The Option Investor Newsletter Thursday 02-19-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Conviction Test Futures Markets: Gravestone Doji Index Trader Wrap: Sell the news, or option expiration? Market Sentiment: A Change in the wind? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-19-2004 High Low Volume Advance/Decline DJIA 10664.73 - 7.30 10753.63 10656.59 1.96 bln 1189/2040 NASDAQ 2045.96 - 30.50 2094.92 2045.96 2.07 bln 1128/2036 S&P 100 566.06 - 2.27 571.62 565.83 Totals 2317/4076 S&P 500 1147.06 - 4.76 1158.57 1146.83 W5000 11176.92 - 60.40 11302.82 11174.80 RUS 2000 582.59 - 8.89 596.00 582.38 DJ TRANS 2892.80 - 8.30 2933.37 2892.67 VIX 15.80 + 0.21 15.97 15.20 VXO (VIX-O)16.90 + 1.16 16.90 15.46 VXN 24.24 + 0.51 24.55 23.16 Total Volume 4,386M Total UpVol 1,116M Total DnVol 3,170M Total Adv 2672 Total Dcl 4591 52wk Highs 507 52wk Lows 10 TRIN 0.88 NAZTRIN 2.25 PUT/CALL 0.72 ************************************************************ Conviction Test Good earnings news breaking out all over but economics are not following the plan. The combination of these factors in an option expiration week turned into new highs and a strong drop from those highs. This created a test of conviction for those already long and a buying opportunity for those who still want to be long. Dow Chart - Daily Nasdaq Chart - daily The fly in the ointment for investors was the Philly Fed Survey which dropped to 31.4 from 38.8 last month. This was the 8th consecutive month in positive territory but a major drop from last months high. The internal components were not exciting with New Orders falling to 27.8 from 36.5. Shipments fell to only 19.3 from 33.1. Back orders fell into the low single digits at 4.4 from 10.7 and was the second month of declines. Employment fell to only 12.5 from 17.5 and was also the second monthly decline. Prices paid rose to 43.7 from 35.3 and prices received jumped from 9.4 to 18.9. The picture was very clear. Orders, production and employment fell while prices showed a significant inflationary jump. The only really positive component was the jump in the average workweek to 23.6 from 12.9. This suggests companies are trying to make do with existing workers and at some point they will have to hire if hours worked continues to rise. Inventories also rose for the first time in five months. Could that have been on purpose or because sales suddenly shrank? The prices paid component reached a nine-year high and it was the seventh monthly increase. This trend was also seen in the NY Empire Survey earlier this week. Jobless Claims fell more than expected to 344,000 and back under the 350K level again. However, claims for last week were revised upward by +5,000 to 368K. The four-week average rose to 352,000 and the highest level since December. The bad news here was a significant jump in continuing claims to 3.186 million from 3.08 million. Most analysts suggested the jump was weather related but I miss the connection. This report was a neutral for the market despite the minor relief bounce in the futures when it was released. Leading Indicators rose by +0.5% and inline with expectations. Considering this number is composed of already released data from other reports including jobless claims, stock market and bond data is should be called the lagging indicators. Only five of the ten components showed any gains but this was the biggest jump since October. It is mostly ignored since the data is already old. The biggest news of the day was old news and that was the AMAT/BRCM boost to the chip sector. The earnings news for the day was less than exciting. Wal-Mart said an excellent January pulled the 4Q out of mediocre territory and turned it into a double digit quarter. Wal-Mart said the holiday period was challenging and it had to result to deep discounts to move apparel. WMT posted 63 cents and inline with estimates and said strength in international sales and a resurgence at Sam's Club helped WMT meet expectations. CEO Lee Scott said 2003 was not a great year and he was much more optimistic about 2004. Sales for the quarter hit $74.49B. The bad news for other retailers was a new commitment to be the low price leader in 2004 and he reiterated they were not going to raise prices to increase profits. Competitor Target beat the street by four cents and posted a 91 cent profit. Sales were only a fraction of Wal-Mart's at $15.57B but were inline with estimates. The better results were do to higher gross margins and improved product mix. Credit card operations added +$641 million in profits to the total. Considering how stores like Sears have been fleeing the credit card business this is remarkable. After the bell today HPQ formally announced their earnings of 35 cents which they preannounced without warning last week. The market was less than impressed with the inline guidance. The number of companies reporting has slowed to a trickle but most are still beating estimates. These companies beat tonight, UVN +1, JWN +8, BEAS +1, OCLR +1, PTEK +1, SRNA +1. Unfortunately most guided inline with estimates or slightly down. The quality of companies this late in the cycle precludes much in the way of blowout guidance. The conviction of those long was tested today after the Dow set a new 52-week high at 10753 and the Nasdaq came very close to 2100 at 2094. The worst performer was the Russell at -1.50% with the Nasdaq close behind at -1.46%. The Nasdaq closed down over -30 points after being up +17 at the open. The range of movement was nearly 50 points but the majority of it was down. After the gap open there was never a serious attempt to move higher for the Nasdaq but the Dow hit its highs as late as 2:PM. The Dow gapped up to 10725 and after a brief pullback rallied to 10750 twice about two hours apart beginning shortly after noon. The Dow showed amazing strength until the crash but the Nasdaq and Russell bled points from the start. At 3:20 all the markets imploded with the Dow dropping nearly -80 points in just under 30 min. The Russell fell -8 points from 2:30 into the close. The initial selling in the small caps and techs with the Dow remaining so strong appeared to be rotation into the blue chips. I remarked in the monitor at the time that it appeared to be a rotation in progress and we could have a significant dip ahead. The conviction part comes tomorrow. The Nasdaq has nearly completed another test of its 50dma currently at 2040 and that retest has come on the heels of a lower high. This is a bad sign and could suggest the retest may not hold on the initial try. There is still strong support at 2000 and the 100dma is rapidly rising to meet the price at that 2000 level. Currently the 100dma is 1980. Buyers with probably have their conviction tested again on Friday as those levels are targeted. Make no mistake this is a serious support test for the Nasdaq. A failure at 2000 could be very dangerous. There are two wild cards in play here. The first is Option Expiration on Friday. This massive swing from new highs to retesting support on Thursday could have been the result of option positions being squared. The last two months we have had strong opex rallies and traders could have overshot for February and produced a negative bias to the settlements. This could continue through Friday. The second wild card is the Dow. The Dow has not tested its 50dma since November. It is way over due despite the current bullish sentiment. Fear of a Dow correction could keep buyers on the sidelines until some stability appears. Fortunately for the Dow to retest the 50dma at 10439 it will have to break several levels of strong support at 10650, 10600 and 10550. This is not likely to happen in one day and may not happen at all. The spark for the entire morning rally was AMAT and BRCM. Both opened much higher and then closed negative for the day. AMAT hit 23.86 at the open and closed at 22.14 and the low for the day. BRCM hit a high of $44 and closed at $41.56. The SOX hit a high for