The Option Investor Newsletter Thursday 03-11-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Market Terror Futures Markets: See Note Index Trader Wrap: It takes a village Market Sentiment: Running for the 200-dma Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-11-2004 High Low Volume Adv/Dcl DJIA 10128.38 -168.50 10321.41 10120.38 2.36 bln 756/2516 NASDAQ 1943.89 - 20.30 1982.58 1943.89 2.18 bln 876/2276 S&P 100 544.16 - 8.64 554.14 543.63 Totals 1632/4792 S&P 500 1106.79 - 17.10 1125.96 1105.87 W5000 10821.48 -157.90 11004.68 10814.88 SOX 473.84 - 2.50 487.19 473.61 RUS 2000 568.74 - 6.27 581.02 568.70 DJ TRANS 2796.00 + 7.50 2848.01 2783.48 VIX 20.67 + 2.00 20.69 17.63 VXO (VIX-O)21.71 + 2.91 21.71 18.35 VXN 26.58 + 0.53 26.68 25.48 Total Volume 5,006M Total UpVol 918M Total DnVol 3,969M Total Adv 1869 Total Dcl 5430 52wk Highs 170 52wk Lows 46 NasTRIN 1.08 TRIN 2.41 PUT/CALL 1.20 ************************************************************ Market Terror The terrorist attack in Spain that killed 192 and injured over 1400 bombed our markets as well. The indexes opened down but well off the overnight reaction lows. After an attempt to rally that lasted until after 2:00 bad news sent them down again. Dow Chart - daily Nasdaq Chart - Daily The second news blow came when Spain reported that a van with explosives had been linked to the bombings and there were Arabic tapes in the van with verses from the Koran. Shortly after that sound bite Reuters broke a news story from England saying Al Queda had claimed responsibility for the bombing in a letter to a newspaper. The letter reportedly claimed a similar attack was imminent in the United States. Traders hit the sell button and the bottom dropped out of the market at 2:30. American officials were quick to point out that Al Qaeda does not normally claim responsibility for attacks and suggested the letter was bogus and designed to shift blame from the real suspects. The markets did not care and fear became the motivator into the close. The morning economics did not help market sentiment with Retail Sales coming in flat for February once autos were removed. Department stores held their own but drug stores, grocery, sporting goods and furniture stores all declined. Rising energy prices were blamed for robbing consumers of cash available for discretionary purchases. Import prices rose +0.4% and export prices rose +0.6%. Analysts said the falling dollar, higher commodity prices and higher energy prices were blamed. Consumer goods remained unchanged with autos and parts up +1.0%. This was not a factor in today's market. Jobless claims continued to fall at 341,000 and continuing claims fell to a post-recession low of 3.032 million. This is good news but it was overshadowed by the global events. The very slow drop in claims continues to show there is no pickup in hiring but as we all know jobs are a lagging indicator in a recovery. At least that is what they keep telling us as an excuse for no jobs. Greenspan said today that jobs will pickup soon because he is continuing to see increasing signs of a pickup in the economy. Somebody get him a new speech. It was not economics that tanked the markets today but the terrorist attack. The markets actually rebounded off their overnight lows when news of the bombing first hit. The blame was first placed on the Basque separatist group, ETA, and the markets shook off the news thinking it was an internal matter for Spain. The Dow rallied back from the morning low of 10228 by nearly +100 points to 10321 before the van was found. That announcement knocked -55 points off the index but it again rebounded when authorities said there was nothing conclusive in the evidence. The news that caused the implosion was the Al Qaeda letter claiming another attack was imminent. "We bring the good news to Muslims of the world that the expected 'Winds of Black Death' strike against America is now in its final stage...90 percent (ready) and God willing near," the letter said. The al-Quds al-Arabi newspaper received similar letters from the same brigade claiming responsibility on behalf of al Qaeda for a November bombing of two synagogues in Turkey and the August bombing of the U.N. headquarters in Baghdad. This was the kiss of death for the struggling rebound. France also announced they were raising the terrorist threat level on all public transportation. The damage to US markets was severe. The Dow had held above the 100dma at 10218 all morning but after the Al Qaeda news blew right through that level and barely blinked as it passed 10200. Were it not for time expiring on the clock we might have broken 10100 as well with the close at 10128. This is a major blow to any bullish sentiment still remaining. In four days the Dow has dropped over -500 points with -168 of those being lost today. Since the market high of 10753 on Feb-19th the Dow has lost -5.8%. It has been 19 months since we have had a 5% correction and we normally have 2-3 per year. The Nasdaq dropped nearly -40 points from the afternoon high and closed at 1944 after the Al Qaeda news. This is below all the averages except for the 200dma which is still quite a ways off at 1873. However, since the Nasdaq high on Jan-26th the Nasdaq has lost -209 points or -9.7% and is very close to the benchmark -10% range. This is a huge change in investor sentiment despite continued upgrades to earnings estimates. The next major support is at 1900. Now that we are out of our Jan/Feb trading range and have broken all short term support where are we going? We have officially lost the required five percent to be recognized as a real dip and the Nasdaq is very close to -10%. In theory we are due for a rebound. In practice we could easily hit Dow 10000 and Nasdaq 1900 with any additional negative news. Fears of another attack on U.S. soil sent the VXO back to near 22 from its low of 14.09 last Friday. This is a major fear reversal. It rose nearly three points today alone. Before I tackle the forecast there was some good news today. Declining volume beat advancing volume better than 4:1. Decliners were 3:1 over advancers. Volume spiked to over 5.0 billion shares and the biggest day since Jan-29th. The majority of this volume came in the last hour and it could be seen as a news washout. A potential capitulation day when considering it came at the end of an already oversold condition. There was also some positive stock news, which was ignored due to terrorist concerns. GE affirmed estimates today and said they were continuing to see an increase in global growth. GE fell -0.68 on the day but it failed to break its 200dma. This is huge support on GE and it should be very difficult to break without any major external event. The addition of the $3.8 billion in new shares has been weighing on GE but the 42 million shares traded today may have put an end to that pressure. Intel has already broken its 200dma from last weeks lowered guidance but it closed right at strong support today at $27 that dates back to September. Intel traded 98 million shares but only fell -.23 cents. This could be a bottom for Intel. Also at critical support levels is Microsoft which closed at $25 and very strong support. MSFT traded 90 million shares and only fell -.28 cents. Dell actually gained +.74 cents today and this was the third day of an uptrend by Dell. It is back over $32 support. The SOX turned in an amazing display of strength with a loss of only -2.45 and a solid grip on the support at 475. Just another indication that maybe we are too oversold. SOX Chart - Daily National Semi announced a $400 million stock buyback and made positive comments about orders and margins for the current quarter. Altera announced their mid quarter update after the bell and said it expected revenue growth at the high end of its previous estimates. Oracle reported earnings after the bell and said software license growth was up +13%. Yellow Roadway said first quarter business was booming and the stock jumped +10% and helped keep the transportation index in positive territory despite the broad market crash. First call said earnings estimates for the first quarter had climbed to +14.9% growth from +13.4% just a couple weeks ago. Earnings are growing despite the worry over the economy. Fannie Mae said rates have fallen so low that they expected a fourth consecutive year of record home sales and increased their estimates by +100,000 homes for the year. They said demand was so strong and inventory so low that housing prices should rise +7.4% in 2004 after a similar +7.5% gain in 2003. 