The Option Investor Newsletter Wednesday 02-04-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Investors React to CSCO's Earnings Futures Wrap: Naz TASRed, enters CSCO skid Index Trader Wrap: NASDAQ's pullback has been about average. So far. Traders Corner: A Tale Of Two Markets Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-04-2004 High Low Volume Advance/Decline DJIA 10470.74 - 34.44 10524.22 10447.18 2.02 bln 705/2132 NASDAQ 2014.14 - 52.07 2044.68 2013.92 2.24 bln 689/2405 S&P 100 558.87 - 4.49 563.36 558.11 Totals 1394/4537 S&P 500 1126.52 - 9.51 1136.03 1124.74 RUS 2000 564.03 - 15.12 579.15 564.03 DJ TRANS 2822.11 - 29.28 2853.88 2815.66 VIX 17.87 + 0.53 18.06 17.46 VXO 17.58 + 0.52 18.10 17.25 VXN 26.65 + 0.35 26.89 25.99 Total Volume 4,772M Total UpVol 859M Total DnVol 3,858M 52wk Highs 270 52wk Lows 19 TRIN 1.06 PUT/CALL 0.81 ******************************************************************* Investors React to CSCO's Earnings by James Brown The NASDAQ has almost wiped out its 2004 gains after investors used CSCO's earnings report last night as another excuse to take profits. What started out as a tech-specific decline quickly widened into a market-wide sell-off. Wall Street completely ignored the two positive economic reports out this morning and chose to rotate money out of tech and cyclicals and into more defensive consumer staples and drug stocks. The only two sector indices that closed in the green today were the RLX retail index and the DRG drug index. The NASDAQ composite lost 52 points or 2.52% to close at 2014. Today's close marks a 6.4% pull back from its high and a test of the 2000 level is almost guaranteed. Meanwhile the Dow Industrials dropped 34 points to close at 10,470 after bouncing twice intraday near the 10,450 level. The S&P 500 index lost almost 10 points to close at 1126. Its short-term trend also looks bearish and a breakdown under the 1120 level may portend a move toward its 50-dma near 1100. Foreign stock exchanges were generally negative, which didn't inspire any investor confidence here. Noteworthy was Japan's NIKKEI index, which fell almost 200 points to 10,447. Renewed concerns over their banking system's bad loans may have been the catalyst to sell and the constant drop in the dollar against the yen doesn't help Japan's exporters. Across the Atlantic rumors surfaced that the Bank of England may actually raise interest rates by 25 basis points while speculation continues for a potential rate cut by the European Central Bank. Here in the U.S. tech stocks took a beating after CSCO's CEO John Chambers said many of their customers remain cautious on capex spending and hiring. Shares of CSCO gapped lower and closed down 8.8% on massive volume of 190 million shares. This lead the NWX networking index to a 5.18% loss. Riding its coattails were the semiconductors, software and hardware sectors. Noteworthy was the 3% drop in the SOX, which broke round-number price support at the 500 level. Shares of Intel reversed yesterday's decent gain for a 4.27% loss. Investors also took money out of homebuilders, biotech, and broker-dealers. Market internals were very bearish. Declining stocks outnumbered advancing stocks 3-to-1 on the NYSE and almost 4-to-1 on the NASDAQ. New highs were the lowest I've seen in a very long time at 164 between both exchanges. Down volume completely overwhelmed up volume 3-to-1 on the NYSE and 6.5-to-1 on the NASDAQ. Overall volume was strong with more than 2 billion shares trading on each exchange. The charts below show the DJIA just above support at 10,400 but in a very clear short-term down trend of lower highs. Meanwhile the NASDAQ has broken its 50-dma and is quickly approaching the 2000 mark. I've also listed the SOX to show its long-term rising trend and the breakdown today through the 500 level. Chart of the DJIA: Chart of the NASDAQ: Chart of the SOX: The big economic report released today was the ISM services index. Economists were looking for a jump to 60.0 from December's 58.0 reading. What we got was a spike to 65.7 in January; a very strong report. Compounding the good news was the factory order numbers released by the Commerce Department. Estimates were for a gain of 0.5% for December's factory orders. The result was a much stronger 1.1% gain. Making the report even brighter was an upward revision for November's factory orders from -1.5% to a -0.9%. Unfortunately, no one was buying the economic news. John Chamber's comments were a great excuse to sell. If that wasn't enough CIENA issued an earnings warning last night that put further pressure on tech and telecom stocks. Shares of CIEN sank nearly 18% to close under its 200-dma at $5.99 after management lowered their first-quarter revenue guidance to $66.4 million. Last month the company had forecasted revenues would be $70.6 million, which was still below analysts' estimates of $76 million. CIEN blamed the timing of a single, albeit large, order for the shortfall. Speaking of timing, Oracle (ORCL) has upped its bid to buy PeopleSoft (PSFT) for the second time. This morning ORCL raised its bid to $26.00 a share in cash (about $9.4 billion) for PSFT. In ORCL's press release Oracle's Chairman and CFO, said, "Given PeopleSoft's current prospects, including its recent downward revisions to earnings guidance for the first quarter, we believe our offer presents compelling value to PeopleSoft's stockholders." Their offer is an 18.8% premium over yesterday's closing price for PSFT but some doubt whether or not the government would approve of such an acquisition. If ORCL doesn't buy PSFT then they might start shopping around for another target. If they do get PSFT, then we could see rivals begin looking for acquisitions to stay competitive. Today's market declines are likely to weigh on investor sentiment more than usual because traders are already apprehensive about Friday's non-farm payrolls report. If jobs fail to materialize there could be a rush for the exits. Many have rationalized that last month's gain of just 1,000 jobs was an abnormality and comments from the