The Option Investor Newsletter Thursday 02-26-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Battle For Control Futures Markets: CRB Breakout Index Trader Wrap: Lots to cover, so lets get started Market Sentiment: Less Bullish Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-26-2004 High Low Volume Adv/Dcl DJIA 10580.14 - 21.50 10612.14 10539.33 1.77 bln 1994/1220 NASDAQ 2032.57 + 9.60 2037.17 2012.83 1.76 bln 1944/1236 S&P 100 565.49 - 0.37 566.99 563.08 Totals 3938/2456 S&P 500 1144.91 + 1.24 1147.23 1138.62 W5000 11162.14 + 28.50 11177.06 11088.70 RUS 2000 583.86 + 4.82 583.86 576.58 DJ TRANS 2891.78 + 22.80 2892.76 2861.22 VIX 14.83 - 0.01 15.33 14.69 VXO (VIX-O)14.65 - 0.34 15.59 14.59 VXN 23.10 - 0.45 24.14 23.07 Total Volume 3,800M Total UpVol 2,552M Total DnVol 1,169M Total Adv 4439 Total Dcl 2776 52wk Highs 350 52wk Lows 12 TRIN 0.93 PUT/CALL 0.64 ************************************************************ Battle For Control The fight for leadership continues to keep the markets in their recent ranges as mixed indexes and sector rotation proceeds on low volume. The Dow closed down while the Nasdaq stretched its gains but the real heroes were the Russell and the SOX. Small cap techs continue to rebound from the weeks of profit taking but they are still struggling to swim upstream weighted down by heavy blue chips. Dow Chart - Daily Nasdaq Chart - Daily The morning started off negative with the Jobless Claims rising to hit the 350,000 level again and helped to increase the rising fear that jobs are not improving. We will get the nonfarm payrolls for February next Friday and with the rising claims the odds are good we are not going to see a strong bounce in payrolls. What we appear to be seeing is a mild reduction in individual layoffs but no real pickup in hiring. The Monthly Mass Layoffs announced on Wednesday rose to highs not seen since Dec-2002 and was the second month of strong increases. The January layoffs at 239,454 was a +25% jump over December and a +73% rise over November. These are very strong jumps and suggest the corporate world is still doing some belt tightening. AT&T announced 4600 job cuts yesterday and Apple announced an undisclosed number of layoffs in their education unit as well. The Help Wanted Index rose one point to 38 for January but this is not significant as the index has been moving between 37-39 for the last year. Still no pickup in advertising for new jobs. This could be seen as confirmation that the payroll number next week could be weak. The most negative number for the day was the Durable Goods Orders which fell -1.8% for January. Fortunately the December number at +0.0% was revised up to +1.6% which blunted the bad news for January. For the last three reporting months we had -2.4% in Nov, +1.6% in Dec and -1.8% in January. You can quickly see we are averaging a drop of nearly -1.0% for the last three months. Computer products dropped -2.1% in January and aircraft and motor vehicles fell -10.2%. If it were not for a giant +73.3% gain in communications equipment, the largest gain since 1997, the headline numbers would have been seriously deficient. The shipment component was flat and back orders fell for the first time in six months. This was not a good report and all eyes will be on the ISM release next week for more current info. January New Home Sales fell to 1.106M and the lowest level since May-2003 but the culprit as we know was the weather. The pace is still strong despite the drop and once the spring weather appears I suspect sales will return. Inventory has risen to a 4.1-month supply and with rates close to hitting six month lows again that inventory should be sold quickly this spring. Toll Brothers reported a +10% gain in profits today and said it saw no signs of slowing demand so far in February despite the bad weather. They said results were impacted by the weather which delayed completions and scheduled closings. Obviously these will catch up once the sun returns. TOL projected +20% revenue growth for 2004. PeopleSoft got a reprieve today when the government said it would file suit to block the Oracle takeover as anti competitive. Larry Ellison has threatened to sue the government if the deal was blocked and it looks like he will get his chance. Once the ruling was announced BEAS spiked upward on the rumor that a failed takeover try of PSFT would have ORCL looking for other targets. DNA got approval for an anti cancer drug that is supposed to add five months to the life expectancy of colon cancer patients. In anticipation of this approval the stock has surged from $40 to $98 and an increase of $30 billion in market cap. The stock surged on the approval today from $98 to $103 adding even more to the market cap increase for this one drug. IF this was going to be a blockbuster like Viagra or Prilosec if would have to apply to a larger segment of the population than just colon cancer patients. I find it hard to believe this gain will stick and I believe you are looking at the Editors Play for Sunday. Hint, hint. The indexes posted a lackluster day of trading on weak volume and a lack of big cap leadership. The Dow continued to trade sideways just below 10600 for the fourth consecutive day and showed no real inclination to fight the status quo. While it waits for motivation the 50dma continues to rise and was slightly over 10502 at the close. Instead of the Dow falling to retest the 50dma support the 50dma is slowly rising to meet the Dow. This sets up an interesting scenario of a support test without a drop. Is it a valid retest? That remains to be seen and at the current rate of ascent and the weakness in the Dow that touch could come as early as Friday. The Nasdaq closed at 2031 and well over the low for the week at 1991. That low was only +5 points above the 100 dma and is close enough for a support test for me. The next real test for the Nasdaq is the 50dma just overhead at 2048. When you consider the weakness in the Dow the Nasdaq has been holding up the markets since Tuesday. Actually it has been the small cap techs in the Nasdaq that are seeing the new buying interest. The Russell and the SOX have been the stars. The SOX has moved up for three consecutive days and closed just below 510 today. Comments from NVLS and several other chip stocks have been reinforcing the idea that chip orders are rising quickly and where the SOX goes the Nasdaq will follow. The SOX will hit new resistance at 515. Semiconductor Index - Daily Russell Chart - Daily The Russell is in the best shape of any index and is only 14 points below its February high. We had a very successful test of the 50dma this week with three days of trading on that support before it launched the current strong move. The Russell closed exactly on its 10dma today at 583 and that should be the last line of resistance before a return to the highs. This is very bullish and if it continues the little guys could actually drag the blue chips back from the cliff and trigger the start of the April earnings run. With the exception of the Dow all the major indexes have been improving slightly as the week progresses. The Dow would be taking part in the rebound if it were not for three stocks. In the last four days UTX has dropped from $97 to today's low of $89 and impacted the Dow to the tune of -60 points. Boeing dropped to $42 from $45 for another -21 Dow points. MMM fell from nearly $81 to $78 for -21 Dow points. That is only three stocks that have accounted for over -100 Dow points over the last four days and the Dow closed today only a handful of points below Monday's close. The Dow has taken the whipping and held its ground. Tomorrow the challenge will be the GDP revision at 8:30. Estimates are for a drop to +3.6% from the initial estimate of +4.0% last month. Nobody expects a material revision but you never can tell. Also out on Friday is the Consumer Sentiment, Chicago PMI and the NY-NAPM. Considering how the recent economic reports have been all over the map we can't count on these reports being business as usual. There is always a risk that some number will stray from the acceptable norm. Friday is also month end and the next three days are historically bullish as window dressing and month end cash flows push stock prices higher. Traders looking for a bounce to lighten the load are probably looking at the next three days for that purpose as well. We are still in a consolidation period and until the indexes start pushing away from the averages and venturing out toward the recent highs there is not going to be much excitement. Trading this week has been very boring and interspersed with only a few random program trades to wake traders up. Volume has been very light with the last two days trading less than 3.8B shares across all markets. We were hitting 5.2B when the markets were at their highs. After Friday we will be two thirds of the way through the quarter and traders will probably start thinking about positions for Q1 earnings. They will probably not enter those positions until after the Employment Report next Friday. Nobody wants to make a big bet only to have it blow up on them with a negative jobs report. I am still in "buy the dip" mode and so far it is working fine. Last Thursday I told you to expect some bargain hunting opportunities this week and the dip played out as expected. The Nasdaq stopped its drop at 2000 and the SOX and Russell both rebounded from textbook tests of support. I am not ready to sound the charge yet but I do think we are getting close. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** CRB Breakout Jonathan Levinson The US Dollar Index rose, but so did commodities, with the CRB breaking to 20 year highs. Gold and foreign currencies declined as silver advanced, treasuries fell and equities were mixed. 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 rose in overnight trading, whipsawed violently with the morning releases of economic data, and wound up virtually unchanged for its trouble, holding its overnight gains and trading at 87.69 as of this writing. Despite this strength, the CRB broke to multidecade highs above 273, led by cocoa, cotton, natural gas, copper and coffee futures. I had difficulty reconciling the action of the CRB with the words of Fed Governor Bies this afternoon: "...Briefly putting on my hat as a monetary policy maker, I will say that the prospect of a strongly growing economy, falling unemployment, and low inflation seems to be close to a central banker's ideal..." but then, I'm not a central banker. The US Dollar rose right to triple top resistance in the 88 area on the daily chart, failing at the upper Bollinger band currently located at 88.14. The daily cycle upphase continues, but with strong confluence from 88 to 90, dollar bulls have their work cut out for them from here. Daily chart of April gold Prophetcharts did not update its current futures chart tonight, and so today's daily price candle is not shown at all. If it were, it would display a red doji hammer, top at 397.80 and bottom at 391.20, with the candle body at 395-396 and closing price at 395.60, -1.30 for the day. I apologize for the inconvenience, and have reproduced yesterday's chart to keep current with the support, resistance and trendlines. April gold low of 391.20 broke recent support at the low but bounced back above 392 support. This move set a lower low and lower high for gold, further confirming the daily cycle downphase. The doji reversal does set up a possible price bottom, but until we see the ongoing downphase end, it's simply wishful thinking. Next support is at 388, and goldbugs need that level to hold on further tests in order to entertain the possibility of an early end to the current downphase. Just as the 88 level is the start of significant resistance for the USD Index, so is 388-91 the start of significant support for gold futures. For the day, HUI added .63% to close at 223.06 and XAU gained .69% to close at 99.07. Daily chart of the ten year note yield Ten year note yields (TNX) rose 3.1 basis points to close at 4.046%, a .77% change on the day. The bounce from our pennant support line gave us the first twitch of a buy signal on the bottoming daily cycle oscillator. This was a very bearish day for bonds, despite the 5B net add from the Fed via its open market desk. Resistance just below 4.08% is imminently approaching, and bond bulls should be defending that level vigorously. Daily NQ candles The NQ had a very good day, recovering from a spike low commencing shortly after the release of the 8:30AM economic data, bouncing to a higher high over yesterday's close, and the settling into a range to close higher by 4 points at 1476. While the daily cycle downphase did not suffer any setback from the nominally higher high, the Macd histogram appears to be building a higher low against the lower price low, and if bulls can simply hold at or above current levels, we'll have steep bullish oscillator divergences begin to develop. A break above 1492 would likely halt the current daily cycle downphase, but it will take a break north of 1502 before we can contemplate an early new upphase on this timeframe. In short, the general downtrend associated with the current oscillator downphase is still intact, but another day like today could threaten it. Bulls need the 1460 level to hold here. 30 minute 20 day chart of the NQ The downdraft discussed last night happened right out of the gate, but the uptrend that has brought us a pattern of rising oscillator and price lows asserted itself again. The lower rising wedge support line was broken in what proved to be a beautiful throwunder / whipsaw, and the morning recovery brought the price back to and over the scene of the crime. That divergent spike notwithstanding, the bear wedge formation remains intact, and until a decisive break above in the 1486 area, bulls need to be attentive the risk of a break back to the 1450 area. The 30 minute cycle oscillators peaked at the cash close, and traders with no appetite to get whipsawed in the apex of the wedge can look for a break below 1470 or above 1486. To the upside, there's next resistance at 1492, and support below at 1460, 1455 and 1450. Daily ES candles Selling in the last 15 minutes wiped out the bulk of ES' gains for a close +.5 at 1143.50. The move resulted in a doji star, with traders exhibiting an equal degree of dissatisfaction to the upside as to the downside. As with the NQ, the higher high and fractionally higher low caused that slight upward twitch in the Macd, and hints that a failure to break the rising trendline in the 1130-36 area will abort the current daily cycle downphase and give bulls a higher stochastic low to celebrate. The daily cycle downphase along with its corollary price slope are still intact, but bears need to do some aggressive selling very shortly if they wish to avoid new rally highs on the subsequent cycle upphase in this timeframe. Support moved to 1138, but 1130-36 is one big confluence zone, and so long as 1118 holds, bulls are sitting comfortably within the broad ongoing uptrend. 20 day 30 minute chart of the ES The rising wedge seen on the NQ is evident here on the 30 minute ES as well, as is the downtick in the 30 minute oscillators as of the cash close. Until the apex breaks, traders need to careful of getting whipsawed in a narrowing range. A downside break of 1143 or upside break of 1149 are the first targets, but 1141 and 1151 are support and resistance just below. This "insulated" wedge appears maximally treacherous to me, and anyone who disagrees need only note the false breakout this morning and the sudden, rapid rise once the broken trendline was regained. We discussed a head and shoulders top forming here, and while today's prints cost the pattern some of its symmetry, the formation is still valid with a neckline between 1133 and 1136. A 20+ point range targets our magically recurring level of 1115, which is becoming the maginot line between bull and bear territory on the ES. 150-tick ES The afternoon range was sufficiently narrow to divide the short cycle oscillators, diminishing their predictive capacity. The 30 minute cycle stopped advancing and went flat at the close, coinciding with the downtick at the top of the 300 minute stochastic's range in the previous chart. If this is indeed a top in the 30 minute cycle channel, then we can expect more chop on the short cycle, but it should produce a pattern of lower highs as (and if) the 30 minute cycle downphase develops. Daily YM candles YM dropped 26 points to close at 10572, the weakest index again, losing .25% for the NQ's .27% gain. Support came at 10533 today, resistance at 10610. 