The Option Investor Newsletter Wednesday 02-18-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Lots of News for a Slow Day Futures Wrap: Outside reversals Index Trader Wrap: Dollar's rise was gold's demise Traders Corner: Channel Surfing Traders Corner: Seeking The Holy Grail Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-18-2004 High Low Volume Advance/Decline DJIA 10671.99 - 42.89 10720.51 10646.96 1.76 bln 1075/1774 NASDAQ 2076.47 - 3.88 2088.51 2072.19 1.76 bln 1271/1811 S&P 100 568.33 - 2.91 571.57 567.56 Totals 2346/3585 S&P 500 1151.82 - 5.17 1157.40 1149.42 RUS 2000 591.48 - 3.00 595.41 590.40 DJ TRANS 2901.08 - 19.66 2920.83 2890.49 VIX 15.59 + 0.19 15.76 15.30 VXO 15.74 + 0.18 16.14 15.29 VXN 23.73 - 0.14 24.22 23.49 Total Volume 3,884M Total UpVol 1,466M Total DnVol 2,367M 52wk Highs 608 52wk Lows 14 TRIN 1.11 PUT/CALL 0.78 ******************************************************************* Lots of News for a Slow Day by James Brown The major averages closed in the red again for the third day in four sessions. It would appear to be plain old profit taking after yesterday's market-wide rally. Investors shrugged off negative housing data and focused on headlines in the technology and biotech sectors. The Dow Jones Industrials lost nearly 43 points to close at 10,671 as 23 of its 30 components turned lower. The NASDAQ dropped less than four points to 2076 and the S&P 500 dropped 5 to 1151. The best performers today were the biotech stocks, semiconductors, hardware and software. Meanwhile selling was heaviest in gold stocks, natural gas and oil services. Influencing gold was the U.S. dollar, which hit a new all-time low against the euro in early trading before strongly rebounding. Sending the dollar higher were comments that the Bank of Japan would continue to intervene as the yen near a three-year high against the dollar and comments from French President Chirac that hinted at possible intervention or similar strategies to stem the rise of the euro against the dollar. Overall stocks only posted mild losses but market internals were bearish. Declining stocks outpaced advancers 17 to 10 on the NYSE and 3 to 2 on the NASDAQ. Down volume surpassed up volume by 2 to 1 on the NYSE and 10 to 7 on the NASDAQ. The good news is probably the bullish pattern of higher lows on the major averages. The DJIA dropped toward the 10640 level and bounced. The S&P 500 followed suit with a bounce from its intraday low near 1149. The NASDAQ also managed a decent bounce in the last two hours of trading. Chart of the DJIA: Chart of the S&P 500: Chart of the NASDAQ Composite: Today's main economic data was the housing starts number. The Commerce Department reported an 8% drop to a seasonally adjusted rate of 1.9 million homes in January. Wall Street was expected a dip so the report was largely ignored. Granted this was the lowest level since August but the housing starts have been very strong and hit a 20-year high in December. Also noteworthy was the 4.9% jump in mortgage applications for last week. The Mortgage Bankers Association of America provided the breakdown with a 2.9% jump in applications for home purchases and a 6.4% jump in refinancings applications. Homebuilders initially traded lower on the news but eventually climbed higher throughout the day eliminating most of their losses. While hardcore traders seem to feel the trading session turned out rather boring there were a number of stories making headlines. Grabbing the spotlight early on was Rambus (RMBS). Shares of RMBS added more than $9.00 to jump 35% near 3-year highs at $34.93 after an administrative law judge with the FTC dismissed an antitrust case against the company. The judge produced a 330-page decision on the case where prosecutors were trying to prove that RMBS violated antitrust laws by helping set industry standards for memory chips while simultaneously pursuing patents for their designs. One analyst estimated that this decision could help RMBS garner $3 billion a year in royalty payments. Almost topping RMBS' gain was Irish drug company Elan (ELN). Shares of ELN rallied 34% and its marketing partner Biogen Idec (BIIB) added 20% after ELN announced that it would pursue FDA approval for its multiple sclerosis (MS) drug Antegren a year ahead of schedule. The two drug makers are halfway through a two-year clinical study of Antegren and based on the one-year results they decided to go ahead with the approval process. MS treatments are a multi-billion a year business and the handful of companies that compete in this niche traded lower. Going the opposite direction was Dobson Communications (DCEL), a mobile phone service provider for rural areas. Shares of DCEL dropped 36.6% on 29 times its average volume after reporting fourth-quarter earnings that were much weaker than expected. The average analyst estimate was for a loss of 5 cents a share. DCEL turned in a loss of 53 cents a share compared to a profit of 28 cents a share last year. The truly big surprise today was El Paso (EP), the largest U.S. natural gas pipeline operator. Shares of EP fell almost 18% after the company sliced its proven natural gas reserves estimate by more than 40%. Proven reserves are the estimated quantities that a company believes is recoverable from its current fields. Why they're called "proven reserves" when they're estimating the amount of fuel they can extract from the ground sounds like a mystery to me. EP said their earnings would be affected by a $1 billion pre-tax charge for its fourth quarter. If you recall it was just last month that Royal Dutch-Shell Group reduced its proven reserve estimates by 20 percent. Yup, you can almost hear the herd of lawyers stampeding towards El Paso's Houston headquarters with briefcases brimming with shareholder lawsuits. Speaking of lawsuits IBM traded lower today (-0.95%) after a federal judge ruled against Big Blue in a pension lawsuit on behalf of 140,000 older employees. In the 1990's IBM moved to a "cash balance" pension plan; which the judge felt didn't accurately give older employees their share of benefits. The decision could cost IBM $6 billion in retroactive benefits but the company plans to appeal. While we're on the topic of legal issues the SEC finally reached an agreement with Wall Street's top five specialist firms to fork over $240 million. Bear Wagner, which is part of Bear Stearns, FleetBoston Financial, La Branche, Speer Leeds Kellogg, which is part of Goldman Sachs, and Van de Moolen are the five firms which will divulge a total of $155 million in perceived ill-gotten gains and another $85 million in penalties to settle allegations that the firms jumped in ahead of its customers while processing their orders. As is typical with these types of SEC settlements none of the firms will either admit or deny any wrongdoing and hope this settlement will reduce the number of civil lawsuits from investors. All of the above are certainly big stories but the ones investors were most eager to hear occurred after the closing bell. The semiconductor sector was able to maintain its gains today because traders were eager to hear from Applied Materials (AMAT) and Broadcom (BRCM). Last night BRCM announced that it would hold a conference call today after the closing bell to discuss their "stronger business outlook". This was highly unusual and shares of BRCM added 7.3% on the session in anticipation of the event. Even though the first quarter is only half over BRCM's CFO raised their first-quarter revenue forecasts from +10% to an estimated +16-18% as rising demand for broadband and wireless communication chips exceed previous estimates. BRCM wouldn't