government have sustained this belief. However, two months of no job growth starts to look like a trend. We also have the G7 meeting on Friday and Wall Street has already assumed that the dollar's decline will take center stage. There is hope that tomorrow could see a bounce. Thursday will see dozens and dozens of companies report their fourth quarter earnings. If we get enough positive surprises it might turn things around. Of course this goes against the recent trend of sell the news no matter how good the numbers are. We'll also have to contend with an earnings warning by Medtronic (MDT) who warned tonight after the close. MDT had previously guided revenues in the $2.15-2.23 billion range and actually suggested they might surpass it. Naturally analysts pegged their estimates at the top of the range. This evening MDT is reporting that revenues will be closer to $2.195 billion, a 15% rise from the same period a year ago. The stock was trading lower after hours and rivals GDT and STJ are likely to trade lower as well. Thursday also brings the initial jobless claims and a host of same-store sales figures for January. Overall the January sales numbers should be positive. Retailers should have easier year over year comparisons since last January the country was holding its breath as we prepared for the Iraq war. Unfortunately, apparel retailers may under perform the pack as steep markdowns and snowy weather on the east coast reduce margins and traffic. ************ FUTURES WRAP ************ Naz TASRed, enters CSCO skid Jonathan Levinson The US Dollar Index extended yesterday's range as treasuries slid, correcting part of yesterday's gains. Equities were mostly lower with the NQ leading the way. Gold and silver advanced modestly and the CRB declined. 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 drifted sideways, reaching a high above 87 but never challenging resistance in the 87.15 area. The morning gains were supported by positive economic news at 10AM but were given back on a sharp round of selling before noon. The CRB dropped 1.72 to 260.05, led by crude oil, coffee and heating oil futures. Daily chart of April gold The nascent daily cycle upphase continues to sputter along at the starting gate. Another higher low by a few cents was established at 399.60, with an intraday high of 402. With price trading within a broad narrowing pennant and an inside day just completed, traders can look forward to a directional breakout shortly. Below 392 would be bearish, targeting next support at 392, while a move above 408 will target 412-414 resistance. April gold close higher by 90 cents at 401.20, while the XAU and HUI traded both sides of unchanged, finishing lower by 1.05% at 94.92 and -1.76% at 212.75 respectively. Daily chart of the ten year note yield Bonds were weak today, with a bullish engulfing candle retracing part of yesterday's decline on the ten year note yield (TNX) which finished higher by .49% or 2 bps at 4.12%. The Fed was generous today, adding overnight repos of 3.25B and a coupon pass of 910M, which is a permanent market operation. The daily cycle oscillators on the TNX had looked ready to roll over but extended the ongoing upphase on today's yield strength. Daily NQ candles The NQ outperformed to the downside today, finishing a hair above its session low of 1461.50 at 1462.50, a 1.65% drop. It was the break of 1480 for which we had been waiting, and it stopped 1.50 above our next posted support level of 1460. Next support below is at 1438-40 if 1460 fails to hold, and the shape of the daily cycle downphase suggests that it should be an achievable downside goal if 1460 cracks. 1480-2, followed by 1496 and 1505 are now upside resistance. 30 minute 20 day chart of the NQ It turned out to be a bear flag after all. Note how the break came right at the apex of the pennant below the declining trendline. That trendline, validated by the failure at yesterday's cash closing high, roughly coincides with the daily cycle downphase, as so long as price remains below it, the daily cycle downphase should continue. It currently provides resistance at 1482, and any 30 minute cycle bounce should fail at or below that level. If it doesn't, then the daily cycle downphase will be in jeopardy, and open shorts should be at or close to their stops by that point. The Nasdaq lost 52 points today and closed at 2014 on solid volume of 2.28B. For the year-to-date, it's up 0.5%. While the daily cycle oscillator on NQ is approaching the lower end of its range, there's no way to know the effect of the Nasdaq's entering negative territory for the year should such occur. Best to continue to follow the cycles, support and resistance levels. Daily ES candles Es closed at 1123.50, with a low printed at 1122. The daily cycle downphase extended further, and the YM, although far less weak than the NQ, looks poised for a challenge of 1122. More important will be the test of 1115-18, which supported what I believe to have been the left shoulder of the head and shoulders formation printing since the beginning of January 04. To the upside, 1133-35 remains the top of the current range. 20 day 30 minute chart of the ES The breakdown came early beneath the descending resistance line- proxy for the daily cycle downphase, suggesting that I might have drawn it too high. If so, resistance moves lower from 1134 to 1130. The 300 minute stochastic continues to meander lower, as does the Macd, and I'm looking for a break of 1122 to target 1115-18. Given the proliferation of important support just below, traders with more delicate constitutions should be wary of chasing a break of 1122 for more than a quick scalp with a tight stop. So long as the oscillators remain in a synchronized downtrend below the declining trendline, it looks good for short positions, but it's been a whippy week, full of surprises. Below 1115, January will look very much like a complete head and shoulders, and the selling should become stronger from there if it occurs. 