The Option Investor Newsletter Thursday 03-18-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Al Qaeda Expiration Futures Markets: See Note Index Trader Wrap: Intra-day swings with a new twist Market Sentiment: Not a good sign Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-18-2004 High Low Volume Adv/Dcl DJIA 10295.78 - 4.50 10328.82 10214.15 1.57 bln 1389/1724 NASDAQ 1962.44 - 14.30 1972.31 1947.31 1.66 bln 1431/1787 S&P 100 550.69 - 0.79 552.44 546.32 Totals 2820/3511 S&P 500 1122.31 - 1.44 1125.50 1113.25 W5000 10960.56 - 20.30 10990.90 10875.18 SOX 480.66 - 6.40 578.57 569.23 RUS 2000 574.55 - 4.02 578.57 569.23 DJ TRANS 2830.92 - 16.70 2850.50 2813.10 VIX 18.53 + 0.42 19.23 18.35 VXO (VIX-O)18.62 + 0.48 19.65 18.18 VXN 24.58 - 0.17 25.36 24.32 Total Volume 3,569M Total UpVol 1,222M Total DnVol 2,277M Total Adv 2928 Total Dcl 4004 52wk Highs 255 52wk Lows 33 NasTRIN 1.72 TRIN 1.15 PUT/CALL 0.80 ************************************************************ Al Qaeda Expiration News that the number two man in the Al Qaeda organization may expire along with March options lifted the markets off their lows and back to the highs for the week. The rumors were flying fast and the market makers earned their money today keeping the SPX under 1125 and guaranteeing the most SPX options would expire worthless. Dow Chart - 45 min Nasdaq Chart - Daily SPX Chart - Daily Pakistan announced they were in a major battle with Al Qaeda and the tribesmen supporting them and they thought they had a high value target surrounded. The rumors were flying as to what high value target it might be and the latest word was Ayman al-Zawahiri, the number two leader was trapped. The fight was centered around a very heavily fortified area that the military said had been built to withstand a military attack. The military said over 200 heavily armed defenders were surrounded and they were going to bring in air power at dawn Friday to finish them off. It may be some time before we really know who is under the rubble. Fortunately the news came just in time to prevent a market melt down as the indexes were accelerating into a decline just after 12:00. The economic news had been less than encouraging with the exception of Jobless Claims. New claims for last week fell to 336,000 and the lowest level in three years. Also encouraging is the week of the month this report represents. Last week was the survey week for the monthly Jobs Report and that suggests we could have an improved jobs number for March. The PPI for January, yes we finally got it, showed prices jumped twice the amount expected at +0.6% but the majority of the increase was in energy. Gasoline prices were up +14% in January. This was old news and traders breathed a sigh of relief that the long awaited report, delayed due to a new method of accounting, was not substantially worse. Prices rose on capital equipment, vehicles, construction equipment and aircraft due to higher demand. Nobody is going to complain about that. The only category with lower prices was foodstuffs brought on by the Mad Cow panic in January. The Conference Board Leading Indicators was unchanged for February and less than expected. The lower than expected number was caused by a drop in sentiment. This information is produced from previously announced components so the market tends to ignore it. The biggest negative for the day was the Philly Fed Survey which dropped to 24.2 for March from 32.4 in February. This was not exciting news. While it still shows an increasing level of manufacturing there was a substantial drop in several areas. New Orders fell to 21.9 from 27.8 and suggests a slowing in the buying process. Inventories fell back into negative territory at -12.8 from +0.8 last month. Unfilled orders rose to 8.8 from 4.4 and delivery times rose to 19.0 from 7.2. This is confusing as you would think a drop off in business would speed up the delivery process. Because of a shortage of inventories in the entire system it could suggest a shortage of new components and raw materials. Adding to this theory was a drop in the average workweek to 17.9 from 23.6 and a minor drop in employees. Prices paid jumped +10 points which also suggests higher demand for raw materials. The biggest component drop was in the six-month outlook which fell to 36.7 from 51.4. That is a -14 point drop! This report was a shock for traders but it was still a positive report. Only the inventory component was negative. The still positive headline number means manufacturing activity is still increasing but only at a slower pace. The last report was the FOMC minutes for the January meeting. The minutes were fairly calm except for fears of a potential deflationary enemy. The minutes said "In the view of many, some modest further disinflation appeared to be the most likely prospect." That feeling still persists in the recent meeting announcement where they still gave the nod to a potential deflationary scenario as having the highest risk although the risks were "roughly equal". They were still expecting "faster growth in employment" but so far that has been an elusive goal. There was some concern about the potential health of the economy in the second half of 2004 once the tax cut stimulus (refunds) ran their course. The concern was a slowing of demand and potential problems in the consumer area. I do not see any rate hikes any time in the near future based on their valid concerns for lack of robust and continued growth. The uncertain and contradictory economics along with option expiration produced a day that opened with a negative bias after two days of strong gains. Traders started out taking profits and the negative Philly Fed report accelerated that trend. The Dow had fallen to 10214 from yesterday's 10305 close when the rumors hit the wire. Within 30 min the Dow was back to the high of the day at 10328. Most of that was in three candles as traders rushed to cover their shorts. Once the burst of news was over and it was determined that Bin Laden was probably not in the area the excitement begin to fade with the indexes pulling back to support to await a Pakistani update. When the 3:PM bell rang and there was no further drops and no further news those still short began pondering their fate if a surprise announcement hit the wires overnight. Shorts began to cover once again and the Dow jumped +60 points into the close. The Nasdaq followed the same pattern as the Dow only it never returned to yesterday's levels. 1970 remained the current resistance level. This was frustrating to traders because Merrill upgraded the semiconductor sector before the open to overweight. The SOX made it to positive territory but could not hold it and ended down -6 for the day. The real challenge for the day was not the news, economics or al Qaeda. It was option expiration week. Those who bought the bottom on Tuesday took profits and closed those option positions at the open and then paused to determine direction. With the Nasdaq hovering right in the middle of its range for the last six days it was tough to decide what direction we were headed and everybody waited on the sidelines. This was complicated by the max pain points being at the high end of our ranges. The SPX max pain point was 1125 and we have stopped dead on that level for two consecutive days. When the al Qaeda spike hit at 1:15 the S&P futures ran to exactly 1124.80 and stopped dead on huge volume. The short covering rally at the end of the day also stopped at 1124.80 on large volume. Market makers had a serious desire to keep the SPX pinned under 1125 and despite the monster news spike they managed it beautifully. Now they have to hold their breath overnight and hope there is not any news before tomorrows open to upset their plans. Despite the market weakness today, regardless of the cause, there was not any serious problem with stocks. Microsoft was knocked for a minor loss at $24.89 after they announced settlement talks with the EU had broken down. The EU is set to hit MSFT with a fine in the hundreds of millions of dollars after Microsoft refused to make certain changes to Windows. Microsoft said it planned to appeal any ruling in court. A court case could take years to even come to trial and an EU order could force the