offer any guidance past the first quarter but did say that the second quarter should be strong. BRCM's announcement is certainly bullish for the chip sector but the one-two punch that could really drive the SOX tomorrow is AMAT's earnings. The largest chip equipment maker on the planet announced net income, minus one-time charges, of 12 cents a share. This is 4 cents above the 8-cent analyst estimates and significantly better than its breakeven results from last year. New orders for the quarter rose 32%. Furthermore AMAT's CFO said new orders will likely rise 30% in the second quarter and they will probably beat analysts' estimates. This of course will force a round of upward revisions for the company as the analyst community readjusts their forecasts. The company expects Q2 earnings in the 17-19 cent range, which is well above current estimates at 11 cents a share and sales were likely to rise 20% from Q1 levels. AMAT was trading higher after hours and it could lead the SOX to a new relative high, which in turn should lead the NASDAQ higher. Fortunately none of tomorrow's economic reports are expected to be a surprise and we only have a handful of earnings to worry about. So what's on our plate for Thursday? The Philly Fed manufacturing survey will probably be the big report tomorrow. Estimates are for a small dip from January's reading. The PPI was supposed to report tomorrow but a new industry classification system has caused a delay in the report. Thursday will also bring the Leading economic indicators index and the weekly jobless claims. After Thursday's close will be the semi book-to- bill report. Everything looks pretty good and as long a Wal-Mart doesn't surprise us with any negative comments in their earnings report before the open tomorrow I believe we'll challenge these short-term resistance levels. ************ FUTURES WRAP ************ Outside reversals Jonathan Levinson The US Dollar Index printed a new low below prior support but finished sharply higher, engulfing the previous sessions' highs. Precious metals and foreign currencies did the same in reverse, breaking below recent lows. Equities and treasuries finished mixed near unchanged. 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 broke to a new low below 84.80, reaching 84.57 before bouncing. The euro reached a record high above 1.29. The reversal that ensued was steep and grew steeper as the session progressed, with the USD Index breaking and closing above yesterday's high for a key reversal, leaving a bullish hammer reversal on the daily chart. The binary dollar trade saw other assets weaker, with the brunt of the damage restricted to metals and foreign currencies. The CRB fell 2.11 to 264.96, led by coffee, wheat, corn and silver futures to the downside. Daily chart of April gold The key upside reversal in the US Dollar was a key downside reversal in April gold, with a high of 418 followed by a low of 410.50, its closing price. March silver blasted to 6.90 but finished at 6.63, 2.3 cents above the low. Along the same theme, euro futures, swiss francs and CDN dollar futures all printed shooting star dojis as well. Just as the daily downtrend in the dollar is firmly intact, so is the uptrend on gold and silver. Today's print felt impulsive, but it was corrective in the context of the dollar's daily cycle downphase / metals' upphase. Support for April gold comes at 407-8, followed by 402 and 398. Daily chart of the ten year note yield Ten year note yields (TNX) broke to a new low but rebounded nicely, closing in the green by just 0.1 bp at 4.049%. The doji hammer, reflecting a possible reversal off the high in ten year bonds, caused a twitch in the still-intact daily cycle downphase for the TNX. Again, this was a bigger move than we've seen in the last several sessions, but it remains corrective unless we see followthrough tomorrow and on Friday. 4.07% appears as resistance implied by the current daily cycle downphase. Daily NQ candles The NQ rose 2.50 to close at 1510, printing a doji star. That's not particularly inspiring, but considering that the binary dollar trade has seen equities advancing as the dollar fell, the lack of significant pullback for the NQ against a 1%+ rise in the dollar is a victory for bulls. The NQ printed a higher low as the daily cycle upphase advanced. The session high was 1517, a point below the stiff resistance level from 1518-20. Support below is 1502 (today's low was 1501.50), followed by 1492 and 1480. The head and shoulders top we've been discussing since last week is still a valid possibility. While we look for symmetry in chart patterns, the sloping neckline and extending right shoulder are still within the bounds of the pattern. While the action today in light of the dollar bounce was bullish, traders need to be alert to this possible outcome, particularly if the NQ sees the south side of 1480. 30 minute 20 day chart of the NQ The NQ gave us both sides of unchanged and the 30 minute cycle oscillator was whippy and unreadable as a result. Unfortunately for bears, the bulk of the skating occurred during the downside, and severely overbought near current levels has been replaced with midrange. The 30 minute cycle downphase aborted early and bounced back up from a higher oscillator and price low, confirming the daily cycle upphase. 1518-20 remains the key level, the pivot above which I'd expect a dismayed short covering rally. Another failure will set up a possible rising triangle as the daily cycle upphase progresses, but unless it breaks above, bears will get their daily cycle top at a lower price high. Daily ES candles ES dropped 5.50 to close at 1151, a .48% decline for the day. As with the NQ, a doji star resulted from the rejection of first the highs at 1158.75 (again) and lows at 1148.25. With a sideways range extending, traders are becoming increasingly convinced or confused, as the case may be, but the fact remains that there is precious little pullback below the rally highs, particularly on today's sharp dollar reversal. Whether this is consolidation or distribution can only be guessed, and even the oscillators are confused: the 10-day stochastic upphase extended while the Macd is headed for a bearish kiss, while technically still in an upphase. The way to stay out of trouble here is to wait for a range breakout, bullish above 1158, cautiously bearish below 1147 with perhaps a partial position, adding on a break of 1143. Until the daily cycle upphase ends, bearish trades are aggressive in the extreme, as uncertainty should resolve itself to the bullish side in this timeframe. 20 day 30 minute chart of the ES The ES left off on a flag-type bounce after a whipsaw in the 30 minute cycle downphase. The rising trendline break delivered a rapid plunge, but it too bounced from a higher low against the previous 30 minute cycle bottom. The daily upphase was responsible for this higher low, but the test will come on at the failed trendline, 1155 currently. A failure there would be the level at which aggressive bears would look for shorts on either a scalp basis or in anticipation of a downside range break. 