150-tick ES A daily cycle downphase is currently in progress on YM, but with lower Keltner support at 1123 being tested and a wavelet bounce trying to set up (bottom pane stochastic), traders should be wary of an overnight bounce. 1128-29 looks like stiff resistance on this intraday timeframe. Daily YM candles Nothing to add on YM, which had the smallest break of its peers. 20 day 30 minute chart of the YM Despite the selective destruction being meted out in select stocks this week, the overall trend of the 2003 rally remains solidly intact. Until the lower daily channel supports get broken, the current leg will look like a correction atop many months of gains. Even as a bear market rally, there is still historical precedent for months of gains to come. That's not to say that I'm expecting such to occur one way or the other, but we must keep an open mind. Wait for the longer uptrend to break before assuming too bearish a stance. The US Dollar Index mostly drifted today as bonds and equities sold, and this despite an injection of more than 4B in liquidity from the Fed. The intermarket relationships are still iffy, and so I'm keeping an open mind there too. However, the combination of dollar and equity weakness looks very ungood to me, and we'll continue to keep an eye out for that relationship this week. See you tomorrow. ******************** INDEX TRADER SUMMARY ******************** NASDAQ's pullback has been about average. So far. Cautious comments from Cisco Systems (NASDAQ:CSCO) $24.08 -8.82% CEO John Chambers in Tuesday evenings quarterly earnings conference call sparked a strong round of selling in today's trade, where few stocks were immune to the selling and now has the NASDAQ Composite (COMPX) 2,014.14 -2.52% struggling to hang onto a 12-point gain for the month of January. Not that Cisco's John Chambers should be credited, or hung by bulls for triggering today's selling, but comments regarding some corporate heads still rather hesitant to spend on information technology and hire back workers raised enough doubt among investors bulls to trigger another strong round of profit taking. We're going to take a quick look at the very broad NASDAQ Composite (COMPX), which has now fallen 140-points since closing at a 29-month high just seven sessions ago. Not to sugar coat the recent declines and get mulled into bullish complacency, but the current 6.5% decline for the NASDAQ Composite would be considered "average" since the move higher from the March lows. Market Snapshot / Internals - 02/04/04 Close Small caps as depicted by the Russell-2000 Index ($RUT.X) 564.03 -2.6% were hardest hit in today's trade, while most stocks with 4 or more letters in their stock symbol and listed at the NASDAQ most likely found a lower trade. While the NASDAQ Composite (COMPX) has decline 6.5% from its recent highs, the also broad Russell-2000 Index ($RUT.X) has fallen 6.2% since its January 26th and 27th matching highs of 601.50. While both A/D lines at the NYSE and NASDAQ were bearish, or weak throughout today's session, today's NH/NL ratio at the NASDAQ of 92.2% (106 / 115) was actually stronger than a recent January 29th NH/NL daily ratio of 89.2%. While some bullish leadership is still found, both the 5-day and 10-day ratios are headed lower. Please note. Both the NYSE and NASDAQ NY/NL 10-day ratio point and figure charts would still be in a column of X and have not yet shown a 3-box reversal (charted on 2% box size). NH/NL breadth at the NYSE showed the daily ratio at 88.3%, where we would have to go back to November 11 and November 17 to find daily NH/NL breadth ratios at such a low level. The NH/NL breadth data simply suggest that buyers are being less aggressive, or perhaps confident, with the buying of stocks at new highs, while any building of new lows would also suggest buyer are becoming less speculative with bottom feeding. We should remember that BUYING isn't created from bulls only, but bears, or shorts also. NASDAQ Composite (COMPX) Chart - Daily Internals Has the NASDAQ Composite seen its top? This question won't be answered for some time, but I've placed a conventional retracement bracket on the COMPX from its October 2002 lows to the recent highs to simply depict a very large range. Levels that were though to be significant resistance at 2,000 and 2,100 are marked on the chart, where I would have to think that if the recent highs were to hold in coming days, weeks or month, then 2,100 would be a level of trade to currently assess resistance at. What I really wanted to do in the above chart is go back and look at some of the past percentage declines where the COMPX had traded a new high, but then pulled back. A 7.5% decline was found from a July 14th high to August 8th pullback, which took 19-days to complete. A similar to current 6.8% decline in mid-September (09/19-09/30) lasted 7-days before a bounce from the rising 50-day SMA was found. I calculated a 7.5% decline from the recent COMPX high would equate to a COMPX trade near 1,992. The reason for this exercise in calculating past percentage moves is to try and put things in perspective of how a broader-market index has moved in the past, digested gains, and can become a measurement, or test for current trade. What we might be monitoring for from a percentage perspective is either SIMILARITY to the past, or DIVERGENCE from the past. How could an index trader use this? I (Jeff Bailey) have had a difficult time not getting swung out of a good trade, by either having my stop set too tight, based on a finite level of trade. One way a trader might look at percentages is to understand how far the market has declined, compare it to past declines, then look to trade accordingly. For instance, I'm looking for a bounce to take place in these markets, especially the NASDAQ, and would currently have to assess further downside of at least 1% based on the COMPX trade, where a 3% bounce higher might not be unreasonable. Traders/investors that may not currently have access to a charting service, but are interested in calculating past pullbacks for indices or sectors they are interested in trading can do so for FREE at www.stockcharts.com. You