The Option Investor Newsletter Sunday 03-21-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Don't Look Now! Futures Market: See Note Index Trader Wrap: DOWNWARD PULL Editor's Plays: Second Chance Market Sentiment: Strength Hard to Find Ask the Analyst: No desire to take possession on Triple Witch Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 03-19 WE 03-12 WE 03-05 WE 02-27 DOW 10186.60 - 53.48 10240.1 -355.47 10595.5 + 11.63 - 35.11 Nasdaq 1940.47 - 44.26 1984.73 - 62.90 2047.63 + 17.81 - 8.11 S&P-100 543.68 - 6.24 549.92 - 18.53 568.45 + 3.91 - 0.33 S&P-500 1109.74 - 10.83 1120.57 - 36.29 1156.86 + 11.91 + 0.84 W5000 10852.98 -115.20 10968.2 -346.24 11314.4 +141.50 + 29.34 SOX 463.35 - 21.75 485.10 - 19.15 504.25 + 1.99 - 7.99 RUT 570.74 - 12.10 582.84 - 16.70 599.54 + 13.98 + 5.67 TRAN 2786.83 - 76.26 2863.09 - 29.98 2893.07 - 9.12 + 10.01 VIX 19.15 + 0.85 18.30 + 3.82 14.48 - 0.09 - 1.47 VXO 19.16 + 0.44 18.72 + 3.92 14.80 + 0.04 - 1.49 VXN 25.99 + 0.69 25.30 + 3.22 22.08 - 0.79 - 1.25 TRIN 1.93 0.44 1.40 1.26 Put/Call 1.03 1.05 0.79 0.73 ****************************************************************** Don't Look Now! by Jim Brown While the talking heads were focused on the battle in Pakistan and the market analysts were talking about option expiration and S&P rebalancing the SOX quietly headed south. As if escaping under the cover of al Qaeda news the semi stocks ignored several upgrades and a strong book-to-bill report to break support at 475 and break the back of the market as well. There were no material economic reports on Friday but I doubt it would have mattered. The market makers managed to pin the S&P at resistance before the open and once the index options were settled the ugly began. We traded flat on very low volume until 2:30 with everyone wondering which forces would control our fate. There was no material news out of Pakistan and the news we did get seemed to point to a longer resolution than everyone first thought. It could be days before the military can overcome the resistance and sort through the rubble. They were ordering up a couple more regiments to aid in the battle. While we waited there was a battle underway in the markets with the bulls and bears trading control several times during the day. The battle fought to a draw about 1:PM and the waiting for end of day option volatility began. At a little after 2:30 Art Cashin reminded viewers on CNBC that the S&P was being rebalanced at the close and within five minutes the bottom fell out of the S&P. The rebalancing was due to the +$3.8B in new stock being issued by GE. This increase in market cap meant index fund managers had to buy more GE and sell small amounts of the 499 other stocks in the S&P. Between Art's reminder at 2:30 and the close the S&P lost -10 points. The high/low range before that had been five points for the entire day and centered around 1120. We closed at 1110. Ironically GE fell like a rock in the last hour despite the doubling of shares traded for the day in the last hour. GE went from 19M to just over 40M in the last hour. One analyst suggested the hedge funds had accumulated shares to sell into the expected bounce while other funds were hoping for the bounce to unload shares of what has been an under performer. With funds seeing a net -$1.5B outflow of cash for the week ended on Wednesday they may have been targeting the expected rebalancing bounce to raise cash. Unfortunately the joke was on everyone it appears as far more sellers appeared than buyers. The net result was net selling on the S&P without any compensating bounce in GE. Obviously option expiration may have had some impact in the end of day market direction but that did not prevent some serious confusion at the close. With the potential for a resolution in Pakistan over the weekend you would not have expected anyone to hold shorts over the weekend. Since we did go down and go down sharply it would suggest there was some serious sell side action where traders were simply getting out of the market. This is disturbing to the overall sentiment picture. I kept watching the Russell all day and it was the strongest of all the indexes and held at the high end of its range. At least it held until 3:PM. About 15 min after the S&P began to implode the Russell followed suit. Whether it was the copycat syndrome where strong selling in one index begets selling in others OR small cap bears combined with options expiration triggered stops. Small cap mutual funds saw outflows of -$1B in the week ended Wednesday. What we should have been watching more closely was the SOX. The index gapped down on a strong book-to-bill number. That should have been a clue. The 1.14 number was lower than the prior number of 1.19 but only because shipments grew much faster than orders. Orders grew +6.5% for the month and shipments +11%. No weakness there and orders have been accelerating since June-2003. In fact orders are at a three year high. It did not seem to matter to the semi sellers. The drop was blamed on weak comments from Taiwan Semi, the worlds largest contract foundry. The chairman of TSM said he expects spending on new plants and equipment to fall by as much as 50% next year. He expects new plants being built in China to lead to over-capacity. He also said he expected global semi growth to slow to 10% in 2005 from 26% in 2004. TSM just doubled its capex budget to $2 billion last October and the announcement they were cutting it back to $1B was a shock to analysts. It also did not help to have an assassination attempt on the president and vice president of Taiwan on Friday. Obviously the news was a shock to traders as well. The SOX tried to rise around lunch time as dip buyers bought support at 473 once again but the rebound attempt was weak. A climax spike to 479 at 11:40 was the peak and the downhill slide began immediately and accelerated into the close. The SOX ended up losing -17, -3.6% for the day. The worst of the damage was the failure at support. For the last eight days the SOX has held at the 473-475 level despite some serious selling in techs. This was the line in the sand launch point for any potential April earnings run. There will be no earnings run if the SOX does not participate and after Friday's action I now have serious doubts. If we back up and look at the market from a broader perspective we can watch the current weakness as it unfolds. Using the Dow as a starting point we had a very nice run that began last year. The spurt into January pushed the index to 10705 on Jan-26th and we spent the next six weeks trying to break that high. Once it became apparent the rally was tired everyone started expecting a profit taking correction. We have seen that over the last two weeks. The bad news is the lack of the expected rebound. The difference between a profit taking correction of -5% to -10% and the beginning of a trend change is the lack of a rebound. We are at the point where that rebound must occur or we are going to retest the corrections lows and I am not optimistic that retest will hold. Where we would normally be seeing some bargain hunting in various stocks after a week at the market lows there is little buying interest. Intel for instance closed at $26.50 and a seven month low. MSFT closed at $24.63 and a ten-month low. The damage is not limited to techs. PFE, the second largest company by market cap, closed at 33.95 and a four month low. Others at or near multi month lows include Dow components HPQ, MRK, UTX, GM and JNJ. About the only stocks holding the high ground are the materials stocks and the home builders. The dip that looked like a normal correction at first is starting to look like just a consolidation pause before another dip. Obviously we will not know that until we actually break support at 10000/1900 but the outlook based on the indexes is far from positive. But what about the economy? Isn't it growing? Yes, from all accounts it is actually picking up speed. Commodity prices are continuing to spike with a price curve that looks like the Nasdaq during the Internet bubble. All the manufacturers are scrambling for raw materials with things like copper and steel seeing shortages in many areas. This is due to the global expansion not just the U.S. economy. Earnings are continuing to climb with First Call quoting 15.9% as of Friday for Q1 earnings. It was estimated at 13.4% at the end of January. Warnings have been almost nonexistent. Productivity is still climbing, interest rates are very low and the goldilocks economy appears to be returning. Unfortunately where you and I think this should be a good reason for stocks to be moving up instead of down there is ample evidence that economic prosperity does not necessarily translate into a strong stock market. Normally, yes but as I have explained many times in the past, the market is always looking 6-9 months into the future. Over the last couple weeks I have discussed the potential for weakness after the April earnings cycle due to the election and the potential for negative expectations. I have mentioned numerous times that earnings comparisons after the April cycle will become much more difficult given the slow economic growth. None of this is news to anyone. What I think helped change the picture was the Madrid bombing. Those that were planning on selling in May and going away have accelerated their timetable with the al Qaeda threat returning. Also, changing the outlook was the sudden emergence of John Kerry as a possible winner. Suddenly the administrative and economic picture became more cloudy. Tax cuts are no longer guaranteed and a more restrictive period may be ahead. Oil prices are continuing to rise and closed over $38 on Friday. The $40 level has been the top for 20 years. The last two times it touched that level were before the 1991 Desert Storm and again just before the Iraq war last spring. Already economists are starting to warn that oil prices are going to impact profits as well as consumer spending. A break over $40 could have a very serious impact. Enough of this negativity. You and I may not want to consider it but we do need to look at the worst case in the markets. The best case would be a retest of the lows and a drop all the way to 10000/1900 just to get it over with then a rebound into April earnings. I do not see any potential for moving back to the highs but we could see a significant rebound from our present levels. This bullish case is built on and depends on no material earnings warnings over the next couple weeks, no new terrorist attacks and positive cash flow into funds. It makes no difference what you and I think about economic and market direction if funds continue to suffer negative cash flow. That is the true voting booth for the stock prices. The bearish case assumes there is more wrong with the market picture than what we see on the surface. The parade of analysts on stock TV are pounding the table to buy the dip and investors are taking money out of the market. Do you see something wrong with this picture? I know from experience that trying to out think the market is an exercise in futility. Once you get a couple turns correctly and start believing you know what is going to happen the market does the opposite. That means we always have to have an alternate plan and that plan is to trade the trend. That trend may have changed on Friday with the collapse of the SOX. I still want to hold on to my hope for one more rebound into April but I am not going to bet money on it until it happens. I want you to