20 day 30 minute chart of the YM The US Dollar Index rose today, gold sold off but recovered much of its losses, the miners and the CRB closed in the green, treasuries declined and equities were mixed. These intermarket relationships appear to be growing more instead of less confused. For traders, that means that the trends on which they've relied for determining primary direction are no longer reliable. For scalpers and daytraders, it likely makes no difference, while longer term swing and position traders need to be careful. The indices were lined up to the downside last night, and the expected breakdown occurred, but the bounce from the morning lows came almost out of nowhere, with only the short cycle intraday indicators giving warning. When moves such as that occur, traders need to act first and wonder later. Trailing stops or an itchy exit finger, whatever works, but don't let your view of what "should" occur blind you to what is occurring. Trade what you see. ************************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 ******************** Lots to cover, so lets get started Tonight I'm going to spend some needed time on the NASDAQ's market internals, and this is going to take up some precious time. But time I think well spent. So let's cut to the chase in get down to business. Here's a quick look at today's closing internals, and hourly price action. Market Snapshot / Internals - 02/26/04 Close For a second-straight session, advancers were able to outnumber declining issues. During the last hour of trade, we might note that we saw a pretty good build of new highs, while during the mid-part of the session, we saw more of a slow and steady build. Is this a sign of eager bullish anticipation, or a late session bout of short covering, where some aggressive bears may have shorted some stocks that looked overextended and had just set a new 52-week high at this morning's open, and thought that we might see a good washout to the downside in today's trade, on the weaker January durable goods data? We'll never know, but looks like some sign of bullish leadership presenting itself late in the session. NASDAQ Composite Index (COMPX) - Daily Intervals I've placed BLUE retracement brackets on my current study period, where I think we are seeing similar technicals that were present from mid-July to mid-August of last year. Both declines have seen a very identical 7.6% decline. Both declines saw the very broad NASDAQ Composite fall below its 21-day SMA and 50-day SMA, where we now look for strength back above these short and intermediate-term moving average, while at the same time looking for support above Tuesday's intra-day lows. If there is one difference I do see today, compared to the July- August decline of last year, is with respect to the downward trends. I "cloned" the PINK downward trend from the then 07/14 high to the 07/31 relative high, and placed it on the current NASDAQ Composite high, where we can make a comparison to the current downward trend in RED, where this comparison gives the observation of a steeper, or greater velocity of decline, that a bullish rally will have to face. I've used retracement brackets in a conventional manner, where anchor points of my study periods are from a high, to a pullback low. I would have to say the mid-August advance was rather powerful as the COMPX NEVER closed back below on of its retracement levels, after moving above one of the levels. I again added the observation of 2,000 and 2,100 levels, where the pullback test did find support at 2,000. A good test for further strength looks to be a bullish break of 2,053, and from there, strength back above 2,100. It's notable how the CURRENT retracement, even though anchored at a low of 1,991.05, would have had the 61.8% retracement being some type of key level of resistance at 2,091.64 before the recent low was found. I would have to think that a bullish trader/investor currently playing this bounce, and using the NASDAQ Composite Index as one of their guides, would think a MAX bounce target from here would be that 2,090-2,100 area. That's the bullish view. Now what is a bear thinking? He/she has got to be thinking about that 2,000 level as support, and probably looking over his/her shoulder at the 2,100 level as a current risk assessment level. What may also be important to note is the upward trend I've shown in GREEN, that does look to be in play. If measured from the October low, this trend is nearly 5-months old, while the downward RED downward trend is considerably younger at just 5- days old. Older trends should be deemed more powerful than younger trends until broken. So that is a quick look at the OUTSIDE of the NASDAQ Composite. I want to also look for SIMILARITY or DIVERGENCE to my test period, but now look at the INTERNALS. NASDAQ Market Internals - Comparison to mid-August 2003 Due to vertical axis limitations, I've split my internals study period into two parts, where the thick BLUE horizontal line divides the then and now study period. Row 138 is the beginning of my benchmark, where the first chart of the NASDAQ Composite, would have July 31, being the attachment of downward trend, where current study period (row 278) and February 19, is also the attachment of current downward trend. What I now focus on is internals at the COMPX lows (rows 144 and 280). Note how SIMILAR both the NDX and COMPX bullish % data are (columns G and H). The BIGGEST concern I have for a BULL right now is that the NDX and COMPQ bullish % are now in columns of "O" and not "X" as they were in mid-August! I've tried to color code my actual numbers in the above table as RED being down, and GREEN still being up. If you look at www.stockcharts.com's FREE bullish % charts, you will see this more clearly for the bullish % data. Note that today's trade did see the NASDAQ-100 bullish % ($BPNDX) slip further to 61%. This is DIVERGENCE to the past, and something I/you/we MUST be alert to. This now has me focusing even MORE on the NH/NL indicators!!!! A healthy/bullish market CONTINUES to REBOUND from a DECLINE when BULLISH LEADERSHIP is present. The measuring of NH/NL indications is a GREAT tool for measuring signs of continued BULLISH leadership. In ratio format as I have calculated, today's trade did see a JUMP in the DAILY NH/NL ratio (column AD), the 5-day average (column AE) shows a lesser rate of decline, but still hasn't turned up and remains below the 10-day average (column AF). Look at row 148, where I've boxed in BLUE how the 5-day NH/NL ratio edged above its 10-day NH/NL ratio, and perhaps gave BULLISH LEADERSHIP confirmation to the reversal. Current analysis is that we have NOT seen such confirmation, so BULLS still need to be CAUTIOUS! Do you sense, like I send, that the recent PRICE LOWS found in the NASDAQ Composite and NASDAQ-100 become an important technical level for price support? This "sense" is based purely on observation. PRICE always matters the most, so this is the main area of a trader/investor's focus right now. However, the internals give VERY important insight into the HEALTH of the market. I can NOT say at this point that the current INTERNALS are showing health, and at this point must operate under the assumption that what we're seeing in the NASDAQ is a "relief bounce" and not necessarily a resumption of STRENGTH. Certainly there are some signs of stability presented outside the bullish % indications, but 2-days of NASDAQ gains shouldn't be considered an all out super ludicrous rebound in the making. I would still be more inclined to trade bullish, and using past history as a guide. But understand the need for a stop, should the INTERNALS not confirm the current PRICE bounce that looks to be underway. Pivot Analysis Matrix - I've highlighted in PINK some of today's lows/high for the major indices that I want to quickly discuss. The INDU violated its WEEKLY S1 by about 10-points, then rebounded, but once again seemed to lag, or doesn't show the type of leadership it had been showing in prior weeks. The NASDAQ-100 Tracker (QQQ), which tends to trade a little sloppier than the NDX.X did see today's low kiss the WEEKLY S1, but buyers quickly provided support at that level. This becomes a key level for near-term support. The S&P 100 Index (OEX.X) traded a high of 566.99. When it did, I challenged market participants to show their bullishness with a press above this important near-term level of resistance, where in today's 01:00 PM EST Update, I showed a 60-minute chart of the OEX, where that chart was capture just before the OEX traded the overlapping 566.65 level. As you can see, the OEX didn't find enough buyers to outstrip sellers, and remains an important level of resistance. The SOX.X traded a session high of 513.57. I highlight this as 514 kept showing up a couple of weeks ago. Lets quickly review the SOX chart. Remember too the potential head and shoulders top formation that we discussed in prior wraps. Semiconductor Index (SOX.X) - Daily Intervals I think it helpful to not just look at charts with their WEEKLY/MONTHLY Pivot retracement, but other types of charts. A couple of weeks ago I showed a similar chart of the SOX as that above. We kept noting how 514 seemed to be showing up in the SOX, and a conventional retracement attached as shown has 50% of a December low to recent high marking this 514 level. Today's high may well have some market participants trading the above chart and retracement. With the head/shoulder top pattern in play, a trader that shorted 535 that has now found another relative low is probably shorting this 514 area again. A quick check of our PIVOT Matrix also shows the SOX has NOT been able to see a trade at its WEEKLY Pivot of 517.06. Consider 514-517 an area of resistance. Dow Industrials (INDU) Chart - 60-minute intervals This 60-minute chart, along with the OEX and QQQ chart shown in today's 01:00 PM EST really begin to show where near-term resistance is line up, and where that resistance, if broken to the upside should find gains to the next level higher. Just as the INDU fell 10-points below its WEEKLY S1 this morning, it has not been able to show much strength above 10,610, where 10,600 and the little zone of yellow resistance is at. I've marked the recent little low of 10,521, which came just a smidge above the MONTHLY Pivot of 10,520.42 as a line in the sand for support, and perhaps more negative impact on market psychology if broken to the downside. At the same time, with the NASDAQ showing a little life, I would have to think buying picks up, or bullishness improves, along with psychology, on a move above the 10,610 level. How about 10,615.08 and tomorrow's DAILY R1? 