30-year rates dropped to 5.41% and the lowest since July-2003. Good news was breaking out all over and many of the major players are holding at strong resistance. The challenge for the day was clearly terrorist related and it may have been a market blessing in disguise. It forced us to lower levels and flushed another billion shares of volume that we probably would not have seen. Tomorrow is light on economic reports with Business Inventories and Consumer Sentiment. Inventories could be a challenge but it is not expected to be a market mover. A positive surprise could be a good sentiment boost. Unfortunately Consumer Sentiment is likely to come in lower once again. The election mud slinging on the economic outlook could again drop the numbers. Fortunately this week's terror event, the market drop, Intel guidance and the Jobs report all occurred after the majority of polling took place. The next report is the one to worry about. Now back to the forecast. The potential is very good for a strong move on Friday as opposed to a sideways consolidation day. The more the press plays the official doubt about the Al Qaeda letter the more it will be seen as somebody trying to shift blame and a non event. The markets are VERY oversold. -507 points for the Dow in three days is completely out of character for the current economic conditions. The two options I see for Friday look like this. Depending on the terror news coming out overnight we could see another day of losses as weekend event risk looms large on investors minds. One more strong decline could take the Dow closer to 10000 and the Nasdaq to 1900. Both of these levels are very strong support. While this is a possibility I think it would take some strong news from overseas to push us over the edge. The other option would be a rebound based on the lack of any new negative news and the very oversold conditions. While I would like to think this was the direction we will go I have to be realistic. I thought today would be a rebound day but the terror news killed that process after lunch. Investors have to be thinking bargain hunting after the drop on no real change in economics. It was just time to rest. Once this weeks drop begin to accelerate it took on a life of its own as they sometimes do and rapidly overshot the expected targets. Just as the bulls headed back into the market the terror news hit them in the face. If you are thinking bargain hunting tonight then you are also thinking about the weekend. Is there risk or not? I vote no because people are more concentrated on work days and make better terror targets. However my vote does not count. This fear of weekend event risk could keep traders from bargain shopping until Monday. This suggests any rebound on Friday could be muted. To get more specific I would expect a potential dip at the open on any overseas news. I would expect the dip to be bought depending on the severity of the news. Midday could be flat as traders weigh their weekend risk. The close could be interesting. Traders wanting to finish dumping stocks to avoid the weekend and start with a clean slate on Monday could be countered by strong short covering from those wanting to lock in profits from the big drop. Never a dull moment and never a clear answer. Personally I would spend Friday looking for bargains and wait for signs of strength on Monday to go buy them. Cash is a position. A week ago I was lamenting the fact we were trapped in a trading range with no material movement. The first chart below was one I showed last Thursday. Wish we were still home on the range. Dow Chart - 45 min Dow Chart - 45 min Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************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 ******************** It takes a village In her book "It Takes a Village," Senator Hillary Rodham Clinton discussed her thoughts on parenthood, and how children develop and what they need to succeed are inextricably entwined with the society in which they live and how well it sustains and supports its families and individuals. Hold on.... there's a point to be made. Stocks are like children. When things get out of hand, they need to be corrected. Right now, there's a nice correction taking place, largely in the form of profit taking, where yesterday, and again today, there were few willing buyers ready to step up to the plate. Surround a good kid with a bunch of "bad apples," as my mom used to day, and chances are that kid is going to take on some, if not many of the characteristics of the bad apples. "Jeffrey!" "I don't want you hanging around Rodney, as he's always getting into trouble." Mom always called me Jeffrey instead of Jeff when she wanted to make a point. Now I have to laugh. I've never read Senator Clinton's writings, but there are some individual stocks I feel should be trading higher than they are today, which in fact traded 52-week highs in recent sessions, where the bullish enthusiasm for those stocks is simply being dampened by weakness in other stocks, that make up the various sectors and indices we may be trying to trade. Take yesterday's trade in Sun Communities (NYSE:SUI) $40.59 -0.39%, where at mid-session broke to a new 52-week high and traded $42.00, and by session's end, closed at $40.75. Where in the he@@ was the village to sustain and support the stock's gains to my swing trade bullish target of $42.40? Yesterday, Procter & Gamble (NYSE:PG) $103.95 -1.49% jumped to a four-year high, but gave back the bulk of those gains in today's session. Where in the he@@ was the village to sustain and support the stock's gains in today's trade? On Friday, Maytag Corporation (NYSE:MYG) $28.44 -1.62% traded a new 52-week high and really broke out of a nice 7-month base, but has slipped back into its base. Where in the he@@ is the village to sustain and support the break out of the base? OK, so that's three examples of stocks showing relative strength versus the MARKET, or perhaps the VILLAGE, and while I believe, based on observation, that these types of stronger stocks will be higher months from now, the current trade I'm observing, has the VILLAGE looking like a ghost town, where buyers are few. I'm not just talking about an observation from a hilltop, where you might think I'm looking down on a village and not seeing very many people walking around. No. I'm talking about walking into the village, looking inside the huts, and not finding much bullish enthusiasm, as internals, especially the bullish %, begin to show more and more point and figure sell signals in recent sessions. Take a look at this village we call the Dow Industrials ($INDU) 10,128.38 -1.63%, which was today's second-biggest percentage loser among the major indices. Don't just look at today's percentage gain/loss, but the 5-day and 20-day percentage change, similar to the U.S. Market Watch from last night's Index Trader Wrap. Dow Industrials Components ($INDU) - Sorted by price I received several e-mail from traders that noted today's out performance to the downside in the Dow Industrials (INDU) and even the NYSE Composite ($NYA.X) 6,480.55 -1.68%. How's that for a village, where little buying was found! Is something wrong with Walt Disney (NYSE:DIS) $24.95 -1.96%? After Comcast (NASDAQ:CMCSA) $29.05 -2.51% made its offer to buy DIS "on the cheap" as some industry analysts have called it, the CMCSA offer is starting to look better as DIS has now fallen from a post-offer high of $28.00. I'm not picking on DIS stock, as the market response toward CMCSA's stock since the offer was made has been anything bull positive. If I were a Comcast (CMCSA) executive, I'd be strangling my investment banker that assured me the market would respond favorably to the offer made for Disney. If I were a Disney executive, I shut my mouth about CMCSA having to up its offer, for fear they pull the offer, or lower it. I digress, but the trade between CMCSA and DIS right now is largely controlled by arbitrageurs, where both stocks are most likely being heavily shorted, where any bullish capital looking to be directed toward stocks at this point is probably avoiding DIS and CMCSA shares. Market Snapshot / Internals - 03/11/04 Close While CMCSA and DIS off their 52-week highs may not be the best example of how some stocks I follow, or have made comment on in recent months, have not found a lot of bullish follow through, I wanted some of these comments to serve as a transition as to today's internals and NH/NL indications. A couple of questions were raised from CNBC's Bob Pisani's continued comments that a source at one of Wall Street's most respected technical analysis firms saying market internals are still holding up, and that the current decline has been more corrective and not all that alarming. The questions among subscribers is "what are they seeing?" Market Internals - 01/28/04 to 03/11/04 Since I keep some data tabulated daily, I thought we'd quickly review some internals. I'm limited by width and apologize if the above table looks compressed, but here's my analysis. I see very little bullishness in the NASDAQ. The only thing marginally bullish is that the NSDQ NH/NL 10-day Avg (column AF) is still in a column of "X" at 92.2, but a reading of 92.0% would have this indicator (we chart the 10-day Avg on a 2% box size point and figure chart) turning back lower to "bull correction" status. On Monday, March 9, 2004, we noted the