150-tick ES The halting advance of the 30 minute cycle downphase is reflected in the whippy bounces of the broader 35-period Keltner channel. That said, the short cycle (red channel) was no less temperamental, leaving off in a mixed to sideways drift. The bias looks hesitantly up, but the pattern looks and feels like a bear flag so far. A move below 1150 should reignite the short cycle downphase and challenge the 30 minute bounce trying to form. Daily YM candles YM fell 32 to close at 10674, mimicking the ES today. Nothing to add here. 20 day 30 minute chart of the YM The binary dollar trade has been so reliable in recent weeks that the pattern on the daily ES resembles an inverted daily US Dollar Index chart. Given the big move in the US Dollar today, we should have seen much more damage inflicted on equities (and treasuries for that matter) than occurred. Given the recent overt talk of intervention from the BoJ and speculation about the ECB, as well as the massive repo drain today (13B), the firmness in US assets looks suspect. However, if we do not see a return to the binary trade and the bounce in the dollar continues, equity bulls will be contemplating a whole new wave to the rally of 2003, as a rising dollar attracts foreign investment into US equities. I personally don't expect that to occur, but it's not an unimaginable outcome either. For tomorrow, we'll continue to follow these relationships and the trading range in equities. See you there. ******************** INDEX TRADER SUMMARY ******************** Dollar's rise was gold's demise The major equity indices found a mixed to lower close, where weaker than forecasted housing starts and building permits put a lid on bullish gains. Despite many economists saying sub-freezing temperatures that blanketed the northeast were most likely the negative variable for January's 8% month-over-month decline for housing starts, a 4.9% gain in the Mortgage Bankers Association weekly Mortgage Applications Index, which reversed three straight weekly declines, wasn't enough to keep the Dow Jones Home Construction Index (DJUSHB) 600.17 -1.18% from falling 7.2 points. While major equity index traders may have been lulled to sleep in today's trade, there was more than enough volatility in the currency markets. The dollar rebounded sharply after hitting new lows against the euro and the pound earlier in the day, when the European common currency pushed above $1.29 for the first time in its five-year history. The dollar's intra-day reversal back higher was driven primarily by comments by French President Jacques Chirac about exchange rate volatility. "Europe must be much more offensive in its treatment of international economic questions," Chirac said at a summit with German Chancellor Gerhard Schroeder and British Prime Minister Tony Blair. Greater exchange rate stability is "absolutely necessary" to secure lasting economic growth in Europe, he said. Mr. Chirac's comments had the dollar finding gains against major foreign currencies with the U.S. Dollar Index (dx00y) 85.76 +0.87% rising to 86.12. Commenting on the euro's intra-day reversal, Sean Callow, a currency strategist at IDEA, a New York-based global financial research firm said, "A 2-cent pullback is remarkable and the trading is not for the faint-hearted." Mr. Callow added that, "It is a testament to the fact that everyone is on the same bandwagon and when everyone is looking for dollars to fall, you soon run out of sellers." While the euro reversed course against the dollar, gold stocks as depicted by the AMEX Gold Bugs Index ($HUI.X) 230.55 -4.74% suffered an 11.4-point decline. U.S. Market Watch - 02/18/04 Close In last week's Wednesday evening Index Trader Wrap we took a look at my QCharts U.S. Market Watch table. For the most part, the major indices have seen some gains, but just less than 1%. The Broker/Dealer Index ($XBD.X) 738.73 -0.15% traded an all-time high in today's session before falling back to lose 1.14 points, but has tacked on an additional 5% gain since last week. The economically sensitive Airlines Index ($XAL.X) 62.21 -1.69% had scrapped back to close above its flattening 21-day SMA (62.46) yesterday, but slipped back to rest comfortably above its intermediate-term 50-day SMA (61.68) by today's close. Market Snapshot / Internals - 02/18/04 Close For the most part, technology stocks bucked some broader market weakness in today's trade, with the NASDAQ-100 Index (NDX.X) 1,507.49 +0.06% holding onto a 1-point gain by the close, with a BIG move in Biogen Idec (NASDAQ:BIIB) $53.23 +20.26% not only helping the QQQ hold positive ground for the bulk of today's trade, but also having the Biotechnology Index (BTK.X) 539.90 +1.24% finishing as today's only sector to gain more than 1%. A blowout quarter from Applied Materials (NASDAQ:AMAT) $22.31 +1.68% and upbeat forward guidance has this semiconductor- equipment giant jumping to $23.52 in extended hours, which has also lifted the QQQ to $37.72 in its extended hours trade. Pivot Analysis Matrix - Support correlations abound at the WEEKLY Pivots for the major indices in tomorrow's trade. January's Producer Price Index (PPI) data was scheduled to be released tomorrow morning, but has been delayed as the government fine tunes some of its indicators for this read on inflation at the producer level. However, traders will have plenty of economic data to digest in the form of weekly initial jobless claims (forecast 352,000 vs. prior week's 363,000), January leading Indicators (forecast +0.5% versus December's +0.2%) and February's Philadelphia Fed (forecast 35.0 versus January's 38.8). With AMAT jumping in after-hours trade, I've highlighted in PINK tomorrow's DAILY R2 in the SOX.X at 530.08, which may be a key level of resistance as it relates to the SOX chart we looked at in last night's Index Trader Wrap. AMEX Gold Bugs Index ($HUI.X) - Daily Intervals I've been more apt to trade some gold stocks from both the long and short side in recent weeks, trying to use shorter-term moves in the dollar as an indicator. One sign of looming weakness in my book is that while the dollar hit a new low against the euro and the U.S. Dollar Index (dx00y) hit a multi-year low this morning, gold stocks as depicted by the $HUI.X, which is an unweighted basket of gold stocks hasn't come close to challenging its recent double-top highs, where further dollar strength and $HUI.X weakness below today's lows has gold stocks falling into a lower trending channel. One of the most frequently pondered questions is if a strengthening dollar might be "doom" for U.S. equities. I'm not sure, but I don't necessarily think so. The reason I think this way is months ago, I was concerned that a strengthening euro would be "doom" for some of the European bourses, and they are all near their highs, just like many of the major U.S. equity indices. NYSE Composite ($NYA.X) - Daily Intervals A quick look at the very broad NYSE Composite ($NYA.X) would have near-term support at 6,680, where after being broken to the upside on February 10th, immediately served support on a pullback as if prior sellers turned into buyers. In late January, when the NYA.X traded 6,680 and fell back to 6,500, the NYSE NH/NL 10-day average ratio had reached 99.5%, where perhaps there just wasn't enough room to 100% without some profit taking needing to have taken place. NASDAQ Composite ($COMPX) Chart - Daily Intervals It has been awhile (several weeks) since a large 4-lettered bellwether like Applied Materials (NASDAQ:AMAT) has seen a positive response in after-hours trade to a quarterly earnings report. While some fundamental analysts expected a blowout quarter from AMAT, those same analysts felt the market had factored the blowout results into things. If not, then a broader rally in the NASDAQ would be found above the 2,100.00 level, if not the 21-day SMA which has been serving up some resistance in recent sessions. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Channel Surfing Both Linda Piazza and Jonathan Levinson use Keltner Channels in the Market Monitor so I decided to take a closer look at this indicator. Linda has already done an excellent job of defining what Keltner Channels are and both her and Jonathan describe how to use them intraday. But for those of you who are unable to log into the OptionInvestor's Market Monitor, I would like to introduce you to a really neat little indicator. There are three kinds of moving average bands - moving average envelopes, Bollinger Bands and Keltner Channels. All three consist of three lines – a middle moving average and two outer lines or bands. Envelope or band theory holds that price has the greatest probability of falling within the boundaries of the outer bands and prices falling outside the bands are considered an anomaly and therefore provide a trading opportunity. The major differences between the envelope types are in the calculation of the bands or envelops, in the spacing between the lines or bandwidth, and how they are interpreted. Keltner channels are actually the name Chester Keltner gave to a technique he called the 10-day moving average Rule in his 1960 book How to make Money in Commodities. They are price envelopes or bands above and below an exponential moving average by a multiple of the Average True Range (ATR). This is why I find these Channels so intriguing; they fluctuate as the ATR fluctuates. But before we get any further I think we should take a minute and discuss the Average True Range. J. Welles Wilder introduced ATR in his book, New Concepts in Technical Trading Systems (1978). It measures a security's volatility but does not provide an indication of price direction or duration, simply the degree of price movement or volatility. Wilder defined the true range (TR) as the greatest of the following: 1. The current high less the current low. 2. The absolute value of: current high less the previous close. 3. The absolute value of: current low less the previous close. If the current high/low range is large, chances are it will be used as the TR. If the current high/low range is small, it is likely that one of the other two methods would be used to calculate the TR. The last two possibilities usually arise when the previous close is greater than the current high or the previous close is lower than the current low. To insure positive numbers, absolute values were applied to differences. Average True Range is a moving average of the True Range over a certain time period. For example the most popular ATR is the 10- day which is the average of the True Range over the last 10 days. Keltner originally constructed his channels with a simple 10-day ATR moving average and subtracting or adding this MA from/to a 10-day MA of the price. Most charting software now use the version popularized by Linda Raschke, which uses an exponential MA of price and builds the channels by applying a multiple of the ATR to the EMA instead of the actual ATR. Here is the formula Upper Keltner Channel = EMA(close,x) + (m * ATR(y)) Lower Keltner Channel = EMA(close,x) - (m * ATR(y)) Where: x = length (number of days) of EMA m = multiplier y = length (number of days) to calculate ATR Most often the EMA and ATR length are the same but they do not have to be, however, charting packages like Qcharts do not give you the option of changing the ATR length only the EMA length and the multiplier. Linda Raschke uses a 20 EMA and a 2.5 multiplier so that is what I will use. The primary interpretation for envelopes, bands or channels is a touch or minor penetration of an upper or lower channel is that price has become overbought/ oversold and is likely to reverse. Keltner's technique, however, was based on the opposite - a close above the upper band or below the lower band is evidence of a strong move and should be traded as a breakout, that is to say breaks of the upper channel are bought and breaks of the lower channel are sold. However you decide to use the Keltner Channels you can’t use them in isolation, you need other indicators to confirm. Let's look at an example of the Keltner Channels using the conventional envelop theory, a break above is a sell and a break below is a buy. I have added the MACD and will take a long if price closes below the Keltner Channel but only after MACD makes a bullish cross upward for confirmation. I will take a short when price closes above the Keltner Channel but only after MACD makes a bearish cross downward. Here is a chart of the Russell Midcap Value iShare - IWS. In this time frame only short positions would have been entered because price never closed below the Keltner Channel. Blue Boxes are when IWS closed above the Keltner Channel. Using just the Keltner Channel for buy and sells would have been OK until the 12/29/03 close. Now add the MACD and although your entries would have been later you would not have taken a short on 12/29/03 or any of the other closes above the Channel and as you can see there are many. Here is the Keltner Channels with stochastics. Now I'm not a big fan of stochs but they seem to do a little bit better job than the MACD at least until you add the wrinkle of a cross below the 80 line for a confirmation. For this example I first of all looked at opening a short position after a close above the Keltner Channel and a stochastic bearish cross, marked by red arrows. However, after the 12/29/03 run stochs made bearish crosses at least three times giving false short signals. I then looked at adding one more filter that stochs had to not only make a bearish cross but cross below the 80 line also. This eliminated the false signals from the 12/29/03 run but of course, like the MACD, got us in too late (magenta arrows). The next pairing I looked at was the Keltner Channels with RSI(14). Here it seems to be a much better fit. Criteria is price close above the Keltner Channel and RSI(14) crosses below the 70 line. You would have had one false sell signal on 12/31/03 but the RSI(14) cross below the 70 coupled with a close above the Keltner Channel seemed to have nailed almost every short term top. You could change the settings in the indicators to your own liking and see how well they work but the point I am trying to make is that no matter how good an indicator may be it can not be used in isolation. The Keltner Channels are designed to define the upper and lower boundaries of what can be considered "normal" price fluctuations. And the reason I like them so much is that these boundaries vary with volatility and can used quite readily as overbought/oversold levels from which you can make trading decisions. Remember plan your trade and trade your plan. Jane Fox ************** TRADERS CORNER ************** Seeking The Holy Grail by Mark Phillips mphillips@OptionInvestor.com We all enter the world of trading with different backgrounds, abilities, skills and biases, but after becoming familiar with the landscape, it is inevitable that we will each embark on our own crusade to discover the Holy Grail. Hopefully you can intuit that I'm not talking about the Holy Grail of Christianity, or even the one discussed in the popular book "The Da Vinci Code". No, what we're talking about here is the eternal (at least it seems that way sometimes) search for a trading plan/system/strategy that can be applied in a consistent manner to yield an account that consistently grows in size. Isn't that why we all tune in every day? In my opinion, traders fall into one of two categories -- they are either discretionary traders or they are system traders. While there are successful discretionary traders, they are a rare breed. They have somehow managed to marry their knowledge of the market with intuition and an almost spooky ability to see or hear the breaking news and know instantly how it should affect price action. Despite our desire to play in that