Microsoft make changes in a matter of months. The EU is demanding that Microsoft sell a discounted version of Windows that does not contain Media Player so that rivals like RealNetworks and Apple have a chance to sell their products. They are also likely to require Microsoft to make their code available so other companies like SUNW can integrate their software into Windows. Microsoft only lost -24 cents on the news but it did close at a new multi month low. We are actually seeing some bullish things shaping up for the current quarter. We are continuing to see companies post good earnings. Adobe earnings tonight were a prime example. They posted earnings of 50 cents when analysts were only expecting 40 cents. They earned a record $423 million and a +43% increase over the same quarter last year. Shares were up +$2 in after hours. This continued trend of better than expected earnings and better than expected guidance, except for Intel, continues to raise the expectations for the first quarter. We are right in the middle of the regular warning cycle and to date we have not had any major confessions and very few minor ones. The quarter is shaping up to be outstanding. The low interest rates should continue, possibly for the rest of the year. All we need is for the economy to catch fire. Countering the bullish thoughts above there is a growing crowd of analysts that are worried about the 3.7% yield on the ten-year note. They claim this is a number that could be telegraphing economic problems ahead that may include another recession. Some people would complain if you hung them with a new rope. There is also the news making the rounds again today that Japan may quit buying bonds to weaken the Yen. They budgeted $100 Billion for that in the first quarter and they have already spent $45B and have twice this week floated the trial balloon that they were rethinking their policy. This could impact rates, the dollar and the equity market. While everyone agrees the economy really needs to be growing faster they also agree it is growing and eventually it will heat up. We still have not seen the impact of the massive flood of income tax refunds that should be hitting mailboxes soon. Large refunds, low interest and spring weather should provide a boost to the economy for the second quarter. The challenge over the next several weeks is to rebuild the bullish sentiment in the market. We suffered a huge sentiment blow over the last two weeks. While the drop to date was only a garden variety profit taking dip any further drops from here could be serious. This coming week is going to be pivotal. We will either move higher and begin battling to recover lost ground or we are going to head for the next lower support level. The odds are very good we are NOT going to just continue trading sideways. We are clearly going to have some volatility at the open as the index options settle and probably some news event movement as well. The rest of the day may expire peacefully. Moving into next week we will not have the options weight hanging over our head and will be free to move without restrictions. One thing is clear, even with the news event spike today the volume was terrible. Only 3.5B shares traded across all markets. This is almost holiday volume and the second consecutive day under 4B. We need a catalyst to get things going again and I do not see anything on the horizon. There are no material economic reports until next Wednesday so we will be left to focus purely on stocks. Friday may not be a stellar day to jump into a position due to all the conflicting forces. Finding somebody important in the Pakistan rubble could provide the stimulus for a short term breakout but there is also the possibility that after today much of the news has been baked into the cake. 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 ******************** Intra-day swings with a new twist The major indices saw a second consecutive session of volatility, where a delayed January report on inflation showed January producer prices rising 0.6%, with a 4.7% jump in energy more than offsetting a 1.4% decline in food prices. That news set a negative tone early, and much of yesterday's gains were erased, where in the case of broader technology, losses were found by mid-session. But stocks reversed from their lows, to finish back near unchanged levels on news out of Pakistan, that Pakistani troops believed they had surrounded a key al-Qaida target, Ayman al- Zawahiri. As I write tonight's Index Trader Wrap, there has been no further clarity to these reports. Suffice it to say, if today's economic data and this week's Triple Witch expiration wasn't ingredient enough for a volatile and uncertain trade, then some potentially positive news on a geopolitical scale added a little more spice to what we've been seeing of late. Market Snapshot / Internals - 03/18/04 Close A/D lines at both the NYSE and NASDAQ finished negative, but it is notable how improved the A/D indications became when news out of Pakistan hit the wires. It is always difficult to measure what it would mean if a key al-Qaida target was captured as it relates to any economic factor, but it would certainly have some type of positive impact on investor and consumer psychology. Of late, I started to wonder how many Corporate CEO's might have had a stack of IT spending, or new job hiring approval forms on their desk, ready to sign, but with recent terrorist bombings in Spain, and a change of that country's government, with some citing those very terrorist attacks as reason for the change in government, hasn't had some CEO pushing the pile of approval forms to the side, while they await some type of clarity on things, before increasing expenditures. June Light, Sweet Crude Oil futures (cl04m) - Daily Intervals Energy prices were a key reason for the rise in January's producer prices, so I thought I'd quickly review a chart of the June Light, Sweet Crude Oil futures (cl04m). A quick check of this commodity's point and figure chart hints at a potential bullish price objective of $40.50. OPEC has been stringent with increasing its supply quota's, and a recovering global economy has increased demand. That type of equation makes for higher prices, where Treasury Secretary John Snow said he is really becoming concerned with the high price of energy, as it acts like a tax that can stall spending in other parts of the economy. Pivot Analysis Matrix - The only thing I would say in regards to the pivot matrix, was an observation I noted in today's market monitor, just before the news out of Pakistan hit the wires. I was noting that the QQQ was edging up from its lows of the session, after just dipping below its DAILY S2, while the other indices had edged up from there lows of the session, after trading near their DAILY S1s. Tracker's have DIA "Max Pain" at $105, while QQQ "Max Pain" is $36. The Q's certainly seem to want to trade closer to the $35.25 level, where inflections of $0.25 either side seem to gravitate back toward $35.25. AMEX Gold Bugs Index ($HUI.X) - Daily Intervals The $HUI.X was on the verge of what seemed to be a break above its downward trend, when wouldn't you know it, the news out of Pakistan had gold stocks backing off their best levels of the session. The dollar was weak today, with the U.S. Dollar Index (dx00y) 87.64 -1.12% currently trading down 1.00 point, while higher producer prices in January brought some thought to inflation. S&P 500 Index (SPX.X) Chart - Daily Intervals The S&P 500 Index (SPX.X) traded within yesterday's range, where this quarter's "Max Pain" level of 1,125 serves up resistance. An intra-day observation would have found the SPX hitting its session high of 1,125.50 at 03:35 PM EST, well after the news out of Pakistan was in the market, but sellers were firm at 1,125. In last night's Index Trader Wrap, I said I wanted to begin monitoring the Market Volatility Index (VIX.X) 18.53 +2.31% in coming weeks, as I made a note to myself on Monday, when the VIX.X kissed the 21.22 level, to begin tying in some longer-term observations with the VIX.X, and the S&P 500 Bullish % ($BPSPX). Market Volatility Index (VIX.X) - Weekly Intervals I've shown this chart of the VIX.X over the years, where I like to set my retracement