The Option Investor Newsletter Thursday 02-12-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Thank You Mr. Greenspan Futures Markets: Running the Clock Index Trader Wrap: Bulls lacked aggression Market Sentiment: Investors Take A Breath Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-12-2004 High Low Volume Advance/Decline DJIA 10694.07 - 43.60 10735.29 10688.36 1.86 bln 1357/1848 NASDAQ 2073.61 - 16.10 2091.22 2072.06 1.94 bln 1291/1872 S&P 100 569.43 - 2.96 572.39 568.97 Totals 2648/3720 S&P 500 1152.11 - 5.65 1157.76 1151.44 W5000 11239.00 - 54.40 11293.42 11234.38 RUS 2000 592.75 - 4.32 597.07 592.13 DJ TRANS 2950.33 - 1.60 2960.52 2936.59 VIX 15.31 - 0.08 15.72 15.23 VXO (VIX-O)14.90 + 0.02 15.46 14.73 VXN 23.53 + 0.00 23.88 23.00 Total Volume 4,074M Total UpVol 1,517M Total DnVol 2,386M Total Adv 3041 Total Dcl 4195 52wk Highs 708 52wk Lows 5 TRIN 0.93 NAZTRIN 1.08 PUT/CALL 0.55 ************************************************************ Thank You Mr. Greenspan After sending the Dow to a new two year high on Wednesday the master of disaster carefully avoided any comments today that would have reversed that gain. The positive comments about GDP growth, job growth and the Fed's patience comforted bulls and despite some minor profit taking today the markets held those gains. Dow Chart - Daily Nasdaq Chart - Daily Even negative Jobless Claims failed to put the skids on the gains from Wednesday. Claims rose to 363,000 for this week and the prior week was revised up to 357,000. Even a two-week rebound over 350K failed to spoil the party. Continuing claims fell another 23,000 to 3.083 million. Blame it on the weather was the general analyst assumption as the four-week average rose back to the 350,000 level. I am surprised there was not a bigger reaction to the two week jump especially when Greenspan himself said there was little evidence of hiring. 350K is the line in the sand below which job growth appears and above that level we historically tend to see job growth decrease. Retail Sales fell -0.3% in January and far below expectations for growth of +0.2%. A larger than expected decline in auto sales was targeted as the culprit. I assume you could blame that on the weather as well since car buyers seldom brave blizzards to test drive new cars. The number ex-autos soared to +0.9% with apparel, grocery and sporting goods stores leading the gains. Building materials dropped -0.9%, again probably due to the weather. Electronics only rose +0.1% and furniture fell -0.9%. Business Inventories rose +0.3% in December and inline with estimates but an increase in sales pushed the inventory to sales ratio to another record low of 1.34. Retailers showed a modest increase in inventory but manufacturers remained flat. In fact manufacturing inventories have declined for three consecutive quarters. Everyone keeps pointing out the record low levels as a sign there is a massive rebuild cycle in our future but it continually fails to appear. This rebuild cycle should add significantly to the GDP for Q1 as retailers restock from the holiday sales. The Greenspan relief rally on Wednesday shook off the minor economic glitches above and the Dow clung to the 10700 level with a grip of steel. The Nasdaq did not participate in the Wednesday gains to the same extent as the Dow. The Nasdaq gave back those meager gains today but held above 2075 support until earnings fears prompted a late day down tick. Those earnings fears did not come to pass with Dell beating estimates by a penny, ADI beat by two cents and NVDA beat by three. Dell traded up in after hours and NVDA got killed. Dell was the real threat. There was a concern that Dell had felt the HPQ heat in the 4Q and had to cut margins to the bone to sell computers. They were afraid that Dell could report inline, show margin shrinkage or even guide lower going forward. None of that came to pass. Dell was pleased with their results, but then they normally are. Dell said IT spending was increasing although at a slow and steady pace. Ironically Dell traded up in after hours despite a relatively subdued conference call. Dell said that despite the steady rise in IT spending they were not seeing any growth from the large companies. The spending was coming from small to medium size businesses with growth slowing as the size of the companies grew larger. Revenue was inline with guidance and shipments rose +25%. Dell also said January was strong and they were refusing to discount prices further in their battle with HPQ. Notebook sales which had been fueling profits over the last two quarters were slowing and lower priced computers were seeing stronger sales in 2004. Dell said sales would decline -3% for Q1 due to seasonal patterns. HPQ is hurting Dell and sometimes selling at a loss to get the business. The battle for bragging rights for first place has been tough and the lead tends to shift quarter by quarter. Dell was quick to point out that its printer business grew by +100% and they were continuing to offer new models to compete with HPQ. Based on the flat tone of the call and the flat guidance I am surprised that they traded higher after hours. I suspect it was a relief rally that they did not do worse as the whisper numbers had suggested. Dell had traded at a six month low of $31.75 just last week. Nvidia on the other hand felt the wrath of traders despite beating estimates by +3 cents. The win was helped by a low tax rate and a reduction in liabilities for tax contingencies. Earnings were less than half of the prior 4Q on basically the same revenue. NVDA also said sales of X-Box chips to Microsoft had declined -$90 million and current sales would be flat to down -5%. This was not really a surprise as most sales come in the 3Q for units sold over the holidays. The drop was slightly more than had been forecast. NVDA was down to $21.90 in late trading. On the flip side of the earnings coin was ADI, which posted earnings that were nearly twice the same period a year ago. ADI posted 30 cents for the 4Q compared to only 16 cents from the prior year. Revenues were up and gross margins rose to a whopping 57.1%. They also declared a dividend of four cents. They guided analysts to 34-35 cents for Q1 and well over the prior estimates of 32 cents. ADI shares jumped over $2 in after hours trading. In related news INTC actually dropped -25 cents despite announcing a discovery that could accelerate data transfer inside a PC by as much as 50 times the present rate. The discovery is a way to pulse light beams through silicon to represent the on/off state of a common bit of information. By using different colors of light in the same beam they anticipate being able to increase the transfer rate even more. It will be sometime before this discovery makes its way into real production but the path is clear. During Dell's earnings they also alluded to the 64bit AMD chip but suggested they would wait for the Intel offering that is expected shortly. The problem is not the chip but the software that runs on it. Until the software catches up there is no rush for anyone to jump ship to the AMD chip. Intel obviously knows this and are taking their time. The biggest news of the afternoon was a sudden drop in Imclone stock just before the stock was halted for news pending. IMCL was trading just over $42 at 1:25 when the stock suddenly dropped to $33.50 in a single tick with volume indicated at over 600,000 shares. Several seconds later the stock was halted news pending. The news was a successful approval by the FDA of Erbitux. The IMCL drop was explored by Nasdaq and the stock did not open again for trading until 4:20. It closed the after hours session back over $44.00. No answer for the drop was ever given and whoever took the other side of that 600,000 share sale should be a happy camper tonight. The FDA originally declined to approve Erbitux and that led to the current Martha Stewart trial and prison for Sam Waksal. IMCL was trading just over $60 when that first denial was made. The second day of testimony by Greenspan concluded without any problems and traders breathed a sigh of relief. The market fell slightly on the conclusion suggesting there was a "sell the lack of news" event. The trading day was actually very boring. We opened down on profit taking on the weak economic news but the Dow then traded in a very narrow 35 point range the rest of the day. 10700 became the battle ground and traders appeared content to let time expire on the clock rather than press the battle. The Nasdaq held 2075 until a minor sell program in the last ten minutes pushed the index to close at 2073. The techs have not been as strong as the Dow but are holding their own. The close at 2075 resistance, now support, and the bump in the futures after the close