the month at 535 and then closed -20 points lower at 515. This was a huge reversal in the semiconductor stocks and it is no wonder the Nasdaq and Russell followed suit. The SOX closed right on its 50dma but that has not been real support. The SOX has performed better in recent weeks from the 100dma now at 501. Semiconductor Sector (SOX) Chart - Daily Russell 2000 - Chart Late tonight the Semiconductor Book-to-Bill was released for January and it came in at 1.18 and a drop from the 1.23 final for December. This was the sixth monthly rise for semiconductor orders and the ratio would have been higher but shipments rose +8.2% compared to only a rise of +3.7% for orders. This is very good news for the sector but the late release of the numbers tends to be overlooked by most investors. This could slow any chip selling on Friday if it makes the headlines. The bottom line to all this mumbo jumbo is that we are likely to see the Nasdaq/SOX take another dip down on Friday and that dip could continue into next week due to a lack of further catalysts for February. This is the buying opportunity that all tech bulls should be excited about. At least those with conviction for their position. If the afternoon downdraft was options related then the dip should be brief. However, the Nasdaq was the laggard all week and we need to see how it performs on Monday before making any judgment calls. The only material economic report on Friday is the CPI and that is before the market opens. As a trader tonight I would suggest not opening any new long positions until Monday. Option expiration Friday's are usually wild and crazy at the open followed by total boredom. With the potential for more selling and the ever present weekend event risk I would wait for Monday to go bargain shopping. Even then it could be risky because next week is filled with economic reports that could mimic the Philly Fed today. This is a risky period for February but any weakness should simply be more consolidation in the current range. You are going to get tired of hearing that but until the range breaks it is still true. The range on the Nasdaq is still 2000-2100 and 10450-10700 on the Dow. Take Friday off and make it a three-day weekend. Come back next week ready to pick up some bargains at a discount. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Gravestone Doji Jonathan Levinson The NQ broke above strong resistance at 1520 before the cash open, but reversed strongly in the late afternoon. ES and YM were notably stronger but also closed negative, while treasuries and precious metals recovered from intraday lows to close lightly positive. The US Dollar Index drifted sideways in positive territory, digesting yesterday's substantial gain. 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 tickled the descending daily resistance line before falling back to within positive territory atop yesterday's large outside reversal. The absence of weakness was sufficient to turn the daily cycle oscillators up, halting the downphase and leaving us on bullish kisses. Any show of strength tomorrow will break the descending trendline in place for the past 6 months and generate fresh buy signals on the dollar from bullish divergences. 86.40 is next resistance. Daily chart of April gold April gold was sold aggressively and reached a bottom at 408.80, just above 408 support discussed here yesterday. The bounce failed at 412 resistance, and contract spent the remainder of the session caught between the two levels and closing higher by .40 at 411. The HUI and XAU recovered from strong initial weakness to close lower by .18% at 100.24 for the XAU, -.31% at 229.83 for the HUI. As the binary dollar trade continues apace in precious metals, I'd expect a dollar breakout to again challenge 408 and next support at 402. The daily cycle upphase continues, but the Macd is hesitating, and another lower close would likely abort the current upphase. Rising trendline support has advanced from 398 to 400, and tomorrow is setting itself up as an important day for gold traders. Daily chart of the ten year note yield Ten year note yields (TNX) moved within a wide range today, spiking down on the disappointing Philly Fed report released at noon. Bonds had been very weak until then, but realigned with the daily cycle trend following the bad news, presumably as traders assumed that it would discourage the Fed from tightening for a longer time. Equities had held up until the final hour selloff, despite a net addition of 2.5B from the Fed via its morning open market operations. For the day, the TNX rose 0.3 bps or 0.07% to 4.052%. Daily NQ candles The NQ's gravestone doji was also a key reversal, engulfing the prior two days and closing at the lowest level in 8 sessions. Everyone who's gone long and held in nearly 2 weeks is now underwater. The move bounced from our posted support at 1482, and a print below 1480 opens the door to the head and shoulders top we've been discussing for the past few Futures Wraps. The daily cycle upphase hesitated but did not abort, although the Macd left off with a bearish kiss. Any weakness tomorrow could lead to a cascade through 1480, but with options expiry upon us and its tendency for rangebound, "tractor-beam" trading, a strong directional move for Friday is difficult to predict. A move below 1480 will be our first clue that something's amiss. Support is at 1460, followed by 1445. For the day, NQ dropped 23 points or 1.52% to close at 1488. 30 minute 20 day chart of the NQ The 30 minute NQ reaffirmed why bearish oscillator divergences *do* matter, with multiple support lines shredded following the bond market close at 3PM. Until then, it was a mere doji reversal, but the action of the last hour and fifteen minutes turned it into a key outside reversal. The strong rejection at a higher high followed by a steep plunge to lower lows portends followthrough to the downside, but the 30 minute cycle oscillators are entering oversold territory and don't have a tendency to trend for long at either extreme. The daily cycle downphase was likely violated by this afternoon's spike to 1482, but until it turns, we have to expect support to hold. With Fibonacci support at 1482, the 30 minute cycle oscillator nearing the bottom of its range and op-ex Friday tomorrow, there's a good case to be made for 1480 holding. There's light support at 1476, below which 1460. Look for resistance at 1488, 1492, 1502 and 1511. Daily ES candles ES fell 4.50 to close at 1146.75, a slight .39% decline. The selloff was as sudden as that which occurred on the NQ, but the prior weakness didn't come close to the NQ. Nevertheless, longs from this week were trapped by the post-3PM selloff, and the daily cycle oscillators are set up for a bearish divergence if the price fails to turn back up. As on the NQ, the Macd turned back down and left off with a bearish kiss. Interestingly, the ES failed to take out yesterday's high of 1158.75, peaking today at 1158.50. We therefore had a lower low and lower high, but not a key reversal on the gravestone doji. 20 day 30 minute chart of the ES Again, the ES is notably farther from the edge of its proverbial cliff than is the NQ, and the 30 minute cycle oscillators show that the downphase is less advanced than on the NQ. Next support is at 1144, followed by 1142 and then the confluence zone from 1130-1136 that we recall so well. Despite the mild .39% decline, bears were spared the rising triangle breakout that seemed to be imminently forming. Again, the daily cycle upphase will be the key here, and if there's any further selling tomorrow, that should cap the current bull run. Note that just as the US Dollar Index is a few ticks away from a breakout, so is the ES verging on a daily cycle breakdown. While it's a trite expression, tomorrow is going to be a very interesting session. 