from 40.00 to 16.78, where I've found this retracement, which breaks up the range in levels, to tie in rather well with what we will see in the S&P 500 Bullish % ($BPSPX). After trading well below the 16.78 level, the VIX.X was able to come up at touch a level higher at 21.22, where this can become an alert towards a shift from call buying to put buying. It also comes as some of the bullish % charts have either shows weakness, like both the NASDAQ-100 Bullish % ($BPNDX) and NASDAQ Composite Bullish % ($BPCOMPQ), with some softening showing up in the S&P 500 Bullish % ($BPSPX). S&P 500 Bullish % ($BPSPX) - 2% box size You could probably turn the S&P 500 Bullish % Chart ($BPSPX) upside down, and see great similarities between it and the Market Volatility Index (VIX.X) shown above. However, each tell a similar yet different story. While internals at the S&P 500 have been softening of late, it would currently take a reading of 72% for this market indicator to turn "bear confirmed." With all the quarterly expiration option action we've been seeing, the VIX.X can be difficult to interpret, but I would have to think that institutional hedging, and buying of puts would be alerted to if the VIX.X moves above 21.22, especially if the S&P 500 Bullish % ($BPSPX) falls to "bear confirmed" status at such a high level of bullish risk. From past index trader wraps, and some focus I've been giving to option-related activity, there certainly seems to be a lot of interest around the SPX 1,125 level, as if it is a point of equilibrium where there is a heck of a lot of option action taking place, as if bulls and bears are very busy with some hedging activities. The SPX Bullish % ($BPSPX) tells us that while internals are still strong, but softening, there's a lot of bullish risk that can still be taken out of this market. The VIX.X becomes useful in understanding what types of premiums options are fetching, where premiums will rise (VIX.X will rise) when premiums rise. That is often when the demand for puts starts to increase, and supply of STOCK begins outstripping demand. 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 **************** Not a good sign - J. Brown After a volatile session the major indices closed mildly lower with tech stocks taking the biggest lumps. Lifting the markets from its midday doldrums was news that Pakistani troops had surrounded what was believed to be Al Qaeda's number two man behind Osama. Should they be successful in capturing or killing him then global markets are likely to have a bullish tailwind going into the weekend. At least that is the general consensus. The growing violence in Iraq as we approach the one-year anniversary of the start of the war is still somewhat unsettling as news channels flash pictures of flaming wreckage. The failure to reach a settlement between software giant Microsoft (MSFT) and the European Union helped depress the software sector. The EU is likely to issue a huge fine totally several hundred million euros. Today's weakness and inability to breakout above the simple 10- dma in the Dow Industrials and the NASDAQ composite is not a good sign. I suspect that investors are still cautious and tomorrow could be weak if we don't get any positive headlines to inspire the markets higher. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7929 Current : 10295 Moving Averages: (Simple) 10-dma: 10313 50-dma: 10526 200-dma: 9788 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 843 Current : 1122 Moving Averages: (Simple) 10-dma: 1125 50-dma: 1137 200-dma: 1053 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1014 Current : 1417 Moving Averages: (Simple) 10-dma: 1425 50-dma: 1487 200-dma: 1377 ----------------------------------------------------------------- Markets churned sideways today and the volatility indices followed suit. CBOE Market Volatility Index (VIX) = 18.53 +0.42 CBOE Mkt Volatility old VIX (VXO) = 18.62 +0.48 Nasdaq Volatility Index (VXN) = 24.58 -0.17 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.80 876,364 700,998 Equity Only 0.65 607,071 393,536 OEX 0.78 87,459 68,037 QQQ 3.22 30,566 98,571 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 71.8 + 0 Bull Correction NASDAQ-100 43.0 + 0 Bear Confirmed Dow Indust. 80.0 + 0 Bull Correction S&P 500 77.0 + 0 Bull Correction S&P 100 85.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.17 10-dma: 1.64 21-dma: 1.35 55-dma: 1.11 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 1654 1440 Decliners 1158 1575 New Highs 63 40 New Lows 13 19 Up Volume 1178M 1144M Down Vol. 618M 771M Total Vol. 1833M 1960M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 03/09/04 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 committing new money to both long and short positions but they are turning more and more bearish in the large S&P contracts. Small traders are holding relatively steady. Commercials Long Short Net % Of OI 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%) 03/09/04 418,394 433,237 (14,843) (1.7%) 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 02/17/04 141,533 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% 03/09/04 155,947 88,317 67,630 27.7% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Wow! We really saw some money come into the e-mini's this week. Commercial traders added nearly 90K new long contracts and more than 90K new short contracts. They remain net bearish on the S&P. Small traders also added more to their positions but remain net bullish. Commercials Long Short Net % Of OI 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%) 03/09/04 431,623 485,268 (53,645) ( 5.9%) 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 02/17/04 144,014 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% 03/09/04 135,233 76,558 58,675 27.7% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders have slowly been turning more and more bullish on the NASDAQ 100 over the last few weeks. As of March 9th, they hit new extremes surpassing they're last bullish peak dating back to June 11th, 2002. Unfortunately, this reading is before the steep Wednesday-Thursday sell-off this week and before the Thursday morning terror attack in Spain. We'll have to wait until next week to see how commercial traders, or "smart money", reacts to the last few sessions. Small traders have also turned more bullish but they're not hitting extreme readings. Commercials Long Short Net % of OI 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% 03/09/04 57,368 46,082 11,286 10.9% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 11,286 - 03/12/04 Small Traders Long Short Net % of OI 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% 03/09/04 15,533 8,070 7,463 31.6% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders or institutions have been slowly growing more and more bullish on the Dow over the last few weeks. Again, this latest data is before the Wednesday-Thursday sell-off and the Thursday terror event but it is encouraging. In contrast small traders have turned more bearish and actually hit a new extreme in their bearishness, surpassing last December's readings. This is a contrarian bullish indicator since small traders tend to be wrong. Yet I would hesitate to draw too many conclusions until we see next week's data and investor reaction to the terrorist attacks. Commercials Long Short Net % of OI 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% 03/09/04 26,867 12,845 14,022 35.3% 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 02/17/04 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%) 03/09/04 7,053 19,159 (12,106) (46.2%) Most bearish reading of the year: (12,106) - 3/09/04 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 03-18-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: DHR Call Play Updates: AET, ATH, CFC, EBAY, JNPR, LXK, RNR, TARO New Calls Plays: DGX Put Play Updates: CHIR, ETN, IVGN 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: ***** None PUTS: ***** Danaher Corp. - DHR - close 92.44 change: +0.38 stop: 92.75 Sometimes a play candidate tells you right out of the gate that you've taken the wrong side. DHR is one such play, as it absolutely exploded higher yesterday, actually tapping a new all- time high (and triggering our stop) before pulling