could suggest there are further gains ahead but it is very tough to draw any kind of conclusions at these levels. Bullish sentiment is still very strong but we are in the period where historical consolidation occurs. We need to hold these levels for at least another week until the April earnings cycle begins with mid quarter updates. Fueling this earnings cycle will be a very strong surge in tax refunds and the beginning of the spring home buying cycle. Greenspan clearly indicated that the Fed was planning on being patient about raising rates. He also suggested the recovery was still on track despite the lack of jobs. This is the green light for equities and he removed any suggestion of a change in conditions for at least the next 90 days. The lack of any material sell off after the Wednesday gains shows that the bullish sentiment is alive and well despite the two year highs. The key for Friday will be the Nasdaq. If the Dell and ADI earnings based on a broad customer base can overpower the disappointment from NVDA which caters to a niche market then we should be in good shape. The Nasdaq pulled back to its 50 dma last week and the rebound from that level has yet to catch fire. After four days we are still trading at the level reached on that initial rebound. The Nasdaq needs to at least hold its ground on Friday. We need to get above the 2080 level and notch another higher high to give traders confidence the rebound is going to stick. We may need a catalyst to push us higher but we are still in dip buying mode until something changes. Tomorrow is Friday the 13th and Monday is a holiday. The only economic report tomorrow that could move the market is the Consumer Sentiment. The consensus is 104.9, up from 103.8 in the last reading. As I reported last week there was an AP sentiment survey for late January that dropped substantially to 91.7 from 106.3. Should the Michigan Survey tomorrow show any significant drop traders might think twice before making big bets before the long weekend. Flights were cancelled again today for terrorist reasons so there is event risk to consider. Lest you think market historians have nothing left to compute you might be interested to know that on this Friday in 2003 the Dow showed the first gain in twelve years. Yes, after eleven straight years of declines the string was broken. Wonder what it is about President's Day that prompted the selling? Could it be they needed money for Valentines presents? Yes, guys, there is only one shopping day left until Valentines. Get off the couch and head for the mall. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Running the Clock Jonathan Levinson It was a quiet day for the indices with the US Dollar, the CRB and gold advancing, while equities and treasuries 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 added some green today as it continued its 24 hour+ drift higher. There was little apparent reaction to Greenspan's senate testimony, which was one of the most interesting discussions of the world's most pressing macroeconomic issues I've yet heard. Without the grandstanding and kowtowing that characterized much of the Congressional questions yesterday, a thoughtful, considered dialogue transpired. Once again, the headlines did a terrible job of transmitting the substance of the questions and answers, and it was well worth the time to listen to the exchange between the Senate and the Fed chairman. The Commodities Index, the CRB rose despite the admittedly corrective advance in the dollar, adding 1.59 to close at 264.65, let by natural gas, cotton and copper futures. Daily chart of April gold April gold was strong throughout the session, reaching a high of 414.60 and spending most of the day above 413. The daily cycle upphase strengthened as gold chipped away at 414's sellers. Bollinger resistance is just above at 417.60, which lines up with the confluence running to 420. Support is at 408, followed by 402. For the day, April gold added .70 to close at 413 on volume of 1,019 contracts, with a day low of 410.40. A late-day selloff took the miners to their lows, with XAU dropping 1.7% to close at 102.54 and HUI -1.39% to 235.37. Note that, after some discussion in the Futures Monitor today, I will be following silver futures throughout the day and reporting my observations there. If anyone would prefer to see coverage of silver instead of gold on an occasional basis (or not), just send me an email to jlevinson@OptionInvestor.com and let me know. Daily chart of the ten year note yield Bonds advanced in the morning and weakened in the afternoon, going out near their lows of the day. Ten year note yields (TNX) finished higher by 3.7 basis points at 4.058%, a .92% gain on the day. The 10 year treasury auction generated a bid to cover ratio of 2.0, low despite large participation from foreign central banks. Once again, today's rise in the TNX is counter to the ongoing oscillator downphase, but the intraday reversal left a bullish doji hammer for the daily print. This is a reversal candle, and printed a higher low over yesterday's wide range. Support at 4% remains firm, and if it fails to crack, we might be looking at an early end to the current yield downphase. Daily NQ candles The NQ declined .79% or 12 to close at 1500.50 today. It was a virtually inscrutable day, the equivalent of heavy fog, and our indicators worked perfectly in deciphering the chop. The 30 minute cycle downphase (see chart below) was juxtaposed with the daily cycle upphase still in progress, resulting in what felt like a corrective drift lower. There were no interesting selling climaxes, just a sideways down move that bored index traders into focusing on the TASR squeeze and the IMCL drama. The doji candle marked the second rejection below 1520 with an intraday high of 1517.50. Like today's print on the TNX, the NQ's move today looks like a countertrend correction, but a sustained move below 1492 support would change that. For the moment, resistance remains at 1418-1420, support at 1492, followed by 1480-82. 30 minute 20 day chart of the NQ The 30 minute NQ chart shows the surprising lack of follow through on the downphase we discussed last night. The bearish oscillator divergence delivered very little bang, and bulls have done an excellent job running the clock on bears hoping for an impulsive push through the daily cycle upphase support. It hasn't occurred, and a weak downphase is usually prelude to a strong upphase to follow. In this case, the cycle oscillator is still pointed south, but it's approaching oversold territory and doesn't usually trend. A followthrough push is expected tomorrow, but given today's lack of action, I'd be surprised if we even see 1492. Resistance is at 1508, 1512 and 1518. Daily ES candles ES fell 4 points or .35% to close at 1151.25. The very shallow pullback so close beneath the rally high looks impressively bullish. The small correction today respects the steep uptrend this week, and even with today's negative prints, the Macd gave us a confirming bullish cross. Note that this has not occurred on the NQ. If anything, the main problem with this picture is that it's too bullish, as evidenced by the put to call ratio, which stayed south of .50 for most of the day and finished at 54, showing an imbalance to the call side. It's always brightest before the dusk, and that (along with the possible double top forming below 1160) appears to be the only bearish thing I see on the daily ES chart. 20 day 30 minute chart of the ES As on the NQ, the 30 minute ES shows the bulls running the clock for the 30 minute cycle downphase. 1149 could coincide with the cycle bottom, and if so, the ensuing upphase will be in gear with the ongoing daily cycle upphase. The combination of synchronous short, 30 minute and daily cycle upphases bouncing from higher rising trendline support... you get the idea. Support below 1149 is 1146 and then 1143, while resistsance is above at 1158. 150-tick ES The lackluster action today has chopped up the 150-tick short cycle oscillators, with the short cycle (red) channel drifting aimlessly in the middle of the downsloping 30 minute (orange) channel. The oscillators are closer to a bottom than to a top on this timeframe, so I'm leaning toward a bounce, but on this timeframe it could break in either direction. I've left 2 days worth of data to illustrate the possibility of either a bear flag or a rough head and shoulders top forming. Daily YM candles YM dropped 16 points or .14% to close at 10687. It was the strongest of its peers, and looks the most impervious to gravity. 