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 **************** Less Bullish - J. Brown Thursday was a lot less bullish than I had expected, at least considering the major indices closing numbers. Maybe it was the disappointing durable goods orders. The new home sales figures were actually better than expected. The NASDAQ did continue its bounce from Tuesday's low boosted by strength in the networking, hardware and Internet stocks. Yet the Dow and the S&P merely churned sideways. Looking back this month appears to be living up to its historical trend for consolidation. We could still be dealing with a "tired" market. The DJIA and SPX really haven't produced a decent correction and traders may be reluctant to chase stocks here without a clear catalyst to drive stocks higher. Fortunately, the big picture for stocks this year remains positive. Greenspan's comments yesterday are bullish for the markets. Market internals were bullish with advancing stocks outpacing decliners 17 to 10 on the NYSE and 18 to 12 on the NASDAQ. Up volume was about twice as strong as down volume on both exchanges. Noteworthy sector moves is a new, almost two-year high for the biotech index (BTK.X), which was fueled by a $7 run in Genentech (DNA) after the FDA approved its drug for colon cancer. The oil index (OIX) has finally broken out above resistance at the 330 level and the oil services index (OSX) has hit another new high as oil closes above $35 a barrel. The DJUSHB home construction index turned in a strong 3.77% gain today after the better than expected new home sales numbers and the group looks poised to challenge its all-time highs. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7416 Current : 10580 Moving Averages: (Simple) 10-dma: 10635 50-dma: 10502 200-dma: 9659 S&P 500 ($SPX) 52-week High: 1158 52-week Low : 788 Current : 1144 Moving Averages: (Simple) 10-dma: 1146 50-dma: 1126 200-dma: 1039 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 938 Current : 1477 Moving Averages: (Simple) 10-dma: 1483 50-dma: 1488 200-dma: 1355 ----------------------------------------------------------------- The volatility indices have been crashing the last three sessions even though the markets haven't been making any huge gains. This is a sign of investors confidence and suggests we could see another move higher soon in the indices. CBOE Market Volatility Index (VIX) = 14.83 -0.10 CBOE Mkt Volatility old VIX (VXO) = 14.65 -0.34 Nasdaq Volatility Index (VXN) = 23.10 -0.45 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.64 714,777 460,082 Equity Only 0.52 607,116 316,163 OEX 0.92 16,687 15,408 QQQ 1.80 38,236 69,009 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 76.0 + 0 Bull Confirmed NASDAQ-100 61.0 - 2 Bear Confirmed Dow Indust. 86.7 + 0 Bull Confirmed S&P 500 85.4 + 0 Bull Confirmed S&P 100 87.0 + 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: 1.15 10-dma: 1.08 21-dma: 1.03 55-dma: 1.00 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 1761 1863 Decliners 1063 1184 New Highs 194 132 New Lows 6 6 Up Volume 1103M 1171M Down Vol. 572M 531M Total Vol. 1701M 1733M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 02/17/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders are still stuck in limbo with very little movement, although the movement this week was bullish. As is normally the case small traders moved the opposite direction. Commercials Long Short Net % Of OI 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%) 02/17/04 416,148 415,278 870 0.0% 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 01/27/04 143,089 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% 02/17/04 141,533 84,227 57,306 25.3% 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 Commercial traders became slightly more bearish last week with a decent increase in short positions. Small traders increased both longs and shorts but overall look a lot more bullish. Commercials Long Short Net % Of OI 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%) 02/17/04 296,313 371,703 (75,390) (11.3%) 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 01/27/04 154,485 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% 02/17/04 144,014 64,391 79,623 38.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercials still aren't making any big changes here but they did turn slightly more bullish on the NDX. Small traders didn't move much. Commercials Long Short Net % of OI 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% 02/17/04 46,104 40,385 5,719 6.6% 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 01/27/04 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%) 02/17/04 9,630 12,338 (2,708) (12.3%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Minor increases in both shorts and longs for commercial traders lead to a small up tick in bullish sentiment. Small traders turned slightly more negative on the Dow. Commercials Long Short Net % of OI 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% 02/17/04 24,451 12,907 11,544 30.9% 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 01/27/04 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%) 02/17/04 6,768 15,623 (8,855) (39.5%) 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 02-26-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: APOL, DHR Dropped Puts: AVID Call Play Updates: AHC, DHI, PD, QCOM, RJR, RNR, SLB, UNH New Calls Plays: ATH, RYL Put Play Updates: CHIR, CTSH, IR, MMM, WGO New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Apollo Group - APOL - close: 75.89 change: +0.15 stop: 74.00 The pullback in shares of APOL that was looking like such a great entry point near $75 took a turn for the worse yesterday. Fellow education company ESI admitted that it had received subpoenas and a search warrant from the U.S. Justice Department and that tanked the whole sector with APOL plummeting all the way to the 50-dma near $73 before rebounding today. While we have to stick with our discipline and drop the play tonight, this may turn out to be the next great entry point before the stock runs to new highs again. All the same, we'd suggest using any continued strength to exit open positions tomorrow. Picked on February 1st at $77.44 Change since picked: -1.55 Earnings Date 12/18/03 (confirmed) Average Daily Volume = 1.62 mln Chart = --- Danaher Corp - DHR - close: 91.03 cls: -0.89 stop: 90.00 Time is up on our DHR play. We were expecting a test of support at $90.00 or its 50-dma this week followed by a strong bounce. What we got was a broken 50-dma and a dip to $90.29. When buyers failed to follow through on the bounce from this low and DHR produced another lower high we decided to cut our losses. Shares look ready to test the $90 level again. Picked on January 30 at $91.01 Change since picked: + 0.02 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 841 thousand Chart = PUTS: ***** Avid Technology - AVID - close: 42.93 chg: +1.98 stop: 42.01 Wow! Something is moving AVID's shares and we don't know what it is. Unless investors have suddenly caught the Oscar bug and thank that AVID might get a boost in business from its technology being used in several nominated films. The stock actually played out pretty close to our plan. Shares hit our exit range of 38.00-38.50 earlier this week but we were a little greedy and were hoping for $38.00. We're exiting now that AVID has hit our stop at $42. Picked on February 04 at $42.87 Change since picked: + 0.06 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 