league, I think most of us discover early in our trading careers that we just aren't cut out for that style of trading. It takes a high degree of conviction in your own decisions and those decisions frequently have to be made in an instant. I think the profession that would most easily be able to make the transition to being a successful discretionary trader would be Fighter Pilot. Most of us aren't cut out for that profession either (despite the fact that we might want to be) and I think it is quite liberating to discover that that approach just won't work for us. That brings us to the topic I want to touch on today, that of becoming a successful system trader. Let me tell you right now that this will be a "To Be Continued" discussion, as there's no way I can cover all the territory that is pertinent in just 2-3 pages. But let's see just how far we can get this afternoon and then we'll pick it up again next week. The Holy Grail of system traders is an animal that I just don't believe exists. Simply put, if we could design the perfect trading system, it would be the equivalent of a black box that we could plug into a data feed and it would just turn out winning trade after winning trade. We'd even be willing to accept a win:loss ratio of 2:1 or even 1.5:1, but the key is that over time, it would have to produce a consistent positive equity growth curve. The basic reason why we can't just hand it over to a machine to place one trade after another is because the markets are constantly in flux. Not only does price oscillate over time, but so do the larger tides of human emotion, macro-economic factors like interest rates, economic growth/contraction cycles, political issues that bear directly on the financial market, as well as the changing tide of money flows from one area of the economy to another. Many of these factors can be modeled in the computer and integrated into an overall automated trading system. The fly in the ointment is the human emotion component. There have been many impressive and in some cases successful attempts to model the way the human mind works, both in terms of though process and in the way that thought process is affected by emotions. The reason why this is so critical to the whole issue of system design is that price action in the market in many respects boils down to interpreting herd or crowd psychology in the face of a given macroeconomic environment. There's a reason why contrarian thinking works much of the time in the market -- the herd or crowd is usually wrong. But we don't know WHEN the crowd will be wrong. Sometimes we can predict when the sentiment of the crowd will shift and at other times, we don't come anywhere close. The mind of man is a very complex subject of study and it is the random and unpredictable factors that will throw a serious monkey wrench into any attempt at mathematically modeling how an individual or group will behave in a given situation. We are rational creatures...most of the time. It is the occasional exceptions to that rule that will turn most any model on its head. Lest you think I'm making the case that there's no way to develop a system that can produce regular and consistent profits in the market, nothing could be further from the truth. The point I'm trying to make is that we can never remove the human from the equation. We must always be involved in making the real-time trading decisions. Certainly, we would like to remove as much subjectivity from the equation as possible, but we must do so with the understanding that it will always take a human decision, evaluating many disparate factors, to make the final "Go-No Go" decision on any given trade. The function of a well-designed system is to take in many inputs, evaluate them against a collection of rules that we have determined through observation (back testing) to be true and then produce an indication of which way we ought to be considering a trade, along with the degree of likelihood that the recommendation will be correct. There are simple rules and complex rules and it is up to us as the system designer to determine which rules belong in our system and how best to combine them to produce a viable system. Let's keep in mind though, when I speak of a system, I'm referring to something that produces trade RECOMMENDATIONS, which must then be filtered through our own experience, biases and observations. Now I think it is worth pointing out that inputs to a trading system are not necessarily all related to price action. I could envision a trading system that would have inputs for various news related events or economic developments. Here is where individuality comes into play. We have to decide what we have found to work or not work through our own path of experience. By way of explanation, I give news zero credence in my own trading approach. I may temper my trading activities around important news releases (that's part of the filtering I have to do, external to my system), but my trading decisions are not affected in the least by what the contents of the individual news releases happen to be. I am a technician -- it's the engineer in my, I suppose -- and as such, I believe everything I need to know is contained in the price action on the charts. The challenge is in turning the observations into actionable trading signals that win more often than they lose. Another trader might have a different belief system, giving significant weight to the actual contents of individual news releases and economic reports and will factor that into their trading system. My approach says that the sum total of those factors are very quickly interpreted by the market and manifested in the form of price action. My job is to interpret that price action to make solid trading decisions, hopefully with a lot of help from a well-defined trading system. I think that's a good place to leave off for today. When we reconvene next week, I hope to walk through the development of an actual trading system. My goal is not to offer the Holy Grail system, but to illuminate the path for all that are interested on embarking on their own quest for their own Grail. See you next week! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 02-18-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: ESRX Dropped Puts: SINA Spreads, Combinations & Premium-Selling Plays: Another Failed Rally? Watch List: Semis, Drugs & Organic foods ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* Express Scripts - ESRX - cls: 69.68 chng: -2.22 stop: 68.00 In an abrupt reversal of fortune, ESRX gave back all of yesterday's powerful rally and then some on Wednesday, falling back into the $68-70 price band that had been containing price action for the past few weeks. The stock gapped down hard this morning and the only newsworthy items were the release of the company's 8K statement and confirmation that earnings would be released on February 25th. There didn't seem to be anything in either news release that should have caused such a negative action, but the chart doesn't lie. With oscillators tipping over in bearish fashion, ESRX appears headed back to test the $68 level and based on the strong selling volume today, it looks like that support may not hold this time around. Rather than take the risk of a breakdown, we'll close the play tonight. We'd recommend using any reflexive rebound tomorrow to gain a more favorable exit. Picked on January 13th at $68.32 Change since picked: +1.36 Earnings Date 2/24/04 (confirmed) Average Daily Volume = 987 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 ************************************************************** ************ DROPPED