20 day 30 minute chart of the YM If the current 30 minute downphase here is not a bull flag, then it's an excellent distribution fakeout. Resistance is at 10740, support 10675. Today was mostly a throwaway day, with what appear to be corrective moves in the US Dollar Index, bonds and equities. A further extension of these moves tomorrow will indicate that more is at work, but for the moment, the cycle don't favor that outcome. The advance in gold and commodities alongside the US Dollar Index was rare, as was the decline in the CDN dollar against the US. I'm attributing much to the anomaly yet, but more of the same tomorrow will be more interesting. See you there. ************************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 ******************** Bulls lacked aggression While shares of Taser International (NASDAQ:TASR) $59.60 +19.91% surged as high as $67.75, bulls seemed less eager to bid stocks higher in today's trade, with the NASDAQ Composite (COMPX) 2,073.61 -0.76% giving back about 3/4 of yesterday's gains, while the stronger Dow Industrials ($INDU) 10,694.07 -0.4% gave back almost 1/2 of yesterday's advance. In my opinion, TASR's advance over the last two days from the $43.00 level, can be largely attributed to some very unkind bulls that have little stock to sell some very short bears, where when it looks like things might have calmed down for TASR's bullishness, it erupts like a volcano. However, there was little sign of aggressive buyers in the tech- heavy NASDAQ-100 Index (NDX.X) 1,501.34 -0.84%, and while Rambus (NASDAQ:RMBS) $24.35 -17.75 is not a component of the Semiconductor Index (SOX.X) 518.78 -1.52%, Noveluss Systems' (NASDAQ:NVLS) $34.12 +0.03%, and only SOX component to post a gain by today's close, didn't have the look of aggressive buyers being present either. Market Snapshot / Internals - 02/12/04 Close Market internals at the A/D line just never were able to get positive in today's trade, but bullish leadership was present at both the NYSE and NASDAQ NH/NL daily ratios. We can see from the hourly price changes for the major indices, that today's trade could be characterized as a "slow bleed" lower, and volume was rather consistent. It has me feeling, based on observation, that buyers just weren't very aggressive on the heels of yesterday's gains. While the QQQ did see some early session gains, and had be thinking that the "beta trade" might have been in play, it simply didn't pan out, and all be darned if the QQQ didn't close at $37.25, where little help was found from the Semiconductor Index (SOX.X) 518.78 -1.52%, which traded a session high of 530.48 after today's 10:00 release of December business inventories, which rose 0.3% and matched economists' forecast. Pivot Analysis Matrix I profiled a day trade in the QQQ today at $37.42 (just below its monthly pivot, but above some intra-day resistance) when it looked as if the QQQ might make a recovery from its then session lows of $37.31, as the Semiconductor Index (SOX.X) had been sitting on today's (Thursday's) DAILY S1, and had started to rise from that level. Evidently I had an old downside alert set on ImClone Systems (NASDAQ:IMCL) at $33.99 and it was about 12-minutes after QQQ bullish entry that this downside alert went off, the QQQ reversed from $37.45, fell to $37.30 (stopped me out at $37.31), then IMCL was halted for news pending, the QQQ bounced back to a high of $37.48 when it was learned that IMCL received FDA approval for its Erbitux drug, thing's calmed down, and the QQQ closed out at its lows of the day. That was today's "excitement" if we want to call it that, and through it all, buyers didn't show much sign of aggressiveness in today's trade. Semiconductor Index (SOX.X) Chart - 5-point box I wanted to take a quick look at the Semiconductor Index (SOX.X) on a 5-point box size point and figure chart, with MONTHLY levels overlaid. I make note that Dorsey Wright & Associates' Semiconductor Bullish % (BPSEMI) recent turned back into "bear confirmed" status from "bear correction" status. It was in early December (red C) that this sector bullish % first turned "bear confirmed" status, and while the recent rebound from 495 (just above MONTHLY S1) has been welcomed by bulls, the above supply demand chart does give focus that the 490 level is an important near-term level of support. I would have to describe the SOX as a sector to be viewing as rather "defensive" right now, where this rebound is most likely going to find sellers, where only aggressive buying, or bulls with some serious conviction, are going to be able to drive the sector higher. This is a statement of the obvious, that only aggressive buyers, or bulls with conviction that higher prices still exist would be buyers, but current levels of trade is where we might also expect some technical selling. Here's a bar chart I've done some rather basic work on, with retracement as well as a regression channel from the March lows. I knew I showed a chart of the SOX in a prior Index Trader wrap, and now I'm focused! It was on 01/27/04, in that wrap that we looked at the SPX chart. Boom! The light goes on for tomorrow as it relates to that wrap http://members.OptionInvestor.com/Itrader/marketwrap/iw_012704_1.ASP tomorrows DAILY S1, and the following chart. Remember... SOX 514! Semiconductor Index (SOX.X) Chart - Daily Intervals I give great attention to the SOX in tonight's wrap, as it is a key technology sector, with some very good levels away from the major indices for us to monitor and not until tonight does my attention get drawn to 514, which becomes a level that has shown up in the past. While I'm not a big fan of MACD, I think it serves a very good test with 514 in mind and the SOX back within its BULLISH regression channel. Remember, MACD is an oscillator that works better when TREND is observed. Some of the best shorts, or declines I've seen is when MACD falls below zero like it has in the SOX, then rolls over from there, where PRICE ACTION can impact the MACD Oscillator. If looking at the SOX chart, that rollover might occur with a break below 514. See how the MACD histogram bars have now recovered back to zero? I feel the next couple of sessions could be important for the SOX, the QQQ, and perhaps the other major indices. Now... some of the hesitancy I feel in the markets today, or lack of aggressive buying, might also be represented in the above SOX chart. As a technician, the bullish side of me would want to WAIT until the potential right shoulder of a head/should top pattern was broken to the upside before acting more bullish. I would ONLY be a buyer of the SOX if I (Jeff Bailey) knew for sure that there was some type of great bullish catalyst about to be presented in coming days or weeks. As such, the bullish side of me would be HESITANT to buy the SOX right here. Now, I'd become more bearish the SOX, if I saw weakness below 514, but I'd be willing to bet, there are quite a few bears shorting the SOX right now, as their risk to the upside can be protected with a stop just above the 535 level. I think I would also carry this "I would only be more bullish," or "I would only be more bearish" type of thinking with the other major indices, but using the SOX as a good sector to be monitoring very closely near-term. Try to put yourself in the shoes of a BULL and a BEAR in the SOX right now. I get the feeling that traders are going to want to at least get another test of the 514 level, to see what type of buying (bullish buying and short covering from bears that might feel they've been trapped below). Almost like placing your hand on the burner of the stove, to see just how hot is really is. C'mon... you've done it before! Even thought the stove burner wasn't red, you placed your hand on it to see if it was turned on or not. Laughing.... I tried to iron out a wet spot on my dress shirt one time, with my shirt still on. I knew the iron was hot, but good gravy I didn't know it was that hot! The same think to the upside may have taken place this morning at SOX 530, where the temperature of buyers and sellers was taken. Obviously that level is hot for resistance right now, and sellers may be formidable. S&P 500 Index (SPX.X) Chart - Daily Intervals To say that the SOX could single-handedly pull the broader SPX lower would be a mistake, but other than profit taking, there would have been NOTHING technically, like found in the SOX, to really explain today's selling. I would try and associate SOX 514 with SPX 1,148.00 to use round numbers. While SOX 514 appears to me an important level of support, the SPX MONTHLY support level, after the SPX slipped back below its MONTHLY R1, would be back lower at 1,142.40. My thinking here is if the SPX is headed to 1,142.40, then the SOX isn't going to have held 415. NASDAQ-100 Index (NDX.X) Chart - Daily Intervals I'm showing the NDX, not the QQQ tonight only because the NDX is trading much cleaner, or accurate if you will, relative to the pivot levels. While the QQQ traded 7-cents above its WEEKLY R1 today, the NDX didn't challenge didn't trade its WEEKLY R1, and would have provided a cleaner trade. I've made some SOX and NDX observations, as it relates to SOX 415, but also not MACD on the NDX, and understand implications of SOX trade near-term. 