The Option Investor Newsletter Thursday 02-05-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: The Moment of Truth Futures Markets: Dollar Jumps on Fed Comments Index Trader Wrap: Jobs with inflows and outflows Market Sentiment: All About Jobs Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-05-2004 High Low Volume Advance/Decline DJIA 10495.55 + 24.80 10522.52 10453.55 1.96 bln 1703/1513 NASDAQ 2019.56 + 5.40 2031.39 2012.79 1.94 bln 1777/1423 S&P 100 559.61 + 0.74 560.81 557.41 Totals 3480/2936 S&P 500 1128.59 + 2.07 1131.17 1124.44 W5000 10974.04 + 24.50 10998.18 10935.34 RUS 2000 569.54 + 5.51 570.90 564.03 DJ TRANS 2833.59 + 11.50 2843.81 2821.76 VIX 17.71 - 0.16 17.99 17.60 VXO (VIX-O)17.75 + 0.17 18.39 17.66 VXN 26.17 - 0.48 26.81 25.96 Total Volume 4,230M Total UpVol 2,365M Total DnVol 1,809M Total Adv 3900 Total Dcl 3376 52wk Highs 279 52wk Lows 18 TRIN 0.82 NAZTRIN 1.02 PUT/CALL 0.76 ************************************************************ The Moment of Truth Friday morning at 8:30 AM is the moment of truth for the markets. At least that is what the talking heads were telling traders all day. It is important but like all things economic the outcome may have already been baked into the cake. Dow Chart - Daily Dow Chart - 30 min Nasdaq Chart - Daily Economics for Thursday put a little more fear into those who were worried about the Nonfarm Payroll report when the Jobless Claims jumped +17,000 to 356,000. This was the first time in four weeks that the number was over 350K. Last weeks claims were revised down -3,000 and analysts theorize weather was the depressing factor. Those snowbound in the prior week finally got out to make claims last week. Ironically the unadjusted claims decreased in 51 states and territories but the total number of weekly claims rose. There are numerous conflicting employment components for the various monthly reports. Some show minor job growth, some show minor job declines. NONE show any significant improvement in job creation. Is this like the emperor's clothes? Nobody can see any jobs but everyone assures us they are there? One analysis suggested that during the two survey weeks for the nonfarm payrolls continuing Jobless Claims fell by 116,000. The payroll survey is done around the 12th of the month. They were suggesting that this would translate into an increase in jobs of +125,000 tomorrow. Dow Jones is expecting +160,000, the street is looking for +175,000 and one analyst on CNBC was expecting +225,000. With estimates all over the map but up significantly from just a couple days ago we are poised again for a potential disappointment. Last month the estimates were also in the same ranges and the number was barely positive at +1,000. Various Fed heads almost promised that those missing jobs would be found in tomorrow's number. This has setup the markets for another failure in confidence. At this point I am not really concerned due to the market action this week. I think cautious traders have already positioned themselves for the worst and are now hoping it is just not as bad as they expect. I think they would be relieved to just have a positive number again. Don't forget the Challenger Layoff report from Monday showed a +26% jump in announced layoffs for the month over the December levels. With the Fed on hold due to the light GDP a blowout number could actually turn up the heat again. Any light number will just be seen as more slow growth and not a real problem. Should the number come in negative I would not only be very surprised but I would expect the market to react negatively. The Productivity report for the 4Q rose by +2.7% according to Thursday's release. Maybe I should say dropped to only +2.7% growth since this was the slowest growth since 2002. The 1Q increased +3.1%, 2Q +6.1% and the 3Q soared +9.5%. The drop back to a realistic number simply showed that the rapid unsustainable pace of growth was just returning to normal. Hours worked rose while unit labor costs fell and this suggests manufacturing will not let price prevent any new hiring. After several days of weakness the major averages managed to close in the green but it was not a stunning performance. The Dow closed under 10500 once again and the Nasdaq closed exactly on its 50 dma at 2019. Traders felt the Wednesday drop was significantly overdone but they were not confident enough to buy stocks before the Jobs report. WMT, HON, KO, IP and BA were the biggest gainers on the Dow and helped overcome losses by IBM. MSFT and INTC were down fractionally and MSFT suffered one additional embarrassment. PFE passed MSFT in terms of market cap pushing MSFT to 3rd place behind GE and PFE. The CSCO depression continued in the big cap techs with CSCO falling to mid-December lows. INTC closed under its 100 dma and under $30. It was the lowest close since Oct-9th. Dell closed at 32.11 and the lowest close since August. Dell is well under its 200 dma at 33.34. With all the majors so severely under water it is amazing the Nasdaq is holding at the 50 dma. We have had two significantly down days on the 28th and again on the 4th. Other than those we have been trading sideways in a consolidation pattern. Treading water for all practical purposes. We still have strong emotional support at 2000 and we are at the uptrend average support that has held since March. The techs have pulled back to their strong support level on decent profit taking to await the jobs report. No big surprise there. Earnings have been good and there is nothing to prevent us from moving higher. Each bounce is sold but each dip is bought and this is the area where consolidation was expected. Just look at the Nasdaq chart above if you have any doubts about support. The SOX has pulled back to its 100 dma at 495 and has held there for two days despite some continued slippage by several chip stocks. This is the key for the Nasdaq. The SOX has not touched the 100 dma since April 2003. This is a major sell off in semiconductors and this is the critical support level. We could see one more dip to horizontal support at 480 but that would be a major break that should be bought. SOX Chart - Daily The Russell-2000 also pulled back to its 50 dma at 564 and rebounded slightly. The Russell has tested the 50 dma six times since March and rebounded each time. This level needs to hold. If we suddenly get a break of the 50dma on the Russell and the 100dma on the SOX then it could be serious. Until that happens I am still in buy the dip mode. Russell Chart - Daily The Dow is consolidating nicely above the 10450 level and has been in the same range for six days. It is still above 10400 support and the 50 dma near 10300. We could easily move up from here or move down slightly with no real damage. The 50-day average has not been tested since Thanksgiving and any real dip could easily retest that 10300 level. The blue chips are holding up the techs and the small caps. This is exactly the reverse from the last two months where the small cap techs lead the charge. We appear to be seeing a rotation from prior high risk leaders and into the defensive blue chips like drugs. Cyclicals like AA, IP, CAT, MMM and DE are being sold on worries that the recovery is slowing. Drugs like MRK, LLY, SGP and PFE are seeing a flood of money as defensive value stocks. They suffered during the recent rally in favor of the techs. Traders are simply rotating funds back into the defensive issues. SGP is at a six month high and PFE hit a new twenty-one month high today. The good news is that this is normal for a new year but just a couple weeks later than usual. The last week of selling has been on significantly lower volume and it appears to be just a normal consolidation period. The next hurdle is the Jobs report on Friday. Regardless of the outcome there will be volatility. Those still wising to sell will probably use any good news to dump stocks. The odds of a sell the news event on are very good despite the results. Personally I think the odds of new job growth over 100,000 are very slim but what I think does not matter. The market will react to the number and how it impacts the recovery scenario and the chances of a Fed rate hike. Friday is immaterial to the larger scheme of things. Monday is the key day for me. How the market responds on Monday to any Friday event will tell us if the rally has any legs left. If traders were focused entirely on earnings there would be no doubt of direction. Over 70% of the S&P have now announced and 67% have beaten estimates. 