150-tick ES Nothing to see here. The short cycle oscillators were bouncing off the bottom of the 30 minute cycle channel following the initial large volume selloff before 3:30PM. 1153 was strong support right up until it wasn't, and it should provide formidable support on any bounce. Daily YM candles YM dropped a mere 8 points or .07%, the clear leader throughout the day and mostly oblivious to the damage wrought on the NQ. It printed a new roughly 32 month high today before the selling took it down, but despite the gravestone doji print, it posted a higher low and higher high. Cyclically, it's lined up similarly to the ES. 20 day 30 minute chart of the YM Tomorrow is a critical day, with the US Dollar Index on the verge of a breakout and the ES and NQ teetering on the verge of a divergent daily cycle upphase abort. Precious metals and bonds both strained at their daily cycle upphases as well today. Whether these daily cycle phases end early or not is the question for now, but it's becoming apparent that they will end. Given the extent to which the dollar has declined and equities, treasuries and commodities have extended, the next weekly cycles have the potential to change the current market picture dramatically. Tomorrow could give us our first confirmation of that turn. 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 ******************** Sell the news, or option expiration? Semiconductor equipment maker Applied Materials (NASDAQ:AMAT) $22.13 -0.8% surged to a session high of $23.86 in the first 5- minutes of trade, up more than 6% than Wednesday's close, to then give back those gains to finish lower. The NASDAQ-100 Tracking Stock (AMEX:QQQ) $36.98 -1.51% jumped to $37.90 in the first 5-minutes of trade, up more than 1% from Wednesday's close, to then give back those gains to fish lower. One could argue a case of "sell the news" as the GSTI Software Index (GSO.X) 156.87 -2.48% traded soft all session after tax preparation software-maker Intuit (NSADAQ:INTU) $45.24 -8.03% lead sector declines as investors "sold the news" when the company's forward guidance didn't add up to Wall Street's consensus estimates. One could also argue that today's index expiration and tomorrow's pending tracking stock and individual stock expiration played a role in today's reversal of fortune session. Jim Brown posted some "Max Pain" levels for various indices, trackers and stocks in this afternoon's Market Monitor. I added the Semiconductor HOLDR's (AMEX:SMH) $41.88 -1.96% as well as Newmont Mining (NYSE:NEM) $44.04 +0.93% to the list. A quick check of AMAT's February Max Pain Theory value was calculated at $22.50. Sell the news, or option expiration related? Market Monitor - 02:34:42-02:39:33 PM EST I tend to view Max Pain theory with a grain of salt, but it can certainly have an impact on how the major indices and stocks trade into an option expiration. Had I been alert to QQQ Max Pain theory of $37, I might have taken some of my own advice this morning at 09:53:00 AM EST when I noted in the Market Monitor that the opening 5-minute bar on the QQQ was $37.85 and today's (Thursday's) DAILY R2. I further noted that one thing traders might be cognizant of is tomorrow's option expiration for the QQQ, where traders might be alert to some gravitation toward the $37.00 level. We had been seeing a lot of trade around the $37.43 level the last couple of weeks and I thought $38.00 was going to be some heavy resistance going into Friday's close. Again... I take Max Pain theory levels with a grain of salt, but the QQQ certainly seemed to have some type of Star Trekian gravitational force of selling pulling it lower into today's close. Still, I can't entirely dismiss the thought that today's reversal on "good news" from AMAT can't be in play. I'm a bit shocked that Biogen Idec (NASDAQ:BIIB) $58.88 +10.61% and Elan (NYSE:ELN) $13.33 +12.96% surged again in today's session. When buyers show conviction, then a February Max Pain value of $45 for such a large-cap biotech like Biogen means nothing, where this would be an example of "buy the news and keep buying!" Market Snapshot / Internals - 02/19/04 Close The hourly intervals do show some internal as well as price action that would tie in with broader observations of what indices have been stronger than others in recent weeks. The NYSE Composite ($NYA.X) 6,715.30 -0.06% did hold strong until the last hour of trade, whereas the NASDAQ Composite (COMPX) 2,045.96 -1.47% found a more steady decline in price action as the session progressed. The Semiconductor Index (SOX.X), with AMAT as a positive catalyst, matched its December 1, 2003 relative "left shoulder" high of 536.32 with a morning high of 535.55. If buyers had shown as much conviction for the semiconductors in today's session, or the chip equipment stocks, as buyers have for BIIB and ELN, then we wouldn't have to wonder if today's trade was sell the news, or option expiration related. Pivot Analysis Matrix - Some of tomorrow's DAILY S2-R2 point ranges would rival those found in the WEEKLY S2-R2 ranges, and when I consider that much of today's economic data wasn't overly surprising one way or the other (bullish or bearish), I've got to think today's session was heavily influenced by some option expiration activity. I would have to think there are a heck of a lot more options being traded, or positions being hedged in the INDU, DIA, SPX, SPY, NDX, QQQ and SOX than in the BIX.X or the TNX.X. It should be notable that the S&P Banks Index (BIX.X) 354.43 +0.32% did see a pretty good price swing intra-day, but Treasuries and the Dollar Index (dx00y) were little changed considering the more wild gyrations of the major indices. I will make a note tonight that QQQ Max Pain for MARCH, which will be a Triple Witching expiration is current calculated at $36.00. This can change in the day's and weeks to come and would ONLY serve as a guidepost of where the bulk of QQQ put/call open interest could be taken to unprofitable levels by March 19 expiration. Wilshire 5000 Total Market Index ($TMW.X) - Daily Intervals In last night's Index Wrap we quickly looked at both the NYSE Composite ($NYA.X) and NASDAQ Composite (COMPX). I like to view the Wilshire 5000 as somewhat of a great mixing pot of all stocks large and small, which combines stocks listed on both the NYSE and NASDAQ. The only "level" I really see providing resistance for this broadest of broad index is a spike relative low of 11,290, which dates back to October 1999, where a recent horizontal support level could be tied to relative highs found in January and March of 2002 before the $TMW.X went on to trade its October 2002 lows of 7,273.40. I didn't show a conventional retracement on the above chart, but if I had taken a retracement from the all-time high of 1,499.60 to that October 2002 low, 50% retracement would be at 11,132.50. A couple of investors also pointed out that both the NYSE and NASDAQ NH/NL indications could be combined to calculated a "total market" NH/NL ratio. I show the NYSE and NASDAQ NH/NL separate. NASDAQ 100-Tracking Stock (QQQ) Chart - Daily Intervals An intra-day chart would show the QQQ edging lower into its MONTHLY Pivot of $37.43, and then picking up some momentum once a 5-minute bar chart close below $37.43 was found. A test for the thought that today's trade was largely option expiration related would be for the QQQ to traded either side of $37 tomorrow, perhaps a range between $36.70 and $37.25, with a Friday close right near $37.00. Today's QQQ high may also be taken notes on, where its high is tied to the "right shoulder" of the potential head/shoulder top formation in the Semiconductor Index (SOX.X). S&P 500 Index (SPX.X) Chart - Daily Intervals The SPX can't make up its mind between 1,143 and 1,157 for six sessions now. Even in the morning updates we see one or two stocks each day generating point and figure buy signals on alternating days. Dow Diamonds (DIA) Chart - Daily Intervals With the OEX and QQQ showing some ability to gravitate toward a Max Pain level, I thought I'd quickly slap a fitted retracement on the DIA. Nothing too scientific about the fitted retracement and just anchored it to a December low and placed the 50% at $105, from Jim's notes. The DIA did show the ability to fall from roughly 107 to 105 on January 28th. I went back and checked the Index Trader Wrap archives and found I had discussed that day's trade as perhaps being tied to the markets thought of potential Fed tightening. 