back just as quickly and then embarking on a steady uptrend. We were looking for a breakdown under $87.50 to trigger the play and since that never happened, there was obviously no temptation to enter the play. It appears the risk of a breakdown has completely vaporized over the past two days, so we're dropping coverage of DHR. This is one of those times that our trigger performs its intended function -- keeping us out of a play that goes against us from the start. Picked on March 11th at $89.39 Change since picked: +3.05 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 879 K Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Aetna Inc. - AET - close: 87.57 change: -0.63 stop: 86.95 The relative strength here in AET is still amazing. The stock has managed to hold its impressive gains despite some strong volatility in the markets. On Wednesday Bank of America reiterated their "buy" rating on AET and raised their price target from $95 to $102. Shares ticked higher and we raised our stop loss to $86.95. We're going to keep our stop loss there for the moment. Right now we are not suggesting any new bullish positions in the stock. It is very overbought and close to our official exit target of $89.00. Picked on February 29 at $80.79 Change since picked: + 6.78 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- Anthem, Inc. - ATH - close: 90.06 change: +0.12 stop: 86.50 While still struggling to make a convincing move over the $90 barrier, it's hard to complain about the price action in ATH, as it continues its trend of higher lows. Last week's brief dip under the 10-dma (now $88.68) turned out to be a great entry point into this very bullish trend. The 20-dma has now risen to $87.00, providing additional support between the current price and our $86.50 stop. ATH looks like it wants to continue working its way higher, but given the way in which it has been rejected on its last two forays over that level, we aren't recommending new breakout entries. Dips to the 10-dma still look like the best bet for climbing aboard. Our revised upside target is in the $94-95 area and we would suggest aggressively harvesting gains if that level is reached. Picked on February 26th at $85.37 Change since picked: +4.69 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.45 mln Chart = --- Countrywide Financial - CFC - cls: 93.00 chg: -0.25 stop: 90.00 We remain concerned for our CFC play. The stock isn't moving and continues to consolidate in a $2.00 range between $92-94.00. That's not necessarily a bad thing considering the market's volatility but with mortgage rates dropping and the recent 3:2 split announcement we'd expect more enthusiasm from the bulls. Traders can still look for dips above $90.00 as an entry point but we'd probably be concerned if it broke $92.00 again. More conservative traders could wait for a move over $94.40 (yesterday's high) but keep in mind that $97.25 is new resistance and we were only aiming for the $100 level to begin with. In the news CFC has announced to new joint ventures to offer their services in various parts of the country. Picked on February 24 at $91.63 Change since picked: + 1.37 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 2.3 million Chart = --- eBay Inc - EBAY - close: 69.34 chg: -0.26 stop: 66.50 Buying the recent dip to the 50-dma is looking better and better but we're still waiting for EBAY to trade back above the $70.00 mark. Actually let me clarify that. We were triggered a week ago when it crossed $70.05 but we're suggesting that most readers look for EBAY to breakout again over $70.00 before considering new plays. YHOO was the big leader in the Internet sector yesterday with two broker updates and EBAY was left to jog in YHOO's shadow. Hopefully the recent coiling action under $70.00 is just what it looks like - a resting period before the next run higher. We're leaving our stop loss at $66.50 and leaving our target at $77.50. Picked on March 09 at $ 70.05 Change since picked: - 0.71 Earnings Date 04/20/04 (unconfirmed) Average Daily Volume: 7.0 million Chart = --- Juniper Networks - JNPR - close: 25.35 chg: -0.07 stop: 23.64 The good news is that JNPR is back above the $25.00 mark. That's one less concern to worry about. The bad news is that the stock appears to be consolidating sideways not upwards. Fortunately its MACD indicator looks encouraging and about to produce a new buy signal. Morgan Stanley had some positive comments today and upgraded the wire-line networking group, the semiconductor sector and the semiconductor capital equipment industries. MWD's analyst suggested that their improved fundamental outlook for the networkers was based on an improving carrier outlook, higher capex spending and a stronger supply chain. All told MWD expects the networkers to out perform the S&P 500 while their best-case scenario suggests a 29% gain for the group (over next 12 months). JNPR was upgraded from "under weight" to "equal weight". Let's just hope investors are listening. Picked on March 14 at $ 25.81 Change since picked: - 0.47 Earnings Date 04/21/04 (unconfirmed) Average Daily Volume: 15.7 million Chart = --- Lexmark Intl. - LXK - close: 89.75 change: -0.15 stop: 85.00 Once clear of resistance in the $86-87 area, LXK didn't waste any time plowing higher to the $90-91 area, hitting $91.10 early yesterday before pulling back near $90. The stock hasn't seen this altitude since the first half of 2000 and eager bulls are now eagerly setting their sights on the century mark. There's an old adage that once it trades $90, a stock will make a run towards $100 and so far all signs are encouraging. LXK has made a pretty strong run from the $82 level in the past week, so new breakout entries over yesterday's high do not look favorable. Even though the stock found intraday support near $89 today, the best entries will now come on a pullback near the 10-dma ($86.04). With our stop safely nestled under that average, support (broken resistance) in the $85.50 area and below Monday's low, it does look like buying the dips should continue to be a winning strategy. Picked on March 14th at $85.77 Change since picked: +3.98 Earnings Date 4/19/04 (unconfirmed) Average Daily Volume = 903 K Chart = --- Renaissancere Ltd - RNR - close: 53.56 chg: +0.01 stop: 52.00 All right, it's nice to see RNR moving higher again after the dip to $52.50. Currently the stock appears to have new resistance near $54.05-54.10 but the intraday chart is positive. We're still gunning for a move to the $55.95 mark but if you missed the original entry or the dip this may be a tough place to consider an entry. Of course it will only get worse if the stock keeps climbing. Conservative traders can shave off some risk by raising their stop loss to $52.50, which we may do tomorrow. Picked on February 15 at $50.83 Change since picked: + 2.73 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = --- Taro Pharma. - TARO - close: 61.53 chg: +1.01 stop: 59.50*new* The performance in the DRG Drug index has been dismal lately. Yes, it's seen some volatility with the markets but there's been virtually no bounce from its test of the 200-dma and it's hitting new relative lows on an intraday basis. This has impeded TARO's performance and frankly we were considering TARO a potential drop after yesterday's close just above the $60.00 level. Today's bounce was encouraging but there was not much volume behind it. It might be wise to wait for TARO to break above the $62.00 level, which should break the trend of lower highs from mid- February. We're going to raise our stop loss to $59.50. Picked on March 14 at $ 61.85 Change since picked: - 0.32 Earnings Date 02/17/04 (confirmed) Average Daily Volume: 284 thousand Chart = ************** NEW CALL PLAYS ************** Quest Diagnostics - DGX - close: 82.97 change: +0.76 stop: 79.00 Company Description: Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Why we like it: Investors cheered DGX's January earnings report and promptly drove the stock to just below the $86 level before some much- needed profit taking set in. The stock fell back near the $79-80 level, but the bulls stubbornly refused to let it drop far enough to fill the post-earnings gap down near $78. After bottoming just above $79 in late February, DGX has