do something for me. Don't think about Donald Trump's hair. I told you not to do it but I bet an image of the world famous comb over just jumped into your consciousness. I did that to prove a point. Now look at the charts below without any bias. I have removed the names and prices to help. The black line is the 100 dma. What do you see? Which charts would you buy? Remember, no bias. Chart 1 Chart 2 Chart 3 Chart 4 Chart 5 Chart 6 Chart 7 If all those charts represented the health of the market would you give it a passing grade? Would your bias be positive or negative? Obviously by shortening the time frame I have taken away all the long term bias that most charts would give the casual investor. I admit I am very easily swayed by past events and past trends. We all are. We tend to unconsciously subscribe to the theory that a "body in motion tends to remain in motion" and looking at the markets over the past year they have definitely been in upward motion. Part of our bias comes from expecting things to continue doing what they have been doing. If you had to make an investment decision on Monday on those charts above would it be to buy, sell or remain on the sidelines? The first chart is easy because it is a three-month chart of the Nasdaq. Would you buy that chart? I would probably pass. Most people if asked on the street would probably say the Nasdaq has been in a bullish uptrend. Has it? You might be surprised to know that the Nasdaq has only had one up week out of the last nine and only three up weeks this year. Uptrend? Yes, from March to January, not from January through March. The Nasdaq closed down -22 points at 1940 and seems a sure bet to test 1900 next week. Fortunately for the Nasdaq the 200dma is rapidly approaching that same level and techs are normally bought at that level. The NDX closed below 1400 on Friday and the QQQ traded three times its normal volume in the last hour. I look for both to test their 200dma as well. Nasdaq Chart - Daily NDX Chart - Daily The second chart is the SOX. The SOX peaked at 560 and the high of the year on January-12th. There has been literally dozens of semi upgrades since then and all to no avail. I shortened the timeframe on the chart to illustrate a point. If you expand the time frame you can always find a critical point to support your trend in motion stays in motion theory. But if you look at the shorter term trend the outlook is much different. Using the longer term chart below and the support break on Friday I would say our risk is to a much lower level. KLAC is the largest weighted stock in the SOX at 10% and it broke major support and fell -2.50 on Friday. It is trading at a five month low and well above its next support level. We could easily see another -$5 drop in KLAC. AMAT also broke support and looks very weak. The SOX closed exactly on the 200dma. SOX Chart - Daily KLAC Chart - Daily AMAT Chart Chart three was the Dow and by itself may not suggest a strong negative bias but a definite change in trend. The trend that changed was the consolidation trend. The Dow peak was on Feb-11th with successive lower highs into the middle of March. There was a climax high on Feb-19th where a higher high was reached but it quickly retraced to a lower low the next day. Everyone continued to pin their hopes on a recovery to higher highs on the fact that we were not making lower lows. We were simply trading in a consolidation range with 10400 on the bottom and as long as that range held we bought the dips and sold the tops with the expectation that a higher move was coming once all the excess was worked off. The justification for that thought process was the uptrending support line from December. Once that support broke the alarms went off and support at 10400 became the critical level to watch. Now that all pretenses of support including the 100dma have been broken there is no real support below us until we hit the 9600-9800 level. 10000 is round number psychological support but there is no recent technical basis. Chart four was Intel. If Intel is the proxy for the semi sector and techs in general then what does the chart below suggest will happen. The congestion support at $27-29 barely slowed its decent and the next likely target is $24. Intel has broken all reasonable support and is accelerating to the downside. Do not expect the Nasdaq to recover until Intel finds a bottom. Intel Chart - Daily Chart five was GE and as the proxy for manufacturing, the economy and the market it is not painting a positive picture. It is fighting to stay above $30 but after closing below the 200dma and the unexpected drop on the S&P rebalancing it does not look promising. The next real support for GE is $28 and I would be surprised if we saw any institution buying before that level. Once a stock breaks the 200dma it loses a lot of institutional support. That is normally a sell signal for funds. This could have added to the volume at the close on Friday. GE Chart - Daily Chart six was the S&P-500 and this is the only real chart that suggests we may still have a chance at a rebound. The uptrend support and the 100dma are just over 1100 and that round number support is critical for this market. The S&P is a much broader indicator of market health than the Dow and tech stocks make up 27% of the index. I have explained in recent articles that the market top coincided exactly with the 50% retracement of the S&P from the market top in 2000 to the market low in 2002. If the uptrend support does break the next logical support level is the 38% retracement at 1067 followed by much stronger support at 1000. Extrapolating an S&P drop to 1000 projects a much lower Dow and Nasdaq and I am not trying to make any case for that today. I am only exploring the worst case support levels. S&P-500 Chart - Daily Chart seven was the Russell. I have been a fan of the Russell for some time and it has influenced my bullish bias considerably. Unfortunately the Russell is struggling. The uptrend support has been broken and it is barely above the 100dma. At this point I think we are looking at a clear double top and that average is about to break. The Russell has rebounded +85% in the last year and came very close to matching its all time closing high from 2000. It is the only index to come even close to recovering all of its losses. The risk now is that funds with huge gains from this rebound will see the break of the 100dma as confirmation that the rally is over and begin closing positions at a faster rate. You can see the battle being waged between the average and the uptrend support where we have seen seven days of long candles. If support eventually fails then we could be faced with a standard retracement of the gains. A -38% retracement would be almost exactly 500. Obviously a -70 point drop in the Russell would be a major hit and would be very ugly. Russell Chart - Daily I did not go through this exercise just to say that the market is going lower. I only wanted to demonstrate that the trend had changed and despite positive economics and earnings we could easily go lower. We need to consider both directions when we are researching a potential position. The optimist view of the charts above would be looking for a rebound from 10000/1900 with the S&P holding 1100. The drop at the close left the S&P at 1109, the Dow at 10186 and the Nasdaq at 1940. Obviously the numbers do not match. The S&P normally drops one point for every ten Dow points. That is a rough average but close. The Nasdaq equivalent is about three points. The S&P is the most widely used index for measuring the market and is seen as the benchmark. Using the SPX at 1109 this suggests a drop to 1100 would put the Dow around 10100 and the Nasdaq at 1910. That would be a new low for the Nasdaq by -17 points but would put the Dow right on 10100 and its support lows from this week. The term support for Dow 10000-10100 is used loosely. There is no real technical support at those levels, only emotional. A -25% retracement of the March bottom to Feb top would be 9919 and 9867 from the Oct 2002 bottom to top. If I had to watch only one thing next week I would watch these levels. SPX 1100, Dow 10100 and Nasdaq 1900. If there is any chance for an earnings rebound into April those levels must hold because a support break there would cause too much technical damage. (As if we have not seen enough already) Nobody knows what really caused the market drop at Friday's close. Expiration, rebalancing, profit taking or fear of weekend news events. Nobody knows what will happen at the open on Monday. Did they find Osama or his lieutenant? Did we trip some magic buy level at the close? I personally would like to believe the market will rebound at last ditch support but we have had a lot of those levels broken day after day recently. Keene and Keith, both Elliott Wave followers in the Futures Monitor, are expecting one more wave up to SPX 1138, Dow 10400. I would like to believe that but the semiconductor implosion on Friday bothers me. I have been telling you to watch for a break of 475 as the confirmation for a trend change and Friday's 463 close sure does qualify. However, if you are grabbing at straws today that is also exactly the 200dma for the SOX. Tech stocks have a strange way of rebounding at those levels but I would not be placing bets on this one. All eyes will be on the SOX on Monday and a break of the 200dma could seal our fate. I am sure I have totally confused everyone with my various scenarios but the bottom line is we are at a crossroad. If we break those support levels (1100/10100/1400) there will be no bulls left in the corral. Actually there were no bids on Friday so maybe they already left. Despite all the option expiration and S&P rebalancing volume we only managed to trade 3.6B shares across all markets. Very paltry. Down volume was 3.5:1 over up volume. There are no economic reports on Monday or Tuesday so nothing to stir up the markets. Choose your direction carefully next week and follow the trend. Sounds like a corny clichi but betting against could be expensive. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** 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 ******************** INDEX TRADER SUMMARY ******************** DOWNWARD PULL By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – I thought we might have seen the lows for this current correction in the week before last, but Friday's renewed downward pull makes me wonder. Of course it came on a triple witching options expiration and the selling came late without apparent "news" connected to it. There is also nervousness ahead of the next round of full-blown earnings releases coming up next month. The indices may hold at or above 1100 in the S&P 500 (SPX), 10,100 in the Dow, and the low-1900 area in the Nasdaq Composite (COMPX). Of course major support is seen at Dow 10,000 and could be the key test if 10,100 give way. The Nasdaq looks the most vulnerable to breaking to new lows given the Semiconductor (SOX) Index closing under its prior mid-December (down) swing low. Money managers seem too complacent on the S&P being in a mild correction only for the market to move into a strong renewed uptrend, especially ahead of seeing Q1 earnings. The recent rally failed just under the prior SPX lows in the 1125 area, which now looms as significant resistance. It looks best to trade for short-term objectives and let the market sort itself out as to the next major move. Technically, longer-term weekly oscillators need to fall further before the market is again really oversold. FRIDAY'S TRADING ACTIVITY – BULLS ARE WONDERING HOW LOW THEY CAN GO – The S&P 500 (SPX) has now shed nearly 5% off its highs from earlier this month. The Index closed at 1118.8, off about one percent or 12.5 on Friday. The Nasdaq Composite has fallen double the SPX corrective figure and the COMPX is now fully 10% off its peak of late-Jan (at 2154) and closed on Friday, down 22 points, to 1940.4. Not much news, some rumors – short sellers were in short supply most of the day – until about 3 pm Eastern – as there was the still active talk about a possible capture of the #2 to Ben Laden in Pakistan. A wild fight was going on for sure. Indexes spent the day not doing much until option expiration activity seems to take over according to our man Jeff (Bailey). UTX (United Technologies) put a bit extra selling pressure on the Dow Industrials on a ratings cut and the stock lost nearly 3%. There wasn't much news as I mentioned, as the market waits for the main season for Q1 earnings reports coming up in April. Decliners outdid advancing stocks by nearly 2 to 1 on the NYSE and nearly that much on Nasdaq. A triple witching day, so it remains to be seen if there is Monday downside follow through. A surprise capture? There may not be much buying interest otherwise and on such a surprise it may be more short-covering in nature. OTHER MARKETS – Bond prices were off a bit on Friday (6/32nds). For the week, the benchmark 10-year Treasury was off slightly after a 3-week rally. Bonds have been trending higher since the weak jobs report early in the month. The 10-year note was at 101 and 26/32nds to yield 3.78 – this versus 3.76 a week ago. Not much change for sure, but prices were lower given the higher yield than the week before. I still remember my Sociology Prof saying that an INVERSE relationship is when two related factors move in the opposite direction - when one is up, the other is down. Never knew that this would come in handy when I traded bonds many years later and needed to remember that with prices up, yields are down and vice versa. The dollar staged a rebound on Friday trading in New York, based on the possibility of the capture of al-Qaida's #2. The rise I should say was against the Euro - against the Yen there was virtually no change. The dollar gained nearly a full percent again the Euro and closed in New York trading at 1.2272 The backdrop to the dollar/yen steady trade was that dollar buying had been going most of this month by Japanese central authorities – on Friday talk around the FOREX market was that the Ministry involved would stop trying to keep a lid on the rise of the Yen and might for now stop trying to keep the U.S. currency from falling. Japan usually wants to buck the trend to a rising yen, based on not wanting to see the price (in dollar terms) of their exports going up. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: SPX need to get, and hold, above 1125 to suggest a renewed uptrend. If the recent rally is the approximate mid point in a corrective down leg – this is plausible given the wide double and triple top formed over several weeks – if so, a measured move objective (2nd down move is equal to the first) is to around 1060. Given that this is the area of the 200-day moving average it would not be too surprising either. The S&P 500, and the component stocks will often pull back to the area of the 200-day average after a prolonged uptrend. The key is whether recent lows in the 1105 area are penetrated especially on a close. If so, an immediate next downside objective is to 1080 with the next lower objective to 1060. A move down to the area of the 200-day average would give me some confidence that the correction was near an end as I think institutional buy support will be found in this price zone. This kind of a move would then suggest entry into Index calls. SPX and OEX put purchases have a favorable risk to reward on another rally, assuming "risk" is held to exiting puts on a close over 1125 basis the S&P 500. Downside profit potential at that point should well exceed risk, given the risk that 1100-1105 might get penetrated. My assessment of market sentiment, as mentioned, is that participants are complacent that the correction won't be much deeper. Maybe, maybe not. THE BIGGER PICTURE – S&P 500 Index (SPX) – Weekly chart: Good to look at the bigger picture when at a juncture like this and from the weekly chart it can be seen that: - The major resistance hit at recent highs - Recent lows were at an up trendline, more or less reflecting the rate of change on the rally from the fall - The RSI on an 8-week basis is falling, but is still at a midpoint and is not yet reflecting an oversold reading. The market will get oversold again if the market just goes sideways or drops lower. Either or. Stay tuned. S&P 100 Index (OEX) – Daily chart: PATTERNS - The S&P 100 (OEX) didn't quite complete a 50% retracement of its last advance from its mid-November low to the first of several tops it made. Just on this basis, the correction could be deeper still and be within what is a "normal" retracement. Something I keep in mind. The other is that the strongest chart support is still well under where the Index has gotten to so far on this pullback. The dashed green line suggests that this line of support is around 527. Heavy resistance is assumed to be at 557- 558, in the area of those late-Jan/early Feb relative lows. INDICATORS – Traders have been trading a lot of equities puts relative to calls – enough so to pull my Equities Call/Put indicator down to it lowest level, in terms of the 5-day average (magenta line), since October, around the time of the start of a major rally. I don't rely on this indicator in isolation. If the chart pattern gets more bullish with a close above 550 – and ability to hold this area on subsequent pullbacks – this Indicator will have greater weight in terms of my trading. The 14-day stochastic is indicating a first oversold reading. This alone is not enough to get bullish, as it can stay in this lower area for a while. At a minimum however, it suggests that one more shot down, say to 535, or worst case, a brief dip below 530, would set up a great Index call buy in my estimation. Stay tuned. As to put suggestions, the hourly chart is next - S&P 100 Index (OEX) – Hourly chart: Basis the hourly chart, would favor puts on signs of rally failure in the 555-560 area. Those who held puts from the area of the triple top at 565-570, profit taking is suggested on a move to the lower end of the trend channel, especially to the 542-540 area. At that point, the longer stochastic (21-hour) would likely be fully oversold again also. Dow Industrials (INDU) Daily: Based on the appearance of this pattern and the Friday close, it does look quite likely that the Dow has another dip to the lower envelope line and to test key support at 10,000. When buying interest wanes, selling doesn't usually dry up and institutional buy support come in until there is a retreat to a recognized support point. The other, more major support will likely kick in if there was a decline to the area of the 200-day moving average intersecting currently in the 9800 area. The rounding top pattern formed in the Dow and outlined below is of interest and not seen on the S&P indices. Often after this kind of arc pattern there is a sharp sell off once prices fall off the midpoint (of the circular pattern) on the right side. The Dow Index (DJX) has first resistance at 103-103.3, next at 104.25, then has a more significant resistance overhang at 105.3 – only a close above this area in fact, and the ability to hold this point on subsequent pullbacks, would suggest that upside momentum had been regained. Nasdaq Composite (COMP) Index – Daily: Support, at the lower end of the hourly downtrend channel is at 1920, then 1900. Momentum is down as measured by the longer range (21-hour) stochastic and measuring the 3-day trend. No doubt there could be some follow through weakness into Monday- Tues before another rally attempt. Rallies have not been too impressive so far and, as mentioned before, the SOX Index is leading the way lower in that it fell to a new closing low. I've been figuring to buy calls in NDX or QQQ (or, buying the stock) based on the Nasdaq Composite getting to the low-1900 area. I still favor this for a trade, but am somewhat less convinced that this could be a "final" low. Maybe best to look at the Nasdaq 100 and QQQ next. Nasdaq 100 (NDX) Index – Daily & Hourly: The new low close for this move ended the week on a definite bearish note. Below support in the 1400 area, next support is at 1380 at least as implied by the intersection of the lower trend downtrend channel line. First resistance is at 1430, then 1440, at the upper boundary of the downtrend hourly price channel. Basis the daily chart, the key resistance is at 1455-1460, the area of the relative lows of February. Significant support, once broken, often "becomes" resistance. I lean to buying NDX calls, and exiting puts in the 1380 area, looking for another rally attempt with a (at most) 40-point objective. My exit or stop point if this trade was realized would be to 1370. Nasdaq 100 tracking Stock (AMEX:QQQ)– Daily & Hourly: As is often the case with QQQ, areas of buying (support) and selling interest (resistance) are pretty well defined on the hourly chart on the right. Repeated recent highs in the 35.5 area show this as first resistance, then at 36 – the area of prior lows. Finally, taking a clue from the upper trend channel boundary, next resistance is 36.5. Support is implied around 34.5 based on the lower trend channel line. A cluster of prior lows going back to December, show up on the daily chart in the 33.80 area. I think the stock is a buy on dips under 34 if seen, with a relatively close stop-out point at 33.5, looking for a recovery rally to at least 35.5 or perhaps to 36-36.5 which I see as more significant technical resistance. Those short the stock or holding puts – I would use the same price points I outline above as potential support and take the money (profits) and run. You may disagree and figure that we are in a new tech bear trend – but, the Nasdaq segment of the market is now quite oversold relative to the S&P. The 8-week RSI on QQQ is now at 32 (not shown) – it can dip under 30 for sure, but the odds increasingly favor a rebound at some – some decent tech earnings and there will be another buy binge in those stocks we just can't stop lovin as we dream of another tech boom some day. TRADER'S CORNER article – My past week's musings (3/18/04) were on the principle methods that I use to find support and resistance technically. See - http://www.OptionInvestor.com/traderscorner/tc_031804_2.asp AND, keep those cards and letters (e-mails) coming, especially that relate to trading/technical analysis tools I use and abuse. Good Trading Success! ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ************** Editor's Plays ************** Second Chance In last weeks play suggestion on SYMC I mentioned trying to buy it on a dip to the bottom of the channel. We did not get much of a dip, only -$2, but we are moving closer to the $42 level. With a week less time available I definitely suggest the July option. If you can get a fill at the $42 level I would use the July-$45 call. Just be aware that the Nasdaq is not in the best of health and calls could be tough. Despite the Nasdaq weakness SYMC and EBAY have failed to crumble. A helium balloon still goes lower in a down elevator. Nothing is bullet proof forever. Symantec Chart - Daily ******************* DNA traded down to $102.41 this week from its $114 high. A week too late for me. Several readers that stuck with the play emailed me their successes. I think they just wanted to rub it in. (grin) ******************* Confused? If you read my market wrap this weekend you should be completely confused about market direction. The answer I arrived at after several hours of research was a strong likelihood that we were going lower, maybe much lower. However, there are just enough straws to grasp to suggest that we may see once more bounce from 1100/10000/1900. If that bounce does occur I am looking for resistance at 10300. I am undecided on how best to play this. Do we buy calls at Dow 10100 when there is little to suggest a material bounce will actually happen? Or do we try and buy puts on any bounce back to the 10300 range? Whichever one we don't choose will be the correct one. Based on the Elliot Wave projections from Keith and Keene they are looking for a return to 10400/1138. I would be really surprised but then I have seen them hit the numbers more than once. I am thinking the best plan is to be safe not sorry. Buying calls at 10100 has a greater risk in my opinion. Odds are very good we will hit 10100 but once there the direction may not be up. I am more comfortable with trying to play the downside from a higher level. We saw 10325 fail three days straight last week and the odds are good it will fail next time as well. If the Friday sell off was a combination of random factors then it is possible we could see a rebound on Monday. Finding a high profile al Qaeda person in the rubble over the weekend could help. I want to target 10300 as an entry point to buy the April $102 DJX puts. I would estimate they would cost $1.50 with the Dow at 10300. The stop loss would be Dow 10400 and the profit target will be Dow 10000. We may never be filled on these if we fail to rebound or any rebound fails to reach this level but no play is better than a bad play. Dow Chart - 30 min **************** MARKET SENTIMENT **************** Strength Hard to Find - J. Brown Ouch! Friday was another rough day for the markets. Investors were being hit left and right with non-market events. Early Friday there were reports that police were rushing to Washington D.C. schools due to a bomb threat. The current Taiwan President and his Vice President were both shot while campaigning ahead of Saturday's general election all while China was performing military maneuvers off their coast. Thankfully both men were okay. Meanwhile violence in Baghdad continued to heat up as we approached the 1-year anniversary for last year's Iraq war. On top of it all was news of a heated battle on the outskirts of Pakistan between the Pakistan military and what some reports described as hundreds of heavily armed men believed to be Al Queda supporters defending Osama's right hand man. Yes, it was a rough day and through it all traders had to deal with a quadruple options and futures expiration and an S&P 500 rebalancing. The only sector to close the session positive was the XAU gold & silver index fueled by a small gain in gold to $412.70 an ounce. Seems like widespread market declines have become rather popular lately. Market internals were naturally bearish with losers outnumbering advancers almost 18 to 10 on the NYSE and 18 to 12 on the NASDAQ. Down volume overpowered up volume 3-to-1 on both exchanges. The markets have certainly turned defensive but traditional safe haven stocks aren't performing very well. That may be misleading. Gold stocks are doing okay and healthcare stocks are out performing by falling less than the rest of the market. Unfortunately drug stocks, a traditional safe haven, are getting punished. Searching for pockets of strength was rather disappointing. Nearly ever sector index I looked at aside from the XAU was breaking down toward new relative lows or rolling over from this week's bounce. Checking out the COT data below this report revealed that the commercial traders (a.k.a. "smart money) had turned pretty bearish on the S&P in the e-mini contracts. Oddly enough they also turned more bullish on the Nasdaq-100 (NDX). Could they be expecting a bounce? Right now the real concern is the semiconductor sector. The SOX tends to lead the NASDAQ up or down and Friday's 3.6% drop fell straight to its 200-dma. I suspect we may see an oversold bounce before it rolls over again but if it doesn't the NASDAQ could follow it lower rather quickly. We might see a bounce on Monday if the Pakistan military prevails and we do find some high-ranking terrorists but that may only be a temporary reprieve. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7929 Current : 10186 Moving Averages: (Simple) 10-dma: 10272 50-dma: 10519 200-dma: 9794 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 843 Current : 1109 Moving Averages: (Simple) 10-dma: 1121 50-dma: 1137 200-dma: 1053 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1014 Current : 1398 Moving Averages: (Simple) 10-dma: 1418 50-dma: 1484 200-dma: 1378 ----------------------------------------------------------------- The volatility indices have pulled back from their recent highs but they still appear to be in breakout mode and that's generally bearish for the markets. CBOE Market Volatility Index (VIX) = 19.15 +0.62 CBOE Mkt Volatility old VIX (VXO) = 19.16 +0.54 Nasdaq Volatility Index (VXN) = 25.99 +1.41 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.03 853,502 881,695 Equity Only 0.89 677,758 599,883 OEX 1.03 59,746 61,299 QQQ 2.23 55,512 123,696 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 71.8 + 0 Bull Correction NASDAQ-100 44.0 + 1 Bear Confirmed Dow Indust. 80.0 + 0 Bull Correction S&P 500 77.2 + 0 Bull Correction S&P 100 85.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.46 10-dma: 1.70 21-dma: 1.40 55-dma: 1.14 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 1018 1171 Decliners 1774 1853 New Highs 119 81 New Lows 11 15 Up Volume 386M 390M Down Vol. 1280M 1195M Total Vol. 1696M 1615M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 03/16/04 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 Hmm... there's been a lot of action in the commercial traders' positions the last few weeks. It's almost like they can't decide what direction to go. The latest data shows them switching from net bearish to net bullish again. Small traders are more consistent and remain net bullish although less so than recent weeks. Commercials Long Short Net % Of OI 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%) 03/16/04 454,635 449,505 5,130 0.6% 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 02/24/04 141,559 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% 03/16/04 159,054 115,023 44,031 25.3% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Whoa! Commercial traders have turned very bearish on the S&P e-mini's. Contract volume in both longs and shorts have soared but they bought almost 90K new shorts pushing bearish sentiment to new levels not seen in weeks. Small traders also increased their positions but remain bullish. Commercials Long Short Net % Of OI 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%) 03/16/04 472,809 574,241 (101,432) ( 9.7%) 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 02/24/04 129,894 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% 03/16/04 192,136 96,691 95,445 33.0% 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 are continuing this bullish trend and hit another new high in bullish sentiment. Is everyone just buying the dip? Small traders may have taken notice as they nearly doubled their number of long contracts but then the more than doubled their short contracts. At least the brokers are making some money on commissions. Commercials Long Short Net % of OI 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% 03/16/04 68,285 54,899 13,386 10.9% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 13,386 - 03/16/04 Small Traders Long Short Net % of OI 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% 03/16/04 27,859 18,333 9,526 20.6% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Not too much change here for the commercial traders although they've become significantly less bullish than recent weeks. Small traders are moving the other direction and becoming less bearish! Commercials Long Short Net % of OI 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% 03/16/04 32,317 17,514 14,803 29.7% 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 02/24/04 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%) 03/16/04 10,002 20,970 (10,968) (35.4%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 *************** ASK THE ANALYST *************** No desire to take possession on Triple Witch I received a plethora of questions this week regarding this quarter's Triple Witch expiration, where questions surrounded various observations and comments I made throughout the past week-and-a-half. Several questions surrounded "Max Pain," and while most everyone understood the concept of how it is derived, I'm going to try and show a graphical representation of how "Max Pain" levels can be viewed in graphical form, which really looks like a bell curve. This may also bring some clarity as to the sector bullish % bell curves we've discussed in prior Ask the Analyst columns. On Friday, March 19, 2004, the MARKET itself gave proof that an option expiration, especially a Triple Witching expiration, can see a high degree of volatility take place, where on March 19, 2004, the equity markets saw a sudden decline in the last hour of trade, with the S&P 500 Index (SPX.X) 1,109.78 -1.11% sliding 7.15 points, or 0.64%, where at the time of the decline, there were no major news announcements. In this weekend's Market Wrap, Jim Brown will discuss some news that was released earlier Friday morning regarding the Semiconductor sector. News I was not aware of, until after Friday's close. While the Semiconductor Index (SOX.X) 463.35 -3.6%, a sector we covered in a February 29, 2004 Ask the Analyst column, lead Friday's list of sector declines, where Jim's Market Wrap will shed light as to the "why," I do believe there are some observations made on Friday, in the OptionInvestor.com Market Monitor (as it was happening), where Friday's Triple Witch expiration may be telling to a more cautious stance being taken from market participants. First, let me confess my incorrect analysis as it relates to my thoughts that we might see a more bullish session on Friday, where at 12:00 PM EST, many of the option-related observations I had been making as to options market makers wanting to see a NASDAQ-100 Tracking Stock (AMEX:QQQ) $34.75 -1.66%, looked to be unfolding just as planned when the QQQ was making a session high of $35.45, and gravitating toward the QQQ's "Max Pain" $36.00 level. But that was it for the highs, and the QQQ once again headed back to the $35.00, which wasn't all that unusual, when prior session's trade had found the QQQ edging into the $35 area, but then regaining composure and rising back near $35.50. However, this Friday Triple Witch, something strange happened, where all of a sudden, it seemed as if all market participants wanted to be seller, with few buyers to support the major indices. I made not prior to the close, that I had not received a single sell program premium alert, but where market action appeared to resemble a sudden thought of "I have no desire to take