do NOT need a login name or password to pull up a "SharpChart" of the S&P 500 Index ($SPX). Once you pull up a chart, click the "annotate" button just below whatever chart you wish to look at, another window should pop up, and you should be able to move your cursor (crosshairs) into that new window and pick the inflection points to be studied. Data should be tracked at the lower part of the chart as the cursor is moved across the screen. Pivot Analysis Matrix - I'm running way behind for tonight's wrap, but want to focus on the SPX, which many consider a major market index for determining market directions. One reason I'm running late on tonight wrap is I went back and reviewed recent sessions trade, where I want to consider the DAILY R1 as a level, which would need to be traded for a first sign of renewed strength. Here's why. Today (02/03/04) the SPX did not test its DAILY R1 Yesterday (02/03/04) the SPX did not test its DAILY R1 On Monday (02/02/04) the SPX traded LOWER, but did NOT test its DAILY R1 of 1,127.85, then reversed back above its DAILY R1 of 1,134.29 and traded further higher above its DAILY R2 of 1,137.45, but then saw selling late in the session to close just above its DAILY R1 of 1,134.29. Now, I've drawn green boxes on the SPX at 1,117.21 as a level of correlative support, and also at the MONTHLY S1 and WEEKLY S2. While I would deem 1,117.00 as a level within the matrix to be looking for support, the 1,103-1,106 level is a further downside risk assessment level should the SPX fall 4.8% from its recent high of 1,155.38. S&P 500 Index Chart - Daily Intervals In the lower left part of the chart, I point to a rather sharp pullback witnessed in the latter part of September, where the SPX fell 4.8% over the course of 8 trading days. I will take some time later tonight to go back and review the pivot matrix' for that period of time to see just how the SPX traded. Still, I'm going to assess current downside risk from the recent highs as being 4.8%, where we can use the levels in the pivot matrix as a test. One thing outside the pivot matrix I see coming into play as a near-term area of support is the extension of our old bullish resistance channel, which served support on 01/29/04 and looks to have held the SPX lows today. I went back an looked at the 01/28/04 Index Trader Wrap, where for 01/29/04, the DAILY S1 was 1,120.27, and the SPX traded a session low of 1,122.38 that morning before reversing back higher. If memory serves me correct, current levels of trade around 1,125 was a frequently mention level that related to index option trade ahead of January expiration. This heightens my alert to being at a key level of support in the SPX right now. NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals I marked a 6.72% decline on the QQQ, where from $39.00, today's lows would equate to a 6.85% decline. Most charting services that I've viewed do show the QQQ having traded $39.00, so that is what I'm thinking was the 52-week high. However, intra-day charts have the QQQ trading a high of $38.85 and this has been a point of contention with some traders in calculation of the pivot matrix. While I try and NOT trade everything to the penny, this disparity of the recent highs should be noted. Note that RYAAY +4.64% was one of today's bigger gainers in the NDX/QQQ. It should also be noted that this stock has fallen sharply from the $58.00 level, where today's gains suggest either short-covering, or value bulls looking for a bottom. Dow Industrials (INDU) Chart - Daily Intervals The INDU has been a pillar of strength compared to the NDX/QQQ and just how IBM escaped some of the broader technology selling in today's session is a question I wouldn't have the answer to. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** A Tale Of Two Markets by Mark Phillips mphillips@OptionInvestor.com In the past, we've talked about the three primary influences on price action in the market - fundamentals, technicals and sentiment. It isn't often that we get such a clear example of the impact of sentiment on price action, but the reaction to CSCO's earnings report last night gives us just the foil for a meaningful discussion on the topic. There's been much debate lately about whether we're still in a bear market, or a new bull market. Central to that discussion is the fundamental picture, which looks at valuations and economic strength or weakness. The case can be made that the market is rallying in response to an improving economy as the underlying fundamentals are improving. At the same time, the persistent rise of the past several months can also be attributed to pure technical action, as important resistance levels have been broken, while at the same time key support has been found at the important 50-day moving averages, both on the major indices and on individual stocks. But we can never underestimate the impact of investor psychology or sentiment on the price action that unfolds in the market. Lately, sentiment has been trumping both fundamentals and technicals, as investors have been enjoying the ability to buy the dips and chase momentum stocks higher. There are no greater current examples of what happens when this process comes to its inevitable end than the meltdown in the shares of TASR over the past 2 days. No amount of price rise has been too much for this stock, as investors have eagerly bid it up from the $4 area last April to $135 prior to the earnings report yesterday morning. The initial reaction to the better than expected earnings and split announcement sent the stock soaring to $154 and then the polarity shifted, with investors piling on those Sell orders and driving the stock down to $127 by the close, a decline that continued today. Sentiment changed in a heartbeat from "Buy at any price" to "Get me out before it falls any further". The technicals didn't change, as the prevailing uptrend is still intact and prior oscillator sell signals didn't produce anything approaching this level of price weakness. The fundamentals didn't change either, although the stock was looking