19% announced inline and only 14% have disappointed. This is very good! Overall earnings are now expected to be in the +27% range or better for the 4Q. This is the second highest in recent history with only 3Q-1993 higher at +30% growth. That quarter's results sent the Dow on a vertical ramp in the 4Q to nearly 4000 in January-1994. Once the 4Q earnings fell short of the miraculous 3Q results the Dow crashed -12% beginning in the last week of January to nearly 3500 by the end of March. It traded sideways for the entire year and did not reach 4000 again until February-1995. If we could use this historical trend as a model it would suggest that the 1Q should ramp to the heavens as traders buy the chance for an even stronger 1Q-2004. Since the comparisons are harder for Q1 than Q4 the odds of a repeat are tougher. The majority of guidance for Q1 has been coming in higher and I suspect that has kept the market from falling under its own weight more than anything else. In about two weeks we will start to get the mid-quarter updates and the beginning of any earnings run for April. That makes the next two weeks very critical. If we can get past the Jobs report the economic calendar next week is fairly light. There is a flurry of reports but none are really important milestones. The bottom line is don't let any negative Jobs commentary on Friday or any negative market reaction bother you. Wait for Monday and let's see how the market responds. If we drop on Monday then be worried. There is a lot of money on the sidelines looking for an entry point and Friday's market action could lure them into the game. The odds are good the Jobs outcome has already been baked into the cake and Monday is the real moment of truth. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Dollar Jumps on Fed Comments Jonathan Levinson Bernanke moved the markets today, iterating the Fed's perception of a decrease in the risk of deflation. Bonds and metals fell, the dollar rose, and equities advanced modestly. 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 Bank of England hiked rates by 25 bps this morning, initial claims exceeded to the upside, preliminary Q4 productivity numbers came in within the expected range and Ben Bernanke made some comments in the early afternoon. I'll let the intraday chart fill in any remaining blanks, of which there appear to be none. For the day, the CRB added .55 to close at 260.50, led by soybeans, lean hogs, live cattle and corn futures, with natural gas, sugar and cotton bringing up the rear. Daily chart of February gold Paraphrasing from what I gleaned from the ticker headlines and without reading the no-doubt abundant details, Ben Bernanke made comments today to the effect that the risk of deflation had lessened but that the Fed still did not see much risk of inflation. The very suggestion that the Fed might not still be terrified of deflation was sufficient to spark a burst of buying in the US Dollar Index, selling in bonds and in precious metals. April gold broke below the 399 floor of the past two days but stopped at 397.90 before reversing weakly. The morning high printed at 402.40. The daily cycle bounce remains tenuous, support in the 392-395 area remains unchallenged. April gold closed lower by 3.20 at 398.00, while the miners gained 1.88% for the HUI and 1.38% for the XAU, closing at 216.75 and 96.23 respectively. Daily chart of the ten year note yield Bonds got torched following Bernanke's comments, presumably on the assumption that if the Fed saw the risk of deflation on the wane, then it would be less inclined to employ measures such as the outright purchase of treasuries and the continued maintenance of rates at multidecade lows. A bullish engulfing candle on the ten year note yields (TNX) finished high by 5.1 bps at 4.175%, a 1.24% gain for the day. The current range has resistance at 4.2%, support at 4.08%, and the daily cycle upphase continues unabated. Daily NQ candles One might expect that, just as bonds and equities sold off following the last FOMC announcement, Bernanke's comments today would have caused the same effect. They didn't, as NQ traded in the green for nearly the entire day, touching a high of 1477 before retreating. The daily cycle downphase twitched but did not abort, and a move above 1480 should be sufficient to pause the cycle. Above 1492-6 resistance, I'd expect to see the first buy signal printing. While 1462 has held so far, we see confluence at 1456, with rising trendline support below that at 1440. The NQ is caught between a rock and a hard place, and with a great deal of selling having occurred to bring it here. This is no place for bears to allow their open shorts too much room, as the next directional move could well be to the upside. NQ gained 4 to close at 1467, a .27% gain for the day. 30 minute 20 day chart of the NQ The NQ continued to struggle within its steeply falling channel on the 30 minute candles. The last bear flag actually broke to the downside, one increasingly rare occasion in which a bearish pattern has actually fulfilled. The current bear flag commencing yesterday afternoon has a steeper slope, suggesting strength. However, the move coincided with a generally weak 30 minute cycle upphase, and if this has been a sideways-up move within a flag pattern, it could well break lower again. To keep it simple, a move above 1475 (confirmed by a break of 1482) or below 1466 (confirmed by a break of 1462) will constitute a range break. Daily ES candles ES printed a higher low and lower high as it squeezed tighter into the 30 minute pennant illustrated below. The move printed the bulk of today's price and volume action below the rising upper channel trendline, the first such print this year. That alone wouldn't get me shorting with both barrels, particularly as the trendline itself is my own artistic interpretation of the chart, but it's nonetheless interesting. The daily cycle downphase extended as the 1122 support held for yet another day. While 1115-1118 is significant support, 1122 is running a beautiful interference. 1130.25 was the high, just at the door to resistance stretching to 1136. The 30 minute chart helps us to refine this further, but for the moment, the ES finds itself like the NQ between a rock and a hard place, albeit having sustained far less technical damage. ES added .22% or 2.50 to close at 1126.50. 