possession of this stock." Those not overly familiar with stock options should have a basic concept of what the BUYER or OWNER of a call option will often do, when they own a call option, which gives the buyer/owner of that call option the RIGHT, but not the OBLIGATION to BUY the underlying security at the stated price of security. Put option BUYERS or OWNERS have the RIGHT, but not the OBLIGATION to SELL the underlying security at the state price of the security. With this basic understanding of options, let's look at the just- expired NASDAQ-100 Tracking Stock (AMEX:QQQ) $34.75 -1.65% March Call option chain, which I've sorted in descending order. March 19, 2004 quarterly expiration - March Calls On the far right of the table, is this months open interest. I've tried to show a graphical representation of a bell curve, where a normal distribution of open interest could be observed. When the QQQ opened for Friday's trade at $35.28, the March $35 calls (QQQCI) were IN the money, meaning that they were profitable, and should the QQQ close above that level, the OWNER of that call option could EXERCISE their RIGHT to buy the QQQ at $35.00 if they wished to. If the OWNER of that call did not want to take possession (exercise their right to buy at $35) they could simply SELL the option itself. It is nearly impossible for anyone, other than the option's market maker to truly have a good sense of buyers versus sellers of an option, but we can see there was a great amount of volume in the March $35 calls on Friday. That volume could have come from speculative trading, based on a trader's thoughts toward price direction in the QQQ itself. The volume could have come from OWNERS of those calls deciding that now was not the time to be taking possession of the QQQ and closing out their position by selling the calls. One way a trader or investor can get a feel for what type of volume was seen during a day, is to follow the open interest that will be reported the following day, once all trading is tabulated. As a basic example, we know that at Thursday evening close, there was 141,500 QQQ March $35 call (QQQCI) contracts still open. If all OWNERS of those contracts were SOLD in Friday's trade (96,871 contracts), then open interest would fall to 44,629. In its most simplistic form, the SELLING of a CALL option is considered somewhat BEARISH. The reason for this is that when a market participant sells a security that would only profit from a rise in price (like a call option) the seller of that call must be thinking that upside reward is becoming minimal, compared to the downside risk. In red arrows, I've pointed to three contracts, where a high volume, relative to open interest was found in today's trade. The March $35 call volume is not necessarily all that unusual, considering the QQQ has been trading between $35 and $36 this past week, and all day Friday, but one could conclude that volumes at the $34 strike and $28 strike, representing 1.09 million and 185,200 shares of QQQ, were most likely option contracts that were CLOSED OUT (not certain, but high likelihood) where the OWNERS of those calls decided to NOT exercise their right to buy the QQQ at the stated strikes. Note the PINK "?" I placed in the above table by the March $41 Call (QQQCO) and volume of 2,000 contracts being traded. I view this has HIGHLY unusual, considering the QQQ trading between $35 and $36. A time and sales check has that trade taking place at 10:50:17 AM EST, and upon intra-day investigation in how the QQQ was trading, I can not figure out what this trade means. But it is HIGHLY suspicious and becomes even more suspicious in a minute. Now lets look at the QQQ March Put option chain, where the OWNERS/buyers of these contract had the RIGHT, but NOT the obligation, to sell the QQQ at the stated strike price of the contract. March 19, 2004 quarterly expiration - March Puts Note the PINK "?" at the QQQ March $27 Put (QAVOA) volume of 2,000 shares. What is going on? A time and sales check has that trade taking place at 10:50:28 AM EST, just seconds after the March $41 call traded the same number of contracts. I've never noticed this type of option trade, and I don't want to sound like a conspiracy theorist, but should I find out that these were errant trades, or offsetting buy/sell trades, ($10,000 per trade) I have to wonder if there was some type of direction signal being given as to where the QQQ was going to settle on this Triple Witch expiration. Split the difference between $27 and $41, and I calculate $34, which might be a directional signal for a settlement toward $34. Again, no big deal here, but very obscure options trade, where should I see this in the future, might be a beneficial observation if trying to trade during options expiration. The QQQ puts were an integral part of my analysis for a higher trade to be found on Friday, where I thought the market maker in the QQQ options, would try and manipulate a higher trade in the QQQ on Friday, in order to have the March $36 puts and the March $37 puts (QQQOK), losing some of their profitability, as both had high level of open interest. While market participants (you and me) will generally be BUYERS of call and puts, the market maker is often the seller, and when expiration nears, we as traders/investors will observe some wild intra-day swings, which some believe is caused by the market makers using their clout to buy/sell the underlying QQQ, in order to have the options swinging wildly, to influence you and I into buying or selling our options. It was my thought, that a MARKET MAKER would benefit, if he/she could get the QQQ to move higher, thus the price of the put options falling, and therefore, increasing the market makers profitability by today's close. While that scenario may have been in play up until about 12:00 PM EST, the closing price of the QQQ shows that scenario did not work out. And here are some things that might begin hinting of a market, where demand for stocks (a willingness to buy being greater than supply) is starting to be outstripped by supply (a willingness to sell being greater than demand). One thing I had been noting as we neared option expiration (as it related to the QQQ) was that open interest in the March $36 and $37 puts had been around 200,000 in each contract, where certainly a market maker would either stand to profit, or not lose as much money, if he/she could push the QQQ higher, if only on Friday, to try and have the $36 and $37 put prices falling. One note from the above table would show that open interest as of Thursday's close, was still rather steady around the 200,000 contract level (200,000 contracts equates to 20 million QQQ shares). We might now think of this in regards to Friday's total volume for the QQQ of 100.1 million shares traded, as the market maker perhaps having to buy at least 40 million shares, should the $36 and $37 put holders decide to exercise their RIGHT to sell their underlying QQQ shares. While some of Friday's first-half session gains may have influenced some put sellers to CLOSE out their put options contracts, the greater amount of open interest may also have been simply too much supply for the market maker to handle. And this is where I become somewhat suspicious to Friday's expiration actually having an impact on trade. Think about this. If it is true that a market maker has a better feel for the number of buyers and sellers in a market (if you buy or sell an option, it goes to the market maker, where he/she provides the liquidity for you and I to buy or sell a security) and senses that sellers outnumber buyers, and is faced with taking possession of roughly 40 million shares at the close of business, what would YOU do to try and protect such a large amount of capital? 40 million shares multiplied by $36.50? I don't know about you, but I would buy some near-term insurance. Here is a QQQ option chain, which is comprised of various QQQ call and put options, which I've sorted by open interest in descending order. March 18, 2004 QQQ Open Interest - (Table date 03/19/04) At 03:09:59 PM EST, I alerted traders in the OptionInvestor.com Market Monitor, that volume in the April $35 puts was unusually heavy. This alert was about 15-minutes after the QQQ had dropped quickly from $35.12 to $35.00. Not a "big move," but somewhat unusual given the day's trade. At the same time, I noticed the NASDAQ-100 Volatility Index (VIX.X) was up 2.07% and was rising quickly (this can be created when a high number of calls are being sold, or puts are being bought). Something was going on, and based on the April $35 put (QQQPI) jump in volume it may well have been a rather large near-term hedge being placed by a QQQ bull, that wanted to buy near-term insurance, to protect against a decline below $35.00. I checked an intra-day chart of the QQQ, and at 03:10 PM EST, the QQQ was traded $35.00 to the penny. Now, I had multiple questions and requests as to being able to track future option open interest, for purposes of analysis. I am not aware of a service (maybe one of the other analysts here at OI, or maybe a subscriber knows) where you can get historical data on option volumes and contract open interest fluctuations. So, I have prepared the current June QQQ call and put option chains, where we could track the changes in open interest with the passing of time. These two option chains can become a benchmark as to where we stand at this quarterly expiration, and where there is current open interest, which will change over time, for next quarter's expiration. As a current benchmark, June "Max Pain" is currently calculated at $36 for the QQQ, the S&P 500 Index (SPX.X) 1,109.78 is calculated at 1,050.00, and for the Dow Diamonds (DIA) $101.94 is calculated at $96.00. QQQ June Calls - Open Interest as of 03/18/04 One observation I make in the calls, is that there doesn't appear to be any unusual volume in the June calls having taken place on Friday. QQQ June Puts - Open Interest as of 03/18/04 The PINK arrow shows a rather high 13,921 contracts traded in the June 32 Puts on Friday, where we might think of this as some type of rolling hedge, with the thought of QQQ $32 being in play between now and June expiration. Is their a directional bias being expressed in today's trade, as it relates to the general direction of trade for the QQQ in coming months? It is impossible to say, with just one day's observation, but sometimes, the noting of anomalies can be useful, where a trader and investor and then benchmark from, and follow with time. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- CCL Crnvl Corp & Crnvl Mon, Mar 22 -----N/A----- 0.22 CBB Cincinnati Bell Inc. Mon, Mar 22 -----N/A----- 0.09 SKIL SkillSoft Corporation Mon, Mar 22 After the Bell 0.04 WAG Walgreen Mon, Mar 22 -----N/A----- 0.42 WOS Wolseley Mon, Mar 22 -----N/A----- N/A ------------------------- TUESDAY ------------------------------ ARRO Arrow International Tue, Mar 23 -----N/A----- 0.33 FDO Family Dollar Tue, Mar 23 -----N/A----- 0.46 GS Goldman Sachs Tue, Mar 23 Before the Bell 1.61 MKC McCormick & Company Tue, Mar 23 Before the Bell 0.27 RHAT Red Hat, Inc. Tue, Mar 23 After the Bell 0.03 ------------------------ WEDNESDAY ----------------------------- RIO Companhia Vale Rio Wed, Mar 24 After the Bell 1.17 LNR LNR Property Wed, Mar 24 -----N/A----- 0.77 SIGY Signet Group Wed, Mar 24 Before the Bell N/A SONC Sonic Corp. Wed, Mar 24 After the Bell 0.23 SCM Swisscom AG Wed, Mar 24 Before the Bell N/A TKA Telekom Austria AG Wed, Mar 24 Before the Bell N/A ------------------------- THUSDAY ----------------------------- BGO Bema Gold Thu, Mar 25 After the Bell -0.01 COGN Cognos Thu, Mar 25 After the Bell 0.35 CAG ConAgra Foods, Inc. Thu, Mar 25 Before the Bell 0.38 VIP Vimpel Communications Thu, Mar 25 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- DISH EchoStar Comm Corp. Fri, Mar 26 Before the Bell 0.09 IMI SanPaolo IMI SpA Fri, Mar 26 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable DCI Donaldson Company, Inc 2:1 Mar 19th Mar 22nd NIHD NII Holdings, Inc 3:1 Mar 22nd Mar 23rd ASFI Asta Funding Inc 2:1 Mar 23rd Mar 24th COCO Corinthian Colleges Inc 2:1 Mar 23rd Mar 24th RJF Raymond James Financial 3:2 Mar 24th Mar 25th AMSG AmSurg Corp 3:2 Mar 24th Mar 25th SCHN Schnitzer Steel Ind, Inc 3:2 Mar 25th Mar 26th WGA Wells-Gardner Elect Corp 21:20 Mar 26th Mar 29th HOV Hovnanian Ent, Inc 2:1 Mar 26th Mar 29th MVL Marvel Enterprises 3:2 Mar 26th Mar 29th APH Amphenol Corp 2:1 Mar 29th Mar 30th XTEX Crsstx nrg co, L.P. 3:2 Mar 29th Mar 30th GGG Graco Inc 3:2 Mar 30th Mar 31st IDSA Industrial Services of 3:2 Mar 30th Mar 31st PHX Panhandle Royalty Co 2:1 Apr 1st Apr 2nd TACT TransAct Technologies Inc 3:2 Apr 2nd Apr 5th -------------------------- Economic Reports This Week -------------------------- There are a lot of Fed heads speaking this week on the economy should it could keep the market hopping. We're still in the middle of pre-announcement season and most of this week's economic reports come out Weds-Thursday-Friday. ============================================================== -For- ---------------- Monday, 03/22/04 ---------------- Federal Reserve's Moskow speaks in Chicago ----------------- Tuesday, 03/23/04 ----------------- Federal Reserve's Stern speaks in New Orleans ------------------- Wednesday, 03/24/04 ------------------- Durable Orders (BB) Feb Forecast: 1.2% Previous: -2.3% New Home Sales (DM) Feb Forecast: 1100K Previous: 1106K Federal Reserve's Guynn speaks in Tennessee Federal Reserve's Parry speaks in Portland Federal Reserve's Minehan speaks in New York ------------------ Thursday, 03/25/04 ------------------ Initial Claims (BB) 03/20 Forecast: N/A Previous: 336K GDP-Final (BB) Q4 Forecast: 4.1% Previous: 4.1% Chain Deflator-Final (BB) Q4 Forecast: 1.2% Previous: 1.2% Help-Wanted Index (DM) Feb Forecast: 39 Previous: 38 Existing Home Sales (DM) Feb Forecast: 6.20M Previous: 6.04M ---------------- Friday, 03/26/04 ---------------- Personal Income (BB) Feb Forecast: 0.3% Previous: 0.2% Personal Spending (BB) Feb Forecast: 0.5% Previous: 0.4% Mich Sentiment-Rev. (DM) Mar Forecast: 94.0 Previous: 94.1 -Amendment to the Economic Calendar- The Feds released the January PPI data last week but have not yet announced when the February PPI data will be released. PPI (NA) Date TBA Feb Forecast: N/A Previous: 0.6% Core PPI (NA) Date TBA Feb Forecast: N/A Previous: 0.3% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 03-21-2004 Sunday 2 of 5 In Section Two: Watch List: Tech, Biotech & Gold Dropped Calls: AET, CFC, TARO Dropped Puts: None ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ********** Watch List ********** Tech, Biotech & Gold __________________________________________________________________ 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. ___________________________________________________________________ MicroStrategy - MSTR - close: 50.76 change: -1.35 WHAT TO WATCH: Oversold or not shares of MSTR don't look healthy. After failing at resistance several times near the $65 region MSTR has fallen sharply in the last two weeks. Concerns over the company's tax rate sent the stock sinking last Tuesday but the bounced from their 200-dma. That bounce has failed and now shares sit at support of $50.00 and its 200-dma. A breakdown here and the next stop is likely the $45 region. Chart= --- Newmont Mining - NEM - close: 44.38 change: +0.07 WHAT TO WATCH: Gold stocks are one of the few pockets of strength in the markets. NEM looks tempting given its recent high-volume rebound above its 50-dma. Bulls can keep an eye on it for a move above resistance at $45.00 or the recent top near $45.75. We'd target a move to stronger resistance at $50.00. Chart= --- Celgene Corp - CELG - close: 47.26 change: -0.51 WHAT TO WATCH: This one is for the bulls and the bears. CELG's recent volume-powered rally to $48.50 looks pretty tempting but bulls shouldn't consider a position until it breaks out above the $49.00-to-50.00 level, which has been tough resistance since September 2003. Conversely bears might eye it as an aggressive short. The BTK looks pretty weak and we expect it to turn lower next week. This will be a drag on CELG and traders may decide to do some profit taking. Unfortunately for the bears CELG should have some support at the $45 mark. Chart= --- Red Hat Inc - RHAT - close: 19.22 change: +0.35 WHAT TO WATCH: It's always impressive to see an expensive (P/E 409) stock like RHAT trade higher on a day when the NASDAQ and ever tech index turned lower. Technicals are bullish for RHAT but the stock still has resistance at the $20.00 mark. A breakout over $22.00 could lead to a run toward its January highs near $21.88. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- IMCL $48.07 -0.45 - Imclone has been relatively strong this past week with new support at $45.00 holding up well. We'd consider bullish positions if it can breakout above the $50.00 mark. PD $83.34 -0.95 - We're still watching PD. Copper continues to inch higher but PD is struggling with resistance at $85.00. We suspect we'll see PD retest the $80.00 level next week. DE $66.19 +0.04 - DE was actually one of the big winners last week but the equipment maker still has to break out over major resistance in the $68.00 range. ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ Aetna Inc. - AET - close: 87.43 change: -0.14 stop: 86.95 AET's performance has been very impressive this week and we came within 2 cents of being stopped out on some early morning Friday weakness. Fortunately, traders continued to buy the dip. Even though AET remains strong we're going to exit. The stock looks very overbought and volume has been fading the past several days. Traders still looking to play AET might want to watch for a dip to the 10 or 21-dma's. Picked on February 29 at $80.79 Change since picked: + 6.64 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- Countrywide Financial - CFC - cls: 91.36 chg: -1.64 stop: 90.00 We've been cautious on CFC for days. The stock just isn't acting that strong for one that recently announced a 3-for-2 stock split and should be drowning in business with mortgage rates so low. We haven't been stopped out yet but we're going to close the stock anyway with the drop under short-term support at $92.00. We believe in the fundamentals here but shares just aren't performing. Maybe we'll get another chance to play it long in a couple of weeks. Picked on February 24 at $91.63 Change since picked: - 0.27 Earnings Date 01/27/04 (confirmed) Average Daily Volume: 2.3 million Chart = --- Taro Pharma. - TARO - close: 61.01 chg: -0.52 stop: 59.50 TARO just never got off the ground for us even though the double- bottom looked so tempting. Of course it's not all TARO's fault. The DRG drug index's performance has been terrible. Fortunately for TARO it has continued to hold support at its slowly rising 200-dma. The bad news is that it's still painting a trend of lower highs. Right now we suspect the next move in TARO may be down not up. Traders might want to consider shorting TARO if it breaks the $59.00 mark. Picked on March 14 at $ 61.85 Change since picked: - 0.84 Earnings Date 02/17/04 (confirmed) Average Daily Volume: 284 thousand Chart = PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ********** 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 Sunday 03-21-2004 Sunday 3 of 5 In Section Three: Current Calls: ATH, DGX, EBAY, JNPR, LXK, RNR New Calls: ONXX Current Put Plays: CHIR, ETN, IVGN New Puts: QLGC, SLAB ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ****************** CURRENT CALL PLAYS ****************** Anthem, Inc. - ATH - close: 89.50 change: -0.56 stop: 86.50 Company Description: Anthem is a health benefits company serving over 7 million members, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names in these states under license agreements with the Blue Cross Blue Shield Association. ATH's product portfolio includes a diversified mix of managed care products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company's managed care plans and products are designed to encourage providers and members to select cost-effective healthcare by utilizing the full range of its medical management services. Why we like it: Despite being unable to sustain a move over the $90 resistance level, ATH has been a stellar performer for us in the past week, as it bounced strongly from the 10-dma (now $88.83) and continued chipping away at that $90 resistance all week long. Even on Friday -- a weak day for the overall market -- ATH hit an intraday high of $90.50, before pulling back to close exactly $1 below that mark. It appears that we'll get another test of the 10-dma early next week, and aggressive traders can attempt new entries at that level. More conservative traders can hold out for a dip back to test the 20-dma ($87.36) before attempting a rebound entry. With the difficulty the stock is having with breaking out over $90, we aren't enthusiastic about new breakout entries at this time. Maintain stops at $86.50, which is just below the bottom of the most recent profit-taking dip. Suggested Options: Shorter Term: The April $90 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the June $95 Call, while more conservative traders looking for more insulation against time decay will want to use the June $90 strike. Our preferred option is the April $90 strike, which is at the money and should provide sufficient time for the play to move in our favor. BUY CALL APR-85 ATH-DQ OI=2835 at $5.70 SL=3.75 BUY CALL APR-90*ATH-DR OI=1673 at $2.35 SL=1.25 BUY CALL JUN-90 ATH-FR OI=1257 at $4.40 SL=2.75 BUY CALL JUN-95 ATH-FS OI= 716 at $2.25 SL=1.10 Annotated Chart of ATH: Picked on February 26th at $85.37 Change since picked: +4.13 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 1.47 mln Chart = --- Quest Diagnostics - DGX - close: 82.35 change: -0.62 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: It was a rather lackluster start for our DGX play, as the stock traded in a very narrow range, just below resistance. But we're willing to be forgiving, as the stock held firm in its bullish trend, while the broad market got hit with another painful round of selling. Any dip back near the short-term rising trendline and the 50-dma (currently $80.99) look great for new entries into the play, but remember our $83.50 trigger. DGX needs to break above that level before we consider buying either on a breakout or on a pullback to support. Options expiration certainly had an effect on Friday, so we'll look for clarity to emerge on Monday. Wait for the breakout before playing. Aggressive traders can enter on the initial breakout, while bargain hunters can wait for a subsequent dip and bounce from support above $81. 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 $4.00 SL=2.50 BUY CALL APR-85 DGX-DQ OI= 357 at $1.40 SL=0.75 BUY CALL MAY-85*DGX-EQ OI=1837 at $2.60 SL=1.25 BUY CALL MAY-90 DGX-ER OI=2810 at $1.05 SL=0.50 Annotated Chart of DGX: Picked on March 18th at $82.97 Change since picked: -0.62 Earnings Date 4/22/04 (unconfirmed) Average Daily Volume = 617 K Chart = --- eBay Inc - EBAY - close: 68.30 chg: -1.04 stop: 67.24 *new* Company Description: eBay is The World's Online Marketplace.. Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Through an array of services, such as its payment solution provider PayPal, eBay is enabling global e- commerce for an ever growing online community. (source: company press release) Why We Like It: Well it's been about two weeks and we haven't gotten very far with our EBAY calls. The NASDAQ has continued to drift lower while the Dow's recent bounce is rolling over. EBAY has been stuck in a consolidation between its slowly rising 50-dma and the $70.00 mark. This consolidation is okay for those traders who are still patiently waiting for another breakout over the $70.00 level as we have been suggesting the last few sessions. Unfortunately, we were triggered on the spike above the $70.00 mark on March 8th. This past week started out okay with some positive comments from Goldman Sachs but they weren't enough to spark any fires under EBAY's stock price. YHOO tried to get things going mid-week with two brokers upgrading its stock and EBAY followed with a rally towards $70 but it never made it above $69.60. We are still cautiously suggesting that readers be patient and wait for EBAY to trade back above the $70.00 mark before considering new bullish positions. We have suggested that more aggressive players can use dips to the 50-dma as entry points but these dips are growing more frequent and EBAY's technicals aren't looking that healthy. We're going to raise our stop loss to $67.24, just under the recent lows. More conservative types can raise their stops to $67.50 just under the 50-dma. Suggested Options: Remember we're pretty cautious here and are only suggesting new plays on a move above the $70.00 mark. Short-term traders should probably choose from the April or July strikes but July seems a ways off yet. BUY CALL APR 65.00 XBA-DM OI=18625 at $4.40 SL=2.20 BUY CALL APR 67.50 XBA-DU OI= 8124 at $2.75 SL=1.35 BUY CALL APR 70.00 XBA-DN OI=18123 at $1.60 SL=0.85 Annotated Chart: Picked on March 09 at $ 70.05 Change since picked: - 1.75 Earnings Date 04/20/04 (unconfirmed) Average Daily Volume: 7.0 million Chart = --- Juniper Networks - JNPR - close: 24.86 chg: -0.49 stop: 23.64 Company Description: Juniper Networks transforms the business of networking by converting a commodity -- bandwidth -- into a dependable, secure and highly valuable corporate asset. Founded in 1996 to meet the stringent demands of service providers, Juniper Networks is now relied upon by the world's leading network operators, government agencies, research and education institutions, and information- intensive enterprises as the foundation for uncompromising networks. The Infranet Initiative uses Juniper Networks MINT (Model for Infranet Transformation) as its underlying framework. Juniper Networks is headquartered in Sunnyvale, California. (source: company press release) Why We Like It: Last week we added JNPR to the call list due to its relative strength and bullish breakout over multiple resistance levels. Since that time we've seen the NASDAQ continue to slide lower and the NWX networking index has followed suit. With the major indices sliding JNPR struggled to follow through on its breakout and has consolidated sideways. This should have bulls turning cautious and preparing their exit plans if the stock and the markets continue to head south. Watch the NWX index. It looks weak and is approaching the recent low near 262, which might correlate with the recent low of $24.00 in JNPR's stock price. If the NWX breaks 262 then the next stop should be the 250-255 support level from November-December last year. This would be a major drag on JNPR. Although we and plenty of Wall Street analysts are bullish on the stock we would still expect it to trade lower. In essence the current short- term picture isn't very bright and we strongly hesitate to suggest new calls. Look for JNPR to trade above its converging 40-dma and 50-dma near $26.25 to feel more confident that the stock is going our direction. Suggested Options: Remember we're pretty cautious here with the NWX slipping lower. Short-term traders can choose the April or July options. We're going to suggest the April 22.50s as our favorite but the 25's look good too. BUY CALL APR 22.50*JUX-DX OI= 7176 at $3.20 SL=1.65 BUY CALL APR 25.00 JUX-DE OI=43537 at $1.65 SL=0.85 BUY CALL JUL 25.00 JUX-GE OI=12311 at $3.10 SL=1.65 Annotated chart: Picked on March 14 at $ 25.81 Change since picked: - 0.95 Earnings Date 04/21/04 (unconfirmed) Average Daily Volume: 15.7 million Chart = --- Lexmark Intl. - LXK - close: 88.70 change: -1.05 stop: 85.00 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: It was starting to look like LXK wasn't going to give us another entry point, the way it charged through resistance at $87 and then just kept on running, all the way to $91 on Wednesday. Fortunately, the stock finally looked back at the lagging broad market and decided it better cool its heels for a bit. When $90 held as intraday resistance on Thursday, LXK investors decided to take a bit of money off the table on Friday, resulting in a slight pullback to just under $89. There's still a lot of space between the current price and the first tangible support down at the 10-dma (currently $86.52) and with daily oscillators threatening to tip over from overbought territory, it appears the prudent approach is to take a wait and see attitude. Certainly if the buyers come back in force, breakout entries can be considered on a strong move through Wednesday's intraday high, but the better entry now appears to be on a bounce from the 10- dma. LXK should not be able to significantly break the 10-dma if there's still another leg to this upward trend, so our $85 stop still appears to be in the right location. Suggested Options: Shorter Term: The April $90 Call will offer short-term traders the best return on an immediate move, as it is just slightly out of the money. Longer Term: Aggressive longer-term traders can use the July $95 Call, while the more conservative approach will be to use the July $90 strike. Our preferred option is the April $90 strike, which is near the money and should provide sufficient time for the play to move in our favor. BUY CALL APR-85 LXK-DQ OI=1265 at $5.20 SL=3.25 BUY CALL APR-90*LXK-DR OI=1902 at $2.25 SL=1.00 BUY CALL JUL-90 LXK-GR OI=1179 at $5.70 SL=3.50 BUY CALL JUL-95 LXK-GS OI= 291 at $3.60 SL=1.75 Annotated Chart of LXK: Picked on March 14th at $85.77 Change since picked: +2.93 Earnings Date 4/19/04 (unconfirmed) Average Daily Volume = 963 K Chart = --- Renaissancere Ltd - RNR - close: 54.14 chg: +0.58 stop: 52.50*new* Company Description: RenaissanceRe Holdings Ltd. is a global provider of reinsurance and insurance. The Company's business primarily consists of four business units: (1) Catastrophe Reinsurance; (2) Specialty Reinsurance; (3) Individual Risk business, which includes primary insurance and quota share reinsurance, and (4) Renaissance Underwriting Managers, which manages the Company's Property Catastrophe Joint Ventures, its Business Development Joint Ventures, and its Structured Reinsurance Products. (source: company press release) Why We Like It: Surfers ready? It looks like RNR is on its next wave higher. The stock was boosted by the mid-week (Tues-Thursday) rally in the IUX insurance sector but as it typical for RNR the stock continues to march to its own beat. We're very encouraged by its Friday close over minor resistance at $54.00, which proved so troublesome two weeks ago. Short-term technicals like the RSI and stochastics are bullish again and we hope to see RNR surf past the $55 level soon. If you missed the original entry near $51.00 or the suggested entry on the dip towards $52.50 this past week picking new positions could be tough. RNR is less than $2.00 away from our planned exit price at $55.95. Thus we're not suggesting new positions. We are, however, raising our stop loss to $52.50. Suggested Options: RNR is pretty close to our planned exit point so we're not suggesting new entries at this time. Annotated chart: Picked on February 15 at $50.83 Change since picked: + 3.31 Earnings Date 02/03/04 (confirmed) Average Daily Volume: 238 thousand Chart = ************** NEW CALL PLAYS ************** Onyx Pharm. - ONXX - close: 36.07 change: +0.02 stop: 34.00 Company Description: Onyx Pharmaceuticals, Inc. is engaged in the discovery and development of novel cancer therapies utilizing two technology platforms, small molecules that inhibit the proteins involved in excess growth signaling, and therapeutic viruses that selectively replicate in cells with cancer-causing genetic mutations. The company is developing a novel small molecule compound, BAY 43- 9006, in collaboration with Bayer Pharmaceuticals Corporation. Utilizing its proprietary virus technology, the ONXX is developing ONYX-411, a second-generation product that targets cancers with abnormal function of the retinoblastoma tumor- suppressor gene, and is developing Armed Therapeutic Virus products. Why we like it: There's no question the December-February rally in the Biotech index (BTK.X) helped ONXX to sustain its bullish trend, but looking at the price action both before the BTK rally and since the profit taking that began earlier this month and we can see there's something else at work. Whereas the BTK plunged all the way through its 50-dma, ONXX once again found support just above that support level, just as it has on numerous occasions throughout its rally over the past year. The stock has traded in a very consistent manner throughout this period. First breaking out to new highs, then undergoing a mild consolidation, finding support at a higher level and repeating the process. The pullback from the most recent rally found support near $34.50, right at the site of the peak from late January and early February. Note that the bounce that began late last week commenced from just above the 50-dma ($34.22) again. The recent break above $38 represented new all-time highs for the stock, so this recent pullback to confirm support at prior resistance was to be expected. So consistent has the upward trend been, that it hasn't given a single PnF Sell signal since issuing the first buy signal in this series, all the way down at $5.00. Obviously, the stock has long since exceeded the bullish price target, so the PnF chart provides no clarity on an upside objective. Once ONXX breaks above its $38.40 high from earlier this month, the $40 level should be a cinch, so that will be our initial target. A pullback near the $35 level would be preferable for new entries, although there's nothing wrong with entries on further strength either. So long as the 50-dma remains unbroken, we'll look to buy the dips all the way up. The key level of support will continue to be the 50-dma, so we're initially placing our stop at $34, just under that average. Suggested Options: Shorter Term: The April $35 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the April $40 Call, while the more conservative approach will be to use the May strikes. Our preferred option is the May $35 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. BUY CALL APR-35 OIQ-DG OI= 757 at $2.90 SL=1.50 BUY CALL APR-40 OIQ-DH OI=5988 at $0.85 SL=0.40 BUY CALL MAY-35*OIQ-EG OI=3107 at $3.90 SL=2.50 BUY CALL MAY-40 OIQ-EH OI=1452 at $1.60 SL=0.75 Annotated Chart of ONXX: Picked on