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 **************** Investors Take A Breath - J. Brown After holding their breath Monday and Tuesday in anticipation of Alan's appearance before congress investors may have let it all out at once during Wednesday's big rally. Today's action looks like everyone just took a moment to catch their breath while listening to Greenspan's second Q&A session with the senate. The economic data today was not inspiring but we'll get to hear more tomorrow. Before the open will be the import/export prices report and the trade balance numbers. After the bell the markets will hear from the Michigan consumer sentiment report. Currently economists are estimating a small drop from 103.8 last month to 103.3. Yet the real catalyst may be Dell's earnings that came out tonight. The EPS number beat by a penny while revenues matched the estimates at $11.51 billion for the quarter. That alone is not impressive and one would normally expect profit taking on this news. However, we all know that investors have selective hearing and they might key in on Dell's comments about corporate demand picking up and their expectation for steady growth in tech spending this year. Unfortunately, they countered this positive outlook by only guiding in-line with current estimates. Maybe they anticipated a negative reaction and in an attempt to keep their stock price up Dell announced a $100 million stock buy back program for the first quarter and another $100 million for each quarter in FY05 for a total of $600 million. Maybe it will work but I think investors may have been happier if DELL had just instituted a dividend instead. How investors interpret this report will influence direction for tech stocks tomorrow. Market internals turned negative by the closing bell on Thursday as declining stocks outpaced advancers 16 to 12 on the NYSE and 18 to 12 on the NASDAQ. Down volume also outnumbered up volume with the selling much heavier on the NASDAQ. Keep an eye on the Dow Transports (TRAN). This sector has rallied strongly from its early February low but has stalled right at resistance in the form of its 50-dma. Bulls were able to drive the biotech index to another high today but gains faded by the close. Its cousin the DRG drug index started the day in the red and remained there but still managed to close above its simple 10-dma. Energy stocks are still showing strength with the OSX oil services index and the XNG natural gas index stretching their winning streak to five days in a row. The OIX has also been strong but is currently under six-week resistance at the 330 level. Right now the market leaders are the DFI defense index and the IUX insurance index, both hitting new highs with a strong trend behind them. The RLX retail index isn't far behind after its recent bullish breakout. Garnering an honorable mention are the airlines and homebuilders. The XAL has rebounded from its February low and closed above its 50-dma today. A number of airlines are starting to slash prices to drive up spring traffic. Meanwhile the homebuilders have been making headway now that Wall Street believes the fed will be patient before raising rates again. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10746 52-week Low : 7416 Current : 10694 Moving Averages: (Simple) 10-dma: 10567 50-dma: 10376 200-dma: 9566 S&P 500 ($SPX) 52-week High: 1158 52-week Low : 788 Current : 1152 Moving Averages: (Simple) 10-dma: 1139 50-dma: 1112 200-dma: 1029 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 795 Current : 1501 Moving Averages: (Simple) 10-dma: 1490 50-dma: 1475 200-dma: 1339 ----------------------------------------------------------------- The volatility indices are little help today. The VIX and VXO closed almost unchanged despite their earlier highs this morning and the VXN did close unchanged. CBOE Market Volatility Index (VIX) = 15.31 -0.08 CBOE Mkt Volatility old VIX (VXO) = 14.90 +0.02 Nasdaq Volatility Index (VXN) = 26.53 +0.00 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.56 916,360 508,743 Equity Only 0.43 820,594 354,644 OEX 1.83 18,758 34,382 QQQ 1.35 40,042 53,905 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 77.0 + 1 Bull Confirmed NASDAQ-100 69.0 - 1 Bear Alert Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 88.0 + 1 Bull Confirmed S&P 100 89.0 + 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: 0.92 10-dma: 0.96 21-dma: 0.97 55-dma: 0.98 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 1192 1175 Decliners 1643 1864 New Highs 347 226 New Lows 10 3 Up Volume 830M 691M Down Vol. 983M 1068M Total Vol. 1833M 1848M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 02/03/04 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 Commercial traders can't seem to make up their mind. Currently, they're almost flat with a slight edge to the bears. Meanwhile the small traders have grown even less bearish. Commercials Long Short Net % Of OI 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% 02/03/04 411,920 414,596 (2,676) (0.3%) 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 01/13/04 149,057 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% 02/03/04 141,465 81,926 59,539 26.7% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Commercials have become significantly more bearish by upping their short positions and closing some bullish ones. Small traders are still feeling optimistic. Commercials Long Short Net % Of OI 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%) 02/03/04 280,519 346,042 (65,523) (10.5%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 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% 02/03/04 133,293 55,476 77,817 41.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders in the NDX remain in limbo with very little movement over the last few weeks. In contrast small traders have become much more bearish. Commercials Long Short Net % of OI 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% 02/03/04 43,600 41,441 2,159 2.5% 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 01/13/04 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%) 02/03/04 8,907 13,729 (4,822) (21.3%) 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 The shuffling continues for commercial traders in the Dow. Small traders have become more bearish. Commercials Long Short Net % of OI 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% 02/03/04 17,765 9,619 8,146 29.7% 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 01/13/04 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%) 02/03/04 6,352 13,113 (6,761) (34.7%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Thursday 02-12-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: IMDC Dropped Puts: EASI Call Play Updates: AHC, APOL, ABK, CDWC, DHR, DHI, ESRX, GD, IBM, PD, TEVA New Calls Plays: ATH Put Play Updates: AVID New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Inamed Corp - IMDC - close: 49.96 chg: -1.01 stop: 48.00 That's it! The slow bleed lower for IMDC has finally crossed the $50.00 mark on a closing basis and we're going to cut our losses now. The MACD indicator is rolling over and the stock looks set on a retest of the 50-dma as support (currently 48.75) if not the $48.00 level. IMDC does have earnings expected on Feb. 24th but there doesn't appear to be much pre-earnings excitement. Picked on February 01 at $51.54 Change since picked: - 1.58 Earnings Date 02/24/04 (unconfirmed) Average Daily Volume: 682 thousand Chart = PUTS: ***** Eng. Support Sys. - EASI - close: 50.66 change: +1.17 stop: 50.00 Bringing this frustrating play to an end this morning, EASI pushed through our $50 stop and put us out of our misery. In hindsight, we can see the stock gave us one quick opportunity for profit when it dropped to just below $46, but last Friday's broad market rebound lifted the stock off its lows and it has been steadily upwards ever since. As expected, the $48-49 area did provide some resistance on the return trip, but in the end, the bulls won. Clearly EASI is a drop tonight as a failed play. Picked on February 1st at $50.00 Change since picked: -0.66 Earnings Date 3/09/04 (unconfirmed) Average Daily Volume = 396 K Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amerada Hess Corp. - AHC - cls: 60.62 chng: +0.13 stop: 57.00*new* Without even pausing for breath, AHC continued its breakout yesterday, vaulting through the $60 level and ending very near its high of the day. Flexing its muscles again