crossover of the 5-day NH/NL average with the 10-day NH/NL averages, which put greater emphasis on the actual price lows of the NASDAQ Composite (COMPX) or NASDAQ-100 Index (NDX.X) as a support level, where if broken could see a sharp decline. Look at the rate of change to the downside in the 5-day NH/NL averages the past two sessions. This is a rather quick loss of bullish leadership, which if anything suggests that institutional bulls are becoming much less aggressive with their buying, or bulls becoming more aggressive with their profit taking, even when a stock is breaking to a new high. While not alarming large, we are seeing a greater number of new lows, especially at the NASDAQ (column R), which is also a sign that bulls aren't doing the "bottom feeding" they were, and when a stock breaks a level 52-week low support, its becoming a case of "sell now, and ask questions later." Another sign that bulls are less aggressive, or willing to take on risk. Whether you agree or disagree, it is a generally accepted investment philosophy that a weak stock (trading at or near a 52- week low) is RISKIER than a strong stock (trading at or near a 52-week high) when the major market averages are or have recently been near a 52-week high. I also tabulated 5-day, 10-day, 20-day and 50-day averages of the NYSE and NASDAQ advance/decline lines to try and pick up on any type of A/D breadth strength/weakness trends. NASDAQ's 5, 10, 20 and 50-day averages all show negative A/D breadth. The NYSE's 50-day average A/D breadth is still positive, but we can see that shorter-term 5-day, 10-day and 20-day breadth is weaker. So what the heck IS GOING ON? Longer-term profit taking? Normal correction? Economic slowing? Deflation? Inflation? Financial crisis on the horizon? Dollar too strong? Dollar too weak? Presidential election uncertainty? Terrorist threats? Good gravy! How about all of the above? My mindset is that we're just seeing a normal corrective phase. How long it could last I don't know. How low it could go I don't know. However, I still believe that by year's end, the major indices will see trade above the recent highs. The reason I think this is that I have never seen the bullish % charts stay so overbought about the 70% level for so long, where now I simply think we're seeing a corrective phase, where some price risk is being reduced. Last night I was looking at my "Beetle's Balanced Benchmark" portfolio, looking for answers to any of the above questions. Here's a link to a recent article in the Ask the Analyst column from January 25th, when we reviewed the REBALANCED portfolio and the UNBALANCED portfolio. http://www.OptionInvestor.com/ask/ask_012504_1.asp Let's take a quick look at both the 12/26/03 REBALANCED "Beetle's Balanced Benchmark" and the UNBALANCED portfolio, which was created back on December 31, 2002. Comparison of Rebalancing (upper) vs. not Rebalancing (lower) In PINK I make the comparison of the closing values (tonight's prices). Are we seeing profit taking? We could be. The AMEX Gold Bugs Index ($HUI.X) is still up 53.65% from 12/31/02 benchmark, but is down 5.91% since 12/26/03 when we rebalanced in the Ask the Analyst column. The QQQ is still up an astounding 43.09%, and it's not far behind the gold bugs losses since 12/26/03. Did your read this weekend's Ask the Analyst column where we reviewed the various sector and market bullish % bell curve? One could certainly argue that all we're seeing is a normal corrective phase and some reduction of risk from very high levels of bullishness. The fixed income portion of the "Beetle's Balanced" shows a 2.61% gain versus the equity portion showing a 2.27% decline since the 12/26/03 rebalance. Aha! Economic slowing! Flight to safety! Not so fast.... I might think the same thing, but what has me thinking that's NOT the case at this point, based on observation, is that the junk bond portion (HIGH RISK BONDS with HIGH YIELD) is that the Pacholder High Yield Fund (PHF) shows a price gain of 4.23% since 12/26/03 rebalance, and that doesn't include the monthly interest payments it kicks off each month. From 12/31/02 benchmark, it continues to be one of the better performing asset classes. I continue to monitor the PHF as a junk bond indicator. It is notable that the longer-term iShares 20-year (TLT) and PHF have been the best performers since 12/26/03. My thinking here, or their association would be HIGHER YIELDING asset classes. Certainly the PHF, or junk bond asset class carries a greater degree of RISK, but also a much higher YIELD than a basket of longer-term Treasuries, but if the MARKET sensed a great degree of economic slowing, the junk bond asset classes should see selling, and I'm not seeing that selling showing up at this point. Bullish % from 01/28/04 - All started with NDX One can never know for sure if a decline is a normal correction, or the MARKET smelling out some type of negative future event(s) that would then have everything becoming "crystal clear." If you read each morning's bullish percent updates, you're eyes may have been popping out of your head when all of a sudden you've started to see a greater number of stocks showing reversing lower point and figure sell signals being generated. The numbers in red are where a bullish percent chart of the respective index turned lower into a column of "O," while the green numbers would still show that bullish % chart still in a column of "X." You can really begin to see how the NDX showed some internal weakening first, that then spilled over to the NASDAQ Composite (COMPQ), that has just recent spilled over to the SPX and INDU. Note how "slow" the NDX bullish % declined, but how the sell signals have started to build in a more rapid pace. Almost as if bulls have completely given up on the though of trying to bid for many of the stocks in the QQQ/NDX. Analysis right now is that we might have seen about 1/2 the bullish risk now removed from the NDX/QQQ. This last comment should NOT be construed as "the NDX/QQQ decline is 1/2 of the way completed" but serves as an observation that the inherent bullish RISK has been greatly reduced in recent weeks. However, since PRICE does matter most, and since the QQQ closed BELOW its MONTHLY S2 of $35.06, I need some kind of level to associate with further downside risk. Here's what I'm going to do. Since the NASDAQ-100 Bullish % ($BPNDX) was at 50% last night, I'm going to take a retracement from the QQQ close at 50% retracement, as if that would represent 50% of the bullish risk now having been removed from the QQQ. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals This is not a conventional use of retracement at all, but may help give some further assessment toward further downside, as the major indices are all below their MONTHLY S2s and WEEKLY S2s. I notice that tomorrow's DAILY S2 of $34.34 might tie in with the above retracement, where yesterday, the above retracement may also tie to the $36.00 resistance found, as well as next week's option expiration "max pain" of $36. I have had a great deal of difficulty getting bar charts tonight, and only got my data feed late in the evening to show the QQQ chart. Here's tomorrow's Pivot Matrix, where at this point only the SPY's MONTHLY S2, the SOX.X MONTHLY S2 and BIX.X MONTHLY S2 offers any type of support for institutional buying. These and the DAILY S1 and S2 levels. Pivot Analysis Matrix - Traders in the Market Monitor may have gotten a good bearish trade in the QQQ late today. I profiled a QQQ day trade short just as the BIX.X approached its session low and WEEKLY S2, with the thought that if the BIX.X gave up that level of support, it could then trigger some broader market selling with downside BIX.X risk to MONTHLY S1 or MONTHLY S2. That's almost exactly what happened as the QQQ fell to today's (Thursday's) DAILY S1. I've marked the SPX WEEKLY S2 and DAILY R2 as correlative, and I would certainly assess that as an upside bounce level if a bear were thinking of backing up the truck with a big short/put position right now. Do NOT underestimate next week's quarterly expiration. I would only use that even to understand and PLAN for the possibility of extreme volatility. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** Running for the 200-dma - J. Brown Investor sentiment has turned sour pretty quickly this week. The terrorist bombings in Spain this morning have created an entire new set of concerns that has traders running for the door to capture profits before they're gone. The Industrials appear headed for a test of support at the 10,000 level, the NASDAQ toward 1900 and the S&P 500 toward the 1100 mark. Odds are that at these round-number psychological levels we'll see a slow down in the sell-off and give the indices a chance for an oversold bounce. This week's declines have sent several sectors careening through support and almost everything appears headed for its simple 200- dma. One of the leaders in this sell-off is the Dow Transports, which performed a beautiful failed rally under the 2850 mark and closed under the 2800 level. Its 200-dma isn't far away so the Transports could find support near 2740. Tech sectors like the GHA hardware index, the GSO software index, the INX Internet index and the SOX semiconductor index are all falling steadily toward their 200-dma's. The DDX disk drive index is already under its 200-dma while the NWX networking index still has plenty of room left to fall. The financial sector, which had been a bulwark of strength for the markets, has finally succumbed to profit taking. Both the BKX banking, BIX banking and XBD broker-dealer indices have fallen below their simple 50-dma's. Joining them in their flight below the 50-dma is the IUX insurance index, which appears to have painted a double-top in February and March. One of the worst performers this week is the DRG drug index, which has plummeted from the 340 level to its 200-dma near 325 (that's a big move for the DRG) in just four days. So much for investors returning to traditional defensive plays like drug stocks. One might have expected the defense sector to trade higher today on the bombing news but not so. The DFI is following the market down four days in a row. Both General Dynamics and Northrop Grumman have turned in very weak performances this month. Of course airline stocks took the brunt of the impact from the terrorist event and dropped 3.41% on top of this week's earlier losses. The market internals have been very bearish with massive amounts of decliners over advancers. Today follows yesterday's numbers with losers outnumbering winners 3-to-1 on both exchanges. Down volume has been excessive the last couple of days with down volume 3-to-1 and even 6-to-1 (like today on the NYSE). Total volume was pretty heavy at more than 2.2 billion on each exchange. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7416 Current : 10128 Moving Averages: (Simple) 10-dma: 10504 50-dma: 10551 200-dma: 9753 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 760 Current : 1106 Moving Averages: (Simple) 10-dma: 1143 50-dma: 1137 200-dma: 1049 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 946 Current : 1402 Moving Averages: (Simple) 10-dma: 1455 50-dma: 1493 200-dma: 1371 ----------------------------------------------------------------- Volatility indices continue to soar for the second day in a row suggesting this correction is "for real" this time. They've all broken their descending trendline of lower highs. CBOE Market Volatility Index (VIX) = 20.67 +2.00 CBOE Mkt Volatility old VIX (VXO) = 21.71 +2.91 Nasdaq Volatility Index (VXN) = 26.58 +0.53 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.20 911,050 1,097,093 Equity Only 0.96 675,246 645,835 OEX 1.14 63,747 72.514 QQQ 5.88 38,151 224,452 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.7 - 2 Bull Confirmed NASDAQ-100 43.0 - 8 Bear Confirmed Dow Indust. 80.0 - 6 Bull Correction S&P 500 79.6 - 5 Bull Correction S&P 100 84.0 - 3 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: 2.11 10-dma: 1.57 21-dma: 1.29 55-dma: 1.09 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 678 829 Decliners 2173 2233 New Highs 55 42 New Lows 14 19 Up Volume 312M 554M Down Vol. 1984M 1562M Total Vol. 2324M 2214M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 03/02/04 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 In spite of a decrease in long positions by Commercial traders they still remain relatively neutral on the large S&P contracts. Small traders remain steadfastly bullish. Commercials Long Short Net % Of OI 02/10/04 412,217 414,044 (1,827) (0.2%) 02/17/04 416,148 415,278 870 0.0% 02/24/04 417,490 416,502 988 0.0% 03/02/04 411,932 418,936 (7,004) (0.1%) 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 02/10/04 143,496 80,362 63,134 28.2% 02/17/04 141,533 84,227 57,306 25.3% 02/24/04 141,559 85,171 56,388 24.9% 03/02/04 148,383 84,135 64,248 27.6% 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 did put some money to use this last week and we see an increase in long positions but they remain net bearish. In contrast small traders reduced their longs and upped their shorts but remain net bullish. Commercials Long Short Net % Of OI 02/10/04 297,601 356,630 (59,029) ( 9.0%) 02/17/04 296,313 371,703 (75,390) (11.3%) 02/24/04 320,425 387,255 (66,830) ( 9.4%) 03/02/04 344,805 395,112 (50,307) ( 6.8%) 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 02/10/04 110,480 58,428 52,052 30.8% 02/17/04 144,014 64,391 79,623 38.2% 02/24/04 129,894 63,524 66,370 34.3% 03/02/04 119,382 67,453 51,929 27.8% 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 here in Commercial traders' positions. and the same can be said for the small traders. Commercials Long Short Net % of OI 02/10/04 44,406 40,439 3,967 4.7% 02/17/04 46,104 40,385 5,719 6.6% 02/24/04 47,266 40,452 6,814 7.8% 03/02/04 49,959 41,059 8,900 9.8% 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 02/10/04 9,906 13,018 (3,112) (13.6%) 02/17/04 9,630 12,338 (2,708) (12.3%) 02/24/04 12,388 7,310 5,078 25.8% 03/02/04 11,605 7,128 4,477 23.9% 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 Commercial traders remain asleep in the Dow futures with almost zero change and small traders are following suit. Commercials Long Short Net % of OI 02/10/04 21,764 11,974 9,790 29.0% 02/17/04 24,451 12,907 11,544 30.9% 02/24/04 27,176 13,918 13,258 32.3% 03/02/04 27,594 14,166 13,428 32.2% 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 02/10/04 6,267 14,220 (7,953) (38.8%) 02/17/04 6,768 15,623 (8,855) (39.5%) 02/24/04 6,509 14,919 (8,410) (39.2%) 03/02/04 6,898 15,874 (8,976) (39.4%) 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 03-11-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: AHC, CDWC, MHK, QCOM, SLB Dropped Puts: CTSH Call Play Updates: AET, ATH, CFC, EBAY, RNR New Calls Plays: None Put Play Updates: CHIR, MMM, UTX New Put Plays: ETN, IVGN **************** 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: ***** Amerada Hess Corp. - AHC - cls: 63.91 chng: -0.88 stop: 64.00 After holding for more than a week, AHC finally broke below the $64 support level, as even the Oil Service stocks succumbed to the broad-based selling pressure. Selling volume increased to well above the daily average and despite a strong midday rebound from the lows, AHC was unable to reclaim the $64 level by the close. This was a good play for us and we still managed to harvest a respectable gain. With the overall uptrend still intact, we'll keep our eye on the stock for another opportunity to play the upside once this bout of profit taking has run its course. Picked on February 10th at $59.53 Change since picked: +4.38 Earnings Date 1/28/04 (confirmed) Average Daily Volume = 930 K Chart = --- CDW Corp. - CDWC - close: 68.09 change: -1.34 stop: 67.00 That was unpleasant! Rather than holding support in the $70-71 area, CDWC got pummeled yesterday with the rest of the market, falling to critical support at $69, which needed to hold if there was any hope for a bullish move. Needless to say, with the strong selling in the overall market on Thursday, support was broken and CDWC fell almost to its 50-dma on another day of heavy selling, ending at its low for the day. Any hope of a rebound from support has now faded and it appears the 50-dma will be tested and possibly broken tomorrow. Even if that level holds as support, there's been enough damage done to the chart that it doesn't make sense to keep the play active. We're dropping coverage tonight and suggesting that any rebound back towards the $70 level should be used to exit the play at a more favorable level. Picked on March 2nd at $72.43 Change since picked: -4.34 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.25 mln Chart = --- Mohawk Industries - MHK - cls: 80.87 chng: -1.13 stop: 79.50 The selling in the broad market has been too much for the bulls in any sector and despite minimal losses in the Housing sector, our MHK play has been taking it on the chin for the past 3 days. Yesterday's action brought the stock right down to the short-term rising trendline near $82. Buyers failed miserably to support the stock at that level and MHK fell through this morning, continuing to fall throughout the session on solid volume. While our stop at $79.50 hasn't yet been threatened, with the break of the short-term trend and selling volume on the rise, prospects for a significant rally over the near term are grim. Rather than hold out for a rebound into the weekend, we're just going to cut our losses tonight. Any rebound tomorrow should be used to effect a better exit point. It should not be viewed as an entry point. Picked on March 4th at $84.53 Change since picked: -3.66 Earnings Date 2/05/04 (confirmed) Average Daily Volume = 342 K Chart = --- Qualcomm, Inc. - QCOM - cls: 61.78 chng: -1.72 stop: 62.00 Holding up better than most stocks during the bout of selling that has enveloped the entire market, QCOM finally succumbed to the