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 **************** A Change in the wind? -J. Brown Is investor sentiment changing? The markets rallied on good news this morning after Wal-Mart and Applied Materials issued positive earnings reports. WMT, a Dow component, helped lead the Dow to a new 32-month high. AMAT, a component of the NASDAQ-100 and the SOX index, also traded strongly higher this morning only to give it all back and more by the close. It is this reversal in techs that is disturbing. Most of the tech sector indices were trading higher for the first half of the session but a late day reversal washed over the entire group. Actually, the reversal hit the entire market. Not one sector closed near its highs save for the XAU gold & silver index and only this pared its losses from the morning as investors moved into gold in self defense. For the markets to turn lower on good news may signal a change in direction, even if it's just a short-term change. Looking more closely at the sector indices I notice the Dow Transports are looking pretty weak after their recent failure under the 50-dma. You've heard it before. Traditional Dow theory states that we can't have an extended rally without the Transports participating and right now they look ready to lead the markets lower. I would go into more detail about the reversal in the various tech sectors but they all look the same. The selling picked up strongly in the afternoon and frankly the whole market looks poised to trade lower tomorrow morning. Market internals were bearish with declining stocks outnumbering advancing stocks nearly 18 to 10 on the NYSE and 2 to 1 on the NASDAQ. Down volume was almost double up volume on the NYSE and more than four times up volume on the NASDAQ. Buckle your seat belts and store you tray tables in the upright position. Tomorrow could be a volatile option expiration Friday. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7416 Current : 10664 Moving Averages: (Simple) 10-dma: 10639 50-dma: 10439 200-dma: 9609 S&P 500 ($SPX) 52-week High: 1158 52-week Low : 788 Current : 1147 Moving Averages: (Simple) 10-dma: 1146 50-dma: 1119 200-dma: 1033 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 938 Current : 1484 Moving Averages: (Simple) 10-dma: 1495 50-dma: 1481 200-dma: 1347 ----------------------------------------------------------------- We have an interesting development in the volatility indices. The VXO added 7.3% today on the market sell-off. More importantly it seems to have set a new higher low, which could be forecasting a trend change. CBOE Market Volatility Index (VIX) = 15.80 +0.21 CBOE Mkt Volatility old VIX (VXO) = 16.90 +1.16 Nasdaq Volatility Index (VXN) = 24.24 +0.51 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.72 1,242,874 890,484 Equity Only 0.59 953,805 560,338 OEX 1.58 39,892 62,931 QQQ 2.67 65,589 175,182 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 77.6 + 0 Bull Confirmed NASDAQ-100 69.0 - 1 Bear Alert Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 87.6 - 1 Bull Confirmed S&P 100 89.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.01 10-dma: 0.95 21-dma: 0.99 55-dma: 0.99 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 1043 1042 Decliners 1794 2012 New Highs 327 243 New Lows 11 11 Up Volume 690M 366M Down Vol. 1177M 1655M Total Vol. 1914M 2040M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 02/10/04 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 No change for the Commercial traders. Small Traders have grown slightly more bullish. Commercials Long Short Net % Of OI 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%) 02/10/04 412,217 414,044 (1,827) (0.2%) 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 01/23/04 141,107 100,090 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% 02/10/04 143,496 80,362 63,134 28.2% 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 are starting to put some money to work and we're seeing another jump in contracts for both longs and shorts. Small traders have pared back their longs a bit and put some of that money on the short side. Commercials Long Short Net % Of OI 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%) 02/10/04 297,601 356,630 (59,029) ( 9.0%) 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 01/23/04 187,270 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% 02/10/04 110,480 58,428 52,052 30.8% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Not much change from the Commercial traders but they are a tiny bit more bullish here. Small Traders have significantly bumped up their long positions. Commercials Long Short Net % of OI 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% 02/10/04 44,406 40,439 3,967 4.7% 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 01/23/04 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%) 02/10/04 9,906 13,018 (3,112) (13.6%) 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 Not much change this week for Commercials. Small traders are slightly more bearish on the Dow. Commercials Long Short Net % of OI 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% 02/10/04 21,764 11,974 9,790 29.0% 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 01/23/04 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%) 02/10/04 6,267 14,220 (7,953) (38.8%) Most bearish reading of the year: (10,136) - 12/16/03 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Thursday 02-19-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: IBM Dropped Puts: None Call Play Updates: AHC, APOL, ATH, BRL, DHR, DHI, GD, PD, QCOM, RNR New Calls Plays: RJR Put Play Updates: AVID, MMM New Put Plays: CTSH **************** 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: ***** Int'l Bus. Machines - IBM - cls: 97.80 chng: -0.62 stp: 97.50 It's time to throw in the towel on Big Blue. Not only has the stock been unable to participate in the rally attempts in the overall market, it has actually been losing ground and today's breakdown under the $98 level does not bode well for the bulls. In fact, the stock came within 2 cents of our $97.50 stop today before a slight rebound at the close. IBM looks like it will take out that stop tomorrow and then there's only mild support at $97 before a drop back to the 50-dma just over $95. Let's cut our losses here and drop the play tonight. Any rebound into the $98-99 area should be looked at as a gift, affording a more favorable exit. Picked on February 1st at $99.23 Change since picked: -1.43 Earnings Date 4/15/04 (unconfirmed) Average Daily Volume = 5.34 mln Chart = PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amerada Hess Corp. - AHC - cls: 61.53 chng: +0.28 stop: 57.75*new* Defying the odds, shares of AHC have continued to steadily climb all week, with each day yielding a new 52-week high. Today's action was no different, with the stock actually tapping the $62 resistance level before dropping back a bit with the rest of the market heading south. With the 10-dma ($59.96) now reinforcing near support at $60, a pullback to that level can be used for continuation entries. Support at $58 should now be very strong, with the 20-dma ($58.35) above that level and the 30-dma ($57.99) not far behind. Raise stops to $57.75. Once AHC pushes through the $62 level, look for next solid resistance in the $64-65 area. Picked on February 10th at $59.53 Change since picked: +2.00 Earnings Date 1/28/04 (confirmed) Average Daily Volume = 1.07 mln Chart = --- Apollo Group - APOL - close: 77.61 change: +0.47 stop: 73.50 Suffering the same fate as the broad market, APOL keeps testing resistance near $79, but so far has been rejected