PUTS ************ Sina Corp - SINA - close: 44.02 change: +3.46 stop: 41.35 Wow! Yesterday we had turned very cautious on SINA and for good reason. Shares dipped low enough to trade through our trigger but by the end of Tuesday had reclaimed support at its 50-dma and the $40.00 level. We warned it was a potential bear trap. My how fast it snapped shut! Fellow Chinese Internet play NTES reported earnings last night that beat estimates by 4 cents on quarterly profits that doubled. This sent the entire niche of Chinese Internets higher. We are stopped out of the play at 41.35. Picked on February 17 at $39.35 Change since picked: + 4.67 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 238 thousand 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Another Failed Rally? By Ray Cummins Market bulls were unable to build on the recent strength in equities as traders sold for profits in the wake of Tuesday's robust gains. The Dow Jones Industrials slid 42 points to 10,671 on weakness in SBC Communications (NYSE:SBC), Caterpillar (NYSE:CAT), 3M (NYSE:MMM), Honeywell (NYSE:HON), International Paper (NYSE:IP), Johnson & Johnson (NYSE:JNJ), Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT). The NASDAQ Composite fared better, falling only 3 points to 2,076 as select computer hardware and internet shares combined to stem the selling pressure in technology issues. The S&P 500 index fell 5 points to 1151, with the worst losses seen in healthcare, gold, natural gas, transportation and advertising shares. Losing stocks outpaced winning stocks by roughly 3 to 2 on both the New York Stock Exchange and the NASDAQ. Volume on the Big Board reached only 1.1 billion shares while 1.5 billion shares changed hands on the technology exchange. The U.S. bond market saw little activity during the session with the 10-year note down 2/32, while its yield rose to 4.05%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 02/17/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield SEPR FEB 20 19.60 27.80 0.40 21.62% 2.04% CECO FEB 40 39.30 52.03 0.70 5.04% 1.78% ERES FEB 27 27.00 31.83 0.50 5.07% 1.85% MICC FEB 65 64.05 86.00 0.95 4.10% 1.48% NTES FEB 40 38.90 41.30 1.10 7.39% 2.83% RMBS FEB 25 24.50 25.84 0.50 5.60% 2.04% SEPR FEB 22 21.90 27.80 0.60 7.02% 2.74% SINA FEB 40 38.75 40.56 1.25 7.89% 3.23% SOHU FEB 30 29.30 27.99 (1.31) 0.00% 2.39% * APPX FEB 35 34.35 34.53 0.18 1.56% 1.89% * CRDN FEB 40 39.05 39.66 0.61 4.59% 2.43% * GPRO FEB 32 32.10 35.15 0.40 4.17% 1.25% KYPH FEB 25 24.45 26.61 0.55 6.84% 2.25% IMCL FEB 35 34.15 42.37 0.85 8.93% 2.49% OSIP FEB 30 29.60 33.36 0.40 4.67% 1.35% PCLN FEB 17 17.15 23.85 0.35 6.93% 2.04% SEPR FEB 22 22.05 27.80 0.45 7.00% 2.04% BRCM FEB 37 37.00 39.56 0.50 5.08% 1.35% CLZR FEB 22 22.20 22.81 0.30 5.54% 1.35% * DRIV FEB 22 21.95 23.79 0.55 9.34% 2.51% * NANO FEB 17 17.05 19.56 0.45 10.87% 2.64% NTAP FEB 20 19.55 22.27 0.45 8.71% 2.30% OSTK FEB 17 17.00 21.10 0.50 11.98% 2.94% SEPR FEB 22 22.25 27.80 0.25 5.25% 1.12% ARO FEB 30 29.50 33.69 0.50 8.22% 1.69% ECLG FEB 17 17.20 22.41 0.30 8.93% 1.74% ERES FEB 30 29.75 31.83 0.25 5.33% 0.84% ERICY FEB 20 19.65 28.64 0.35 9.74% 1.78% JCP FEB 25 24.60 28.54 0.40 8.27% 1.63% LIN FEB 30 29.65 33.36 0.35 5.80% 1.18% WEBX FEB 22 22.25 25.44 0.25 5.90% 1.12% DISH FEB 37 37.25 39.33 0.25 5.96% 0.67% IDCC MAR 20 19.55 26.86 0.45 6.66% 2.30% IMCL FEB 30 29.55 42.37 0.45 16.77% 1.52% LSCP MAR 17 17.10 25.85 0.40 6.20% 2.34% PCLN MAR 22 21.70 23.85 0.80 7.85% 3.69% SLAB FEB 55 54.60 55.22 0.40 6.70% 0.73% SONO FEB 22 22.20 23.65 0.30 13.48% 1.35% Positions in Sohu.com (NASDAQ:SOHU), Ceradyne (NASDAQ:CRDN) American Pharmaceutical Partners (NASDAQ:APPX), Digital River (NASDAQ:DRIV), and Candela (NASDAQ:CLZR) should have been closed by conservative traders. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CYD FEB 35 35.45 21.97 0.45 6.36% 1.27% SNDK FEB 80 81.10 51.69 1.10 5.97% 1.36% ISIL FEB 30 30.50 25.00 0.50 6.00% 1.64% MCHP FEB 35 35.45 30.61 0.45 4.57% 1.27% UTSI FEB 40 40.95 33.45 0.95 8.23% 2.32% AEIS FEB 25 25.55 23.44 0.55 9.96% 2.15% ELX FEB 30 30.45 25.96 0.45 6.62% 1.48% PHM FEB 47 48.00 47.34 0.50 4.66% 1.04% MRVL FEB 42 42.90 43.48 (0.58) 0.00% 0.93% NVLS FEB 35 35.25 33.76 0.25 4.75% 0.71% SSYS FEB 25 25.60 24.62 0.60 15.57% 2.34% AAII MAR 25 25.40 18.59 0.40 7.47% 1.57% GRMN FEB 50 50.45 47.65 0.45 9.51% 0.89% PHS FEB 32 32.90 35.50 (2.60) 0.00% 1.22% * PacifiCare Health Systems (NYSE:PHS) gapped higher, at the open, on the day after the position was offered and closed near the sold (call) strike that afternoon. Aggressive traders who initiated the position should have been out of the play by the end of the session for a maximum loss of $0.40. As noted last week, conservative traders should consider closing the bearish spread in Marvell (NASDAQ:MRVL). PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status COCO 60.73 63.36 FEB 55 55 0.65 54.35 0.65 Open KOSP 45.30 59.41 FEB 35 40 0.60 39.40 0.60 Open CEPH 54.65 57.60 FEB 45 50 0.65 49.35 0.65 Open NFLX 32.55 35.28 FEB 22 25 0.13 24.88 0.13 Open CFC 80.32 89.70 FEB 70 75 0.65 74.35 0.65 Open MDC 66.31 68.72 FEB 55 60 0.60 59.40 0.60 Open CVH 42.54 42.71 FEB 37 40 0.36 39.64 0.36 Open SII 48.80 50.56 FEB 42 45 0.30 44.70 0.30 Open BA 43.56 44.60 FEB 40 42 0.30 42.20 0.30 Open MRK 48.94 48.86 FEB 45 47 0.25 47.25 0.25 Open GS 107.09 106.92 MAR 95 100 0.65 99.35 0.65 Open MSTR 64.78 63.89 MAR 50 55 0.55 54.45 0.55 Open Gilead Sciences (NASDAQ:GILD) has previously been closed for a small loss. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status ANF 24.90 28.20 FEB 30 27 0.30 27.80 (0.40) Closed MANH 27.00 29.15 FEB 35 30 0.50 30.50 0.50 Open ESV 27.45 29.85 FEB 35 30 0.45 30.45 0.45 Open? NVLS 41.68 33.76 FEB 47 45 0.40 45.40 0.40 Open HTCH 32.45 28.46 FEB 40 35 0.60 35.60 0.60 Open ICST 27.60 28.04 FEB 35 30 0.50 30.50 0.50 Open BZH 92.40 102.59 FEB 105 100 0.55 100.55 (2.04) Closed LEN 43.71 47.68 FEB 50 47 0.30 47.80 0.12 Open BHE 32.30 35.57 FEB 40 35 0.50 35.50 (0.07) Closed OMG 27.59 30.88 FEB 35 30 0.50 30.50 (0.38) Closed MGAM 38.65 39.98 MAR 50 45 0.50 45.50 0.50 Open UTEK 26.28 27.48 MAR 35 30 0.60 30.60 0.60 Open As noted last week, OM Group (NYSE:OMG), Benchmark Electronics (NYSE:BHE), Beazer Homes (NYSE:BZH), and Abercrombie & Fitch (NYSE:ANF) were candidates for early exit. Ensco (NYSE:ESV) is on the "watch" list and any further upside movement would be cause for closure. Bearish spreads in Checkfree (NASDAQ:CKFR) and Kohl's (NYSE:KSS) have previously been closed for small losses. Questions & comments on spreads/combos to Contact Support ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AMLN - Amylin Pharmaceuticals $22.62 *** Bottom Fishing! *** Amylin Pharmaceuticals (NASDAQ:AMLN) is committed to improving the lives of people with diabetes and other metabolic diseases through the discovery, development and commercialization of innovative, cost-effective medicines. Amylin has two primary drug candidates in late-stage development for the treatment of diabetes; SYMLIN (pramlintide acetate) and exenatide, formerly referred to as AC2993 (synthetic exendin-4). AMLN - Amylin Pharmaceuticals $22.62 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 20 AQM OD 406 0.45 19.55 6.4% 2.3% * SELL PUT MAR 22.5 AQM OX 122 1.35 21.15 12.9% 6.4% __________________________________________________________________ ATRX - Atrix Laboratories $27.41 *** Entry Point? *** Atrix Laboratories (NASDAQ:ATRX) is a specialty pharmaceutical company focused on advanced drug delivery. With five unique patented technologies, Atrix is currently developing a diverse portfolio of proprietary products, including oncology, pain