bears' assault today, breaking its short-term ascending trendline and violating our $62 stop in the progress. With bearish Stochastics divergence now clearly in place on the daily chart, it appears that we had our stop set in the right place. It would have been nice to ride the stock up to our $67 target, but unfortunately that wasn't in the cards, so we'll have to settle for the consolation prize of a small gain on the play. Traders that didn't exit the play today should use any rebound early tomorrow to do so. The bullish run appears to have come to an end, at least for now. Picked on February 17th at $59.55 Change since picked: +2.23 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 8.51 mln Chart = --- Schlumberger Ltd - SLB - close: 62.16 change: -1.04 stop: 62.75 No sector has been immune from the broad-based selling that has hit over the past two days and even the Oil Services sector (OSX.X) got hit for a 1.66% decline today despite continued strength in the price of crude oil. The stock broke below the bottom of its mid-February consolidation zone, triggering our stop in the process of breaking its recent bullish trend. It looks like the stock is headed for a test of the 50-dma and we definitely wouldn't want to stick around for that continued decline. But we'll keep our eye on the stock for another attempt at a bullish play once the selling party subsides. For tonight though, SLB is a drop. Picked on February 24th at $64.47 Change since picked: -2.31 Earnings Date 1/23/04 (confirmed) Average Daily Volume = 3.74 mln Chart = PUTS: ***** Cognizant Tech. - CTSH - cls: 42.90 chng: +0.66 stop: 44.00 Completing its trek down to our targeted exit zone, CTSH cracked the $42 level this morning before bouncing sharply higher to tag our lowered stop at $44. Either way you look at it, this play was closed out for a nice gain today and we're happy to make our way to the exits. After the past two days of heavy selling in the broad market, there's a definite risk of a rebound tomorrow, so if you haven't exited already, use any opening weakness in the morning to do so. Picked on February 19th at $47.49 Change since picked: -4.59 Earnings Date 2/10/04 (confirmed) Average Daily Volume = 1.32 mln 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 ******************** Aetna Inc. - AET - close: 79.65 change: -1.03 stop: 77.50 The market declines have done some serious technical damage to the insurance index (IUX), which has put in a double-top and a breakdown under the 320 level and its simple 50-dma. The next stop is likely to be the 310 level, which would be a 38.2% retracement for the industry's November to February gains. That makes us cautious on AET and AET's close under the $80.00 level makes us extra careful. We do NOT suggest new bullish positions in AET at this time. More aggressive traders may want to consider positions on a bounce from $78.00 but if AET doesn't reclaim its $80.00 mark tomorrow we may close the play to keep our losses at a minimum. In the news AET held an institutional investor conference today but there didn't seem to be any stock- moving headlines come out of the meeting. Picked on February 29 at $80.79 Change since picked: - 1.14 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- Anthem, Inc. - ATH - close: 86.73 change: -1.37 stop: 85.70 Insurance stocks have had a rough couple of days and the IUX index crashed through its 50-dma ($319) on Thursday, as the selling pressure in the broad market intensified. With the potential for support in the $310-315 area we could be nearing the end of this decline, or we could see selling pressure slice right through. While ATH has been pressured by the weakness in the market, the stock has held up better than many of its peers, just barely violating its 10-dma ($87.17) today. The key level of support for the stock appears to be $86, which provided the base for last week's launch over the $90 level. With ATH ending the day at its low of the day, conditions don't look great for the bulls, but a rebound from above $86 could provide a decent aggressive entry point. That said, there is the risk that ATH will slice right through that support and challenge the 20-dma ($85.56). That average should be over (just barely) our $85.70 stop by tomorrow and if the bulls are able to defend support into the weekend, conditions may turn back in our favor. Aggressive traders can consider new positions on a bounce from support, but those with a more conservative approach will likely be best served by staying on the sidelines until next week. Picked on February 26th at $85.37 Change since picked: +1.36 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.43 mln Chart = --- Countrywide Financial - CFC - cls: 91.92 chg: -0.78 stop: 90.00 Bonds have been soaring all week and that means yields are falling, which pushes mortgage rates lower. That means more business for CFC. Unfortunately, the stock market declines have been so strong this week that CFC has slipped backward with them. Odds are growing that CFC might test support at its 21-dma near $90.50 or psychological support at $90.00. Our stop is at $90.00, which puts us at risk for a play closure. We really hate to move our stops backward but more aggressive traders willing to take the heat might want to consider adjusting theirs to $89.95 or lower. We're going to keep ours at $90.00 and hope for the best here. Traders can actually be looking for a bounce from $90.00 as a new bullish entry point. Picked on February 24 at $91.63 Change since picked: + 0.29 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 2.3 million Chart = --- eBay Inc - EBAY - close: 67.44 chg: -1.03 stop: 66.50 EBAY has actually been holding up pretty well these last four days. Unlike the major indices and fellow Internet giants AMZN and YHOO shares of EBAY are still north of their simple 50-dma. That gives us another level of support near the $67.00 level. The bad news is that EBAY looks ready to test that support tomorrow, especially given the velocity of the market's drop Thursday afternoon. This has been an incredibly tough week to play bullish strategies and we're not encouraging new positions in EBAY right now either. Aggressive traders can look for a bounce from the 50-dma but we'd suggest waiting for the stock to reclaim the $70 level before considering new bullish positions. Picked on March 09 at $ 70.05 Change since picked: - 2.61 Earnings Date 04/20/04 (unconfirmed) Average Daily Volume: 7.0 million Chart = --- Renaissancere Ltd - RNR - close: 53.85 chg: +0.11 stop: 52.00 RNR has always been a relative strength play for us. First it was a chance to play the strength in the insurance sector. Then when the IUX began to fall RNR continued to climb on its own. The stock has weathered the recent turmoil very well holding at support near $53.50 for the last three days. Our official exit plan is still $55.95 so this isn't the best place to consider new positions. If RNR does dip then traders can look for new bullish entries on a bounce from $52.50 or higher (maybe $53.00) but do so carefully. The selling in the insurance sector has really begun to pick up steam with the breakdown under its 50-dma. Picked on February 15 at $50.83 Change since picked: + 2.02 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Chiron Corp - CHIR - close: 47.50 chg: -0.48 stop: 50.05 Slowly but surely we're seeing new lows in CHIR. It would seem that traders are concentrating their selling focus on stocks that still have a lot of profit left in them, which is only natural. CHIR is already in a down trend so the early sellers are already out of the stock. Fortunately, traders continue to use the simple 10 & 21-dma's as pressure points to sell into strength. Today's failed rally at the 10-dma looks good. Picked on February 24 at $49.11 Change since picked: - 1.61 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.7 million Chart = --- 3M Company - MMM - close: 75.35 change: -0.65 stop: 77.00*new* It certainly took its sweet time getting started, but once the selling got started, MMM has declined nicely all week and is now nearing our exit target. When we initiated coverage, we were looking for a break of $77 to give us bearish confirmation from the PnF chart and that occurred yesterday, with the stock falling all the way to $76. Despite an attempted rebound today, MMM couldn't buck the bearish trend in the overall market and then declined to end the day very near its low of the day. We were originally targeting a drop to the $73 level at the 200-dma, but with that average now over $74, we need to be more modest in our expectations. Let's revise the profit target to $74 and look to exit the play should the 200-dma be tested on Friday. With the proximity of our revised exit target, it makes sense to get more aggressive with our stop as well. Lower stops to $77, which is just above today's intraday high. Either way, odds are good that we'll be closing the play out over the weekend. Picked on February 