM are trading now, it would not fit in this format. The number 15 is perfectly aligned under the 90-degree angle. On this chart find the number 316 at the top of the diagram and this will be the 90-degree angle. The 45-degree price objective would be 17 and the 0 and 360 degree price objective would be 19. Follow around to the number 23 and that would be the 270-degree angle. Please continue around still to the number 11 and that would be the 180-degree line. Now I skipped the bottom right corner angle and many others butlike in Fibonacci, some calculations are more important than others. The Fibonacci ratios 0.382, 0.500, 0.618, 1.000, and 1.618 are relationships we know that are critical areas to watch in the markets. This is also how the various Gann angles are interpreted. The angles that are most important in the financial markets are 0,45,90,180,270 and 360. Now many traders use the Square of Nines and calculate every 22.5 degrees out. But for me I basically only use the above numbers when I am trading the YM. If you had every angle plotted on your chart every 22.5 degrees you would have a line every 15 – 20 points or so. When using it with the ES, I do have all the numbers plotted as they are a bit more spread out but key on the major angles most of the time. I am presently using Ensign Software for my charting program, which calculates all these numbers automatically for me. They are always on my chart no matter if price goes to zero or to 20,000. The Square of Nines goes on to infinity and as the price of the YM, ES, or whatever you are following goes around the Gann Wheel like in the example above, you always come back to those Square of Nine numbers using the same angles as support and resistance. I have been only using these Square of Nine calculations for only about a year now but I can tell you I would not trade without them. I don’t have in front of me the mathematical formula for figuring out these numbers but why bother when they are calculated in the charting program for me. In the YM 233 T chart from Friday’s trading, you can see a classic setup. There was the daily pivot at 10457 and the strongest magnet of them all, a 180-degree SON at 10456. Note the open price was 10456 as well. I look for divergence in the CCI and for price to come back through that area for a short signal. Running out of space and time. Hope you understand a little more about the concept of Square of Nines and how they are used. Will talk about this more another time another day. Good trading to you all. Larry Wales ************************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. 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