management, and dermatology products. The firm also partners with large pharmaceutical and biotechnology companies to apply its proprietary technologies to new chemical entities or to extend the patent life of existing products. ATRX - Atrix Laboratories $27.41 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 OQF OX 20 0.45 22.05 6.8% 2.0% * SELL PUT MAR 25 OQF OE 42 0.95 24.05 9.8% 4.0% __________________________________________________________________ BRCM - Broadcom $42.46 *** Solid Earnings Outlook! *** Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated silicon solutions that enable broadband communications and the networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for all broadband communications markets. Their diverse product portfolio includes solutions for digital cable and satellite set-top boxes; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network processors; and SystemI/O(TM) server solutions. BRCM - Broadcom $42.46 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 37.5 RCQ OT 3436 0.55 36.95 4.3% 1.5% * SELL PUT MAR 40 RCQ OH 2431 1.20 38.80 7.5% 3.1% __________________________________________________________________ IDCC - InterDigital Comm. $27.05 *** New Trading Range? *** InterDigital Communications (NASDAQ:IDCC) specializes in the architecture, design and delivery of wireless technology and product platforms. Over the course of its corporate history, the company has amassed a substantial and significant library of digital wireless systems experience and know-how, and holds an extensive worldwide portfolio of patents in the wireless systems field. InterDigital markets its technologies and solutions primarily to wireless communications equipment producers and related suppliers. In addition, the company licenses its Time Division Multiple Access and Code Division Multiple Access patents to equipment manufacturers worldwide. IDCC - InterDigital Comm. $27.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 DAQ OX 1532 0.40 22.10 5.9% 1.8% * SELL PUT MAR 25 DAQ OE 673 0.90 24.10 9.1% 3.7% __________________________________________________________________ OSTK - Overstock.com $24.05 *** Rally Mode! *** Overstock.com (NASDAQ:OSTK) is an online "closeout" retailer offering discount, brand-name merchandise for sale primarily over the Internet. The company's merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods and designer accessories. Overstock offers its customers an opportunity to shop for bargains conveniently, while offering an alternative inventory liquidation distribution channel to its suppliers. The company typically offers around 5,000 non-media products and over 100,000 media products (books, CDs, DVDs, video cassettes and video games) in seven departments on its Websites, www.overstock.com, www.overstockb2b.com and www.worldstock.com. OSTK - Overstock.com $24.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 20 QKT OD 226 0.65 19.35 10.3% 3.4% * SELL PUT MAR 22.5 QKT OX 20 1.35 21.15 14.1% 6.4% __________________________________________________________________ NEOL - NeoPharm $21.50 *** New Two-Year High! *** NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. The firm has built its drug portfolio based on its novel proprietary technology platforms, the proprietary NeoLipid liposomal drug delivery system and a tumor-targeting toxin platform. NeoPharm has several promising compounds in various stages of development. The company's lead compound is IL13-PE38, a tumor-targeting toxin being developed as a treatment for glioblastoma multiforme, a deadly form of brain cancer. NEOL - NeoPharm $21.50 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 17.5 UOE OW 127 0.55 16.95 10.5% 3.2% * SELL PUT MAR 20 UOE OD 0 1.45 18.55 16.6% 7.8% __________________________________________________________________ RMBS - Rambus $34.93 *** Favorable Judgment! *** Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip" interface solutions that enhance the performance and effectiveness of its client's chip and system products. These solutions include multiple chip-to-chip interface products, which can be grouped into two categories: memory interfaces and logic interfaces. Rambus' memory interface products provide an interface between memory chips and logic chips. In addition, the firm's logic interface products provide an interface between two logic chips. Rambus has two major memory interface products: Rambus dynamic random access memory and Yellowstone. Additionally, it offers a logic interface product for high-speed serial chip-to-chip communications between logic chips in a range of computing, networking and communications applications. RMBS - Rambus $34.93 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 25 BNQ OE 6223 0.25 24.75 3.4% 1.0% TS SELL PUT MAR 30 BNQ OF 2496 1.10 28.90 10.6% 3.8% * SELL PUT MAR 35 BNQ OG 442 2.90 32.10 16.8% 9.0% __________________________________________________________________ SMTC - Semtech $25.60 *** Earnings Speculation! *** Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal semiconductors. The company operates in two business segments, Standard Semiconductor Products and Rectifier, Assembly and Other Products. The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes the company's line of assembly and rectifier devices, which are the remaining products from its original founding as a supplier into the military and aerospace market. SMTC - Semtech $25.60 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 QTU OR 346 0.35 22.15 4.6% 1.6% * SELL PUT MAR 25 QTU OE 134 1.10 23.90 10.0% 4.6% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MICC - Millicom Cellular $88.25 *** Wireless Telecom Giant *** Millicom International Cellular S.A. (NASDAQ:MICC) is a global telecommunications investor with cellular operations in Asia, Latin America and Africa. The company has a number of cellular operations and licenses in countries around the world and the group's cellular operations have a combined population under license of over 500 million people. In addition, MIC operates a GSM clearing house, provides high-speed wireless data services in various countries and has a licenses to develop high speed wireless data services in other areas. MIC also has a major interest in Tele2 AB, an alternative pan-European telecom firm offering fixed and mobile telephony, data network and Internet services. MICC - Millicom Cellular $88.25 PLAY (conservative - bullish/credit spread): BUY PUT MAR-70.00 CQD-ON OI=40 ASK=$0.80 SELL PUT MAR-75.00 CQD-OO OI=58 BID=$1.15 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$74.50 __________________________________________________________________ VIP - Vimpel Communications $83.25 *** Another New High! *** Vimpel Communications (NYSE:VIP) is an established provider of telecommunications services in Russia, operating under the Bee Line family of brand names. VimpelCom's license portfolio covers much of Russia's population including the City of Moscow and the Moscow Region. VimpelCom introduced two digital communications standards to Russia and built a dual band GSM-900/1800 cellular network. The company also led the development and emergence of the mass consumer market for wireless communications in Russia by introducing a prepaid product solution. VimpelCom offers various technologies, such as wireless application protocol and BeeOnline, a multi-access web portal that provides a multitude of wireless information and entertainment services, including location-based features. VIP - Vimpel Communications $83.25 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-70.00 VIP-ON OI=317 ASK=$0.45 SELL PUT MAR-75.00 VIP-OO OI=164 