on each attempt. That pattern repeated on Thursday, with the stock pushing right up to resistance and then fading throughout the afternoon, pressured by the decline in the rest of the market. Support does seem to be building near $77 and aggressive traders can target new entries on another successful rebound there. But APOL really looks like it could dip a bit further and come back to test the $75 support level before kicking off another strong upward push. With that support level reinforced by the 20-dma ($75.48) and the 30-dma ($74.62), we like new entries near that level. Traders that would prefer to enter on strength really need to see a breakout over the $80 level before playing. Maintain stops at $73.50 for now. Picked on February 1st at $77.44 Change since picked: +0.17 Earnings Date 12/18/03 (confirmed) Average Daily Volume = 1.65 mln Chart = --- Anthem, Inc. - ATH - close: 82.60 change: -0.23 stop: 81.00 After just cresting the $85 level on Friday (enough to activate our trigger), ATH's performance this week has really been disappointing, as the stock has lost ground every day. As we've noted before, the $82-83 area should be solid support if the stock has any hope of reaching higher levels over the near term and the 20-dma ($82.32) looks like a key level to watch heading into the weekend. A rebound from that level can be used for aggressive traders to establish new positions, but if it fails to produce that rebound, then it appears likely that our stop will be threatened. Traders looking to enter on strength will need to wait for ATH to reclaim the $85 level and push through last Friday's $85.25 high before playing. Picked on February 12th at $84.53 Change since picked: -1.93 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.46 mln Chart = --- Barr Pharmaceuticals - BRL - cls: 78.90 chg: -0.66 stop: 77.95*new* Uh-oh! BRL trade up and through our trigger of $80.61 on Wednesday but promptly rolled over and closed back under the $80 level. That's never a good sign and today's weakness confirms yesterday's failed rally. Currently the stock is trading at its 10-dma. Unfortunately, we don't expect the 10-dma to hold it and BRL will probably retest support at the $78.00 level. We rarely do it but we're going to slide our stop loss backwards. Instead of $78.00 we're going to use 77.95 and give BRL a chance to bounce from the $78 level. If it breaks $78.00 then we should be stopped out. Picked on February 18 at $80.61 Change since picked: - 1.71 Earnings Date 02/05/04 (confirmed) Average Daily Volume: 730 thousand Chart = --- Danaher Corp - DHR - close: 92.81 cls: -0.19 stop: 90.00 *new* Shares of DHR followed the market lower in the last 90 minutes of trading today. The trend of lower highs is beginning to take a stronger shape and the stock looks ready to retest support at its rising 50-dma. Aggressive traders may want to consider buying a bounce from the 50-dma (near $91) but we are not suggesting new positions at this time until DHR can trade back above the $95.00 level. Picked on January 30 at $91.01 Change since picked: + 1.80 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand Chart = --- D.R.Horton - DHI - close: 30.50 chg: -0.29 stop: 27.99 The late day profit taking also hit the homebuilders as the DJUSHB index closed under the 600 level. DHI actually lead the group lower early on due to a downgrade from CSFB who lowered their rating from "neutral" to "under perform". DHI quickly slipped to the $30.00 before bouncing from support. Unfortunately, shares began to roll over again during the afternoon and both DHI and the sector look prone to more profit taking tomorrow. If DHI closes under the $30.00 level we would become very cautious. However, more aggressive traders can look for a potential entry point from the 29.35-29.50 level, which should be DHI's next support. Picked on February 08 at $30.00 Change since picked: + 0.50 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 2.4 million Chart = --- General Dynamics - GD - close: 95.26 chg: -0.51 stop: 92.00 In the last three days GD has been awarded another $91 million in defense contracts but it hasn't been enough to spark any fire under the share price. The sideways consolidation continues and we expect GD to retest the $94.00 level of support soon. Keep an eye on the DFI defense index. Defense has been one of the strongest sectors in the market recently but this afternoon's sell-off really began to pick up speed in the DFI. Traders can wait for a bounce from $94 as a new entry or wait for a move back over $96. Picked on February 08 at $96.88 Change since picked: - 1.62 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Phelps Dodge - PD - close: 81.88 chg: -0.44 stop: 78.00 There continues to be a lot of talk about the rise in metals, specifically copper and silver, due to the growing demand as the global economy picks up steam. Copper has been a real standout and added 2.45% in today's session to a new multi-year closing high. Strangely there seems to be a disconnect today between shares of PD and the rise in copper. We would have expected PD to trade higher on the commodity's move. Right now PD has a short-term trend of lower highs and is suggesting a retest of support at the $80 level soon. Aggressive traders can try and buy the next bounce from $80 but we would be cautious and look for a new (short-term) relative high above $83.50 before initiating any new positions. Picked on February 11 at $80.51 Change since picked: + 1.37 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 1.6 million Chart = --- Qualcomm, Inc. - QCOM - close: 58.79 change: -0.27 stop: 56.00 With the Technology sector's weakness this week, QCOM just hasn't been able to get it in gear. Despite that inability, it has been impressive that the stock was still able to challenge the $60 resistance level this morning, before heading south with the rest of the Technology sector. With our $60.75 trigger still untouched though, we remain in observation mode for now. QCOM should find support attain in the $57-58 area and that should provide a rebound for another run at resistance. Optimal entries will be found on the initial breakout over our trigger, while more cautious traders can wait for a possible pullback and rebound from the $60 level, as it transforms from resistance to support. Clearly, QCOM will need to see renewed strength from the NASDAQ in order to make that assault on resistance. Picked on February 17th at $59.55 Change since picked: -0.76 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 8.41 mln Chart = --- Renaissancere Ltd - RNR - close: 51.32 chg: -0.13 stop: 49.50 For the first time in days we're starting to see some weakness (a.k.a. profit taking) in the IUX insurance index. After being such a leader in the market, hitting new high after new high, traders are taking some money off the table. Shares of RNR have not been immune and after the Monday-Tuesday rally RNR has pulled back to its 10-dma. If the weakness in the IUX persists we could see the index test its 21-dma near the 320 level. That might suggest that RNR could test the $50.00 level of support. We'd be patient before initiating new positions and look for the bounce from $50.00. Picked on February 15 at $50.83 Change since picked: + 0.49 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = ************** NEW CALL PLAYS ************** RJ Reynolds Tobacco - RJR - cls: 59.73 chg: +0.36 stop: 57.50 Company Description: R.J. Reynolds Tobacco Holdings, Inc. is the parent company of R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco Company, Inc. R.J. Reynolds Tobacco Company is the second-largest tobacco company in the United States, manufacturing about one of every four cigarettes sold in the United States. Reynolds Tobacco's product line includes four of the nation's 10 best- selling cigarette brands: Camel, Winston, Salem and Doral. Santa Fe Natural Tobacco Company, Inc. manufactures Natural American Spirit cigarettes and other tobacco