today, the stock actually managed to post a fractional gain, in spite of the mild profit taking across much of the broad market. Of course, it didn't hurt that the Oil Services sector (OSX.X) finished with a solid 1.1% gain on the day, which was probably helped by the strength in Crude Oil prices, once again holding over the $34 level. The continued strength in AHC after Tuesday's breakout is very encouraging and shows that the breakout is for real. A pullback into the $58-59 area would make a gift of an entry point. While there's some potential resistance in the $61-62 area, it doesn't look like AHC should encounter strong resistance until reaching the $65 level. That means it should still be safe to enter the play on a breakout over today's high. Note that our stop has been raised to $57 tonight, which is just below 20-dma ($57.66) support. Picked on February 10th at $59.53 Change since picked: +1.09 Earnings Date 1/28/04 (confirmed) Average Daily Volume = 1.06 mln Chart = --- Apollo Group - APOL - close: 78.46 change: -0.30 stop: 73.50 Yesterday's strong market rally gave APOL the boost it needed to push into a slightly higher orbit, breaking out over the $78 level and despite the weakness today, the stock managed to hold onto the lion's share of those gains. While the stock does look extended here and in need of a bit of consolidation, each time it gives that appearance, it seems to push just a bit higher. Look for a pullback into the $75-76 area to provide a solid entry point, especially with the 20-dma ($74.90) rising to reinforce the bottom of that support zone. Aggressive traders can enter on breakouts to new highs, but need to beware of the potential for a profit taking pullback. We'll maintain our stop at $73.50, which is just under the 30-dma ($73.64). Picked on February 1st at $77.44 Change since picked: +1.02 Earnings Date 12/18/03 (confirmed) Average Daily Volume = 1.76 mln Chart = --- Ambac Financial Group - ABK - close: 76.35 chg: -0.16 stop: 71.99 We're starting to lose patience with ABK. The IUX insurance index has been setting new highs almost daily and we keep waiting for ABK to play catch up. Unfortunately, ABK has been stuck in a sideways consolidation above the $76.00 level. As suggested earlier a bounce from $75 still looks buyable but conservative traders may want to wait for ABK to trade above The $77.50 mark. In the news ABK's CEO will be presenting at the Merrill Lynch Global Insurance Investor Conference on February 24th in New York. Picked on February 1 at $74.77 Change since picked: + 1.58 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 476 thousand Chart = --- CDW Corp. - CDWC - close: 68.61 change: +0.11 stop: 64.00 We're still waiting for CDWC to give us the go ahead to enter this pending bullish play. Recall that we need to see a trade above resistance at $70.25 in order to consider an entry. It was really puzzling yesterday to see the broad market rally, and yet CDWC unable to capitalize on it. The stock has spent the past two days in a tight consolidation pattern, simply continuing the consolidation patter that began in the middle of January. Wait for the breakout before playing and then enter either on the breakout or a subsequent pullback to $68-69 support, depending on your trading style. Picked on February 8th at $69.13 Change since picked: -0.52 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.37 mln Chart = --- Danaher Corp - DHR - close: 94.33 cls: -0.15 stop: 89.50 DHR still appears to be coiling for its next move higher above resistance at $95.00-95.50. The stock dipped toward the $92.50 level on Tuesday offering a new entry point but DHR just didn't have enough gas to get back over the $95 level, which is a surprise considering the market-wide rally on Wednesday. Looking at its chart you'll notice that volume has dropped off the last few sessions as shares churn relatively sideways, which is what you'd want to see during a consolidation. No new headlines and no change to our stop. Picked on January 30 at $91.01 Change since picked: + 3.32 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand Chart = --- D.R.Horton - DHI - close: 30.79 chg: +0.24 stop: 27.99 The good news is that the DJUSHB homebuilders index appears to have broken out of its recent consolidation and is heading back towards its December highs. Fortunately, DHI is leading the way with new highs of its own. The recent move to $31 extended its bullish breakout on its P&F chart, which suggests a $44 price target. Traders following DHI may want to consider new positions here since the stock hasn't gotten away from us or continue to look for dips toward the $30.00 level. No change in our stop. Picked on February 08 at $30.00 Change since picked: + 0.79 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 2.4 million Chart = --- Express Scripts - ESRX - cls: 69.14 chng: +0.23 stop: 67.00*new* As boring as ESRX has been over the past few weeks, it looks like something constructive is finally taking place. The stock has been chopping up and down between the $68 support and $71 resistance levels and support has been staunchly defended. The bears have been unable to achieve either an intraday dip below $68 or a close below the 20-dma ($69.14). That speaks of hidden strength and with the daily Stochastics oscillator just starting to hook upwards in bullish fashion, it looks like the next leg of the upward trend may be ready to kick off. As we've discussed on numerous occasions, the best entries into this play will likely come on a rebound from support, either an intraday dip and rebound from above $68, or another successful close over the 20- dma. Once through $71, look for a bit more resistance near $72 before continuing up towards the all-time highs near $75. ESRX has held above support so well that it seems prudent to tighten our stop to just below that support. Raise stops to $67. Picked on January 13th at $68.32 Change since picked: +0.82 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 996 K Chart = --- General Dynamics - GD - close: 96.22 chg: +0.35 stop: 92.00 This looks like our next entry point for calls on GD. The stock has spent the last few sessions slowly drifting lower. The lows yesterday touched the $94.50 region, which had been previous resistance, and GD quickly bounced. The intraday chart shows a nice trend of higher lows during the last session and a half. It's now time for GD to get back to being the leader for the rising DFI defense index. Picked on February 08 at $96.88 Change since picked: - 0.66 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Int'l Bus. Machines - IBM - close: 99.30 change: -0.66 stop: 96.50 What's wrong with Big Blue? It's almost as though there's an electric fence at $100 and each time the stock touches that level, it gets hit by a fresh wave of selling. IBM inched over the century mark again this morning, but got knocked back to close at its low of the day. It was a bit surprising that the stock couldn't manage a breakout to new recent highs yesterday with the strong rally in Blue Chip stocks. On the positive side, IBM continues to build a pattern of higher lows and is finding good support at its 10-dma ($99.11). Continue using dips in the $98 area to open new positions or else wait for a strong breakout over the $100.50 level. Maintain stops at $96.50. Picked on February 1st at $99.23 Change since picked: +0.07 Earnings Date 4/15/04 (unconfirmed) Average Daily Volume = 5.52 mln Chart = --- Phelps Dodge - PD - close: 84.25 chg: +0.21 stop: 78.00 Another rise in the price of copper to $1.24/lb sent shares of PD soaring on Wednesday with a 5% gain. PD quickly traded through our TRIGGER at $80.51 and opened the play for us. In last night's newsletter we raised the stop loss from $75.99 to $78.00. The rally continued today with a run to $86.51 before traders began to take some money off the table. Shares closed almost flat on the session, which paints an ugly candle on its daily chart. All the technical indicators are bullish but be prepared for potential profit taking tomorrow. Those traders who missed the trigger entry point can be looking for a dip. PD did have some good news today as Moody's Investors Service upgrade Phelps credit outlook from negative to stable. You'll also notice a few articles regarding PD executives selling shares or cashing in options. The last time anyone on PD's management team sold stock was back in 1999. More recently PD's management sold quite a bit of stock (or exercised options and sold stock) in the last couple of months. This news came out last week so it obviously didn't have an affect on the stock price. Fortunately for PD analysts are now expecting the price of copper to stay above the $1.00 level for quite some time and this should be