pretty expensive at a P/E ratio greater than 300 and a price to sales ratio of 28. The price decline was simply a result of a dramatic shift in investor sentiment. But I said I wanted to talk about CSCO and its earnings report. Networking stocks have been on fire in recent weeks, as sentiment has become more overdone to the upside leading into the current earnings season. CSCO more than doubled from the April lows near $13 to a January high of just over $29 as the Networking index (NWX.X) soared from $140 to over $330 in the same period of time. Daily Chart of CSCO It certainly would have made sense that the price pullback in CSCO over the past couple weeks was just consolidation in front of the earnings report, with good odds of a bullish move following the report. Afterall, investors have been buying every dip for months, right? Unfortunately for traders that took that bet, sentiment shifted sharply and the stock gapped below its 50-dma and just kept falling from there, coming to rest on $24 support, losing nearly 9% on absolutely huge volume. The sentiment shift is no different than that seen in shares of TASR this week, except that it took longer to play out. In hindsight, we can see that sentiment was becoming significantly weaker leading up to the earnings report. But the gloves came off after last night's report, resulting in today's bloodbath. A fitting contrast to the price action in CSCO surrounding its earnings report is what we saw last month when JNPR issued its quarterly results. The company handily beat estimates, but if anything management was trying to reel in investor enthusiasm in the conference call. The result was truly astounding, as the stock skyrocketed $7 the next day and held those gains. Daily Chart of JNPR Even weeks later and in the wake of today's meltdown in the Networking sector, JNPR has held firm above the top of that post- earnings gap. There has been no shift in sentiment in JNPR. Why? The simple answer is that prior to earnings, investor sentiment was less bullish than the results that were delivered. On the other hand, investors were looking for CSCO to deliver something more compelling than their usual "beat by a penny" results and when it didn't appear, the punishment was meted out in brutal fashion. Fundamentally, CSCO is a much better value than JNPR, with a P/E ratio of 39 vs. 290. Price-to-Sales favors CSCO as well, with a 9:1 ratio vs. JNPR's 15. Use any other fundamental metric such as profit margin, return on equity, revenue growth - they all paint CSCO as a more attractive investment. Technically, CSCO and JNPR both looked similarly strong prior to their respective earnings reports, with nary a hint of a Sell signal, either on the standard price charts or in the PnF chart view. Both had pushed up against strong resistance levels prior to their earnings releases, but for some reason CSCO was turned back at resistance, while JNPR blasted through, as though that resistance didn't even exist. That leaves us with only one explanation for the disparate price action -- Sentiment! What I hope this highlights is the fallacy of trying to make trading decisions based simply on whether the earnings news was good or bad. There is no absolute (other than price action) for determining whether the earnings were good or bad, because what is more important is the expectations ahead of the report. If earnings were strong but below what investors were hoping for, then price action will likely show that it was a 'bad' report. However, if investors are expecting poor earnings and the company misses official estimates, but the miss isn't as bad as what investors feared, then price action is likely to be positive, demonstrating that it was actually a 'good' report. Perverse, isn't it? The reality of sentiment's impact on price action in the marketplace is neither good nor bad -- it is just part of the equation. Our job as investors is to try to trade in accordance with the prevailing sentiment, hopefully in keeping with the pertinent fundamental and technical factors. One key task we must achieve is to avoid exposing ourselves to undue risk when potentially "sentiment shifting" events occur. This is the primary reason why we never advocate holding positions over an earnings announcement. It isn't that the earnings report is unpredictable (although it is), but the mood of the investing public is far more unpredictable and it is safer to wait for the herd to move before jumping aboard than to take a position and get trampled in the stampede. I hope this has been useful. By the way, if anyone ever finds a way to measure investor sentiment ahead of earnings reports - short of a crystal ball, I'd sure like to know what it is! Have a great week! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. 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The Option Investor Newsletter Wednesday 02-04-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: AVID Dropped Calls: None Dropped Puts: None Spreads, Combinations & Premium-Selling Plays: Market Rotation Offers Little Catalyst For Buying Watch List: A few Dow components ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** AVID - put play We are TRIGGERED on today's decline - stop loss is now 46.17 ************* DROPPED CALLS ************* 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 ************************************************************** ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Market Rotation Offers Little Catalyst For Buying By Ray Cummins The major equity averages retreated Wednesday, despite bullish activity in pharmaceutical and consumer-related issues. The performance of hi-tech shares was the primary reason for the slump as Cisco's (NASDAQ:CSCO) mediocre profit outlook drove the composite technology index down 52 points to 2,014, its worst loss in four months. The blue-chip Dow industrial average finished 34 points lower at 10,470 with the majority of components in the red. The S&P 500 Index fell 9 points to 1,126 as early selling pressure spread to most sectors. Trading volume was