20 day 30 minute chart of the ES The 30 minute ES didn't challenge the descending trendline I've been using to approximate the upper limit of the idealized daily cycle downphase channel. It too drifted mostly sideways on a 30 minute oscillator upphase that held for the afternoon. Again, price is narrowing into a flat wedge, and it remains to be seen whether this daily cycle downphase will prove to be the right shoulder of a head and shoulders top (neckline anywhere between 1115 and 1123) or a bull flag of sorts. Above 1130, we'll look for a break of 1136 to confirm the end of the daily cycle downphase, while below 1122-3, next support is 1115-8. 150-tick ES It was another tight day for ES, with the intraday cycles showing a mostly sideways drift that has chopped up the short cycle oscillators nicely. This is what one would expect as the ES approaches the pennant's apex, with price drilling into a narrowing range. Daily YM candles All three equity contracts traded in lockstep today, all three advancing by equivalent amounts for a change. YM has support a 10430, with today's low at 10432. It resembles the ES most closely, still trading within an uncertain daily cycle downphase, a head and shoulders that will either deliver to the downside or fake out pattern followers yet again, as so many others have done this year. 20 day 30 minute chart of the YM The YM is the only one of its peers to hold the primary flag support and to break its descending trendline. It's either leading its peers and hinting of a bullish breakout, or merely lagging their weakness. We should find out soon enough as ES and NQ approach their pennant apexes (apices?). The move higher in the dollar lined up with a move lower in treasuries and, to a lesser extent, in precious metals futures. The mining equities advanced along with broader equities, which was an anomaly when compared with the reaction to the FOMC announcement that brought down all assets against the US Dollar Index. Rather than wrack our brains over it, it's easier to follow the now well-defined support resistance zones governing the current range. These pennants won't last forever, and we should be rewarded for our patience with a directional move when they break. See you tomorrow. ************************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 ******************** Jobs with inflows and outflows The major indices traded in a rather tight range today, where surprising strong reports from most retailers in the form of January same store sales gave pause to recent declines. Retailers saw consumers visiting the shopping malls in January, as shopping became January's recreational activity of choice. Redemption of gift cards received also helped boost sales. As noted in December, retailers that sold gift cards could not book sales until gift cards were redeemed for merchandise. Dow component Wal-Mart (NYSE:WMT) $56.25 +1.55% closed back above its rounding flat 200-day SMA of $55.73 and helped lead the S&P Retail Index ($RLX.X) 381.06 +1.25% to a 4.7-point gain. But today's trade may be best described as the calm before a storm as traders and investors alike await tomorrow morning's release of January nonfarm payrolls data. "The storm" could be that of rain, which is welcomed by the farmer after experiencing severe drought conditions, perhaps analogous to those jobseekers that have had a tough time finding work the past few years. But "the storm" could also be that of heavy snowfall, where the rancher has been unable to feed his herd of cattle, where investor's appetite for stocks may be starved if the economy still struggles to produce jobs. I thought CNBC's senior trading correspondent Alexis Glick, who left Morgan Stanley as head of the firm's floor operations at the New York Stock exchange made a good point when she said traders and investors should keep a close eye on tomorrow's AMG Data Services release of weekly mutual fund inflows and outflows. While mutual fund investors are often-times made fun of by equity traders, it is those mutual fund inflows or outflows that can give hint of investor's appetite for stocks. Where even a floor trader will build or deplete inventory of stock based on this supply/demand indicator. After seeing a NASDAQ-100 Index (NDX.X) 1,465.03 +0.16% pull back 5.6% from its highs, tomorrow's mutual fund flow data provides a good test for investors resolve. For the prior week/period ending January 28, 2003, AMG Data Services reported net inflows of $6.3 billion to equity funds. But it will most likely be the nonfarm payrolls data, where economists remain optimistic for jobs growth (forecast 165,000 new jobs added) that gets greatest attention. Monthly Payroll Data - January (Forecast) to September In December, economists missed the mark when forecasting a gain of 148,000 new jobs, and after adding 99,000 in September and 100,000 in October, November and December data still suggest companies remain hesitant to hire back workers. While I (Jeff Bailey) believe that a strengthening labor market is on the horizon, I also understand that the S&P 500 Index (SPX.X) 1,128.59 +0.18% is still 7.5% above its October 31, 2003 closing value of 1,050.71, and with a rising government deficit, partially due to tax cuts and increased government spending to help fuel and economic recovery, the sluggish addition of new jobs, where wages can be taxed, gets great focus. Market Snapshot / Internals - 02/05/04 Close After a higher open, stocks treaded water for the bulk of the session. Just as economists remain optimistic for jobs growth, comments from Federal Reserve Board Governor Ben Bernanke that he was "pretty confident" that the U.S. will be posting some big numbers on job growth soon had Treasuries traders and currency traders responding, while equity traders seemed to take more of a wait and see approach to things. Just after Mr. Bernanke's statements hit the news wires, Treasuries found selling, while the dollar reversed losses. It was interesting to me that spot gold was flat today, never finding a bid despite early morning weakness in the dollar, but gold equities as depicted by the AMEX Gold Bugs Index ($HUI.X) 216.75 +1.55% found a bid as when the U.S. Dollar Index (dx00y) 86.75 -0.1% fell below its MONTHLY Pivot of 86.61 and fell further to 86.30, before reversing back higher. I'm not sure what to read into this, other than to think that the move higher in gold equities is a trade that forecast a weaker than expected nonfarm payroll report, where under that scenario, I would think the dollar finds weakness once again, where confidence in the dollar and perhaps the economy's ability to generate jobs is questioned. I should make note too, that the G7 meets this weekend, which may also have currency traders a little jittery, bringing some volatility into currency markets. Pivot Analysis Matrix - I've highlighted some correlative support/resistance levels in the pivot matrix, which I would consider to be potentially important levels in tomorrow's trade, where violations of these levels could dictate price action in the weeks ahead. I would also tie in some of the things discussed in last night's Index Trader Wrap regarding the major indices recent pullback in the scope of past pullbacks and some of the work we did with how the SPX traded in relation to its DAILY Pivots for trade setups. Today, the SPX did edge above its DAILY Pivot, but bulls may have been cautious as the DAILY S1 of 1,133.45 was not traded. S&P 100 Index Chart - Daily Intervals I count 9 different equity sectors posting gains greater than 1% compared to 3 sectors posting losses of 1% or more by today's close, but the OEX was little budged and MONTHLY Pivot provided resistance, while the January 29 relative low of 557.36 managed to hold support. My knee joint starts to ache when