a driving force in its stock price. Picked on February 11 at $80.51 Change since picked: + 3.74 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 1.6 million Chart = --- Teva Pharma. - TEVA - cls: 65.96 chng: -0.17 stop: 63.00*new* That $66 resistance sure has been a pesky barrier to deal with over the past few days, but yesterday's close above it and today's close just a few pennies below, certainly hints that this resistance is weakening. And not a moment too soon either, as the clock is ticking. TEVA is set to report earnings on February 17th, which is next Tuesday. That means we really should be putting greater focus on when and where to exit, rather than contemplating new positions. TEVA has been a nice play because it has gone in the right direction. Unfortunately it hasn't done so quickly enough and we have to think about getting out ahead of earnings. A breakout over $66 should be able to garner some follow-through, and we'd suggest selling into strength above that level. Due to the proximity of earnings, let's get more aggressive with our stop tonight and raise it to $63, which will be below the 20-dma ($62.74) by tomorrow. Picked on February 3rd at $64.66 Change since picked: +1.30 Earnings Date 2/17/04 (confirmed) Average Daily Volume = 2.62 mln Chart = ************** NEW CALL PLAYS ************** Anthem, Inc. - ATH - close: 84.53 change: +1.68 stop: 81.00 Company Description: Anthem is a health benefits company serving over 7 million members, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names in these states under license agreements with the Blue Cross Blue Shield Association. ATH's product portfolio includes a diversified mix of managed care products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company's managed care plans and products are designed to encourage providers and members to select cost-effective healthcare by utilizing the full range of its medical management services. Why we like it: Since early November, shares of ATH have had quite a run, tacking on nearly $20 in gains from the bounce off of support just below $65. Normally, we'd say the stock looks a bit extended and in need of a pullback, but ATH seems to be different. It tends to settle into a bullish trend and even after moving to new highs, just keeps on going until it runs out of gas. The previous rally in the first half of last year saw the stock vault higher by nearly $8 after first pushing through to new all-time highs. In early February, ATH broke out above the $83 resistance level and has been consolidating that breakout for nearly two weeks now. If ATH can break out above the $85 level, we're expecting a move to at least $90 and possibly even a bit higher. But we'll cross that bridge when we get to it. After generating a fresh PnF Buy signal in early January when it broke through $77, ATH just powered straight up and the tentative vertical count off of that column of X (which is still growing) is a whopping $107! Clearly we won't be shooting that high during this play, but it's nice to know there's room to run. We want ATH to prove itself to us a bit more before playing though, so we're setting our entry trigger at $85. Entries on the initial breakout look good, as that will have the stock at new all-time highs. But more cautious traders can certainly opt to wait for a pullback before playing. Note how the stock has continually found strong support near the 10-dma ($82.87) throughout the rally of the past month, so dips back to that average following the first touch of our trigger look like viable entries. We won't rule out a more significant dip though, because the stock is up pretty strongly over the past month. A deeper pullback should find strong support at the 20-dma ($81.18) so we're placing our stop initially at $81. Suggested Options: Shorter Term: The February $85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. But with February expiration next Friday, the better choice appears to be the March $85 call Longer Term: Aggressive longer-term traders can use the March $90 Call, while traders looking for more insulation against time decay will want to use the June $90 strike. Our preferred option is the March $85 strike, which is at the money and should provide sufficient time for the play to move in our favor. ! Alert - February options expire next week! BUY CALL FEB-85 ATH-BQ OI=1584 at $1.05 SL=0.50 BUY CALL MAR-85*ATH-CQ OI=3088 at $2.70 SL=1.30 BUY CALL MAR-90 ATH-CR OI=1431 at $0.90 SL=0.40 BUY CALL JUN-90 ATH-FR OI= 118 at $2.85 SL=1.40 Annotated Chart of ATH: Picked on February 12th at $84.53 Change since picked: +0.00 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.54 mln Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Avid Technology - AVID - close: 41.48 chg: -0.77 stop: 45.50*new* So far so good. Considering the bullish trend in the averages the last few days and the big rally yesterday we're content to see AVID slowly making new lows. Shares failed under its descending 10-dma yesterday and dropped toward the $41 region this morning. We did mention in the original write up that the $40 level could be round-number support but our first target is closer to the $38 area. We're going to lower our stop loss to $45.50, right at its 200-dma. Picked on February 04 at $42.87 Change since picked: - 1.39 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 612 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 02-12-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: All Traded on the NYSE Traders Corner: We Worked Hard To Earn It – Let’s Keep It Traders Corner: Three Line Price Break. ********** WATCH LIST ********** All Traded on the NYSE ___________________________________________________________________ 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. ___________________________________________________________________ Guidant Corp - GDT - close: 62.69 change: +0.21 WHAT TO WATCH: GDT gapped down a couple of points on Jan. 29th after rival Medtronic (MDT) announced that its current quarter's revenues would be lower than previously guided. Sounds like competition is heating up and GDT is taking some market share from MDT. That's probably why GDT found support at the $60.00 level and is now starting to rebound. Aggressive bulls could see the recent bounce as an entry point with a stop loss under $60.00. More conservative types may want to see GDT break back above its gap (now resistance) from late January near the 65.30 level. Chart= --- Quest Diagnostic - DGX - close: 83.12 change: -2.11 WHAT TO WATCH: DGX has turned in a stellar 2004 thus far. The stock rallied higher in anticipation of its late January earnings and the company beat by 3 cents. Furthermore, DGX guided higher and the stock gapped up the next session and ran toward the $86 level. Unfortunately, it has spent the last 2 1/2 weeks consolidating under the $86 level and today's weakness may forecast a deeper correction to come. Its MACD indicator has produced a bearish sell signal from very overbought while its other technical oscillators are already turning lower. Volume was stronger than normal on today's decline although DGX did bounce from the $82 level. The challenge for bears is that the top of the gap near $81 should be support on top of potential support at the round-number $80 level. Chart= --- AutoZone - AZO - close: 90.39 change: -0.86 WHAT TO WATCH: Bulls and Bears may want to keep an eye on AZO. Several days ago the auto parts retailer broke out from a multi- week consolidation and burst through technical resistance at its 50-dma and 200-dma and the $86.50 level. Now the stock has filled its mid-December gap down and paused right under the top of the gap (in this case resistance). Will the rally continue above the $90 level? Now that the gap is filled will it roll over? Or will it merely retrace some of its recent gains and attempt another leg higher? P&F chart readers will note that the turn around has already produced a new buy signal with a price objective near $108. However, there is P&F resistance near $96, which coincides with price resistance on its daily chart. Chart= --- Bard C. R. Inc - BCR - close: 94.31 change: +0.77 WHAT TO WATCH: Investors are still bullish on Bard. The stock had a strong January running from $80 to $90 in anticipation of its earnings report. The company beat the street on earnings and revenues although net income dropped substantially on a previously announced court verdict that cost BCR $35.5 million. Post-earnings the stock rallied again but ran into resistance at the $95.50 level. After two weeks of sideways consolidation, quite a feat given its impressive January gains, BCR looks ready to breakout and make a run for the $100 mark. Be sure to use a good stop loss! Chart= --- Ingersoll-Rand Ltd - IR - close: 67.00 change: -0.57 WHAT TO WATCH: Bulls will want to keep an eye on IR. The stock recently bounced from its long-term rising trendline (on the recent low at $64) and has now reclaimed its 50-dma. Its technical oscillators are turning bullish and Greenspan's comments yesterday should ease investor concerns over cyclical stocks like this one. Consider a move over $68.00 as a potential entry point for bullish positions. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- STJ $75.70 +0.67 - We mentioned GDT above and its bounce from support. STJ, a rival of both GDT and MDT, has seen nothing but gains after its recent earnings report. With its new EPIC line of heart devices due out in May traders might want to be thinking about their next entry point. DF $34.40 +1.30 - The 3.9% gain in Dean Foods is also a bullish breakout over resistance in the 33.50 region and a new all-time high. TTC $51.42 +3.74 - Toro Co., the lawn-care equipment maker, soared after issuing a profit warning. TTC now expects Q1 earnings in the 34-36 range, well above previous guidance at 15- 20 cents. This is a new all-time high for TTC. ************************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 ************** We Worked Hard To Earn It – Let’s Keep It By Mike Parnos, Investing With Attitude Here are a few more answers to commonly asked tax questions. It’s tough enough to make money trading. That’s why I’m devoting this space to helping you keep it in your pocket. This will be the last of the tax related columns. I hope you’re benefiting from the information. If you have further questions, direct them to your own tax preparer or the folks at TradersAccounting.com. You might want to print out the last three Thursday tax-related columns and give them to your tax preparer. They may already know everything we have covered, but, then again – they may NOT. It’s like chicken soup. It can’t hurt. They shouldn’t be offended. If they are, well, they’ll get over it. If they don’t get over it, well, there are a LOT of tax preparers out there. _____________________________________________________________ QUESTION: Are there any tax advantages to trading in a LLC above what I am doing now as a mark to market Trader in Securities, who already can deduct business expenses and such? ANSWER: The main advantage is the certainty of being able to deduct your expenses. The Trader in Securities designation, while sounding very official, is completely absent from the IRS code, and is roughly based upon tax court cases. Our concern is that courts could easily lay down a new ruling, and completely wipe out your Trader in Securities filing status. You could be trading all year, assuming that you would be classified a Trader in Securities, only to find the law changed in November and you being unable to deduct your expenses. With that in mind and also the asset protection an LLC will give you, it is much safer to trade in the entity. Moreover, if you have more than one member in the LLC, then the LLC is taxed as a partnership, resulting in a lower audit rate. QUESTION: Do "traders" have to pay Social Security and Medicare taxes? And do they lose long-term capital gains rates? ANSWER: If you file as a trader you do not pay the employment taxes mentioned. It is still considered unearned income. One problem with trader status is that you lose long-term capital gain rates on the stock that is bought and sold as a trader. An easy solution is to set up a separate account for your long-term portfolio. Be sure that it is a completely separate account from the short-term account, perhaps even with a different brokerage firm. QUESTION: I am a day trader and do not have a job besides trading. If short-term capital gains are taxed at the ordinary income level and I have no ordinary income, what would the tax rate be on my short-term capital gains? I am also wondering if short-term capital gains are added to ordinary income that could push my tax- rate higher? ANSWER: While capital gains seem to be taxed differently (and in the case of futures and long term holdings they are), they all add to the total of your income. To figure out your income tax rate you would use the total of all income received during the year, including your trading. QUESTION: What kind of retirement funding alternatives are available to the independent trader? ANSWER: Everyone who is in the business of trading has the ability to have their business sponsor and form a 401(k) for their business. The benefits are wonderful in each of two different scenarios: 1. Let's say you are trading, or beginning to trade and have a 401(k) or 403(b) from a previous employer, or you have rolled one into an IRA, or you have a self funded IRA. You probably don't know this, but you have the ability to set up your own 401(k) and transfer all of your funds into it. This would make you a Trustee of your own plan at this point, giving you the freedom to make any "prudent" investment. What this means to a trader is that you can make your own investment decisions for your retirement funds, rather than leaving your money with professional money managers who are cutting your capital in half, effectively making your 401(k)s into 201(k)s! In addition to the wonderful benefit of being able to control all of your retirement investment decisions, you can borrow up to $50,000 from it to augment your own personal trading account. 2. The second type of funding has to do with secondary tax strategies in your Tax Efficient Trading Plan. In the years that you make money trading, when you need a powerful vehicle to lower your taxes, you and your business can contribute up to $40,000 to your 401(k)! Not only is this contribution an expense to the business, and lowers your taxable income, it is not income to you until you retire, and have reaped the benefits of years of compounded growth. QUESTION: How do you elect mark to market accounting? ANSWER: First, you must be considered a trader by definition, as the mark to market accounting election isn’t available to investors. You also need to be proactive, and decide ahead of time what you want. To make the election for the current tax year, you must file a statement with your tax return for the previous year. That means by April 15th. If you miss your deadline, you can’t elect mark to market accounting until the next year, unless you establish a legal entity. Then, you’ll have two months from opening to notate in your meeting minutes that mark to market accounting is your accounting method of choice. Once you’ve properly elected mark to market accounting, fill out Form 3115, an Application for Change in Accounting Methods, and submit it when you file your current years tax return. Within Form 3115, you’ll find a Section 481(a) adjustment, which is a dollar amount based on your change in accounting methods. When you make the MTM election, you’ll adjust the securities to market value at the beginning of the year. The difference between last years ending balances, which were recorded at cost, and the fair market value at election, is your 481(a) adjustment. If the adjustment is less than $25,000, you may deduct the full amount on your tax return. If it’s greater than $25,000, deduct one-fourth of the value each year for the next four years. Please note -- if you elected the mark-to-market accounting method on your legal entity's first tax return, a 3115 is not required. QUESTION: When mark to market accounting is used by an LLC and the net income is determined, how is that reported by the individual members if reporting as a partnership? ANSWER: The mark to market election in the LLC will allow all income to be reported as net income or net loss, which will then flow through to each of the partners via the K1 that is part of the LLC tax return. ______________________________________________________________ Don’t Take Chances When you have your taxes prepared, make sure the preparer has the knowledge and background to deal with the tax laws applying to full and/or part time traders. As in the two previous tax Q&A columns, the above answers were provided by the folks at TradersAccounting.com. They’re a good resource and offer a variety of services. ______________________________________________________________ FEBRUARY CPTI POSITIONS Position #1 -- OEX – Credit Spread Boogie – 569.43 With the market trending, let's not fight the tape. We're going to establish a bull put spread, take in some premium, and ride the wave into shore. We sold 3 OEX February 565 puts, and bought 3 OEX February 540 puts for a total credit of $6.80 (x 3 contracts = $2,040). This strategy requires $25 x 3 contracts = $7,500. We're only trading three contracts because, if the market reverses significantly, it might become necessary to close the bull put spread and establish a bear call spread that may be wider and would require more contracts. We need to preserve our money for a potential maintenance requirement. Position #2 – MNX (mini NDX index) – Iron Condor – 150.13 This index seems substantially safer than the highly volatile NDX. We going 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. The market turned down and that “skew” might come back to bit us in the ass, but the market popped up off the 50-day MA. We sold 10 MNX February 165 calls and bought 10 MNX February 170 calls for a net credit of $.40 x 10 contracts = $400. Then we sold 20 MNX February 150 puts and bought 20 MNX February 147.50 puts for a net credit of $.50 x 20 contracts = $1,000. Our total credit of $1,400. Our maximum profit range is 150 to 165. Our exposure is only $3,600 ($5,000 less $1,400). Maximum profit: $1,400. Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $102.54 This is a low risk and relatively safe play with a wide range. 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) - $106.33 We reduced 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. OSX has violated our short $105 call. The bear call spread could be closed for $2.20 – resulting in a loss of $1.00 ($1,000). For our CPTI portfolio, I’m going to hang on for a little while longer and give the OSX a chance to come back down. If anyone is actually in the trade, it might be wiser to take your loss at this point. Remember, the CPTI portfolio is playing with “hypothetical” dollars. _____________________________________________________________ ONGOING POSITION QQQ ITM Strangle – Ongoing Long Term -- $37.25 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. QQQ Adjustment MARCH QQQ ROLLOUT: We’re going to buy back the Feb. $36 put for $.10 (or less) and roll out to the March $37 put at $.90 – taking in an $.80 credit (or more). We’re not going to roll out the Feb. $34 call just yet. We’re going to look for an interday dip in the QQQs to buy back the Feb. $34 calls and then wait to sell the March calls as the market rebounds – all this is IF the market provides us with the opportunity. ___________________________________________________________ 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. ************** TRADERS CORNER ************** Three Line Price Break. I have used many different techniques in my trading looking for the one that would give me an edge over other traders and an insight into supply and demand. Point and figure charts help a lot with this but there is another technique that I have used that is quite intriguing. It is called Three Line Price Break (3LPB), a more subtle form of point and figure where bullish and bearish reversals are decided by price movement and less by arbitrary rules as in PnF. Its name is derived from the fact that today's price must exceed the low of the three successive white lines, or the high of the three consecutive black lines, to get a reversal. Like PnF, 3LPB uses the number three to reverse a trend but differs in two other very important ways. PnF uses the highs and lows of a candle but 3LPF uses only the close. Another difference is that PnF uses "Xs" and "Os" but 3LPB uses black and white boxes called lines. If a rally or a selloff is strong enough to draw three black or white lines then the high or the low of these lines has to break before the trend changes. The term 3 LPB has to "break" three lines of one color before an opposite color is drawn and the trend changes. Although many charting systems have 3LPB, I have always used graph paper and plotted it myself. It is amazing how much of a feel you get for the technique once you take on this task. 3LPB looks like a series of boxes with only one box per column. Each box is called a line. A white box is called a white line and a black box is called a black line. A new white line is added if the previous high is exceeded or a new black line added if the previous low is exceeded. You can use this technique on any timeframe but since I use the 5-minute for daytrading I will be speaking to the 5-minute chart. Ok here are the rules: 1. Starting off, I will take a piece of 8*10 graph paper and using it sideways, place a mark 1/2 down the page. This is the open price and the only time you use anything other than the close of the candle because you have to start somewhere. 2. If the close of first 5-minute candle is below the open you shift over one column on the graph paper and draw a black line (box) one row down. If the close of the first 5-minute candle is above the open you shift over one column on the graph paper and draw a white line (box) one row up. 3. Only if a candle closes at a new high or low do you shift one column and draw either a black or white line. 4. Once three lines of the same color are drawn you count down or up three lines to determine when the next opposite color line will be drawn. The best way to explain this technique is with an example. Here is a chart of Monday February 10th 5 minute S&P e-mini. Most charting services that chart 3LPB draw the boxes to scale but I don't so I need to print the price on each line. I have put the numbers of each comment below on the charts so you can follow the comments with the charts. Here is the 3LPB chart for the above 5-minute chart of the S&P e- mini for February 10th. 1. Open was 1138.25, a white line is drawn if this candle closes above 1138.25 or a black line drawn if this candle closes below 1138.25. 2. The close of the first 5-minute candle is 1138 so shift over one column and draw a black line. Now a white line is drawn with a close above 1138.25 or black if close below 1138. 3. 9:35 candle closes at 1138.75 so shift over one column and draw a white line. Now a black line is drawn if the next candle closes below 1138 or a white line is drawn if the candle closes above 1138.75. Nothing is drawn if the candle closes in between. 4. 9:50 candle closes at 1139.25 so another white line is drawn. 5. 9:55 candle closes at 1139.75 so another white line is drawn. Now the 3LPB starts because there are 3 white lines. So a black line is drawn if a candle closes below 1138.25. 6. 10:00 candle closes at 1140 so another white line is drawn. A black line is only drawn with a close below 1138.75. 7. 10:40 candle closes at 1141.75 and we draw a white line. A black line is only drawn with a close below 1139.25. 8. 10:50 candle closes at 1143 and we draw a white line. A black line is only drawn with a close below 1139.75. 9. 12:50 candle closes at 1144 and we draw a white line. A black line is only drawn with a close below 1140. 10. 12:55 candle closes at 1145.75 and we draw a white line. A black line is only drawn with a close below 1141.75. 11. 14:55 candle closes at 1141.25 and we switch to black lines now. A white line is only drawn with a close above 1145.75. Do you see nicely this has smoothed out the day. It has taken all the noise out and has given you a very clear picture of where supply and demand overtakes one another. Here is how it looks on my graph paper. Very easy to keep track of throughout the day and it also keeps you very engaged with the market you are plotting. If your 3LPB is a series of alternating black and white lines this reflects a trendless market whereas once a series of three black or white lines are drawn you can define the trend. With the example above, from the candlesticks February 10th looked like a trendless day but as you can see it was in an upward trend the whole day until the 14:55 candle that closed at 1141.25. Here is the 5-minute chart for February 11th. And here is the 3 LPB for this chart: Notice how choppy the 3LPB was before 11:00 then the trend never broke for the rest of the day. Once a trader sees all the white lines and the profit he/she could have made by just staying long you begin to wonder if you could use this as a trading system Let's see what profit you could have made using only 3LPB to trade: 1. Short at 1142.50 stopped at 1144 for a loss of 1.5 points. 2. Long at 1144 stopped at 1141.75 for a loss of 2.25 points. 3. Short at 1141.75 stopped at 1145.75 for a loss of 4 points 4. Long at 1145.75 sell at the close at 1155.50 for a gain of 9.75 5. Total for the February 11th would be 2 points. For February 10th the gain would have been 2.5 points. Not the kind of profit I would think a good trading system would generate. This drives home the point that 3LPB is not to be used in isolation, as PnF should not be, but can be used to enhance your candle charts in that it defines bullish or bearish trends and takes out a lot of the noise in between. Remember plan your trade and trade your plan. Jane Fox ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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