moderate, with about 1.6 billion shares changing hands on the New York Stock Exchange while 2.2 billion shares traded on NASDAQ. Decliners outnumbered advancers by more than 2 to 1 on the NYSE and by more than 3 to 2 on the technology exchange. Bonds fell with the benchmark 10-year note down 6/32, bringing its yield up to 4.12%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 02/03/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield SEPR FEB 20 19.60 27.53 0.40 21.62% 2.04% CECO FEB 40 39.30 48.59 0.70 5.04% 1.78% ERES FEB 27 27.00 34.04 0.50 5.07% 1.85% MICC FEB 65 64.05 74.96 0.95 4.10% 1.48% NTES FEB 40 38.90 44.29 1.10 7.39% 2.83% RMBS FEB 25 24.50 30.00 0.50 5.60% 2.04% SEPR FEB 22 21.90 27.53 0.60 7.02% 2.74% SINA FEB 40 38.75 43.10 1.25 7.89% 3.23% SOHU FEB 30 29.30 30.41 0.70 6.72% 2.39% APPX FEB 35 34.35 34.00 (0.35) 0.00% 1.89% CRDN FEB 40 39.05 40.76 0.95 7.15% 2.43% GPRO FEB 32 32.10 36.55 0.40 4.17% 1.25% KYPH FEB 25 24.45 28.39 0.55 6.84% 2.25% IMCL FEB 35 34.15 41.89 0.85 8.93% 2.49% OSIP FEB 30 29.60 34.94 0.40 4.67% 1.35% PCLN FEB 17 17.15 18.79 0.35 6.93% 2.04% SEPR FEB 22 22.05 27.53 0.45 7.00% 2.04% BRCM FEB 37 37.00 39.50 0.50 5.08% 1.35% CLZR FEB 22 22.20 22.40 0.20 3.67% 1.35% DRIV FEB 22 21.95 22.70 0.55 9.34% 2.51% NANO FEB 17 17.05 19.04 0.45 10.87% 2.64% NTAP FEB 20 19.55 20.88 0.45 8.71% 2.30% OSTK FEB 17 17.00 18.28 0.50 11.98% 2.94% SEPR FEB 22 22.25 27.53 0.25 5.25% 1.12% American Pharma Partners (NASDAQ:APPX), Ceradyne (NASDAQ:CRDN), Priceline.com (NASDAQ:PCLN), Overstock.com (NASDAQ:OSTK), Candela (NASDAQ:CLZR), and Digital River (NASDAQ:DRIV) are candidates for early exit. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CYD FEB 35 35.45 19.80 0.45 6.36% 1.27% SNDK FEB 80 81.10 48.75 1.10 5.97% 1.36% ISIL FEB 30 30.50 25.66 0.50 6.00% 1.64% MCHP FEB 35 35.45 28.90 0.45 4.57% 1.27% UTSI FEB 40 40.95 34.14 0.95 8.23% 2.32% AEIS FEB 25 25.55 21.47 0.55 9.96% 2.15% ELX FEB 30 30.45 26.57 0.45 6.62% 1.48% PHM FEB 47 48.00 44.24 0.50 4.66% 1.04% PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status COCO 60.73 61.00 FEB 55 55 0.65 54.35 0.65 Open KOSP 45.30 51.25 FEB 35 40 0.60 39.40 0.60 Open CEPH 54.65 55.65 FEB 45 50 0.65 49.35 0.65 Open NFLX 65.10 71.90 FEB 48 50 0.25 49.75 0.25 Open CFC 80.32 84.61 FEB 70 75 0.65 74.35 0.65 Open MDC 66.31 64.79 FEB 55 60 0.60 59.40 0.60 Open GILD 65.37 56.21 FEB 55 60 0.55 59.45 (3.24) Closed CVH 42.54 39.99 FEB 37 40 0.36 39.64 0.35 Open SII 48.80 47.41 FEB 43 45 0.30 44.70 0.30 Open Conservative traders should have closed the bullish spread in Gilead Sciences (NASDAQ:GILD) last Wednesday, for a much smaller than published loss, when the issue moved below the sold (put) strike at $60. Coventry Health Care (NYSE:CVH) became one to "watch" after their profit forecast disappointed investors. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status ANF 24.90 26.19 FEB 30 27 0.30 27.80 0.30 Open MANH 27.00 28.60 FEB 35 30 0.50 30.50 0.50 Open ESV 27.45 28.79 FEB 35 30 0.45 30.45 0.45 Open NVLS 41.68 32.95 FEB 47 45 0.40 45.40 0.40 Open HTCH 32.45 28.66 FEB 40 35 0.60 35.60 0.60 Open ICST 27.60 24.91 FEB 35 30 0.50 30.50 0.50 Open BZH 92.40 96.90 FEB 105 100 0.55 100.55 0.55 Open KSS 42.67 45.00 FEB 50 45 0.55 45.55 0.55 Closed LEN 43.71 44.69 FEB 50 47 0.30 47.80 0.30 Open The bearish spread in Checkfree (NASDAQ:CKFR) has previously been closed for a small loss. The recent rebound in Kohl's (NYSE:KSS) after an upgrade by Oppenheimer analyst Bernard Sosnick put the issue on the early-exit list. Questions & comments on spreads/combos to Contact Support ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ARO - Aeropostale $31.55 *** Retail Sector Strength! *** Aeropostale (NYSE:ARO) is a specialty retailer of casual apparel and accessories that targets both young women and young men from ages 11 to 20. The company provides its customers with a focused selection of quality, active-oriented, fashion basic merchandise. It maintains control over its proprietary brand by designing and sourcing all of its merchandise. Its products can be purchased only at its stores or organized sales events at college campuses. The firm aims to create a fun and high energy shopping experience with the use of creative visual merchandising, colorful in-store signage, bright lighting, popular music and a well-trained sales force. ARO - Aeropostale $31.55 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 30 ARO NF 90 0.50 29.50 8.2% 1.7% * SELL PUT MAR 30 ARO OF 21 1.20 28.80 6.8% 4.2% __________________________________________________________________ ECLG - eCollege.com $19.02 *** Entry Point? *** eCollege.com (NASDAQ:ECLG) is a provider of technology, products and services that enable colleges, universities, primary and high schools, grade schools and corporations to offer online classes for distance, on-campus and hybrid learning. The firm's unique technology enables it's customers to reach students who wish to take courses at convenient times and locations via the Internet. Its customers can also use its technology to supplement on-campus courses with an online environment. In addition, the company offers services to assist in the development of online programs, including online course and campus design, development, management and hosting as well as ongoing administration, faculty and student support. ECLG - eCollege.com $19.02 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 17.5 EGU NW 31 0.30 17.20 8.9% 1.7% * SELL PUT MAR 17.5 EGU OW 106 0.90 16.60 8.9% 5.4% __________________________________________________________________ ERES - eResearch Technology $35.56 *** Uptrend Resumes! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $35.56 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 30 UDB NF 1097 0.25 29.75 5.3% 0.8% * SELL PUT FEB 32.5 UDB NZ 630 0.65 31.85 10.5% 2.0% __________________________________________________________________ ERICY - LM Ericsson $22.53 *** Nortel Rally Boosts Telecoms! *** LM Ericsson (NASDAQ:ERICY) is a global supplier of mobile systems. The firm provides total communications solutions from systems and applications to services and core technology for mobile handsets. Ericsson has been active since 1876 with products such as mobile systems, multi-service networks, enterprise services, transmission and transport technologies, general packet radio services (GPRS), third generation mobile telephony, advisory services, management and optimization services, multimedia messaging services, and a variety of Bluetooth wireless technologies. With Sony Ericsson, it also is a supplier of complete mobile multimedia products. ERICY - LM Ericsson $22.53 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 20 RQC ND 1797 0.35 19.65 9.7% 1.8% * SELL PUT FEB 22.5 RQC NX 1130 1.15 21.35 21.6% 5.4% __________________________________________________________________ JCP - J. C. Penney $27.00 *** Near Multi-Year Highs! *** J. C. Penney (NYSE:JCP) is a major retailer, operating 1,049 J.C. Penney department stores in 49 states, Puerto Rico, and Mexico. In addition, it operates 54 Renner department stores in Brazil. A major portion of J.C. Penney's business consists of providing merchandise and services to consumers through department stores, catalog departments and the Internet. The stores market family apparel, jewelry, shoes, accessories and home furnishings. In addition, JCP operates a chain of 2,686 drugstores, primarily through the Eckerd name, located in the southwest, southeast, Sunbelt, and northeast regions of the United States. JCP - J. C. Penney $27.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 25 JCP NE 29715 0.40 24.60 8.3% 1.6% * SELL PUT MAR 25 JCP OE 2486 0.85 24.15 6.1% 3.5% __________________________________________________________________ LIN - Linens 'n Things $31.45 *** Solid Quarterly Sales! *** Linens 'n Things (NYSE:LIN) is a national large-format retailer of home textiles, housewares and home accessories that operated 391 stores in 45 states and four Canadian provinces, as of the fiscal year ended January 4, 2003. The company provides its guests with a one-stop shopping destination for their home furnishing needs by offering a selection of brand name linens such as bedding, towels, window treatments and table linens, and things such as housewares, home and decorative accessories. The company has balanced its merchandise mix from being driven mainly by the linens side of its business to a fuller selection of both linens and things. LIN - Linens 'n Things $31.45 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 30 LIN NF 22 0.35 29.65 5.8% 1.2% * SELL PUT MAR 30 LIN OF 0 0.65 29.35 3.8% 2.2% __________________________________________________________________ WEBX - WebEx Communications $24.50 *** A Big Day! *** WebEx (NASDAQ:WEBX) develops and sells services that allow users to conduct meetings and share software applications, documents, presentations and other content on the Internet using a standard Web browser. Integrated telephony and Web-based audio and video services are available using telephones, computer Web-cameras and microphones. The company's activities have been focused on continuing to enhance and market its WebEx Interactive Services and its WebEx Multimedia Switching Platform, developing and deploying new services, expanding its marketing organizations and deploying its global WebEx Media Tone Network. The company sells WebEx Meeting Center, WebEx Meeting Center Pro, WebEx Training Center, WebEx Support Center, WebEx OnStage and WebEx Enterprise Edition. It also provides a service called WebEx Business Exchange to existing customers. WEBX - WebEx Communications $24.50 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 22.5 UWB NX 638 0.25 22.25 5.9% 1.1% * SELL PUT FEB 25 UWB NE 10 1.05 23.95 17.6% 4.4% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BA - Boeing $43.56 *** Blue-Chip Play! *** Boeing (NYSE:BA) makes commercial and military airplanes, missile systems, space and communications equipment and offers financing through Boeing Capital. Boeing's commercial operations involve development, production and marketing of commercial jet aircraft and providing related support services. Military aircraft and missile systems operations mainly involve research, development, production, modification and support of military aircraft, both land-based and aircraft-carrier-based, as well as helicopters and missiles. Space and Communications operations involve research, development, production, modification and support of space and missile defense systems, satellites and their launching vehicles, rocket engines and information and battle management systems. BA - Boeing $43.56 PLAY (less conservative - bullish/credit spread): BUY PUT FEB-40.00 BA-NH OI=6064 ASK=$0.15 SELL PUT FEB-42.50 BA-NV OI=5354 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.35-$0.45 POTENTIAL PROFIT(max)=16% B/E=$42.15 __________________________________________________________________ MRK - Merck $48.94 *** Strong Sector! *** Merck (NYSE:MRK) is a research-driven pharmaceutical products and services company that discovers, develops, manufactures and sells a range of products to improve human and animal health, directly and through its joint ventures. The firm also provides pharmacy benefit management services through Medco Health Solutions. The company's operations are comprised of two business segments: Merck Pharmaceutical and Medco Health. Merck Pharmaceutical's products consist of therapeutic and preventive agents sold by prescription for the treatment and prevention of human disorders. Medco Health provides pharmacy benefit services including sales of prescription drugs through managed prescription drug programs. MRK - Merck $48.94 PLAY (conservative - bullish/credit spread): BUY PUT FEB-45.00 MRK-NI OI=6853 ASK=$0.10 SELL PUT FEB-47.50 MRK-NW OI=5637 BID=$0.30 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$47.25 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MRVL - Marvell Technology $39.24 *** In A Trading Range? *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL - Marvell Technology $39.24 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 