been building an encouraging pattern of higher lows, all the while holding above the 50-dma ($80.82), which appears to be providing a solid safety net. If looking for the source of the stock's strength, one potential answer can be found in the PnF chart, which has been strongly bullish since giving a Buy signal in September and then smashing through its bearish resistance line in October and never looking back. DGX has long since met its $79 price objective, so the PnF chart doesn't provide any illumination as to the potential upside from here. But looking at the weekly chart, we can see why the stock paused near $86 last month -- that was the site of broken support back in early 2002. Given the recent consolidation, it appears very likely that the bulls are going to drive DGX up to test that level again and based on the way the stock has traded in recent months, we're looking for a breakout and run up to at least the $90 level. Note how there is near-term horizontal resistance in the $83.00- 83.50 area. That level looks about to be broken with an upside move, and breakout entries over the top of that resistance zone look favorable. Of course, bargain hunters may be able to get a better entry before that on a dip back near $81, the site of the short-term rising trendline that connects the lows of the past few weeks. While conservative traders might want to use a stop just under the 50-dma, we're going to give the play a bit more room to breathe, initiating coverage with our stop at $79, just under the late February low. Suggested Options: Shorter Term: The April $80 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the April $85 Call, while the more conservative approach will be to use the May strikes. Our preferred option is the May $85 strike, as it should provide sufficient time for the play to move in our favor. BUY CALL APR-80 DGX-DP OI= 142 at $4.30 SL=2.75 BUY CALL APR-85 DGX-DQ OI= 354 at $1.45 SL=0.75 BUY CALL MAY-85*DGX-EQ OI=1830 at $2.70 SL=1.25 BUY CALL MAY-90 DGX-ER OI= 303 at $1.05 SL=0.50 Annotated Chart of DGX: Picked on March 18th at $82.97 Change since picked: +0.00 Earnings Date 4/22/04 (unconfirmed) Average Daily Volume = 607 K 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: 46.85 chg: -0.22 stop: 48.50*new* Slowly but surely shares of CHIR continue to slip lower with a steady stream of lower highs. There is always a chance it will spike up to its 10-dma (currently 47.67) but the trend is certainly intact. We're going to lower our stop loss to its 21- dma at $48.50. Our target remains the $45-44 range. Picked on February 24 at $49.11 Change since picked: - 2.26 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.7 million Chart = --- Eaton Corp. - ETN - close: 57.25 change: +0.10 stop: 58.75 After chopping between $54.50 and $56.00 earlier this week, shares of ETN popped strongly higher yesterday, helped along by the strength in the broad market. Today's action did nothing to clarify the near-term picture, as the stock ended the day near its intraday high and right at the upper end of the resistance zone we've been expecting to provide bearish entry points. The big question is whether ETN will roll over and then subsequently take out its recent lows or if we're witnessing a trend reversal. Obviously, since we're still covering the play, we're expecting a rollover. But that suspicion needs to be proved by price action, meaning that the best entries will come on a break back under the $56 level. More conservative traders will want to see a crack under $54.50 before playing, as that would have the stock back under both the 100-dma ($55.35) and the recent lows, setting the stage for the next leg down on the way to our $49 target. Maintain stops at $58.75, just over the 50-dma (now $58.68). Picked on March 11th at $54.82 Change since picked: +2.43 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.17 mln Chart = ---- Invitrogen - IVGN - close: 68.31 chg: +0.85 stop: 70.01 Uh-oh. IVGN is bouncing. The stock traded up to its simple 10- dma at $69.25 today before fading a bit into the close. That may be a new failed rally to consider entry point but we'd like to see more weakness to confirm the move. Volume hasn't been that strong but we're still a little cautious this close to our stop and resistance at $70.00. A move back under $67.00 would be more encouraging. Picked on March 11 at $ 67.26 Change since picked: + 1.05 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 910 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. 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The Option Investor Newsletter Thursday 03-18-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Oil, Defense and Internet Option Spreads: Spring Has Sprung – New April Positions Traders Corner: The Secret To Success Traders Corner: Support and Resistance and Oscillator "Divergences" ********** WATCH LIST ********** Oil, Defense and Internet ___________________________________________________________________ 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. ___________________________________________________________________ ChevronTexaco - CVX - close: 89.75 change: +0.83 WHAT TO WATCH: Several of the larger oil stocks are looking pretty bullish with a bounce from the recent lows back toward their one-year highs. Rising crude oil prices certainly don't hurt the picture. CVX's bounce from its 50-dma looks buyable but the stock has long-term resistance in the $91-92 range dating back from early 2002. Chart= --- General Dynamics - GD - close: 88.06 change: +1.11 WHAT TO WATCH: The technical picture is turning around for GD now that the stock is bouncing from support north of the $85.00 mark. Today's rally puts it right at the descending 10-dma and the sideways 100-dma. There is overhead resistance at $90.00 and its 50-dma but the week-long consolidation above $85 may be a new bottom. Unfortunately, its P&F chart is very bearish. If you think GD is headed lower look for a failed rally under $90.00. Chart= --- L-3 Communications - LLL - close: 54.42 change: +0.69 WHAT TO WATCH: The technical picture is also improving for LLL. Its shorter-term oscillators like the RSI and stochastics are already bullish while the MACD is about to produce a new buy signal. LLL has been consolidating under a trend of lower highs for the last month and it looks ready to breakout. A trigger over $55.00 might work. Chart= --- Ask Jeeves Inc - ASKJ - close: 30.61 change: +1.26 WHAT TO WATCH: Watch out! The Internet bulls are back; at least if you look at shares of ASKJ. The stock soared in early March after issuing a positive earnings preannouncement and news that it would buy the Excite Network, officially known as Interactive Search. The Excite Network is a family of websites that drew almost 24 million unique visitors in January. Investors are obviously excited about the deal since shares of ASKJ are edging higher. Thursday's rally was a breakout above resistance at $30.00. The next level of resistance is the $33.88 level dating back to September of 2000. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- TASR $62.40 +5.62 - TASER Intl doesn't trade with equity options (yet) but it does draw a lot of attention from momentum traders. Today's breakout over the $60.00 looks pretty bullish but any play (up or down) in TASR should be considered HIGH risk. COP $70.35 +1.45 and TLM $60.39 +0.99 These are both oil & gas stocks like CVX above. These look bullish with the recent bounce from their 50-dma's and breakouts over round-number psychological levels at $70 and $60 respectively. RSE $51.90 +0.60 Shares of RSE tend to move slowly but there is no denying their strength. The best place to consider bullish positions seems to be pullbacks to the 40-dma but right now the stock is running towards a new high. CAKE $45.06 -1.97 The Cheesecake Factory was sliced for a 4.18% loss on Thursday after reporting a management change late Wednesday evening. At least one brokerage downgraded the stock while two more came out to defend it. Volume was huge at 2.2 million shares or four times the average. ************************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 ************************ Spring Has Sprung – New April Positions By Mike Parnos, Investing With Attitude It’s that time of the month again. We’re going to get a head start by establishing our “hypothetical” positions on Friday instead of waiting until Monday – when premiums are lower. Tomorrow is quadruple witching. Sounds like my first marriage. Maybe that was quadruple bitching. Oh well, there was always a lot of volatility. And, with the recent sell-off, some of the volatility has returned to options in the form of additional premium. More, but not much more. ANY more is welcome. That’s how we make our living. On Sunday we’ll go over our CPTI portfolio March results and our Quickie results. Things look pretty good. Yesterday was St. Patrick’s Day. It was green everywhere – including our wallets. Here are some new April positions that have a good chance of being profitable – if the market cooperates, of course. ______________________________________________________________ April Position #1 – SPX Iron Condor Sell 4 SPX April 1075 puts Buy 4 SPX April 1050 puts Credit: $2.50 (x 4 contracts = $1,000) Sell 10 SPX April 1170 calls Buy 10 SPX April 1180 calls Credit: $1.40 (x 10 contracts = $1,400) Total net credit and potential profit of about $2,400. Maximum profit range is 1075 to 1170. Safety range is about 1072.60 to 1177.40. Maintenance: $10,000 _____________________________________________________________ April Position #2 – RUT Iron Condor Sell 10 RUT April 530 puts Buy 10 RUT April 520 puts Credit: $1.10 Sell 10 RUT April 610 calls Sell 10 RUT April 620 Calls Credit: $1.15 Total net credit of about $2.25. Potential profit: $2,250. Maximum profit range: 530 to 610. Safety range: 527.75 to $612.25. Maintenance: $10,000. ______________________________________________________________ April Position #3 – XAU Iron Condor Sell 10 XAU April 95 puts Buy 10 XAU April 90 puts Credit: $.95 (x 10 contracts = $950) Sell 10 XAU April 110 puts Buy 10 XAU April 115 puts Credit: $.55 (x 10 contracts = $550) Total net credit: $1.50. Potential profit: $1,500. Maximum profit range $95 to $110. Safety range: $93.50 to $111.50. _____________________________________________________________ April Position #4 – OSX Calendar Spread Plus – 108.03 OSX is the Oil Index. This is a play on the common belief that oil prices will continue to move up over the next month or two. Buy 10 OSX June $115 calls @ $3.20 (36 delta) Sell 10 OSX April $115 calls @ $1.05 (23 delta) Cost: $2.15 Since my recent column on calendar spreads, I received emails requesting we put on a calendar spread. You know I’m not thrilled with directional trades, but this one may have some potential. Notice how we bought the June $115 to give us flexibility and a 36/23 delta advantage. We may only hold this trade for a month, but the extra two months provide us with many choices. More aggressive traders, who believe in the direction of OSX, can also put on an April $100/$90 bull put spread and take in an extra $.60 ($600) to reduce the cost basis to $1.55. _____________________________________________________________ Those Friendly Reminders The premiums quoted on the above educational trades are based on Friday's closing bid/ask prices. On Monday, the premiums will likely be different due to market movement and/or the additional two days of time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you a trader. And make sure you thoroughly know the intricacies of a strategy before you trade. The money you save may be your own. ______________________________________________________________ MARCH CPTI POSITIONS Position #1 – OEX (S&P 100 Index) Iron Condor – 550.69 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 – 574.55 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 - $141.78 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 - $144.62 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 -- $35.34 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. April: Apr. $34 calls and $37 puts – credit of $750 Total credit: $8,050. 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 – 550.69 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. That guarantees the principal $100,000 investment. We’re trading the remaining $26,000 to generate a “risk free” return on the original investment. Bought 3 OEX Jan. 2006 540 calls @ $81 (x 300 = $24,300) March: Sold 3 OEX 585 calls @ $3.10 (x 300 = $930) March: 535/525 Bull Put Spread for credit of $1.10 (x 300 = $330) Current cash position is $2,960 ($1,260 plus the unused $1,700). Adjustment: This week we bought back the 3 OEX March 585 calls for $.10 and sold 3 of the March 560 calls for $1.35. A credit of $1.25 x 300 = $375.00. Today (Thursday), we bought back the March 560 calls for only $.15, locked in $120 x 3 = $360 of profit. Now, we’ll wait until we see what’s going to happen on Friday and then roll out to April before the market closes. We’ll probably also roll out the 535/525 bull put spread before Friday’s close. _____________________________________________________________ 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 ************** The Secret To Success by Mark Phillips mphillips@OptionInvestor.com There are many ways of measuring success, but in the trading world, it is pretty simple. Make more money than you lose. Sounds simple, right? Unfortunately many traders fall far short of that goal and quite simply it is due to a lack of a clearly defined goal and a plan for achieving that goal. That's right sports fans, it's time for the regular reminder to write/modify/finish your trading business plan. If you've already completed that task, stick around because we're going to cover some new territory. There are a few ways in which to achieve that simple goal stated above. The first way is to win more trades than we lose. Another method would be to allow for more losers than winners, but make the size of the winners so much larger than the losers as to still win the numbers game. Me, I like the combination of both methods, where we endeavor to win the majority of our trades AND have the size of the winners swamp the losers in size. I know, it still sounds great -- where's the secret? Let's break the question up into two pieces so that we can handle the two sub-goals separately. Our first goal of winning more trades than we lose comes about from all the tools of our trade that enable us to measure the odds of success. That's right, we're talking technical analysis. I don't care if you use naked candle charts, oscillators, moving averages, momentum studies or some other combination. Technical analysis is an individual study which embodies as much art as science. Our job as individual traders is to find what works for us and matches our trading style. That's right, we each have to do our own back-testing, whether we do it by hand (dragging back those charts and looking at past price performance) or programming a computer and letting it sift through reams of historical data. In the end, what we're looking for is a mix of technical indicators or signals that when combined will provide more winning trades than losing trades. The key to me achieving that elusive goal was when I learned about Point & Figure (PnF) charts and began to incorporate them into my daily technical analysis routine. Believe it or not, PnF charts are an integral part of both aspects of the success formula I'm talking about -- achieving a better than 50% win/loss ratio and making the winners bigger than the losers. PnF charts don't care about volume or time or any of the little price squiggles within the trend. They only care about price, and then only when it is making meaningful price moves capable of giving us those 3-box reversals or generating new Buy and Sell signals. Over the years that I've been watching these charts, I've found that they have a very good success rate at determining whether the buyers or sellers are in control. Like any other creation from the land of technical analysis, they can be wrong from time to time, but I've found they are right more often than not. So we can make a very simple rule in our trading plan. Only trade long on stocks that are bullish on their PnF charts and only trade short on stocks that are bearish on their PnF charts. The great advantage in doing so is that it eliminates the compulsion to try picking bottoms and