612 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 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amerada Hess Corp. - AHC - cls: 62.32 chng: -0.01 stop: 59.50*new* With the price of crude oil continuing to make new highs, it is no great surprise that our AHC play continues to perform, albeit in a slow and methodical fashion. The stock finally broke out over $62 yesterday, and held onto those gains today. Of course, it didn't hurt that the Oil Services index (OSX.X) broke out to a new yearly high today and that bodes well for further upside in AHC. The stock has built a minor base near $61 over the past week and that support is reinforced by the 10-dma ($61.20), making it a logical place to consider new entries on a pullback. With price pushing through the $62 resistance level, momentum traders can look for new entries above $62.50. Note that we're getting more aggressive with the stop this evening, raising it to $59.50, which is the site of the steadily rising 20-dma. Picked on February 10th at $59.53 Change since picked: +2.79 Earnings Date 1/28/04 (confirmed) Average Daily Volume = 945 K Chart = --- D.R.Horton - DHI - close: 30.95 chg: +0.49 stop: 27.99 We've been suggesting that traders watch for a dip to $29.00- 29.50 for another entry point the last few updates. Did you use it? Shares of DHI dipped to $29.28 on Wednesday when the existing home sales figures came in lower than expected. Of course those are existing home sales and don't really affect DHI. The stock bounced strongly back above $30.00 by the closing bell and looked prime for another move higher. This morning's new home sales report did the trick. Economists were looking for a dip to 1.06 million units and sales came in at 1.11 million. The entire sector rallied on the news. DHI still looks attractive here at current levels. Picked on February 08 at $30.00 Change since picked: + 0.95 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 2.4 million Chart = --- Phelps Dodge - PD - close: 85.19 chg: +0.95 stop: 79.99*new* The rally in copper continues. The commodity charged higher yesterday to a new multi-year closing high and shares of PD followed suit. PD is up four days in a row after testing support at $80.00 on Friday. The only hurdle between here and the $90.00 level is the early February high of 86.50. That and a little tax problem. A couple of hours after the close this evening PD announced that it would be lowering its Q4 earnings numbers due to an extra $9.3 million in taxes. This equates to about 10 cents per share. The company is restating its Q4 numbers, announced in January to reflect the change. It is unclear how investors will react to the news if at all. Traders might want to look for a bounce from the 10-dma near $83.00 as the next potential entry point. We are going to raise our stop loss to $79.99. Picked on February 11 at $80.51 Change since picked: + 4.68 Earnings Date 01/29/04 (confirmed) Average Daily Volume: 1.6 million Chart = --- Qualcomm, Inc. - QCOM - cls: 63.70 chng: +1.62 stop: 60.50*new* Proving that Monday's stellar breakout wasn't a fluke, QCOM finished its consolidation of that breakaway gap without ever actually filling it and over the past two sessions, the stock is charging higher once again. Today's session was particularly encouraging, as the stock actually managed to close above Monday's intraday high. With potential resistance at $62 now cleared, QCOM is free to set its sights on next resistance in the $67-68 area, our targeted exit point for the play. As noted on Tuesday, the best shot at an entry following Monday's breakout was on a pullback near the $60 level. We never quite got there and now it looks like the rally is in the hands of the momentum bulls. Breakout entries above $64 should be good to run to our final target. Dip buyers might get lucky and see a dip back into the $61-62 area before QCOPM charges ahead, and that's probably as good an entry as we're likely to see. Raise stops to $60.50, just under Tuesday's intraday low. Picked on February 17th at $59.55 Change since picked: +4.15 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 8.72 mln Chart = --- RJ Reynolds Tobacco - RJR - cls: 61.28 chg: -0.23 stop: 57.50 RJR is making progress, albeit slowly. With the renewed bounce in tech stocks investors are paying less attention to defensive plays like RJR. However, as long as the stock holds up above what should be new support at $60 we should be okay. RJR had some mixed news late this evening when a California appeals court upheld a lower court's decision that RJR had violated a 1998 nationwide tobacco settlement targeting children. While the decision itself sounds like bad news for the company the appeals court did reverse a $20 million fine against RJR and told the lower court to re-examine how they determined that figure. The iffy part here is that the appeals court didn't say the fine was too high just that it needed to be recalculated so it could go either way (-Reuters). This could be a temporary stumbling block for RJR shares. Traders may want to take a look at larger rival Phillip Morris (a.k.a. Altria Group) symbol MO. Shares of MO have also broken out of a recent consolidation and are setting new yearly highs, which look very bullish. Just be careful for resistance near $57.50. Picked on February 20 at $60.51 Change since picked: + 0.72 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 699 thousand Chart = --- Renaissancere Ltd - RNR - close: 52.05 chg: +0.94 stop: 49.50 After four days of tight consolidation near the $51.00 level shares of RNR finally renewed their push higher. RNR added 1.83% and closed over the $52 mark for the first time since Feb. 17th. Volume was just over average and its short-term technicals (RSI and stochastics) look bullish. The stock looks ready for additional gains but conservative traders may want to wait for a move over the current highs in the $52.20-52.40 range. Picked on February 15 at $50.83 Change since picked: + 1.22 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = --- Schlumberger Ltd - SLB - close: 64.76 change: +0.30 stop: 60.40 The Oil Patch has become a new favorite playground for bullish investors, as supplies remain tight and demand remains strong, driving the price of black gold to fresh highs, seemingly on a daily basis. SLB is not a fast-moving stock, but it does seem to be trending well. We would have liked to see more immediate follow-through to Tuesday's breakout, but SLB did manage to slightly extend that breakout over the past two sessions. While we could see the stock continue steadily upwards, a near-term pullback to confirm new support near $62 would be welcome for traders looking for a solid entry. The only other choice is to enter on future breakouts above $65. Recall that our initial target is $68, which we expect will just be a waypoint on the way to our $73-74 target. Maintain stops at $60.40. Picked on February 24th at $64.47 Change since picked: +0.29 Earnings Date 1/23/04 (confirmed) Average Daily Volume = 3.55 mln Chart = --- UnitedHealth Group - UNH - close: 61.98 change: +0.10 stop: 58.00 Continuing to ride the lower edge of its rising channel, UNH is still sneaking up on a breakout over the $62 level. So the stock really haven't made much upward progress since we initiated coverage on Tuesday. But remember our suggestion to target new entries on a pullback to the bottom of the channel just above $60? UNH delivered that entry setup this morning, when the stock briefly dropped back to the $60.50 level before rebounding to close near its high of the day. Successive dips to the bottom of the channel still look attractive, so long as the stock continues to find support at the bottom of that channel, coinciding with the 20-dma ($60.42). Of course, momentum traders got their opportunity to enter on both of the last two days with the intraday forays over $62. A break above today's high ($62.29) can still be used for momentum entries, although our preference is to enter on the intraday dips. Maintain stops at $58. Picked on February 24th at $61.92 Change since picked: +0.06 Earnings Date 1/22/04 (confirmed) Average Daily Volume = 2.52 mln Chart = ************** NEW CALL PLAYS ************** Anthem, Inc. - ATH - close: 85.37 change: +1.00 stop: 81.00 Company Description: Anthem is a health benefits company serving over 7 million members, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names in these states under license agreements with the Blue Cross Blue Shield Association. ATH's product portfolio includes a diversified mix of managed care products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company's managed care plans and products are designed