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$74.35 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CMTL - Comtech Telcom $27.34 *** Pre-Earnings Slump? *** Comtech Telecommunications (NASDAQ:CMTL) designs, develops, produces and markets products, systems and services for advanced communications solutions. It conducts its business through three complementary segments: telecommunications transmission, mobile data communications and radio frequency microwave amplifiers. The telecommunications transmission segment provides products and systems for satellite, over-the-horizon microwave and wireless line-of-sight systems. The mobile data communications segment provides satellite-based mobile tracking and messaging services and mobile satellite transceivers for defense applications, such as logistics, support and battlefield command and control. The RF microwave amplifier segment designs, manufactures and markets solid-state, high-power, broadband RF microwave amplifier products. CMTL - Comtech Telcom $27.34 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 35 CQH CG 228 0.45 35.45 7.5% 1.3% * SELL CALL MAR 30 CQH CF 182 1.30 31.30 13.3% 4.2% __________________________________________________________________ FLML - Flamel Technologies $26.75 *** In A Trading Range? *** Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company engaged mainly in the development of two polymer-based delivery technologies for medical applications. The company's Micro-pump technology is a multi-particulate technology for oral ingestion of small molecule drugs with applications in controlled release, tastemasking and bioavailability enhancement. The company has three major products based on its Micropump technology: Asacard, a controlled-release formulation of aspirin for the treatment of cardiovascular disease; Metformin XL, a controlled-release form of Metformin that is in development for use for the treatment of Type II diabetes, and Genvir, a controlled-release acyclovir for the treatment of genital herpes. In addition, FLML has developed new herbicide delivery systems and has patented a biomaterial, ColCys. FLML - Flamel Technologies $26.75 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 35 FLU CG 3033 0.35 35.35 6.0% 1.0% * SELL CALL MAR 30 FLU CF 2520 1.05 31.05 12.1% 3.4% __________________________________________________________________ MHS - Medco Health Solutions $31.85 *** Big Contract Loss! *** Medco Health Solutions (NYSE:MHS) is a pharmacy benefit manager that provides sophisticated programs and services for its clients and the members of their pharmacy benefit plans, as well as for the physicians and pharmacies that the members use. The firm's programs and services help clients control the cost and enhance the quality of the prescription drug benefits that they offer to their members. Medco accomplishes this primarily by negotiating competitive rebates and discounts from pharmaceutical companies, obtaining competitive discounts from retail pharmacies and also administering prescriptions filled through its national networks of retail pharmacies or its own home delivery pharmacies. MHS - Medco Health Solutions $31.85 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 35 MHS CG 282 0.45 35.45 4.4% 1.3% * SELL CALL MAR 30 MHS CF 40 2.60 32.60 14.8% 8.0% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AMZN - Amazon.com $44.87 *** Consolidation Underway *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN - Amazon.com $44.87 PLAY (conservative - bearish/credit spread): BUY CALL MAR-55.00 ZQN-CK OI=7195 ASK=$0.15 SELL CALL MAR-50.00 ZQN-CJ OI=14302 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$50.50 __________________________________________________________________ CTAS - Cintas $42.77 *** Sell-Off In Progress! *** Cintas (NASDAQ:CTAS) provides highly specialized services to businesses of all types throughout North America. The company designs, manufactures and implements corporate identity uniform programs and provides entrance mats, restroom supplies, unique promotional products and first aid and safety products for over 500,000 businesses. Cintas classifies its businesses into two operating segments: rentals and other services. The rentals operating segment designs and manufactures corporate identity uniforms that it rents, along with other items, to its customers. The other services segment involves the design, manufacture and direct sale of uniforms to its customers, as well as the rental or sale of ancillary services including hygiene supplies, first aid products and services and clean-room supplies. CTAS - Cintas $42.77 PLAY (less conservative - bearish/credit spread): BUY CALL MAR-50.00 NQQ-CJ OI=74 ASK=$0.20 SELL CALL MAR-45.00 NQQ-CI OI=191 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$45.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ********** Watch List ********** Semis, Drugs & Organic foods ___________________________________________________________________ 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. ___________________________________________________________________ Marvell Technology Group - MRVL - close: 45.35 change: +1.87 WHAT TO WATCH: With all the good semiconductor news investors may want to keep an eye on MRVL. The stock broke out over the $45 level today on better than average volume but it still has longer-term resistance near $46.50. Fortunately, its P&F chart looks bullish as well and points to a $61 price target. Earnings for MRVL should be February 26th. Chart= --- Whole Foods Market Inc - WFMI - close: 77.46 change: +2.25 WHAT TO WATCH: Up, up and away! Shares of WFMI are soaring. The stock has broken out of its recent rising channel and its trajectory has become much, much steeper. Driving the stock is the recent earnings report where the company beat estimates during arguably the best quarter the company has ever had. Strong sales growth and impressive same-store sales growth could keep this one on the run but look for the right entry point. Right now WFMI looks very extended. Chart= --- Invitrogen Corp - IVGN - close: 75.21 change: -1.03 WHAT TO WATCH: Keep an eye on IVGN. The company recently announced earnings and we're seeing some post-earnings depression as momentum traders exit their positions. IVGN is approaching support at $74 but we're not sure it will hold. A better bullish entry point would be a bounce from its 50-dma just under $72.00. However, shares tend to overshoot the 50-dma so look for a bounce from the $70.00 level. Chart= --- United Technologies - UTX - close: 97.36 change: +2.18 WHAT TO WATCH: UTX was the best performing Dow component today with a 2.29% gain. Some shuffling in the S&P 500 really drove volume for UTX and demand for the stock sent it to a new all-time high. The stock remains near the top of its current 2 1/2 month trading range but bullish traders may want to reconsider new positions if it can breakout over the $98 level. Such a move would produce a fresh triple-top buy signal on its P&F chart. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- RIMM $92.80 -1.66 - RIMM is starting to see a little bit of profit taking. If it breaks $90 traders can target the $85 level. PEP $51.27 +0.27 - Pepsico recently broke out to the upside on its earnings report and the retest of $50.00 two days ago looks good. Bulls can consider new positions here but do so with the appropriate time frame. Shares of PEP tend to move slowly. JNJ $53.89 -0.52 - The recent run for JNJ may be slowing and traders can watch it for support near 52.50-53.00. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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