tops in stocks. If the PnF chart is on a Buy signal, then we ONLY want long trades. If we can't see a long entry in line with our more precise entry criteria, then we should not trade that stock. While this may seem overly restrictive, I've found that there are still plenty of viable trades out there and this one simple rule eliminates a lot of mediocre to poor trades. That brings us to the other side of the equation, that of making the winners significantly larger than the losers. One of the neat features of PnF charts is that they can be used to generate price targets once a Buy or Sell signal is given. We shouldn't think of these price targets as carved in stone. Rather, they give us a solid estimate of how far a price move has the ability to extend. There are plenty of instances where price targets are not reached or where they are exceeded, but I can't tell you the number of times I've seen a PnF chart forecast a move that seems inconceivable, only to watch it unfold with amazing precision. For instance, last September QCOM issued a new Buy signal with its breakout over $40 and by the time the vertical column completed at $46, the bullish price target of $67 looked more than a bit aggressive. QCOM makes such a great example of how the PnF chart can be combined with standard price charts, that I want to spend the remainder of our time dissecting it. QCOM PnF Chart Look how price steadily advanced after that Buy signal back in late August. Since that point in time, there hasn't been a single PnF Sell signal and QCOM is getting awfully close to that $67 price target that was generated 6 months ago. QCOM Daily Chart With a solid bullish bias on the PnF chart, we turn to our price chart (my apologies for it being so compressed, but I wanted the entire timeframe on one chart) and look for bullish entry points. I've just shown QCOM with its ascending price channel and an unconventional Stochastics oscillator. Look at the setting on Stochastics and if you can figure out the logic to the parameters, you'll have a big leg up on our topic for next week, which I think you'll find VERY interesting. But I digress. This chart is where we get our entry points. There were exactly 3 entry points into this bullish trend, one near $43, the next near $47 and most recently at $56. Note that we completely ignore the bearish signals, as we only want long positions in agreement with the bias given by the PnF chart. Now turning to the PnF chart, our initial entry at $43 comes with a stop at $35, as QCOM would have to trade that price level to generate a Sell signal. That gives us a $24 potential return and an $8 risk. A nice little 3:1 reward to risk ratio. The next entry point comes near $47, and at that point, our risk is to $43, the level that would then give us a Sell signal. Here we're looking at $20 of upside potential and only $4 of downside, for a 5:1 reward to risk ratio. Finally, in early February, we get an opportunity to enter near $56-57. That's $10 of potential upside, but we have risk all the way down to $48. That's roughly a 1:1 reward to risk ratio, and I think I'd actually avoid an entry at that point, as I can't skew the odds heavily enough in my favor. Now you'll notice that there were several points over that 6-month span where some traders might have seen the price roll over and/or the Stochastics sell signals and tried a bearish position. Can you see how the PnF chart keeps your focus aligned with the dominant trend? By taking only the bullish entries in alignment with the PnF chart, we both increase our odds of a successful trade AND we give ourselves the ability to quantify our risk to reward ratio. It is this sort of disciplined approach that will serve us very well in our trading business, as it keeps us taking only the strong trades that are in agreement with both the supply/demand dynamic, as well as the short-term up and down cycles in price. The one other MAJOR component to our success formula has to do with account management, and it is absolutely CRITICAL to get this right. But we'll have to save that discussion for another time. I hope this helps! -Mark ************** TRADERS CORNER ************** Support and Resistance and Oscillator "Divergences" By Leigh Stevens lstevens@OptionInvestor.com OIN SUBSCRIBER QUESTION: "I Just started reading your column within the last couple of weeks and your support/resistance predictions are very impressive. If you could tell me more and help answer some questions, I'd really appreciate it! I've done some options, but I'm never quite comfortable deciding which strike price, expiration and so forth is best to use. Even though I usually only hold them for a few days to a few weeks, I tend to go with an expiration that's 2 or 3 months away (comfort zone) and I try to stay 1st in the money, or 1st out of the money. 1. Would you please tell me what you usually do? 2. Will using QQQ's with NDX parameters work okay? 3. Do you have a minimum that you use for "Open Interest"? 4. Do you have a minimum that you use for "Volume"? I greatly appreciate any input you can provide!" RESPONSE: I should say thank you for taking the time to write this note and give me something to work "off from" so to speak. We work for you and I don't always know what aspects of what I do are of interest and value to OIN Subscribers. These questions help. I'll respond to questions 2-4, which are easier, then tackle question 1, which can be shown pretty much only with a replay of the charts I used in my Index Trader wrap last Sunday (3/14/04). Question # 2 - yes, QQQ's track the NDX very closely so parameters are close enough to trade off from. #3 - For Index futures - no minimum for Open Interest. Maybe I don't understand the question, but mainly open interest is useful when it diverges from the trend; e.g., open interest is declining when the market is going up - it's going up on short covering, so beware the staying power of the rally. Your Question #4 - No minimum for volume - again, am not sure I understand the question, but daily trading volume is whatever it is and that is about all I use as far as "volume"; i.e., trade volume - not "tick" volume, etc. SUPPORT & RESISTANCE - Re your first question: Saying what I "do" is pretty hard, as it is such a combination of things that I use to try to figure out support and resistance areas alone - plus to be able to predict at which of these points an Index might turn or reverse trend. However I can discuss the points I used in my last Index Trader (3/4/04) and give some more background and explanations to how I was figuring support areas and why those might also be points to buy (in this case) Index calls. I like to buy Index calls and puts and to achieve a good profit means buying them "right" of course. Buying them right is like paying wholesale and not retail. That is, anticipating WHERE the market will turn and taking a chance at buying calls at a significant support area and puts at a significant resistance. These are points where two things happen: 1. Premiums are cheap as the market hasn't turned (reversed) yet. 2. It doesn't "cost" as much - why? Because you can exit just below or above support or resistance when the projected support/resistance areas are penetrated. I also tend to go out at least a few weeks in terms of expiration and to stay more or less at the money in terms of strike. I don't go out probably as far as 2-3 months away, but perhaps have reason to be comfortable in my "timing" and ability to ANTICIPATE support and resistance. The greatest option trader I ever knew, Mark Weinstein (not the writer, rather a very private trader) - a complete unknown except for being in Jack Schwager's "Market Wizards" book. He had the kind of confidence I am speaking about as far picking buy points ahead of where the market reversed. And, this trader taught me that, for catching the bigger moves, it was necessary to anticipate areas to buy options before the crowd bought them and the market makers jacked the premiums way up. It's a well-known style or theory and one even Warren Buffet uses so well - buy em when no one wants em or when the world isn't looking at the thing. Getting back to the "how to" aspect - there are a few different things that I use in the way of indicators