to encourage providers and members to select cost-effective healthcare by utilizing the full range of its medical management services. Why we like it: It is with more than a twinge of regret that we've watched ATH rebound from its lows last week. Recall we had played the stock bullish looking for a breakout over $85 resistance to continue significantly higher. With five consecutive days of losses last Friday, we finally pulled the plug, just before the stock bottomed and just above our $81 stop. Looking at the price action this week, we can safely say that holding that play would have been a winner, with today's solid breakout over that $85 resistance. In case you didn't notice, that's a fresh all-time high and price action is looking strong. So we're going to take another shot at jumping into this bullish trend now that we have a confirmed breakout. ATH is still on a PnF Buy signal and the $107 bullish price target is still intact. We'll set our sights a bit lower and will look for an initial move to $90, where we can reassess whether we should shoot even higher. With the breakout taking place today, there's no need to utilize a trigger on the play and with today's close so close to $85, there's certainly nothing wrong with an entry at current levels. Traders looking for proof of further strength before playing will want to enter on a break above $85.80. Those looking for a better entry on a pullback will want to target a pullback and rebound from the $84 area, confirming that former resistance level as new-found support. While we're initially targeting the $90 level, our initial stop at $81 (just under last Friday's intraday low) may seem a bit on the loose side. The rationale for that choice is that it is clearly a technically significant level, and we know from the PnF chart that the potential for more upside does exist. Suggested Options: Shorter Term: The March $85 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the April $90 Call, while more conservative traders will want to use the April $85 strike. Our preferred option is the April $85 strike, which is at the money and should provide sufficient time for the play to move in our favor. BUY CALL MAR-85 ATH-CQ OI=6096 at $2.10 SL=1.00 BUY CALL MAR-90 ATH-CR OI=1510 at $0.45 SL=0.20 BUY CALL APR-85*ATH-DQ OI= 129 at $3.30 SL=1.75 BUY CALL APR-90 ATH-DR OI= 6 at $1.25 SL=0.60 Annotated Chart of ATH: Picked on February 26th at $85.37 Change since picked: +0.00 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.43 mln Chart = --- Ryland Group - RYL - close: 83.96 chg: +3.96 stop: 79.00 Company Description: With headquarters in Southern California, Ryland is one of the nation's largest homebuilders and a leading mortgage-finance company. The Company currently operates in 27 markets across the country and has built more than 215,000 homes and financed over 185,000 mortgages since its founding in 1967. (source: company press release) Why We Like It: The homebuilding sector has been revived again with the better than expected new home sales numbers this morning. Economists were looking for a dip to 1.06 million units and sales actually came in a 1.11 million, a smaller than expected pull back. Combine the strong home sales figures with Greenspan's comments yesterday that the economy looks good and has moved into a "vigorous expansion" and together investors have a favorable outlook for homebuilders. We like several stocks in the group. Ryland, Centex (CTX), Beazer (BZH) and more all look like strong bullish candidates. We're choosing RYL for its bullish close over the 50-dma and filling the gap from early January. Furthermore RYL's P&F chart has produced a strong bullish breakout and points to a $97 price target. We're going to target a move to the old highs between $92-94 but honestly we'd be happy with a rally to $90.00. The breakout over $83 looks like a decent entry point but if RYL offers a dip back to $83 we'd probably take it. We'll start the play with a stop loss at $79.00. Suggested Options: Short-term traders can choose from the March or April strikes. We like the April 85's but the April 80's may work on a dip. BUY CALL MAR 80 RYL-CP OI= 1454 at $5.70 SL=3.25 BUY CALL MAR 85 RYL-CQ OI= 2602 at $2.65 SL=1.30 BUY CALL APR 80 RYL-DP OI= 710 at $7.10 SL=4.25 BUY CALL APR 85*RYL-DQ OI= 309 at $4.20 SL=2.10 BUY CALL APR 90 RYL-DR OI= 931 at $2.35 SL=1.15 Annotated Chart: Picked on February 24 at $83.96 Change since picked: + 0.00 Earnings Date 01/21/04 (confirmed) Average Daily Volume: 746 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 ******************* Chiron Corp - CHIR - close: 49.31 chg: -0.09 stop: 51.50 Our put play in CHIR is off to a slow start. The consolidation under the $50 mark continues with buyers still defending the biotech at $48.85. The good news is that there was no reaction in CHIR when news hit that Genentech (NYSE:DNA) had won approval by the FDA for the Avastin colon-cancer drug. Sometimes a new drug approval announcement can lift the whole sector. This may not be the case for Avastin. We're still bearish on CHIR but more conservative traders may want to use a trigger under $48.85. Keep your ears open for any news when CHIR presents at the Lehman Brothers Global Healthcare conference on March 3rd. Picked on February 24 at $49.11 Change since picked: + 0.20 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.7 million Chart = --- Cognizant Tech. - CTSH - cls: 47.99 chng: +0.06 stop: 50.50 The good news is that CTSH does appear to be weakening, with the rebounds from support carrying less and less momentum. The bad news is that support near $46 has been tougher to crack than we had first anticipated. The stock fell to that support level on Tuesday and since then has been slowly creeping higher, re- establishing the 100-dma ($47.14) as support. Overhead, the 50- dma ($49.82) combined with horizontal resistance at $50 looks like a firm barrier, so our $50.50 stop should be out of the way of the current near-term rebound. With support being so firm near $46, it appears the best strategy for new entries is to use failed rebound attempts below $49. Note that the 10-dma ($48.79) provided resistance on the last failed bounce, and if there's more downside in store, that average should continue to provide resistance. Picked on February 19th at $47.49 Change since picked: -0.50 Earnings Date 2/10/04 (confirmed) Average Daily Volume = 1.30 mln Chart = ---- Ingersoll-Rand - IR - close: 65.95 chg: -0.05 stop: 68.00 Our IR put play is also off to a tough start. Shares bounced strongly on Wednesday putting IR back above the $65 level and its rising trendline of support. Thoughts that this was a "bear trap" began running through our head. However, there really wasn't much of a follow through on Wednesday's move today so it may turn out to be just an oversold bounce, powered by the same in the markets. IR still has resistance overhead at its 50-dma and the $68.00 level but we'd be cautious on initiating new positions and probably wait for a move back under the $64.00 level. Picked on February 24 at $64.72 Change since picked: + 1.23 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- 3M Company - MMM - close: 78.18 change: -0.39 stop: 81.50*new* It took long enough, but MMM is finally starting to show the weakness that we suspected was lurking under the surface. After several feeble rebounds from the 100-dma (now at $79.76), the stock finally broke down with some conviction yesterday and added to its losses today, ending very near its low of the day. Adding to the bearish picture is the fact that volume is starting to rise on this latest decline, hinting that the breakdown under $77 that we've been waiting for may be drawing near. Recall that a trade at $77 will generate a fresh PnF Sell signal and give us a tentative bearish price objective of $72. Failed rebound attempts below $80 still look like the best bet for new entries, with momentum entries becoming viable under $77.50, which is just below the early February lows. Lower stops to $81.50 tonight, which is just over the high from February 11th. Picked on February 15th at $79.68 Change since picked: -1.50 Earnings Date 1/20/04 (confirmed) Average Daily Volume = 2.73 mln Chart = --- Winnebago - WGO - close: 65.32 chg: +0.43 stop: 69.00*new* WGO appears to be digesting their recent losses with a sideways consolidation between $64.00 and $66.00. Technicals are sending us mixed signals with short-term oscillators suggesting a bullish move. Meanwhile its intraday chart suggests traders are selling the bounces. The fact that WGO has not bounced more strongly with the broader indices the last two days may be the biggest clue. Alternative entries are