products, and markets them both nationally and internationally. (source: company press release) Why We Like It: We're going to add RJR to the call list both on its developing bullish technical picture and as a defensive play if the markets continue to slip lower. Technicals are turning bullish as the stock builds on its trend of higher lows and consolidation under resistance in the $60.00-60.50 level. RJR is also a defensive play based on its recession proof products and 6.4% annual dividend. We're going to use a TRIGGER at $60.51 to open the play. This should be a clean breakout above the recent highs. If we're triggered we'll use a stop loss at $57.50 but more conservative traders can probably get away with a stop under the 50-dma (near 58.50). RJR made some headlines recently when management stated their proposed merger with British American Tobacco's Brown and Williamson unit should close this summer. Together RJR, the No 2 U.S. tobacco company, and Brown and Williamson, the No 3 tobacco company, will form to become Reynolds American. They hope to compete more efficiently with their much larger rival Phillip Morris, owned by Altria Group (MO). Currently the merger is still under FTC review. Suggested Options: Looking over the March and May options we like the 55 and 60 strikes but our favorite is the March 55's. BUY CALL MAR 55 RJR-CK OI= 202 at $5.10 SL=3.00 BUY CALL MAR 60 RJR-CL OI=1585 at $1.35 SL=0.65 BUY CALL MAY 55 RJR-EK OI= 722 at $6.00 SL=4.00 BUY CALL MAY 60 RJR-EL OI=2995 at $2.90 SL=1.50 Annotated Chart: Picked on February xx at $xx.xx <-- see trigger Change since picked: + 0.00 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 699 thousand 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: 40.07 chg: -1.82 stop: 44.36 The early morning strength quickly faded for AVID and the stock moved lower in a steady decline the entire session. Shares actually pierced support at $40.00 before bouncing off its lows in the last 30 minutes. Volume was strong at 1.2 million shares, which is twice the norm. We might expect an oversold bounce from this round-number level at $40.00 but overall the bearish trend has held. We're going to lower our stop loss to 43.40. Short- term traders can begin to plan their exits as AVID approaches our first target near $38.00-38.50. Picked on February 04 at $42.87 Change since picked: - 2.80 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 612 thousand Chart = --- 3M Company - MMM - close: 79.10 change: -0.56 stop: 82.50 It hasn't really gotten moving with any conviction, but we certainly like the way MMM has been steadily losing ground all week. The drop at the end of the day on Thursday looks encouraging, as it has the stock closing back under the 100-dma ($79.32). We may be a bit premature here, but with daily oscillators now tipping over in solid bearish fashion, it looks like this break of the 100-dma should see more follow-through than the one earlier in the month. Trader that have been shorting the failed intraday rallies have gotten the best possible entries into the play so far and momentum traders are eagerly looking for a break below $77.50 to join the party. Maintain stops at $82.50 until we get that print at $77, which will issue the PnF Sell signal. Picked on February 15th at $79.68 Change since picked: +0.64 Earnings Date 1/20/04 (confirmed) Average Daily Volume = 2.74 mln Chart = ************* NEW PUT PLAYS ************* Cognizant Tech. - CTSH - close: 46.86 change: +2.37 stop: 42.75 Company Description: Cognizant Technology Solutions Corporation delivers full lifecycle solutions to complex software development and maintenance problems that companies face as they transition to e- business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. Among CTSH's prominent clients are ACNielsen Corporation, ADP, Inc., Brinker Int'l, Computer Sciences, The Dun & Bradstreet Corporation, First Data Corporation and Nielsen Media Research. Why we like it: There's no arguing the fact that shares of CTSH have had an amazing run over the past year, first clearing its highs near $25 and then steadily working higher in a steady rising channel. That run came to an end at the same time as the bullish run in the overall NASDAQ, as the stock reached the $57 level in late January. With weakness beginning to creep into the Technology market, CTSH fell back towards mild support in the $50-52 area ahead of its February 10th earnings release. After the post- release volatility subsided, the stock resumed its fresh downward trend and there has been quite the battle going on the past few days around the 50-dma ($49.65). The bulls lost that battle today, with the stock breaking down both below the average and the $49 support level. Although price did come to rest on potential support near $47, that does not look like a level that will hold. The PnF chart was already on a Sell signal with the drop in early February, but today's breakdown reinforces it with another Sell signal. Note that the current bearish price target is $40. That lines up nicely with historical support near $41, the site of the December lows. With potential near-term support at the 100-dma ($46.60) and then again at $45, breakdown entries are definitely the more aggressive strategy. Our preference would be for entries on a failed rebound near the 50-dma, or perhaps as high as $50, which should now be firm resistance. Since today' breakdown appears to have gotten the bearish slide going, there is really no need to use a trigger on the play. We'll target a drop into the $40-41 area and use an initial stop at $53, just over the 20-dma ($52.77) and 30-dma ($52.58). That's a wider stop than we normally recommend, so for traders that elect to enter on a break of the 100-dma, we would suggest using a stop at $51. Suggested Options: Aggressive short-term traders can use the March 45 Put, while those with a more conservative approach will want to use the March 50 put. Aggressive traders looking for more insulation against time decay will want to utilize the April strike. Our preferred option is the April 45 strike, as it provides more time until expiration. BUY PUT MAR-50 UPU-OJ OI= 258 at $4.20 SL=2.50 BUY PUT MAR-45 UPU-OI OI=1222 at $1.75 SL=0.80 BUY PUT APR-45*UPU-PI OI= 757 at $2.65 SL=1.25 Annotated Chart of CTSH: Chart = Picked on February 19th at $47.49 Change since picked: +0.00 Earnings Date 2/10/04 (confirmed) Average Daily Volume = 1.24 mln Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 02-19-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Drugs, Internet and a Cat. Traders Corner: Getting A Head Start -- The New March Positions Traders Corner: Subscriber Mail plus my CBOE "sentiment" model ********** WATCH LIST ********** Drugs, Internet and a Cat. ___________________________________________________________________ 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. ___________________________________________________________________ Forest Labs - FRX - close: 72.90 change: -1.11 WHAT TO WATCH: A couple of days ago we mentioned in the MarketMonitor that FRX was starting to look a bit weak. The bullish trend does appear to be in jeopardy as its technical oscillators have all turned clearly bearish. If FRX trades under $72.00 it will reverse its current P&F chart into a sell signal. However, before you start planning any short trades be aware that the 50-dma may be support as should the $70.00 region. A break down under either may suggest a test of the gap from January. Chart= --- Netease.com - NTES - close: 48.45 change: -3.01 WHAT TO WATCH: Aggressive players can keep their eye on NTES. This Chinese Internet stock soared yesterday after announcing earnings. Today's 5.84% loss is only a 38.2% retracement of yesterday's rally. The close under $50.00 may be a concern for bulls but the daily chart appears to be building a reverse head- and-shoulders pattern. Entry points for longs could be a bounce from the 200-dma (near 45.00) or a move above yesterday's high near $52.00. Chart= --- Caterpillar - CAT - close: 78.53 change: -0.38 WHAT TO WATCH: We're still watching this Dow component for a move over the $80.00 level and its 50-dma (80.81). Unfortunately, today marked its second failed rally at $80 in three days. The stock could be building a bear flag. If it breaks the $77.00 level aggressive traders could go short with a tight stop. The rest of us might want to wait for a breakdown under $75 to consider shorts. Chart= --- Bard C.R. - BCR - close: 93.63 change: -0.45 WHAT TO WATCH: The profit taking in BCR has been rather mild considering its extensive run up over the past several weeks. While we're tempted to consider buying a dip to $90.00 its technical oscillators are producing some concerning divergences that may portend a deeper correction. Both bulls and bears will be watching this one as it approaches what should be support in the $87.50-90.00 region. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- WAG $34.95 +0.26 - Walgreens has been consolidating sideways between 33.50 and 35.25 for several weeks in a row. Today's high hit the 50-dma. A move over 35.25 looks like a bullish trigger for patient investors. GDW $109.85 +1.80 - GDW has been a common candidate on the watch list. The stock has broken out over resistance at $105 and reached the $110 level. Bulls might want to watch for a dip back to the $105-106 region to consider new positions. PII $82.30 -1.12 - PII is rolling over again after several days of trying to crack the $85 level. $80 looks like its next stop but bears might target the 200-dma. ERES $29.74 -2.65 - The sell off in ERES really began to pick up speed this afternoon. The close under $30.00 and its 50-dma is very bearish and traders can probably target a move to the $25.00 region. EBAY $68.43 -0.09 - As mentioned in the MarketMonitor today bulls will want to keep an eye on EBAY for a breakout over the $70.00 mark. Although currently shares look headed toward the $68.00 level. ************************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 ************** Getting A Head Start -- The New March Positions By Mike Parnos, Investing With Attitude This isn’t a democracy! But I’m a reasonable guy. So, I will acquiesce to the request of the masses. That means that I have to get off the couch and it’s not even a commercial. Many CPTI students have requested that we post the March positions in my Thursday column because it will likely bring in more premium. Even though we’ll be exposed for an extra few days, it does make some sense. So, let’s get the road on the show. To get even, I have something that I think (and hope) will drive you a little crazy. Read about it later on in the column. __________________________________________________________ New March CPTI Positions Position #1 – OEX Iron Condor – 566.06 Sell 12 OEX March 595 calls and buy 12 OEX March 605 puts for a credit of about: $.45 ($540). Sell 12 OEX March 540 calls and buy 12 OEX March 530 puts for a credit of about: $.75 ($900). Total net credit of $1.20 ($1,440). Maximum profit range: 540 – 595. Maintenance: $12,000 less $1,440 = 10,560. Position #2 – RUT (Small Cap Index) Iron Condor – 582.59 Sell 8 RUT March 610 calls and buy 8 RUT March 620 puts for a credit of about $1.55 ($1,240). Sell 8 RUT March 550 puts and buy 8 RUT March 540 puts for a credit of about $1.20 ($960). Total net credit of $2.75 ($2,200). Maximum profit range: 550 - 610. Maintenance: $8,000 less $2,750 = $5,250. Position $3 – MNX (Mini-NDX Index) Iron Condor - $148.48 Sell 20 MNX March $157.50 calls and buy 20 XAU March $160 puts for a credit of about $.45 ($900). Sell 20 MNX March $142.50 calls and buy 20 MNX March $140.00 puts for a credit of about $.45 ($900). Total net credit of $.90 ($1,800). Maximum profit range: $142.50 - $157.50. Maintenance: $5,000 less $1,800 = $3,200. Position #4 – BBH (Biotech Index) - Siamese Condor - $143.42 Sell 10 BBH March $145 calls and sell 10 BBH March $145 puts for a credit of about $6.95. Buy 10 BBH March $160 calls and buy 10 BBH March $130 puts for a debit of about $.70. Total net credit of about $6.25 ($6,250). Our profit (safety) range is $138.75 to $151.25. These are also our bailout points. The closer BBH finishes to $145, the more money we will make. _____________________________________________________________ Those Friendly Reminders February is a five-week option cycle. The premiums quoted on the above educational trades are based on Friday's closing bid/ask prices. On Tuesday the premiums will likely be different due to market movement and/or the additional three days of time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you’re a trader. And make sure you thoroughly know the intricacies of a strategy before you trade. The money you save may be your own. ____________________________________________________________ FEBRUARY CPTI POSITIONS Position #1 -- OEX – Credit Spread Boogie – 566.06 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. Closed trade for $.35 ($105). Profit: $1,935. Position #2 – MNX (mini NDX index) – Iron Condor – 148.48 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 end up “skewing” us.come back to bite 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. Closed trade @ $.20 ($400). Profit: $1,000. Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $100.24 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) - $104.75 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 is 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. Closed trade @ $.20 ($200). Profit: $1,000. ____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.94 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 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. March: Mar. $34 calls and $37 puts – credit of $1,150. Total credit: $7,300. 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. ZERO-PLUS Strategy. OEX – 565.92 In the Feb. 8th column, I outlined a strategy based on an initial investment of $100,000. $74,000 was spent on zero coupon bonds that will mature in seven years at a value of $100,000. In essence, that guarantees the principal $100,000 investment. We are trading the remaining $26,000 to generate a “risk free” return on the original investment. We bought 3 OEX Jan. 2006 540 calls at a cost of $24,300. Then we sold 3 OEX March 2004 585 calls for a credit of $930. We also put on a bull put spread, selling three OEX March 535 puts an buying three OEX March 525 puts for a credit of $330. Our total credit is $1,260. Our current cash position is $2,960 ($1,260 plus the unused $1,700). This one is going to drag on for seven years, so get comfortable. We’re going to make some money. _____________________________________________________________ Let Me Drive You Crazy Subject: Reflex motions While sitting at your desk, lift your right foot off the floor and make clockwise circles. Now, while you’re doing this, draw the number “6” in the air with your right hand. Your foot will change direction and there’s nothing you can do about it. ______________________________________________________________ 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 ************** Subscriber Mail plus my CBOE "sentiment" model By Leigh Stevens lstevens@OptionInvestor.com OIN SUBSCRIBER QUESTION: Glad you're back. Can you explain in more detail your statement in the QQQ analysis Sunday: "The volume trend is still bullish – QQQ is not at an overbought extreme. More market action is needed to resolve this pattern" What level would be extreme? ANSWER: Well, I suppose first I ought to first say something – which I didn't get into in my Sunday Index Trader Wrap – about how daily trading volume action was being consistently with the price trend. The thing that is said about stock volume is that it should move in the same direction as the trend. In an up trend, volume should on balance increase (expand) on upswings and contract (fall off) on downswings. This type action then means that volume