or patterns and chart examples follow - TRENDLINES - A high potential area for the market to find support is at a trendline - especially when a correction is more "technical" in nature; e.g., the market got overextended and stocks are being sold that got overvalued and would be buyers are backing off from doing new buying until valuations get cheaper again. The trend is up still, the fundamentals are not all that different and trendlines, for various reasons, are the best point to anticipate a buy. There is an art to drawing trendlines. Draw them though 2-3 lows in the case of an uptrend line and through the MOST number of points - don't worry about what they say in "charting 101" about being at the lowest low always. (The reverse is true for downtrend lines sloping down.) Draw a LOT of trendlines and you keep learning what works. In the Dow chart below, I ignore the downswing low before this very last one. Why? - because the straight line could be drawn through the first two lows. Trendlines are even more significant if OTHER indicators also suggest that the market is at an extreme. Look at the RSI Indicator, which is one of the oscillator type overbought/oversold indicators (also, stochastics) and the it was at an extreme as prices came down to the up trendline. The thing with things like trendlines is that you need to develop some faith that they "work" more often than not - it's not that you have the attitude that I will believe it when I see it - waiting until there is a strong recovery rally will mean that the option will not be as cheap. That's ok too, but this is my style and I have developed some confidence in trendlines, especially coupled with other technical patterns. There's another thing with trendlines that gives me what I often find is a high risk to reward outlook. I will exit the trade as soon as there is even a minor penetration of the trendline - say, not by more than a percent. It helps when you see 2 or three days worth of lows around the same point. DXJ comes down to the 100.9 area 2 or 3 days running. I won't even figure I need to give it to 100.1 to exit. I will set 100.6 as my stop or exit point on long DJX calls - if the Dow is being supported and finding buying interest at around 10100, then that area won't give way by much. RETRACEMENTS - Use em! If an Index or a stock for that matter retraces around half of what it gained on the last rally, a 50% giveback is about all it will typically give back before reversing back to the upside in an uptrend - the exact reverse in a downtrend. Is the Index, the S&P 100 (OEX) in this case in the chart below, going to exactly hit the 50% retracement? Often not, as that is "too easy" or too obvious to hold out for those exact points. In this example here, relative to the OEX, buying interest is coming in when the S&P has made approximately (not always exactly) a one half retracement of the last major advance. Wait for perfection is like expecting or waiting for the Dow to get back to 10,000 - then, I'll buy! Oh yah, and I'll wait for the most beautiful woman in the world to show up and only her. We're talking about the market here, which has as its participants some of the smartest people in the world. TRADING ENVELOPES - Moving average envelopes are something I use a lot mostly for the Indexes. I discussed their use in a prior Trader's Corner article at - http://www.OptionInvestor.com/traderscorner/tc_022604_2.asp The point with envelopes is also that there is some "art" in using them and part of that is knowing that they give not only an idea of when the market is extended, such as on the downside, but what that price area might be based on prior history of volatility or range. Why did I have the lower band set so that the lower line was 3% below the 21-day moving average? Well, as above (often) so below. When, in an uptrend the highs are tracking a moving average envelope line that is 3%, I often assume that in a good- sized correction, the lows will also reach that same extreme. Of course, a downtrend can just follow this line lower and it does not necessarily mark a reversal point. Again, look at both this and other indicators for further clues. At a minimum I often figure that a first rally will take the Index back up to the 21- day moving average. The use of the 21-day moving average is important. The 3% bands, for the S&P 500 "works" with this moving average pretty consistently - exceptions occur and the market gets more volatile or more extreme, but I am talking about the "average" condition over time. Getting back to the use of other indicators to suggest the likelihood that SPX was likely to rebound from the area of the lower envelope line - several lows in this area was a tip off. More than that was what was happening to my chef "sentiment" indicator, my Call-Put option ratio of daily CBOE call volume to put volume for equities options. When traders get so bearish that they are trading as many puts as calls, the resulting 1-day readings of 1.1 or less often have signaled a bottom for a correction. Not always, and it is situational; e.g., a correction going on in a market whose dominant trend is still up. The 5-day Call-Put average shown above is not so important but I also look at it - and it got almost to the same low reading, unlike what had occurred in many months. So, with the move down to the lower trading band in the S&P 500 AND the extreme on my call-put indicator, a call buy opportunity was strongly suggested for me. More on the use of this custom indicator can be found at - http://www.OptionInvestor.com/traderscorner/tc_021904_2.asp USE OF TRENDLINE PRICE CHANNELS - I also, and you probably have noticed, that I work with trendline channels a lot, both on hourly and daily charts. What you can see on the daily chart is often what you can also see on the hourly charts, only in better detail. A couple of examples of these follow. It's a tip off to buying developing or emerging buying interest when lows start being made repeatedly in the same area. And when that area is also at the lower boundary of a trend channel or a single trendline that intersects 2-3 or more lows. The upper channel line is simply the parallel line to the lower one in this example of the Nasdaq 100 Index (NDX) below. In terms of price and numbers, the even 100 numbers on the indexes of larger size (also, SPX) are common areas of buying (or selling) interest. With an oversold market and the retreat from the 1500 area, buying at 1400, basis the Nasdaq 100 or NDX, was a pretty good bet. A related suggestion for a good tradable bottom is when both short-term and longer-term oscillators like the Stochastics Indicator both reach extremes at the same time. I especially tend to rely on length set to 21, a fibonacci number. In the Stochastics indicators above, one is measuring momentum and "overbought/oversold" on both a 5 and 21-hour basis; trading hours of course, so the 21-hour Stochastics measures a 3-day trading cycle - 7 hours of trading X 3. Going back to the question of trading the QQQ Nasdaq 100 tracking stock based on the NDX chart - well the chart below has of course the same pattern in terms of the hourly trend channel. Prices are different of course. With the stock you can set actual (sell) stops as an order in with the (AMEX) exchange and precisely set just a bit under the downtrend channel line as it develops - not too close. In recent price action above, the first instance that prices came down to the channel line, an exit or sell stop order I would use to try to keep my loss small, would be at 34.4 - figuring both that there could well be a second "touch" to the downward sloping line and that 34.5 would be a likely area of support (if broken, I would want out). The even numbers and half numbers are typical for that in the Q's. I was going to include a discussion of the use of oscillators, especially the RSI indicator, when they also have established a bullish or bearish "divergence" relative to these tip offs I've discussed for buy/sell points, but the hour grows late and I'm at or beyond our deadline. For next time - enough for now. Good Trading Success! ************************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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