15th at $79.68 Change since picked: -4.33 Earnings Date 1/20/04 (confirmed) Average Daily Volume = 2.78 mln Chart = --- United Technologies - UTX - cls: 85.63 chg: -1.47 stop: 89.51*new* With the Dow Industrials in free-fall shares of UTX, a Dow component, have been falling sharply as well. Today's intraday bounce back toward the $88 level rolled over after the news about Al Queda supposedly claiming responsibility for today's bombing hit the markets. UTX is quickly approaching our short-term target of $85.00 and some traders may want to begin planning their exits. Our official exit was a move toward the 200-dma near $83.00 but the 200-dma is now up to 83.17. We're going to officially set our exit price at $83.65 and if UTX gives us a sharp move lower we can close the play for a profit. Meanwhile we're going to lower our stop loss to $89.51. Picked on March 09 at $ 88.75 Change since picked: - 3.12 Earnings Date 01/20/04 (confirmed) Average Daily Volume: 2.3 million Chart = ************* NEW PUT PLAYS ************* Eaton Corp. - ETN - close: 54.82 change: -1.18 stop: 58.50 Company Description: Eaton Corporation is a global diversified industrial manufacturer with businesses in fluid power systems, electrical power quality, distribution and control, automotive engine air management and fuel economy and intelligent truck systems for fuel economy and safety. The principal markets for the company's Fluid Power, Automotive and Truck segments are original equipment manufacturers and after market customers of heavy-, medium- and light-duty trucks, passenger cars, off-highway vehicles, industrial equipment, and aerospace products and systems. The principal markets for the company's Industrial and Commercial Controls segment are industrial, construction, commercial, automotive and government customers. Why we like it: Culminating its strong upward trend with a 2-for one split in late February, ETN made one last feeble rally attempt last Friday, resulting in another lower high and setting the stage for the next leg down to the bottom of the $56-62 trading range. But a funny thing happened on the way to another bullish entry point. Support failed miserably, as the bullish sentiment in the overall market evaporated in the past 2 days. Near-term support was as $58.50, right at the 50-dma ($58.48). But yesterday's selling party sent the stock plummeting through that potential support like a hot knife through butter, resulting in a drop all the way to the bottom of the trading range of the past 2 months. Buyers didn't even attempt a bounce this morning, as the stock continued to plunge, taking out the 100-dma ($54.97) on the way to another close at the low of the day on accelerating selling volume. Today's action looks that much more bearish with the 10-dma ($58.21) crossing below the 50-dma, indicating that this level should be strong resistance in the future. The plunge of the past two sessions paints an ominous picture on the PnF chart, with a fresh Sell signal and a tentative bearish price target of $48. That target lines up pretty well with the next level of strong support at the 200-dma (currently $49.19). There are potential support levels found at $54, $52.50 and $50 on the way to that target, but based on the rapidly increasing selling volume, we're betting that the 200-dma is what the bears have in their sights. Following the sharp decline of the past 3 sessions, ETN is overdue for an oversold rebound and we'll welcome it as the precursor to an attractive entry point. There should now be strong resistance in the $56-57 area, as broken support becomes resistance. A failed rally in that area looks great for new entries. More aggressive traders can chase the stock lower below today's low, but with the understanding that ETN is overdue for a near-term bounce, possibly from the $54 area. We'll use $49 as our target for the play and set our stop initially at $58.50, just over the 50-dma. Suggested Options: Aggressive short-term traders can use the March 55 Put, but with March options expiring next Friday, time decay will be a problem. Those with a more conservative approach will want to use the April 55 put. Aggressive traders looking for more insulation against time decay will want to utilize the April 52 strike. Our preferred option is the April 55 strike, as it is currently at the money and should provide ample time for the play to move in our favor. ! Alert - March options expire next week! BUY PUT MAR-55 ETN-OK OI= 659 at $1.10 SL=0.50 BUY PUT APR-55*ETN-PK OI= 113 at $2.05 SL=1.10 BUY PUT APR-52 ETN-PX OI= 74 at $1.10 SL=0.50 Annotated Chart of ETN: Chart = Picked on March 11th at $54.82 Change since picked: +0.00 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.14 mln Chart = --- Invitrogen - IVGN - close: 67.26 chg: -1.26 stop: 71.01 Company Description: Invitrogen Corp. provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery and commercial bio-production. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery including functional genomics, proteomics, bio-informatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen has headquarters in Carlsbad, Calif., and conducts business in more than 70 countries around the world. The company globally employs approximately 3,000 scientists and other professionals. (source: company press release) Why We Like It: The trend changed for IVGN in mid-February. Actually it was February 12th, the day of its earnings report. The stock enjoyed a great pre-earnings run up boosted by gains in the broader market. IVGN beat earnings by 2 cents and announced a debt offering of $450 million in convertible notes due 2024 to payoff their notes due in 2007. Something didn't sit well with investors. It was either the normal post-earnings depression or the debt sale or something else but shares of IVGN couldn't turn around. There was a brief bounce at its simple 50-dma but the bounce was rather flat. In the last four sessions we've seen IVGN break support at its simple 100-dma and the psychological and historical support at $70.00 on better than average volume. Considering the stock's run from March of last year there is still plenty of profit on the table and IVGN looks vulnerable toward its December lows near $63.00 and quite possibly its simple 200-dma near $60.00. Its P&F chart is on a sell signal that points to the $63.00 level so we'll make that our initial target. We'll start the play with a stop loss at $71.01 but more conservative traders can probably use a tighter stop just north of $70. We would open positions at current levels but failed rallies under $69.50 will also work. Suggested Options: We would suggest the April of May puts. Our favorite would be the April 70's. BUY PUT APR 70*IUV-PN OI= 164 at $5.10 SL=3.25 BUY PUT APR 65 IUV-PM OI= 376 at $2.60 SL=1.35 BUY PUT APR 60 IUV-PL OI= 60 at $1.15 SL=0.65 BUY PUT MAY 70 IUV-QN OI=1046 at $6.30 SL=4.15 BUY PUT MAY 65 IUV-QM OI= 730 at $3.80 SL=1.65 Annotated Charts: Chart = Picked on March 11 at $ 67.26 Change since picked: - 0.00 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 910 thousand 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 03-11-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Pulling back, Testing & Breaking Support Option Spreads: There’s Good News & There’s Bad News Traders Corner: Designing The System ********** WATCH LIST ********** Pulling back, Testing & Breaking Support ___________________________________________________________________ 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. ___________________________________________________________________ Phelps Dodge - PD - close: 78.80 change: +0.02 WHAT TO WATCH: Earlier in the session on Thursday shares of PD were looking pretty bullish with strong gains following a 4% rally in the price of copper and positive comments from Morgan Stanley. Unfortunately, the rally in PD faded as the sell-off in the broader markets gained speed. Today marks the second close in a row under the $80 level and its 50-dma. Bearish traders might speculate on a drop toward the 100-dma near $71.00 with a tight stop (maybe today's high) while bulls can look for a breakout above today's high at 81.76. Volume was twice the norm on Thursday's move. Chart= --- Zimmer Holdings - ZMH - close: 76.20 change: -2.00 WHAT TO WATCH: ZMH recently broke out to new all-time highs above the $80 level of resistance but this week's market-wide sell-off has brought it back toward support. ZMH closed below its simple 40-dma but managed to hold minor support at $76.00. We would watch the 50-dma near $75.50 for direction. Bears can short a breakdown while bulls can buy the bounce. Chart= --- Federated Dept. Stores - FD - close: 50.42 change: -0.95 WHAT TO WATCH: FD had been one of the market's and retail sector leaders hitting new multi-year highs in late February and early March. Unfortunately, most of those gains are gone as stocks headed south this week. FD is now resting just above round- number, psychological