a failed rally under $68 or a breakdown under $64.00. The challenge with the lower entry is we're expecting support in our target range of $60-62. We're going to lower our stop to $69.00. Picked on February 22 at $68.13 Change since picked: - 2.81 Earnings Date 12/17/03 (confirmed) Average Daily Volume: 276 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 02-26-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Homes, Drugs and Biotech Traders Corner: Real Life Options That Make Sense Traders Corner: MOVING AVERAGE ENVELOPES ********** WATCH LIST ********** Homes, Drugs and Biotech ___________________________________________________________________ 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. ___________________________________________________________________ Centex Corp - CTX - close: 104.15 change: +3.76 WHAT TO WATCH: The homebuilders were big out performers today after the new home sales numbers fell less than expected. Shares of CTX added 3.74% to breakout above its simple 50-dma and its earlier February high near $104. We think CTX may be a play back toward the $110-112 level and momentum traders may flock to it with its 2-for-1 split coming up on March 15th. Chart= --- Pharmaceutical Resources - PRX - close: 60.91 chg: +0.51 WHAT TO WATCH: PRX announced earnings this morning that beat estimates by a penny. Revenues soared almost 125% over last year on strong generic Paxil sales. Shares of PRX have been trying to build a base along the $60 level and its 200-dma. It's a little odd that the stock didn't react more strongly to this morning's earnings news but the intraday trend suggests a potential bullish breakout building. We would look for a mover over its 50-dma and/or the $62.00 level. Chart= --- Meritage Corp - MTH - close: 73.30 change: +2.21 WHAT TO WATCH: Yet another homebuilder hitting new highs today. MTH didn't suffer the same January-February pull back many of its peers did and the stock looks attractive based on its relative strength. We also like the bullish move from new support near $70.00. Currently its P&F chart points to an $86 price target. Chart= --- Invitrogen Corp - IVGN - close: 75.85 change: +1.30 WHAT TO WATCH: We mentioned IVGN in the MarketMonitor today. The pull back to technical support at its 50-dma was bought again. The latest bounce looks like a good entry point for a run back toward its highs in the $80-82 range. Given the positive news by DNA this afternoon investors may develop a strong taste for biotechs tomorrow. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- RE $86.45 +1.21 - A number of insurance stocks turned in strong moves today and we like the bounce from $84 in RE. The stock looks ready to run back toward resistance near $90.00. MHK $82.50 +2.04 - This could be more fallout from the new home sales numbers. All those homes tend to need carpet and that means more business for MHK. The bounce from $80 looks tempting. ************************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 ************** Real Life Options That Make Sense By Mike Parnos, Investing With Attitude The concepts and theories we discuss at the CPTI make good sense. They especially make sense when you apply them to real life – above and beyond the trading markets. I found a good example of options at work in everyday life recently reported in the Wall Street Journal. In Syracuse, New York they’ve come up with a way of stabilizing home values in less-than-attractive urban markets. A non-profit organization has developed a home-equity protection program. The pilot program enables homeowners to hedge against a decline in property values. Hedging? Does that sound familiar? That’s what we do when we buy a protective put on stocks and/or other investments. Now, they’re coming out with put-buying on real estate. Great idea! For the most part The Syracuse program is a way to help homeowners protect themselves against market fluctuations that are beyond their control – which are most of them. The concept seems to be working and there is talk of expanding it to other Eastern cities. A participant can buy protection of as much as 150% of a home’s assessed value. The cost? A one time fee of 1.5% of the value protected (which can be financed). Protecting 150% is the same as us buying an in-the-money put. An at-the-money put, in this scenario, would be buying protection at only the assessed value. If the house appreciates in value, the homeowner has locked in those profits. If it decreases in value, the homeowner is covered. To keep speculators out of the equation, the program requires owners to have occupied the home for at least three years. If they stay for 30 years, they will receive a payout as though they exercised the put – and they’ll still own the home. It’s quite an incentive to stay PUT. ______________________________________________________________ Options That Expire After You Do All good things must come to an end – or must they? According to a recent article in Barron’s, an electronic trading platform called NexTrade is trying to generate interest in a new class of options that never expire. They’re calling them XPOs. Think about it. All the speculators out there who buy options would be able to add “till death do us part” to their relationship with their option. It’s like a lifetime lottery ticket. Having been an option buyer (once upon a time), there were instances that I guess right on the direction, but the damn option expired a week before. I learned some expensive lessons and learned not to try and guess a direction and a timeframe. That’s just too much guessing to bet on – no matter what the chart and its spaghetti may say. Option sellers (like us), who profit from the erosion of time premium, would be less than excited about the prospect. On the other hand, those who purchase protective puts to hedge their portfolios would find the idea appealing. It all depends on the pricing. I suspect the perpetual options would be pretty pricey. How do you charge for forever? Speculators like the expiring options because they’re substantially cheaper than XPOs would be – resulting in greater leverage. I’m not worried about these XPOs infringing on our premium-selling methods of generating money. It could be years away from approval – even if they can come up with a reasonable pricing model and can entice option traders to change. You can’t teach an old dog new tricks. But, eventually, even old dogs expire. These options, if adopted, may survive us all. If you’re interesting in reading more on the subject, the NexTrade website is www.nextrade.com. ___________________________________________________________ Passing Thoughts 1. An invisible man marries an invisible woman. The kids were nothing to look at, either. 2. I went to buy some camouflage trousers the other day but I couldn't find any. 3. Two satellite dishes meet on a roof, fall in love and get married. The ceremony wasn't much, but the reception was excellent. 4. A dyslexic man walks into a bra. ____________________________________________________________ MARCH CPTI POSITIONS Position #1 – OEX (S&P 100 Index) Iron Condor – 565.49 We sold 12 OEX March 595 calls and bought 12 OEX March 605 calls (Bear Call Spread). Then we sold 12 OEX March 540 puts and bought 12 OEX March 530 puts (Bull Put Spread). The total net credit was $1.20 ($1,440). Maximum profit range: 540 – 595. Maintenance: $12,000. Position #2 – RUT (Small Cap Index) Iron Condor – 583.86 We sold 8 RUT March 610 calls and bought 8 RUT March 620 calls (Bear Call Spread). Then we sold 8 RUT March 550 puts and buy 8 RUT March 540 puts (Bull Put Spread). The total net credit was $2.75 ($2,200). Maximum profit range: 550 - 610. Maintenance: $8,000. Position $3 – MNX (Mini-NDX Index) Iron Condor - $147.71 We sold 20 MNX March $157.50 calls and bought 20 MNX March $160 calls (Bear Call Spread). Then we sold 20 MNX March $142.50 puts and bought 20 MNX March $140.00 puts (Bull Put Spread). The total net credit was $.