there is a higher level of humidity in the air. Is it rain, or is it snow? Dollar/bond action today seemed to day rain, where job growth was the forecast. S&P 500 Index Chart - Daily Intervals Similar to the OEX, the SPX found resistance at its MONTHLY Pivot. A trader sent me an e-mail today wondering he hasn't been seeing as many buy/sell program premium alerts of late? I think its because institutions have the SPX at a somewhat "neutral" level, right around that 1,125 level where we saw so much option activity taking place in December. Perhaps the lesser amount of buy/sell program premium alerts is "the quiet before the storm." One thing I would look for tomorrow to NOT happen is this. I expect volatility tomorrow, but if an index trades below or above a DAILY S1 or R1, if the move has any conviction behind it, the index should not come back through either of those levels. For instance... if the SPX trades above DAILY R1, its should not fall back below DAILY S1. Conversely, in what might be deemed a near-term "oversold" condition, should the SPX trade below its DAILY S1, then it should not trade back above its DAILY R1. If it does the latter, it may be indicative of short covering, or economic data already factored into the recent pullback. Dow Industrials (INDU) Chart - Daily Intervals Not much new in the INDU's chart. IBM, which escaped yesterday's technology selling slipped back under $100 today, while some gains were found in lesser price-weighted components. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals In last night's wrap we looked at a 6.72% decline in the QQQ and compared that percentage decline to the one currently underway. I'm also noting some very SIMILAR oscillators. While price action matters most, the QQQ witnessed some wild intra-day swings for several session back in November, and it wouldn't surprise me to see similar volatility. 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 **************** All About Jobs - J. Brown The last several days have seen the DJIA churn sideways in anticipation or some might say apprehension of the jobs report due out tomorrow before the opening bell. Current estimates peg January job growth in the range of 150,000-165,000. Whether the result is a blow out or a no show we're expecting some movement in the major averages. The markets did get some help today from Fed governor Ben Bernake. Bernake made some comments midday about the Federal Reserve expecting large job growth "pretty soon". Some chose to believe that means tomorrow's report will be positive. Others suggested that pretty soon may be a hint that tomorrow's report isn't so hot and the job growth may show up in the next couple of months. Investors were also happy to hear the January same-store sales numbers. Overall they were much better than expected. Even the apparel stores, which had been expected to do poorly, turned in strong results. Cold winter weather actually helped move their winter inventory (imagine that!). The International Council of Shopping Centers reported a 5.8% jump in U.S. sales, above their 4.5% forecast. A fundamentally bullish clue for the economy is the confident consumer who opted to splurge at fancy retailers like Neiman Marcus who reported a 15% jump in same-store sales. Market internals were also bullish. The NSYE advance decline line showed winners outpacing losers 15 to 13. On the NASDAQ winners numbered 17 for every 13.6 decliners. Up volume outnumbered down volume on both exchanges. The jobs report tomorrow truly is the market-moving event of the week so prepare for some volatility. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10701 52-week Low : 7416 Current : 10495 Moving Averages: (Simple) 10-dma: 10531 50-dma: 10291 200-dma: 9511 S&P 500 ($SPX) 52-week High: 1155 52-week Low : 788 Current : 1128 Moving Averages: (Simple) 10-dma: 1136 50-dma: 1103 200-dma: 1023 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 795 Current : 1465 Moving Averages: (Simple) 10-dma: 1499 50-dma: 1468 200-dma: 1330 ----------------------------------------------------------------- For the first time in months we've seen the VXO (old vix) break the trend of lower relative highs. This could mark a turning point but like just about everything else, market direction will depend on how investors interpret the job data tomorrow. CBOE Market Volatility Index (VIX) = 17.71 -0.16 CBOE Mkt Volatility old VIX (VXO) = 17.75 +0.17 Nasdaq Volatility Index (VXN) = 26.17 -0.48 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 757,792 574,865 Equity Only 0.66 654,226 434,512 OEX 0.84 24,832 20,799 QQQ 1.30 48,878 63,418 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 76.1 + 0 Bull Confirmed NASDAQ-100 70.0 - 2 Bear Alert Dow Indust. 90.0 + 0 Bull Confirmed S&P 500 86.6 + 0 Bull Confirmed S&P 100 88.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.00 10-dma: 1.01 21-dma: 1.00 55-dma: 1.03 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1529 1707 Decliners 1300 1369 New Highs 128 116 New Lows 12 10 Up Volume 1089M 1022M Down Vol. 801M 865M Total Vol. 1898M 1928M 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 Thursday 02-05-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: MWD Dropped Puts: None Call Play Updates: ABK, DHR, ESRX, GENZ, HSIC, IBM, IMDC, TEVA New Calls Plays: None Put Play Updates: AVID, EASI, QLGC New Put Plays: COF **************** 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: ***** Morgan Stanley - MWD - close: 56.20 chg: -0.70 stop: 56.75 There were a lot of headlines out today for MWD, most of which involve its bid to buy England's Canary Wharf real estate. Yet one story should have been positive for MWD. An Illinois judge dismissed a lawsuit claiming that MWD had overcharged a state bond agency by $21,0000 back in 1993 (Reuters). Unfortunately, the news didn't seem to matter as yesterday's breakdown under the simple 50-dma prompted more selling today. The stock has traded through our stop loss at $56.75. Keep an eye on MWD for more weakness as the recent declines have produced a major technical breakdown of its rising channel. Picked on January 15 at $59.81 Change since picked: - 3.61 Earnings Date 03/18/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Ambac Financial Group - ABK - close: 76.90 chg: -0.31 stop: 71.99 We continue to see strength in the insurance sector. Wednesday's market-wide sell-off did see some profit taking in the insurance sector index (IUX) but the group has gained it all back and looks poised for more gains. Meanwhile ABK has been rock steady above the $76 level and witnessed almost no selling during yesterday's market drop. If the job number is good then ABK should be free to rally higher. If the job number tomorrow is bad or the markets interpret it negatively, then look for ABK to potentially pull back to the $74-75 region (preferably shares will find support at $75). No change to our stop loss. Picked on February 1 at $74.77 Change since picked: + 2.13 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 476 thousand Chart = --- Danaher Corp - DHR - close: 91.80 cls: +1.67 stop: 87.99 Right on target, DHR bounced on a pull back to the $90.00 level and it looks like a decent entry point for new bullish positions. However, shares continue to struggle with a short-term trend of lower highs and as we mentioned on Tuesday more conservative traders may want to wait for a move above the $93.00 mark. No change to our stop loss at 87.99 but more cautious investors could probably use a stop just under the 50-dma at $89. Apparently DHR's presentation