is "confirming" the price trend. You can see this in the QQQ price/volume chart below, helped by the up or down sloping trendlines that I have drawn above and below price and volume action- Basically, volume expanded steadily on the January advance and was in a declining trend in the February downswing. As to the Q's being at an "overbought" extreme, the 14-day stochastic got down to an oversold reading around the time that the Nas 100 tracking stock fell to the low end of its uptrend channel recently. However, the overbought and oversold measurements are relative to the time frame being measured. If we look at weekly chart of QQQ, we will see a different story by use of the weekly RSI (Relative Strength Index) Oscillator set at 13, meaning it is calculating a 13-week span for the high and low during that period versus the ratio of up closes to down closes. See this chart below – On a weekly chart basis, the recent peak was at an overbought extreme in that QQQ got to reading above 70. It may not be a top and the (price) pattern is still bullish, but this relatively high RSI reading is at least suggesting that the Nasdaq top stocks are vulnerable to a downturn, such as on any negative market/economic news. Also, the recent peak is hitting possible resistance suggested by the back that the stock has retraced 62% of the fall from a peak in May 2001 to the low in Q4 in 2002. Time will tell as to whether the market has reached an extreme and will start to fall off. So, far the price trend is still very much intact and you can see prices moving higher within an untrend. If there is going to be a correction, say back to support in the 34 area, it should happen soon I think and this will cause the RSI to fall back to a more "neutral" reading. A long answer to a short question, but worth going into to show how these technical type indicators get used. ANOTHER WAY TO MEASURE MARKET "EXTREMES" – A measure of market "sentiment" I use to see if the market is getting overheated or just the reverse is by examining the daily volume of option put volume relative to call volume - a "standard" measure is the so called put/call readings. This is a ratio of total put volume to call volume, such as on the CBOE (Chicago Board Options Exchange) alone or all options exchanges together. Put volume any given day for both (individual) equities AND index options is compared and is (usually) a fractional number - for example, .75, indicating that put volume was 75% of call volume. If the put/call reading was 1.00, put volume equaled call volume that day which doesn't happen all that often. Total daily index and equities options put volume is divided by total daily call volume. You can check this number all over the place, such as on the CBOE web site (www.cboe.com) or in charting programs like Q-Charts – their symbol being "QC:PUTCALL" I believe. Why use Option Volume Ratios? It has been noticed that when put volume gets quite high, such as being equal to call volume, traders are getting pretty bearish - and traders are "closest" to the market so to speak, day in and day out. If in the case of a put volume being high, the market may be at or approaching an "oversold" extreme in terms of how traders feel about the market – bullish or bearish, which way are they trading. Obviously how bullish or bearish option traders are is best shown by where they are putting their money - more into calls or into puts and what is the trend of that. Selling calls should not be considered a bullish play just as selling puts can be a bullish play. Nevertheless, the majority of option traders are betting on market direction, so call volume goes up on rally phases and put volume increases substantially in declining markets. I talked before about how Charles Dow, back more than a 100 years ago, observed that at significant market tops most market participants are bullish and at market lows many were shorting stocks, or they were out of the market – no options then! Dow started writing about the idea that if there is especially heavy buying or heavy selling, the market could be nearing a trend reversal and something contrary to the trend was about to happen when everyone was heavily betting on one direction or the other for the market. The concept of "contrary opinion" sort of started with Dow and that extremes in bullishness are bearish and bearish extremes in trading are bullish. I used to think of Alice in Wonderland! when I think of how this is. PUT/CALL RATIO - THE CONVENTIONAL WAY When put/call ratios have gotten down to the .40 to .45 area, this is seen to mark a bullish extreme and caution is indicated as to the FURTHER prospects for much more of a rise. When put/call ratios have gone to or above about .90, this is considered to be a sign that there is excessive put buying and bearishness – which may signal an upcoming reversal. However, this indicator (put/call ratios) tends to be EARLY and well ahead in "signaling" a trend change. Buy or sell points are often in fact 1 to as many as 5-6 trading days ahead of an actual top or bottom. The other thing that can make the put/call standard way of measuring market extremes tricky is the effect of index calls and index puts in the total option volume figures. There is a lot of hedging by money managers and hedge funds that goes on and this can be related more to that (hedging) than simply how individual traders see the market. As many of you know, I have found it useful to keep up my own way of measuring option volume numbers. For example, I only look at daily equities option volume numbers. I tend to get a more pure measure of bullish or bearish trader "sentiment" this way. I also come up with an indicator that way that is more like the other overbought/oversold indicators like stochastics and RSI I talked about at the start of this piece. A LOW number is suggesting a possible "oversold" market and a high reading is indicating an "overbought" market. I always say to notice the ORDER of how I say that I use a CALL/put indicator and it takes OUT Index option volume – this is not the PUT/call ratio that divides put volume by call volume and includes the Index options. I keep this radio plotted below say an OEX chart by being able to put a "custom" data item into my TradeStation software – there are other ways of doing it too. I used to plot it my hand even. My Call Put indicator as of the close today, Thursday, Feb. 19 (2004) is seen below with the S&P 100 chart. I think it is pretty self explanatory in that you can see the extremes and how I have the lines suggesting where this daily ratio is suggesting an extreme – similar to saying a market may be overbought or oversold. There was definitely a warning of this first top (around 572) in the OEX by how much equity call buying there was on a couple different occasions. The second top that has formed recently, at least so far, has come with only a milder amount of equities call buying relative to put volume. There was a recent reading at the beginning of this week's trading (Tuesday) that was bullish in the way I measure it. However, the price pattern looks like formation of a possible double top, so we have to see how this plays out. First and foremost is price action – what's the trend. The key to the readings of this indicator is, and you'll notice, that readings at or above about 2.4-2.5 have tended to mark at least temporary tops and they occurred within a day or a few days. I also do look at a 5-day moving average of the call to put equities option ratio which is the magenta line, but I rely on single one day numbers at the extremes – I don't wait for a moving average confirmation. We don't often see these extreme readings, but when they do, it's like saying "ready, get set, go" – time to be watchful for a trend reversal in the coming day or up to about 5 trading sessions or a week. ************************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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