and historical support at $50.00 underpinned by technical support by its 50-dma. Technicals are obviously bearish given the recent drop but bulls can hope for a bounce while bears will be hoping for a breakdown! Chart= --- Ashland Inc - ASH - close: 47.00 change: -0.87 WHAT TO WATCH: ASH has been a very steady performer for investors over the past several months and has been able to maintain its gains in the face of broader market consolidation and weakness. The strength in ASH is finally being challenged with its losses starting to pick up speed in just the last two sessions on rising volume. Fortunately for shareholders ASH still has technical support at its 40 & 50-dma's as well as historical and round-number support at $45.00. Bulls can look for a bounce from either. Bears might want to wait for ASH to break the $45 level to avoid being caught in a trap. Chart= ---------------------------- RADAR SCREEN - more to watch ---------------------------- HRB $52.58 -1.18 - Normally one might think that tax time is a bullish time of year for H&R Block. Not so this year. The recent rebound has failed and HRB is painting new relative lows. The next stop looks like $50.00. RKY $66.52 +1.01 - low carb dieters can now enjoy a new beer as the founder of Coors comes out with Aspen Edge. The bounce from $65.00 might be an entry point for bulls. PCAR $50.00 -0.74 - PCAR is trading back towards its historical support near $49.00 from September and November last year. A breakdown at $49 could lead to a test near $44 or lower. AAPL $27.15 -0.53 - AAPL's recent strength has been amazing. The stock broke out to new three-year highs this week and appears unaffected by the market's sell-off. CCL $42.46 -1.95 - Cruise liner CCL got hammered today fueled by terrorist fears. The breakdown at its 50-dma could lead to a test of $40.00 or even its 200-dma near $36.00. ************************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 ************************************************************** ************************ Option Spread Strategies ************************ There’s Good News & There’s Bad News By Mike Parnos, Investing With Attitude Don’t get excited. I lied about the good news. The market is playing with our minds and our money. Thus far, our Couch Potato Trading Institute portfolio has two casualties. The other two are hanging on by their short and curlies. Well, maybe there is a silver lining. With the market plummeting, some of the volatility has returned to the market. That’s good, because we’re premium sellers. However, it’s no so great if we have to bail out of trades gone bad. It’s time to think seriously about adjusting our QQQ ITM Strangle position. Many astute CPTI students have already done so. Right now, with the QQQs at about $34.85, our March $34 calls would cost $1.15 to buy back. That means there is still $.30 of time value left. We have no idea where the QQQs are going to end up. The only thing we know for sure is that the $.30 of time value will erode away by option expiration. The April $34 calls can, as of tonight, be sold for about $1.60. If you rolled out now, we’d be taking in a credit of $.45. If the QQQs didn’t change in value between now and expiration (which, I know, isn’t realistic), we might gain $.25 in additional time erosion of the March $34 calls. At the same time, we might lose $.10-.15 in the erosion of the April $34 calls. If the market continues to pull the QQQs down toward our $34 strike price, the situation changes. Why? Because, even though the intrinsic value will be disappearing, the amount of time value will increase. Remember, at-the-money options always have the most premium – whether it’s March or April. That’s not a bad thing, because, regardless of how much time value is left in the March $34 call, it will be gone by expiration. Then, if the QQQs are at, or near, $34, you might take in $.75 for the rollout to the April $34 calls. The same concept holds true for those CPTI students who have the $35 calls. The closer you are to your sold strike (calls or puts), the more premium you can take in. The further you are in- the-money, the less premium that will be available. For the moment, we’ll roll out the $37 puts and take the $.25. We’ll wait on rolling out the March $34 calls to see where the market takes us. In the QQQ Strangle email question below, I go over a few alternatives. Keep in mind that the email arrived a few days ago and the prices are different now. The reasoning behind the potential adjustments is still valid. NOTE: We also made an adjustment to the Zero Plus Strategy. See the details below. _____________________________________________________________ Hi Mike, I’m in the QQQ ITM Strangle with the $38 calls and $37 puts. I just bought back my EOY March $38 QQQ calls for $.05, but have not sold the April 36 calls at $.95 - $1.00 yet. My thinking is that there is a good chance that Comp support at 1,990 will hold as well as Dow 10,400. If we get a QQQ bounce into next week, option expiration week, then I may well have a chance to buy back the March QQQ puts cheaper before I roll them to April. That may also yield the opportunity to roll them to April strike prices that are more in the middle of the 33 - 43 Jan 05 range. If I rolled the calls now to $36, and the puts moved up to over $36, at what strike would you sell the puts? 36? I'm trying to learn fast, but don't have the experience base yet for the rolling process? Thanks for your patience, Coach. I need the help. -- William Hi William, Since you already bought back the Mar. $38 calls, you have a choice to make. Right now (when this email was received) you could get $.95 for the April $36 call. In a week and a half, that $.95 may erode to $.75 (with all else being equal). If you think the market will bounce let's say $1.00 in the next week. Then, you might get $.85 for the $37 calls -- IF it bounces. You don't have to do the puts now, even though it’s in the money and almost all of the time value is gone. If the QQQs bounce up, you may be able to get more for your $37 puts. Look at the puts now. With the QQQs trading at $35.73, the Mar. $37 puts would cost $1.40 to buy back. That would mean you're only paying $.17 in time value -- for a week and a half. If you rolled out now to the April $37 puts, you could sell them for $1.80. You would pocket the $.40 difference. If you wait, and the stock doesn't move, the $.17 of time value in the Mar. $37 puts will not likely go down until very close to expiration Friday. The $.57 of time value in the April $37 puts will likely go down about $.10. As you know, it's hard to guess what the market is going to do. A lot of this is just a matter of personal preference. There are no set rules. If you rolled out now, you'd take in a total of about $1.35 and have sold the April $36 calls and $37 puts. Ideally, you'd like to have sold the $36 puts and $37 calls. That makes it a little easier to roll out for the May cycle. But, in the markets, we don't always get what we want. If you anticipate a bounce, you've essentially become a directional trader. If you're comfortable with that, fine. Your risk is that some premium may erode away while you're waiting for the move to happen. ______________________________________________________________ MARCH CPTI POSITIONS Position #1 – OEX (S&P 100 Index) Iron Condor – 544.16 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 – 568.74 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 - $140.22 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. Our range was violated and we closed the position for $2,300. We took in $1,800. Result: $500 loss. Position #4 – BBH (Biotech Index) - Siamese Condor - $144.10 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 was $6.25 ($6,250). Our profit (safety) range was $138.75 to $151.25. These were also our bailout points. The closer BBH finishes to $145, the more money we will make. We closed the position for a loss of $1.15 ($1,150). ______________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $34.87 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 – 544.16 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. Adjustment: Buy back the OEX March 585 call for $.10 and sell the March 560 call for $1.35. A credit of $1.25 x 300 = $375.00. _____________________________________________________________ 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 ************** Designing The System by Mark Phillips mphillips@OptionInvestor.com We've spent the past few weeks dancing around the issue of building an automated trading system and just how one goes about it. While we could have jumped right into the process of looking at charts and indicators and trying to develop trading rules, I purposely avoided it because I wanted to focus everyone's attention on the issues that I think are more important. Namely, that we have to have reasonable expectations, be able to measure the results coming out of the potential system