at the Lehman Brothers conference yesterday didn't unveil any significant news. Picked on January 30 at $91.01 Change since picked: + 0.79 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand Chart = --- Express Scripts - ESRX - cls: 68.84 chng: -1.56 stop: 65.50 Proving once again that momentum entries are not the way to play, ESRX reversed sharply on Thursday, dropping back to close near mild support at $68.75 and more than likely destined for a test of stronger support at $68. With the 20-dma now rising to $67.99, a rebound from that level looks like a very favorable entry point ahead of another rally back above $70. There was no meaningful news to explain today's drop, but it is somewhat disconcerting that the stock shed more than 2% and closed near the low of the day, when the rest of the market held up rather well. Buying the dips is still the best strategy on ESRX, and it looks like we could get that opportunity on a bounce tomorrow. Maintain stops at $65.50, which is below all the shorter-term moving averages. Picked on January 13th at $68.32 Change since picked: +0.52 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 1.06 mln Chart = --- Genzyme Corp. - GENZ - close: 55.00 change: -0.65 stop: 53.00 Is this deja vu? Just when it looked like we had a bona fide breakout over the top of the recent trading range, GENZ is right back to familiar territory, closing exactly at $55 again. The past two days have seen GENZ reverse its breakout in a rather disconcerting manner, as today's close was the first below the 10-dma ($55.14) since this rally took off in early January. Of potentially greater concern is the fact that daily MACD is now giving a rather strong Sell signal, which is confirmed by a confirmed Sell signal on the Daily Stochastics. GENZ should find strong support near $54, with last ditch support coming in at the 20-dma ($53.52). We're hesitant to suggest new positions at this time with the bearish oscillator pattern, but a strong rebound off of $54 support could work for aggressive traders. Maintain stops at $53. Picked on January 20th at $53.00 Change since picked: +2.00 Earnings Date 2/19/04 (unconfirmed) Average Daily Volume = 2.86 mln Chart = --- Henry Schein - HSIC - close: 69.73 chg: -1.13 stop: 68.00 Uh-oh! We really don't like the close under the $70.00 level today. Shares have been flirting with support at $69 but this is the first close under $70.00 since Jan. 28th. We suspect HSIC will test the $69.00 level again or the 50-dma at 68.50. Today's close and the bearish tone in HSIC's technical oscillators makes us cautious and we would be hesitant to open any new bullish positions unless the stock traded back above 71.70. The only headline for HSIC today was news that its Chairman, CEO and President opened the NASDAQ market this morning in honor of the American Dental Association's second annual Give Kids a Smile (sm) Day. According to the NASDAQ pres release "This program provides free oral health services to more than one million underserved children in communities across the country. This annual one-day initiative enlists more than 14,000 volunteer dentists and 34,000 dental team members who provide free educational, preventive and restorative services to children from low-income families." Picked on January 22 at $70.65 Change since picked: - 0.92 Earnings Date 03/04/04 (unconfirmed) Average Daily Volume: 334 thousand Chart = --- Int'l Bus. Machines - IBM - cls: 98.86 chng: -1.33 stop: 95.50 The question of whether Tuesday's kiss of the $100 level did in fact trigger our IBM play became moot with yesterday's close above that level. Sellers were active today though, driving the stock back down to test the 10-dma ($98.60) before a slight rebound in the afternoon. Our focus now turns to securing an entry on a drop and rebound from the $97-98 support area, taking advantage of the near-term weakness. The 20-dma has now moved above $96 and should serve as ample protection of our $95.50 stop. Traders looking to enter on strength will now want to see IBM push through $100.50 (just above yesterday's high) before taking a position. The Jobs report in the morning is likely to determine the fate of the market (and IBM as well) heading into the weekend. A sharp dip at the open is likely to get bought, and that would be the recipe for a solid entry on IBM near that $97-98 support zone. Picked on February 1st at $99.23 Change since picked: -0.37 Earnings Date 4/15/04 (unconfirmed) Average Daily Volume = 5.53 mln Chart = --- Inamed Corp - IMDC - close: 51.26 chg: +1.10 stop: 48.00 Did you get it? IMDC offered traders another entry point in the $49.50-50.00 range and they bought the dip. Actually, the low today was $49.63, effectively a bounce off the 49.60 level, which happens to be the top of the Jan. 28th gap higher. Usually the top and bottom edges of a gap tend to act as support or resistance depending on what direction the stock is approaching it from. IMDC still looks attractive here and shares closed near their high for the day, which is bullish for tomorrow. Picked on February 01 at $51.54 Change since picked: + 0.28 Earnings Date 02/24/04 (unconfirmed) Average Daily Volume: 682 thousand Chart = --- Teva Pharmaceutical - TEVA - cls: 64.47 chng: -0.75 stop: 61.00 Following the strong breakout earlier in the week, it was only a matter of time until TEVA ran into some profit taking. Considering that the sideways consolidation in the $61.50-63.00 area is midway between the launch point down near $58.50 and today's highs just below $66, it would be natural to expect a near-term pullback from the site of today's highs. Despite the sharp dropoff, there were plenty of bulls willing to buy the dip, and TEVA close well off its lows in the $63.50 area. Today's dip wasn't quite enough to call a solid entry point, as we're looking for a pullback into the $62-63 area for that setup. As noted on our initial writeup on Tuesday, our preference for entries was to wait for a pullback precisely because of the likelihood of such a pullback as seen today. Look for a dip back to support and the beginning of a rebound before entry. Maintain stops at $61, which is now just under the 20-dma ($61.04). Picked on February 3rd at $64.66 Change since picked: -0.19 Earnings Date 2/17/04 (unconfirmed) Average Daily Volume = 2.60 mln Chart = ************** NEW CALL PLAYS ************** None ************************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 ******************* Avid Technology - AVID - close: 43.00 chg: +1.07 stop: 46.17 AVID fell out of its inside day yesterday and opened our new put play when shares traded below $42.87. The stock closed at its low for the day on Wednesday and shares looked pretty weak but were overdue for an oversold bounce. That bounce happened today. AVID rebounded to touch the $44.42 level before rolling over again in the last 90 minutes of trading. What is significant is that shares have found new selling pressure in the 44.40-44.50 region for 2 1/2 days in a row. We're going to keep our stop loss at $46.17 but more conservative trades might consider using the 200-dma at near $45.15 as a guide. Picked on February 04 at $42.87 Change since picked: + 0.13 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 612 thousand Chart = --- Eng. Support Sys. - EASI - cls: 45.75 chng: -1.90 stop: 50.50*new* Now that's what we've been waiting for! EASI finally cracked below our $48 trigger yesterday and as expected, that breakdown was significant. Of course, there were still some stubborn dip buyers that bought the initial