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 - $146.10 We sold 10 BBH March $145 calls and sell 10 BBH March $145 puts for a credit of about $6.95. Then we bought 10 BBH March $160 calls and buy 10 BBH March $130 puts for a debit of about $.70. The total net credit is $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. ______________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.68 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 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 – 565.49 In my 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. _____________________________________________________________ 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 ************** MOVING AVERAGE ENVELOPES By Leigh Stevens A recent Trader's Corner article by Jane Fox - http://www.OptionInvestor.com/traderscorner/tc_021804_1.asp described 3 types of the Indicators known as envelope "bands": Moving average envelopes, Bollinger Bands, and Kelter channels. Bolinger Bands and Kelter channels build volatility into their equations and can be used as so-called "breakout" indicators and are not the subject of this article. "Moving average envelopes" are my focus here. Moving Average envelopes have 3 component lines. One line is a moving average and is shown on the price chart. Two: a line that "floats" above the moving average and most of the price action. Three: a line that is set at some percentage below the moving average. In the moving average envelopes Indicator you can at most, set the following different inputs or vary the: 1. Type of moving average; e.g., simple, exponential, etc. 2. Length of the moving average; e.g., the number of trading periods - averaging 10, 20 or 30 days; or, hours, etc. 3. Percentage figure above the moving average in question. 4. Percent figure below the moving average. In some application programs, you will not be allowed to make the upper envelope percentage any greater or lesser than the lower envelope line - in other words, the lower moving average envelope line AND the upper moving average envelope can only be the SAME percentage - there is only one "envelope" setting possible. This is a bit of an unfortunate limitation for trading the indexes. In the Indexes, in an uptrend, the moving average percentage will increase on the upper side - that is, the percentage at and under which MOST trading occurs is a bit higher than the lower envelope line; e.g., 5% versus 3%, or 3 versus 2%. And, for the type of moving average, I use a simple moving average (SMA), so it a matter of adding the closing price of some number of trading periods (e.g., days, hours, etc.) and dividing by this same number, for example the sum of the past 10 closes divided by 10. My favorite moving average length to use for Stock Indexes is 21, which I mostly use on Daily charts only. The regular blue chip market as represented by the S&P 500 Index, in an “average” market cycle or trend duration, will tend to see prices fluctuate in a range that is typically 2-3 percent above or below its 21- day average. As we are interested in also seeing the high and low extremes relative to the envelope lines, bar (or candlestick) charts are used. In a volatile market, the S&P envelope line can expand to 4% or more, but it won't typically be more than this. With the Nasdaq, this percentage might be 5-6%. The percentage line we are looking for is the one that will then contain within it most of the daily highs and lows that occur. I am demonstrating the use of moving average envelopes for the Indexes only. Due to the bouts of volatility associated with earnings, business developments, etc., individual stocks tend to work less consistently than for the indexes, which "smooth" out the individual stock "hiccups" and reversals. A bar chart with a moving average envelope: In an uptrend I usually end up setting the UPPER band at a greater percentage ABOVE the center moving average. In a declining trend that goes on for a long period (a bear market), the declines will typically bottom at a greater distance BELOW the center moving average. There is not typically a huge gap between the upper envelope percent and the lower envelope line percentage - as of this writing, on the S&P 500 (SPX) I am using a 3% envelope line for the upper envelope and 2.5% for the lower envelope line. In an uptrend, a high probability trade is to buy dips (e.g., buy OEX calls) when prices fall to the lower envelope line. The reverse is true in a sustained downtrend - buy puts on moves up to the upper envelope, at least one that has been "containing" the rallies that have occurred in the past 9-12 months. After about 6 weeks of an uptrend or downtrend that has been closely hugging the upper/lower envelope lines, the odds increasingly favor a correction and can be favorable to a bet on at least a sideways trend ahead which suggesting selling option premium; e.g., shorting calls or puts. On the Nasdaq 100 (NDX) Index, often in recent years the most volatile of the major indices, my current settings for the two Daily chart envelope lines is 4% for the upper band and 3% for the lower envelope line. Even here, it's not a huge difference between where the index tops out or bottoms, in percentage terms. However, there are other differences. In a prolonged downtrend/bear market, there will tend to be MORE instances of the index topping out in the area of the "centered" moving average and there will be more "touches" to the LOWER line. The reverse is true in a dominant uptrend or bull market, where there will tend to be a number of lows that are "contained" or held at the centered moving average and more "touches" to and along the UPPER envelope line. The following characteristics list is one I have used to sum up and categorize the tendencies of market action relative to moving averages and their upper and lower envelopes: 1. Determination of what moving average to use somewhat arbitrary but is found by what “works” in the most number of markets. The biggest variation is with the percentages above and below this line. I suggest using a 21-day moving average length for the Stock Indices. You can experiment yourself too with different lengths. 2. A common starting point for the Index envelope size is 3% with the Dow and S&P or 4-5% in the case of the Nasdaq. The envelope size varies from trend to trend and market to market. For an envelope size that “works” – the percent figure that contains within it 90-95% of the price moves above and below the moving average -- start with 3% and expand or contract the envelope size as is appropriate for the dominant trend. 3. If the last high was 4% above the moving average, the next high will often reflect the same extreme. Conversely, if the last significant downswing low was 3% below the moving average, keep this figure as the lower envelope setting until market action otherwise dictates. 4. If prices cross above the moving average, assume that this line will act as support on pullbacks and the next rally will have the potential to advance to the upper envelope line. If in an uptrend, the envelope line can act as a rising line of resistance for multiple rallies – the rally tops will “hug” and move up "along" the upper envelope line. The key thing is that rate of increase will SLOW - the index will not always reverse on move to or above the line. 5. If prices cross below the center moving average, assume that this line will act as resistance on any rebounds and that downside potential now becomes for a move to the lower envelope line. If the trend is down, the envelope line may act as a falling support line and there may be multiple downswings that touch or “hug” and move down "along" the lower envelope line. 6. In an uptrend, the optimum Index Call purchases are the declines to the lower envelope line – this area will both define where the stock or other item is both “oversold” and the specific price area that offers a opportune buying opportunity. If in a downtrend, sell advances to the upper envelope line – this area will help define where the market is both “overbought” and the specific price area most opportune as a selling point. In an uptrend, when the index goes through and STAYS ABOVE the 21-day average it usually does it quickly and maintains a pattern of higher highs such as is seen with QQQ until recently. When a rally "fails" very quickly and fairly soon again has a pattern of falling relative highs and lows and, within a few trading periods, again falls under the center moving average - this pattern suggests adopting a bearish trading bias. 7. Even if there is an extension of a price swing to above or below the envelope lines, the probability for a significant further move in that direction is limited, especially if the price swing is a counter-trend move. At a minimum, there should be a reaction (countertrend move) once prices are above or below the envelope line in question. There is not much more to say about how to use envelopes except to say that the use of this technical indicator gives another kind of an idea about where a market might be at an extreme. While extremes don't happen all that often, when they do, it often marks a very good trading opportunity. And, we don't need more than a few of these to make for a profitable year trading options. ************************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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