42.5 UVM BT 1720 0.40 42.90 5.9% 0.9% * SELL CALL FEB 40 UVM BH 2355 1.20 41.20 14.1% 2.9% __________________________________________________________________ NVLS - Novellus Systems $31.97 *** Next Leg Down? *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $31.97 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 35 NLQ BG 6239 0.25 35.25 4.7% 0.7% * SELL CALL FEB 32.5 NLQ BZ 1675 0.90 33.40 13.0% 2.7% __________________________________________________________________ SSYS - Stratasys $22.66 *** Pre-Earnings Slump? *** Stratasys (NASDAQ:SSYS) is in the three dimensional solid imaging business as a maker of rapid prototyping systems for automotive, aerospace, industrial, recreational, electronic, medical and other consumer products OEM's. The company's patented Fused Deposition Modeling (FDM)rapid prototyping process create precision three dimensional plastic and wax prototyping parts directly from 3-D CAD systems. Stratasys holds over 110 granted and pending patents worldwide focused on rapid prototyping. Stratasys will release its quarterly results before the market on February 18, 2004. SSYS - Stratasys $22.66 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 25 QQG BE 147 0.60 25.60 15.6% 2.3% * SELL CALL FEB 22.5 QQG BX 0 1.60 24.10 28.1% 6.6% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BHE - Benchmark Electronics $32.30 *** Earnings Speculation! *** Benchmark Electronics (NYSE:BHE) is in the business of making electronics and provides the its services to original equipment manufacturers of telecommunication equipment, computers and related products for business enterprises, video, audio, and entertainment products, industrial control equipment, testing and instrumentation products and medical devices. The services that the firm provides are commonly referred to as electronics manufacturing services. Benchmark Electronics provides its customers comprehensive and integrated design and manufacturing services, from initial product design to volume production and direct order fulfillment. The company also provides specialized engineering services, including product design, printed circuit board layout, prototyping and test development. The company's quarterly earnings are due this week. BHE - Benchmark Electronics $32.30 PLAY (less conservative - bearish/credit spread): BUY CALL FEB-40.00 BHE-BH OI=61 ASK=$0.20 SELL CALL FEB-35.00 BHE-BG OI=500 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$35.45 __________________________________________________________________ OMG - OM Group $27.59 *** Concerns Over Insider Selling? *** OM Group (NYSE:OMG) through its operating subsidiaries, is a vertically integrated international producer and marketer of value-added, metal-based specialty chemicals and other related materials. More than 625 different products are supplied for applications to more than 30 industries. Typically, the firm's products represent a small portion of the customer's total cost of manufacturing or processing, but are critical to a customer's product performance. The firm operates in three segments: base metal chemistry, precious metal chemistry and metal management. OMG - OM Group $27.59 PLAY (conservative - bearish/credit spread): BUY CALL FEB-35.00 OMG-BG OI=553 ASK=$0.20 SELL CALL FEB-30.00 OMG-BF OI=367 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$30.45 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ********** Watch List ********** A few Dow components ___________________________________________________________________ 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. ___________________________________________________________________ Procter & Gamble - PG - close: 103.20 change: +1.18 WHAT TO WATCH: Investors appear to be turning defensive as the major indices drift lower. PG, normally seen as a defensive play, has managed a five-day streak of gains. The breakout over the $100 level looks positive. Chasing it here may not be the best bet so look for a pull back. The $100 level should now be strong support. Chart= --- International Paper - IP - close: 40.72 change: -0.95 WHAT TO WATCH: The declines in IP just keep coming. Shares peaked in early January after a strong run from its Thanksgiving lows. Since its highs the stock has been unable to break the trend of lower highs and has fallen into a descending channel. The company announced earnings a couple of days ago that beat by a nickel and still investors used the news to sell the stock. IP was one of the worst Dow performers today and looks headed for what may be support at $40.00. Chart= --- Wal-Mart - WMT - close: 55.39 change: +0.38 WHAT TO WATCH: Keep an eye on WMT. The retail titan lead the retail index higher today with a run up and through resistance at its 200-dma but shares failed at the $56 mark and faded back below the 200-dma once again. Retailers are about to announce their January same-store sales numbers and no one carries more clout than WMT. Unfortunately, today's candle does not look bullish. Chart= --- Freeport Mcmoran - FCX - close: 35.92 change: -0.58 WHAT TO WATCH: The wedge pattern of declining lows in FCX looks ready to breakdown through support at $35.00. Should this occur we could see a quick test of its simple 200-dma near 31.65. Its current P&F chart looks bearish as well pointing to a $27.00 price target. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- MXIM $48.69 -2.27 - MXIM has broken support at the $50.00 level and broken through the bottom of its rising channel. The stock may have support near $46.00 but we wouldn't be surprised to see it test the $45.00 level. ROP $48.22 -1.20 - ROP bears watching. The recent bounce from support at $48.00 is already failing. If ROP trades under 48.00- 47.50 we could see it test its 200-dma near $43.00. NSM $36.62 -1.21 - NSM is another semiconductor stock that looks vulnerable to more selling. Traders could use a trigger under $36.00 and target the 200-dma near $31.00. ******************* 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. 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