drop yesterday, but they couldn't get price back over $48 by the close. The real follow-through occurred today, with one last shot at $48 (now resistance) being rejected and EASI falling nearly 4% on very strong volume. Recall that we were looking for the first pause after the breakdown to be seen near the $45 support level and EASI isn't far above that market now. The potential exists for a near-term rebound, but given the heavy selling volume the past 2 days, that rebound should be short-lived and should deliver another entry point on a rollover below the 100-dma (currently $48.60). A continued break below $45 can be used for momentum entries, as we could see the stock fall quickly to strong support near $40. We're recommending aggressive exits on a test of $40, as EASI should find strong enough buying interest at that level to produce a sizable bounce. Lower stops to $50.50 tonight, which is just above the 20-dma ($50.45). Picked on February 1st at $50.00 Change since picked: -4.25 Earnings Date 3/09/04 (unconfirmed) Average Daily Volume = 378 K Chart = --- QLogic Corp. - QLGC - close: 43.47 change: -0.10 stop: 46.00*new* Despite a lack of excitement from our QLGC play, we certainly aren't disappointed by the way it has been trading. The consistent pattern of lower highs and lower lows continues, as the stock trends lower in its short-term descending channel. The bounce earlier in the week topped out just above $44, and well below both the 10-dma ($44.61) and the top of the channel (currently $44.30). With another lower high in place, now we want to see the stock break the low from earlier in the week ($42.56) to confirm the bearish trend is still intact and strong. Failed rebounds below the top of the channel still look good for new entries, and we would continue to avoid entries into further weakness due to the propensity for near-term bounces. Lower stops to $46, just above the top of the rebound from late last week. Picked on January 22nd at $45.25 Change since picked: -1.78 Earnings Date 4/14/04 (unconfirmed) Average Daily Volume = 3.96 mln Chart = ************* NEW PUT PLAYS ************* Capital One Fin. - COF - close: 69.65 change: -0.92 stop: 72.50 Company Description: As one of the top 10 credit card issuers in the U.S., Capital One's secret weapon is its vast databases. The company uses this data to match a potential Visa or MasterCard customer to any one of its thousands of cards, varying in annual percentage rates, credit limits, finance charges and fees. Ranging from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor credit histories, the company has a credit card for just about anyone. The company also sells wireless phone services, mortgage services, and consumer lending products. Why we like it: Enjoying a strong rally up to just eclipse its all-time highs late last month, shares of COF are starting to feel the pull of gravity once again. The initial drop from its highs near $74 paused near $69, and after a feeble rebound attempt, the stock fell back to test that near-term support at $69 on Thursday. The 20-dma ($69.19) helped to reinforce that support near the end of the day, but if it breaks, COF looks destined for a drop to at least $65 and possibly the 50-dma ($63.37). At the same time, the Banking index (BKX.X) has dropped back from its all-time highs above $1000 and is just holding onto support at the $980 level. If that support gives way, the BKX should drop first to its 50-dma near $969 and then stronger support at $950. Of course, with the PNF charts for both COF and the BKX strongly bullish, this is simply a play on the expectation for some much needed profit taking down to strong support. We are not anticipating a major breakdown. We'll use a trigger at $69.00, just under today's low and use an initial stop at $72.50, just above the intraday highs from earlier in the week. Our initial target will be for a drop back to the $65 support, with the potential for a dip as low as the 50-dma. The best approach for entry will be on the initial breakdown, although more patient traders may get a shot at a better entry on a subsequent rebound and failure below what should be solid resistance in the $70-71 area. If entering on weakness, be sure to confirm sector weakness as well, with the BKX breaking its $980 support. Suggested Options: Aggressive short-term traders can use the February 70 Put, while those with a more conservative approach will want to use the March 70 put. Aggressive traders looking for more insulation against time decay can use the March 65 Put. Our preferred option is the March 65 strike. BUY PUT FEB-70 COF-NN OI=6591 at $2.20 SL=1.00 BUY PUT MAR-70 COF-ON OI=2824 at $3.70 SL=2.25 BUY PUT MAR-65*COF-OM OI=6376 at $1.75 SL=0.90 Annotated Chart of COF: Picked on February 5th at $69.65 Change since picked: +0.00 Earnings Date 1/21/04 (unconfirmed) Average Daily Volume = 2.13 mln 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 Thursday 02-05-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: A BIG watch list for Friday! Traders Corner: Structure Your Trading To Hang Onto Your Profits ********** WATCH LIST ********** A BIG watch list for Friday! ___________________________________________________________________ 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. ___________________________________________________________________ LM Ericsson Telephone Co - ERICY - close: 23.70 change: +1.17 WHAT TO WATCH: After nearly four weeks in a sideways consolidation shares of ERICY are moving again. The breakout above the $23.00 level today was sparked by an upgrade from Bear Stearns. The analyst raised their price target on ERICY from $19 to $27 on expectations for a strong quarter. ERICY announces earnings tomorrow before the opening bell. Chart= --- Amgen Inc - AMGN - close: 64.55 change: -0.81 WHAT TO WATCH: AMGN may be worth watching here. A couple of weeks ago shares broke out above its 200-dma and the $65.00 level. It then spent a few days consolidating above the 200-dma before leaping higher again on Monday. We've since seen it pull back to support at the 200-dma. Now the question is what direction does it move next? Below the 200-dma is even more support. However, the recent highs near $66.50 are right at point & figure chart resistance. A breakout on its P&F chart could be the start of its next big move. Chart= --- Borg Warner - BWA - close: 92.38 change: +0.98 WHAT TO WATCH: BWA announced earnings today that beat the street by 6 cents and surpassed revenue estimates. The company also announced a 2-for-1 stock split. The bounce today may be an entry point for another rally attempt toward the $100 level, or at least the current highs above $98. However, watch for possible resistance in the $94.00 region. Chart= --- St. Jude Medical - STJ - close: 72.94 change: +1.53 WHAT TO WATCH: Up, up and away! STJ looks almost bulletproof. The stock soared in late January on a very strong earnings report. The recent market volatility has not affected shares, which just churned sideways. News of Guidant filing a patent infringement lawsuit yesterday didn't phase the stock at all. This morning's weakness on the Medtronic revenue warning was completely regained and more with STJ hitting a new all-time high. We'd watch it for any dip back toward $70 as a potential entry point. Chart= --- American Intl. Group Inc. - AIG - close: 71.33 change: +1.18 WHAT TO WATCH: The IUX insurance sector has been exceptionally strongly lately. The market-wide sell-off did see some profit taking in the group yesterday but today's rebound