and determine whether they meet our trading goals and more importantly, whether they are likely to be sustainable over the course of time. I think if we spent the next 12-14 weeks on this topic, we might be able to cover all the different nuances involved in the process and build a candidate system that might be viable. Unfortunately, we'd each have a different view, a different timeframe, prefer to trade a different set of symbols, or any number of variances. That's why when we started out, I said I didn't want to build a system for you. I want to guide you down the path of system development so that you're equipped to create a system, test it out and put it into practice all on your own. Trust me when I say that it is far more valuable to be able to create your own system, because you'll know it well enough that you can recognize when it isn't performing and make the necessary adjustments. You can never do that with a system that is not of your own creation. Alright, enough chatter. Let's get to the charts and see what we can learn. Recall that we're keeping things as simple as possible in this discussion, so that the concepts remain clear. Moving average crossover systems are just about the simplest that can be developed and we picked a couple of obvious periods to start with -- the 50-pma and the 200-pma -- and we'll be looking at their interaction on our first test stock (CSCO) on various timeframes. Recall also that our goal is to generate 2-3 trades per month and that will tie in with the timeframe we choose to trade. Last week's assignment was for you to apply those averages on various time-frame charts and see if there were any usable patterns there that we can use for defining our first system rules. I hope you had fun with the exercise, but more importantly how the averages interact with one another, especially as we change timeframes. The suggested timeframes to review were 5-, 10-, 15-, 30- and 60-minute charts. There's nothing magical about any of these settings -- they just happen to be among the most common ones in use. Part of system development would consist of also experimenting with different timeframes. As a clue to the theme of an idea we'll explore next week, what would happen if we picked chart periods that correspond to primary Fibonacci numbers? But I digress... Before we proceed define the basic behavior that I was expecting to find. 1. With the 50-pma over the 200-pma, the trend is bullish, so we're looking to take only long trades. With the 50-pma below the 200-pma, the trend is bearish and we're looking to take only short trades. 2. Potential bullish trades may come under any one of the following conditions: - 50-pma crosses up through the 200-pma - Price touches the 50-pma - Price touches the 200-pma 3. Potential bearish trades may come under any one of the following conditions: - 50-pma crosses down through the 200-dma - Price touches the 50-pma - Price touches the 200-pma Remember, these are just our starting ideas for the chart analysis. Now it's time to dive into the charts and see if there is any merit to the theory, if it needs to be modified, or discarded as the first (probably of many) ideas that will be discarded along the path to a winning system. The first chart up at bat is the 60-min chart. CSCO 60-Minute Chart With the 50-dma solidly above the 200-dma at the far left of the chart, clearly we're starting out with a bullish bias, using each touch of the 50-dma as a potential long entry point. After quite a bit of chopping around the average, price takes off, eventually resulting in a very nice bullish move. Then conditions change, producing a couple of losses as price breaks down under the 50-dma and then hits the 200-dma. That initial touch of the 200-dma is another potential long entry point, but with the gap down under $25, , we get a dross of the 50-dma below the 200-dma, resulting in a reversal to a short position and a short bias. Then all the way into the far right of the chart, we are using each subsequent touch of the 50-dma as continuation short entries. Quite honestly, I'm not particularly wild about the results here, but with the appropriate definition of profit targets and initial stops, we could probably get a workable system defined. But maybe there's a better solution to be found on the shorter timeframes. CSCO 30-Minute Chart Unfortunately, due to space constraints, we can't look at the same size data sample on the 30-minute chart. So what we're looking at is the early December to mid-January period, where we get an initial bullish bias with the crossover of the moving averages in late November and never see a reversal, all the way into the mid- January highs. Each test of the 50-dma provided viable entries into the overall bullish trend. Needless to say, there were plenty of opportunities to get aboard for the ramp higher into late January. I actually like the performance of the 30-minute chart better than that of the hourly chart, and it's hard not to appreciate the added responsiveness of the shorter timeframe. How about if we slide down one more notch on the time scale? CSCO 15-Minute Chart AC Alright, there's just no way to put a pretty face on that chart. With 6 crosses of the moving averages, clearly our trend bias has the ability to shift far too easily and the 15-minute chart is too short for our purposes, at least with our first test stock. Looked at subjectively, I'd have to say that the 30-minute chart is the optimal timeframe for using these particular moving averages. There may be a better choice, like 22 minutes, but we're sticking with the round numbers for our discussion. So what's the next step? Well we've now made some observations as to what timeframe seems to give the most reliable price action around the specified averages. Now we need to find out if our short-term observations stand up to the test of time. That means either a ridiculously large amount of time dragging charts back and forth and scribbling notes, or it's time to sit down at the programming terminal and let the computer do the tedious work for us. Of course, we'll have to specify parameters for profit targets for each trade, as well as initial and trailed stops. Everything must be defined in advance as the computer can only do what we tell it to. Once the model is programmed, we want to have it crunch through at least 12 months worth of intraday data and give us the cold hard numbers. Does it make money or not? How much? And the all important issue of what is the maximum drawdown over that period of time. If I'd hazard a guess, I'd say this system would end up a loser no matter how we jockey the profit target and stop management settings. I mean, this is a pretty simple approach and if it was that good, someone else would have stumbled across it long ago. That isn't to say that a moving average crossover system couldn't be VERY profitable, it's just unlikely to be this one. So how do we find out? Trial and error, my friends. We've already got the initial test system built in the computer and now it's just a matter of tweaking parameters. We can change the periods of each of the moving averages, maybe add a third or fourth for added filtering and possibly even consider exponential averages instead of simple. Then of course, there's the added nuance of perhaps shifting one of the averages forward or backward in time, each of which will change the nature of the averages interactions with price. As you can see, even on something as simple as a moving average crossover system, when it comes to the process of optimization, the possibilities are just about endless. First we narrow down the timeframe, then we start picking moving averages that seem to act well with regard to price and the way we're interpreting those averages. It's a delicate balance between looking at the charts with different averages applied, then picking what we think we like, making the appropriate changes in the system test in the computer and letting it filter out the winning ideas from those that should be discarded. Once we've finally settled on something we think works for a single stock, then it's time to expand the universe and run our other test stocks through the same system. If we get acceptable (i.e. a positive equity curve) over a period of a year or more, and also across a basket of stocks, then we'll know that we have really come up with something worth paying attention to. If there's any interest, I'm more than willing to carry this exercise forward in the weeks ahead, but I don't want to keep harping on the same topic if you're bored with it. So let me know what you want. Who knows, if we keep marching down this path, we just might get lucky and come up with something that does provide the basis for a viable automated trading system. Now wouldn't that be a nice surprise? Have a great weekend! -Mark ************************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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