gained it all back and more. Shares of AIG, one of the biggest players in the property and casualty niche, have rebounded from a pull back to the $70.00 level. Nimble traders might want to consider bullish positions here and exit ahead of its February 11th earnings report. Chart= --- Corning Inc - GLW - close: 11.82 change: -0.17 WHAT TO WATCH: GLW rode the early January frenzy for networking stocks to new highs and hit the $14.00 level before selling off. Now that investors are taking some money off the table GLW is breaking down through the $12.00 mark. The company recently announced a $600 million investment into its LCD glass screen business, which they expect to grow 30%-50% over the next few years. Keep an eye out for any pull back to the $11.00 or 11.50 levels. The stock has a long-term rising trendline that has been rock-solid support for months and we want to buy the bounce. Chart= --- PACCAR Inc - PCAR - close: 83.11 change: +0.71 WHAT TO WATCH: It's been a good week for shares of PCAR. The company announced earnings on Monday that beat the estimates by 10 cents. The company also announced a 3-for-2 stock split with a short-time frame before its payable date. Together (the earnings and split) have sparked a rally from the $79 region to the current level at $83.00 above its simple 50-dma. We like the stock and a move above $84 may be a good trigger for a potential run back toward the $90 level. However, its split is due to take place on Feb. 6th (that's tomorrow). Sometimes a stock will suffer some post-split depression, sometimes it won't. Assuming the markets don't gap up or down then PCAR should open near the $55 level. That $90 target would become $60 on a post-split basis. Chart= --- Diamonds - DIA - close: $105.13 change: +0.34 WHAT TO WATCH: Diamonds are a way for investors to trade the Dow Jones Industrials like a stock. The DJIA has been churning sideways the last few days because investors are nervous over the non-farm payrolls report tomorrow morning. We're expecting a big move one way or the other based on the jobs number. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- CB $72.51 +1.91 - We really like shares of CB here. The stock looks strong and is hitting new relative highs on decent volume. DOW $41.91 +0.66 - DOW might be a play on a move above the $42.50 mark. Its MACD and other technicals are turning bullish. CAT $76.32 +0.42 - CAT got whacked after its earnings report and the threat of rising interest rates didn't sit well with traders. Now shares have pulled back toward the $75 level. This is a crucial pivot point and depending on the jobs report we could see a move to $70 or $80 pretty soon. RNT $24.25 +1.19 - RNT has broken out above resistance at $24.00 to new all-time highs after two weeks of consolidation. XL $79.90 +1.56 - XL is another insurance stock we're bullish on with a suggested trigger to go long at $80.75. Unfortunately, the company has earnings on Feb. 10th and we don't want to hold over the announcement. ************************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 ************** Structure Your Trading To Hang Onto Your Profits By Mike Parnos, Investing With Attitude Janet Jackson and I have something in common. We both have had a wardrobe malfunction. I lost my shirt in the market. While my financial nipples were exposed for the world to see, and, for some reason, it didn’t make headlines. It was the most valuable lesson I’ve ever learned. There are times in life when you learn what TO do by learning what NOT to do. Janet Jackson learned she should keep certain body parts covered and I learned to keep my options covered – both valuable lessons. Perhaps Janet and I should get together and commiserate . . . Getting back to the world at hand, we’re going to continue our discussion of tax strategies for traders. OK, so this isn’t as interesting as reading about trading strategies, but this tax stuff is stuff you need to know. Or, at least you need to make sure the people who are preparing your taxes know it. _____________________________________________________________ QUESTION: What is the best structure for tax savings? ANSWER: You have three options. One is to keep filing your Form 1040 (U.S. Individual Tax Return) year after year. That is the most expensive solution and unfortunately, that is what most people do. Next, you could try to file as a "trader" and deduct your business expenses on Schedule C of your Form 1040. This is risky and does not offer you any income tax strategies, so we advise you to stay away from this option. The third strategy is to place your trading capital in a legal entity. There are various entities that may be appropriate, depending on your situation. Your main choices are the c- corporation, the flow-thru entities such as the limited liability company (LLC) and the limited partnership, and a combination of a c-corporation and a flow-thru entity. The following is an explanation of the corporation - LLC strategy for active traders. This strategy can allow you to legally write- off your computers, home office equipment, all educational expenses, and a large percentage of meals, entertainment and travel. You will learn how to run your investment activities as a qualified business, and how you can grant yourself all the legal perks, benefits, tax breaks, and tax deductions afforded to large companies. The Limitations of Filing a 1040 Tax Return as an Investor As you probably know, when you file your Form 1040 tax return, your ability to deduct expenses related to your investment activities is extremely limited. Certain expenses are deductible, but these itemized deductions are subject to the 2% of adjusted gross income limitation. Additionally, deductions for investment seminars and home offices are categorically disallowed. Another limitation affecting more and more investors is the Wash Sale rule. This rule prevents you from realizing losses on securities sales if you are in basically the same financial position in a 61-day window of time. The goal of the IRS is to prevent you from selling a position simply to record the loss, and then immediately buying back the stock at a lower basis price. Unfortunately, with active trading being more the norm, individuals often find themselves moving in and out of the same stock within the same 61-day window. One benefit of filing a Form 1040 tax return is the capital gain treatment of your long-term stock positions. If you hold your securities for 12 months or longer you can lower your capital gains tax bracket to as low as 10% or 20%. In conclusion, if you work at a full-time job and are realizing capital gains in the stock market, you do not have any powerful methods for offsetting your tax liabilities. In fact, all of the expenses incurred in learning how to grow and manage your capital are almost entirely non-deductible. But what if there was a way to make your investment activities into a business? What if you became a qualified money manager in your part-time? Do you think that you might receive a preferential tax treatment by the IRS? Let's see: Filing as "Trader" on Form 1040 Tax Return tax breaks but risky This tax strategy boils down to this: You convert your investment activities into a trading business. Once your investing is recognized as a business, you are able to deduct any ordinary and necessary business expenses. What does it take to form a trading business? The Internal Revenue Code is conspicuously quiet about how to qualify as a trading business. So, the burden has been placed on brave individuals who filed their 1040 tax returns and attempted to establish themselves as "traders" in order to write- off their business expenses. Most of these individuals were slaughtered in the tax courts. In case after case, the individuals were rebuked by the courts. The net effect of the rulings is that it is nearly impossible to qualify as a trader. To qualify, you would most likely have to be trading full-time, hold your positions for less than a day, and trade a large amount almost every business day throughout the year. In essence, the court has said, "If you are not on the floor of the exchange, or holed up in a trading room, you do not qualify." Some CPAs have been very active in promoting "trader status" filings. If you look at the actual text from the court cases, you will agree that attempting to establish your trading business as an individual trader on your personal Form 1040 tax return is a risky proposition and can lead to sleepless nights worrying about a possible audit. The bottom line is that while a very small portion of active traders can realize substantial tax savings by filing as a "trader", a majority of investors do not qualify and need an alternative strategy. The Complete Solution: Placing Trading Capital in an Entity Structure Instead of attempting the Herculean task of qualifying as a "trader" on your personal return, there is a method of qualifying that is automatic, trouble-free, and positively overflowing with powerful tax benefits. This strategy is what business greats like Warren Buffet, Michael Dell, and Michael Bloomberg, along with tens on thousands of others, have chosen for their investment capital. Advantages of Using a Corporation One of the most exciting things about using a corporation is the sheer amount of tax deductions and perks that are available to corporate owners and company employees. Congress has created tax laws and special exemptions for corporations. It is the lobbyists of the major corporations that have paved the way for you. Now, you can own your own corporation and be able to write-off all "ordinary and necessary" business expenses, fully deduct the costs of attending board meetings that are held in vacation areas, write-off all medical expenses with no limitations, contribute up to $40,000 to your own pension plan, and much much more. For individuals that are generating a large amount of excess revenue, the corporation structure allows you to start-up additional businesses with the expenses of the new business offsetting the income from the trading business. Another great benefit of the corporate entity is that it is a perpetual entity. Many individuals choose to retain the controlling interest in the corporation, and gift the non-controlling stock to their beneficiaries early in the growth of the business. That way, all future growth occurs in the estate of the beneficiaries, so that when you pass away, your beneficiaries do not need to sell off your business simply to pay the taxes. All they would be receiving is the small amount of controlling stock. Taking Action If you are a part-time trader, you have created a situation where you can take advantage of major tax strategies usually reserved for individuals with full-time businesses. It is simply a matter of getting started. We are the experts in this arena. We can look at your situation and show you how the entity structure would work in your situation. The Trader Tax Experts Once again, the answers have been provided by the tax experts at TradersAccounting.com. All questions and/or clarifications should be directed to their website. ______________________________________________________________ FEBRUARY CPTI POSITIONS Position #1 -- OEX – Credit Spread Boogie – 559.61 With the market trending, let's not fight the tape. We're going to establish a bull put spread, take in some premium, and ride the wave into shore. We sold 3 OEX February 565 puts, and bought 3 OEX February 540 puts for a total credit of $6.80 (x 3 contracts = $2,040). This strategy requires $25 x 3 contracts = $7,500. We're only trading three contracts because, if the market reverses significantly, it might become necessary to close the bull put spread and establish a bear call spread that may be wider and would require more contracts. We need to preserve our money for a potential maintenance requirement. We’re below our 565 short strike, but there is still farther to go to convince us that the trend has actually changed and plenty of time to make an adjustment. Position #2 – MNX (mini NDX index) – Iron Condor – 146.50 This index seems substantially safer than the highly volatile NDX. We're going to put on an Iron Condor with limited exposure. Because the market is trending, we skewed the strike prices slightly so that we have a little more cushion on the upside. We sold 10 MNX February 165 calls and bought 10 MNX February 170 calls for a net credit of $.40 x 10 contracts = $400. Then we sold 20 MNX February 150 puts and bought 20 MNX February 147.50 puts for a net credit of $.50 x 20 contracts = $1,000. Our total credit of $1,400. Our maximum profit range is 150 to 165. Our exposure is only $3,600 ($5,000 less $1,400). Maximum profit: $1,400. This position has fallen through the short $150 strike price, but because of the relatively low risk, we’re going to see if it bounces back up off of the 50-day moving average. There are still two weeks left. Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $96.23 The XAU has been temperamental of late. This is a low risk and relatively safe play with a wide range. Maybe we can make a couple of bucks. We sold 10 XAU February 90 puts and bought 10 XAU February 85 puts for a net credit of about $.70 (x 10 contracts = $700). Then we sold 10 XAU February 110 calls and bought 10 XAU February 115 calls for a net credit of about $.45 (x 10 contracts = $450). Our maximum profit range is $90 to $110 – a 20-point range. Our exposure is $3,850 ($5,000 less $1,150). Maximum profit: $1,150. Position #4 – OSX (Oil Service Sector Index) - $99.12 We're being cautious again here. We're reducing our potential income by expanding our safety range. We sold 10 OSX February 105 calls and bought 10 OSX February 110 calls for a net credit of about $.45. Then we sold 10 OSX February 90 puts and bought 10 OSX February 85 puts for a net credit of about $.75. Our total net credit of about $1.20 (x 10 = $1,200). Our maximum profit range is 90 to 105 – a 15-point range. Our exposure is $3,800 ($5,000 less $1,200). Maximum profit: $1,200. _____________________________________________________________ ONGOING POSITION QQQ ITM Strangle – Ongoing Long Term -- $36.47 We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the 2005 QQQ $29 calls for a total debit of $14,300. We're going to make money by selling near term puts and calls every month. Here's what we've done so far: October: Oct. $33 puts and Oct. $34 calls – credit of $1,900. November: Nov. $34 puts and calls – credit of $1,150. December: Dec. $34 puts and calls – credit of $1,500. January: Jan. $34 puts and calls – credit of $850. February: Feb. $34 calls and $36 puts – credit of $750. Total credit: $6,150. Note: We haven't included any of the proceeds from this long term QQQ ITM Strangle in our profit calculations. It's a bonus! And it's a great cash flow generating strategy. ___________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page and click on "Traders Corner." They're waiting for you 24/7. ____________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. 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