March 21st at $36.07 Change since picked: +0.00 Earnings Date N/A Average Daily Volume = 569 K Chart = ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ***************** CURRENT PUT PLAYS ***************** Chiron Corp - CHIR - close: 45.90 chg: -0.95 stop: 48.30*new* Company Description: Chiron Corporation, headquartered in Emeryville, California, is a global pharmaceutical company that leverages a diverse business model to develop and commercialize high-value products that make a difference in people's lives. The company has a strategic focus on cancer and infectious disease. Chiron applies its advanced understanding of the biology of cancer and infectious disease to develop products from its platforms in proteins, small molecules and vaccines. The company commercializes its products through three business units: BioPharmaceuticals, Vaccines and Blood Testing. (source: company press release) Why We Like It: The all-important drug pipeline is critical to biotechs and drug companies alike and any time a company discontinues it research means that is one less candidate to recoup their R&D costs. On Friday CHIR announced it would discontinue development of tezacitabine. Here's an excerpt from the company's press release, "the company has decided to discontinue further development of tezacitabine, a next-generation nucleoside analog, based on an analysis of the data from a Phase II trial in patients with gastroesophageal cancer. The compound did not demonstrate sufficient antitumor activity in the trial to satisfy Chiron's predetermined criteria to advance the program." While that's sad news it's actually good news for our put play. The stock's recent slide has picked up speed and volume is ticking higher too. CHIR is fast approaching our exit range of $45-44 and its Point-and-figure chart vertical count at $44.00. We're going to try and exit ahead of any crowd that might try and cover their shorts as CHIR approaches $44. We're going to set our official exit point at $45.00, which is already round-number psychological support. If you think CHIR has farther to fall feel free to keep the play open. Readers should realize that nothing tends to fall in a straight line for very long and CHIR is getting rather oversold. We will also lower our stop to $48.30 following the simple 21-dma. Suggested Options: CHIR is less than $1.00 from our exit point at $45.00 so we are not suggesting new entries. Annotated Chart: Picked on February 24 at $49.11 Change since picked: - 3.21 Earnings Date 01/28/04 (confirmed) Average Daily Volume: 1.7 million Chart = --- Eaton Corp. - ETN - close: 56.25 change: -1.00 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: To say last week was a volatile ride for ETN investors would be an understatement, as the stock was rejected both at support and resistance, keeping it confined between the $54.50 and $58.00 levels. After a couple more failed attempts to decisively break below $54.50, the buyers appeared and sent the stock sharply higher on Wednesday in response to news of the company's acquisition of the Electrum Group. The stock gapped up above $57 and spent the next two days failing to advance significantly. That had us eyeing a potential rollover entry and aggressive traders got just that on Friday when ETN tipped over in response to the broad market weakness. We're not out of the woods yet though, as we really need to see a break back under $56 to confirm real downside potential. And conservative traders may still want to wait for the break under $54.50 before entering the play. Resistance at $58 still looks firm and it should get stronger early next week, as the 20-dma ($58.13) drops below that level. Maintain stops at $58.75, just over the 50-dma. Suggested Options: Aggressive short-term traders can use the April 55 Put. Aggressive traders looking for more insulation against time decay will want to utilize the July 52 strike. Our preferred option is the April 55 strike, as it is currently near the money and should provide ample time for the play to move in our favor. BUY PUT APR-55*ETN-PK OI= 166 at $1.25 SL=0.75 BUY PUT APR-52 ETN-PX OI= 74 at $0.55 SL=0.40 BUY PUT JUL-52 ETN-SX OI= 110 at $1.80 SL=0.90 Annotated Chart of ETN: Picked on March 11th at $54.82 Change since picked: +1.43 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 1.15 mln Chart = ---- Invitrogen - IVGN - close: 68.11 chg: -0.20 stop: 70.01 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: IVGN tried to rally mid-week with the bounce in the BTK biotech index but both the BTK and IVGN struggled with resistance. The resulting failed rally on Friday looks like a tempting entry point for new bearish positions. Obviously with the bounce some of IVGN's technicals look a bit more bullish but we're still seeing more volume on the declines than the rallies. That doesn't suggest a lot of enthusiasm from the bulls. If you're not willing to consider the failed rally at resistance of $70.00 and its simple 100-dma then look for a bit more confirmation with a move below the $67.50 mark, which was support for the last day and a half. We're going to keep our stop loss at $70.01 and our short-term target remains at $63.00 the same as its P&F price target. More aggressive traders can hope for a move to the simple 200-dma near $60.00. You might want to keep an eye on AMGN, the biggest component in the BTK index, and the BTK index itself. Both look vulnerable to more selling next week and that's good news for us but if they begin to strength reconsider your stops. 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= 206 at $4.00 SL=2.00 BUY PUT APR 65 IUV-PM OI= 461 at $1.80 SL=0.95 BUY PUT APR 60 IUV-PL OI= 217 at $0.70 SL= -- BUY PUT MAY 70 IUV-QN OI=1055 at $5.30 SL=3.25 BUY PUT MAY 65 IUV-QM OI= 752 at $3.00 SL=1.50 Annotated Charts: Picked on March 11 at $ 67.26 Change since picked: + 0.85 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 910 thousand Chart = ************* NEW PUT PLAYS ************* QLogic Corp - QLGC - close: 40.53 change: -1.58 stop: 42.30 Company Description: Since 1993, over 50 million QLogic products have shipped inside servers, workstations, RAID subsystems, tape libraries, disk and tape drives. These products were delivered to small, medium and large enterprises around the world. Powering solutions from leading companies like Cisco, Dell, EMC, Fujitsu, Hitachi, HP, IBM, Network Appliance, Quantum, StorageTek and Sun Microsystems, the broad line of QLogic controller chips, host bus adapters, network switches and management software move data from storage devices through the network fabric to servers. A member of the S&P 500 and NASDAQ 100, QLogic was recently named to Fortune's 100 Fastest Growing Companies list for the fourth consecutive year and to Forbes' Best 200 Small Companies for the fifth consecutive year. In addition, QLogic was named to Business Week's list of 100 Hot Growth Companies for 2003. (source: company press release) Why We Like It: It was a rough week for investors in QLGC. The stock traded lower on Monday after rumors surfaced that a third player in the HBA market may emerge. Right now HBA's or host bus adapters, that are needed for storage area networks is an industry dominated by QLGC and EMLX. A third competitor would immediately squeeze margins in a fight for market share. QLGC managed to rally back toward resistance in its 10 & 21-dma's but that didn't last very long. Weakness in the semiconductor sector (SOX.X) was very pronounced on Friday. The SOX dropped 3.6% and closed on its 200-dma. QLGC followed suit with a 3.75% drop and closed above round-number psychological support at $40.00. If you look at the intraday chart of the SOX the drop looks pretty ugly and leads one to believe that the selling will continue on Monday. However, it's easier to believe that we may see a bounce, even just a small one, from the 200-dma. Thus we're expecting a small bounce in QLGC and plan to use a TRIGGER at $39.99 to open the play for us. Until then we'll just be spectators. However, more aggressive traders might want to look for another failed rally under the $42.00 level in QLGC to open positions. Once QLGC breaks support at $40.00 the next level of true support appears to be the $32.50 range. We do suspect some support at the $35.00 level and plan to make that our initial target. If we are triggered our stop loss will be $42.31 but we plan to ratchet it down quickly as QLGC falls. P&F chart readers will note that its bearish vertical count is only $40.00. That could be a call for caution but sometimes a stock will overshoot its P&F price target and this looks like a good candidate for just such an event. Suggested options: We're going to suggest that short-term traders mull over the April and July puts. Our favorites are probably the July 40's but the April 40's look good too. BUY PUT APR 35.00 QLC-PG OI= 931 at $0.55 SL= -- BUY PUT APR 37.50 QLC-PU OI=1067 at $0.80 SL=0.40 BUY PUT APR 40.00 QLC-PH OI=2541 at $1.65 OI=0.85 BUY PUT APR 42.50 QLC-PV OI=1809 at $3.10 SL=1.65 BUY PUT JUL 37.50 QLC-SU OI= 326 at $2.40 SL=1.20 BUY PUT JUL 40.00 QLC-SH OI=3444 at $3.50 SL=1.75 Annotated Chart: Picked on March xx at $ xx.xx <-- see trigger Change since picked: - 0.00 Earnings Date 04/27/04 (unconfirmed) Average Daily Volume: 3.8 million Chart = --- Silicon Labs. - SLAB - close: 51.35 change: -2.53 stop: 55.75 Company Description: Silicon Laboratories designs, manufactures and markets proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. Why we like it: As goes the Semiconductor sector (SOX.X), so goes the rest of the NASDAQ, so the saying goes. Well, if Friday's action is any indication, the Tech bulls are in trouble. The $470-475 level has been rock solid support since the breakout through that level in late October. The SOX led the sector loser list on Friday, with a 3.6% decline, resulting in a close right on the 200-dma at $462. The carnage in the SOX tipped the scales in SLAB, which up until Friday had been trying to stage a rebound from just above the 50-dma ($52.66). Selling off with real conviction, the stock smashed through its 50-dma in the process of delivering a 4.69% loss. It appears the only thing that stopped the slide was the bottom of the early February gap near $51. That and the fact that the clock ran out. Turning to the PnF chart, the picture gets even gloomier for the bulls, as the stock produced its first Sell signal since the first of the year. That sell signal gives a tentative bearish price target of $45, which lines up nicely with the 200-dma ($44.75), making it an ideal target for the play. But it won't likely make a straight run towards that goal, with the PnF bullish support line at $49. The first test of support is usually painful for the bears, so we need to be careful here. Aggressive traders can certainly enter on a breakdown below Friday's low, but only if they're willing to take the risk of a strong bounce from the $49 area, which is also the site of the lows from early February. The better entry strategy will be to wait for that bounce to occur and look for entries on a rollover from the $52.50-53.00 area, with the 50-dma now likely to act as resistance. Once SLAB trades the $50 level, the PnF price target will drop to $42, near the site of strong support from last December and that is certainly a viable target for more aggressive traders. Due to the sharp decline over the past two days, we need to use a fairly wide stop to allow for a near-term bounce.. Initial stops go at $55.75, just over Thursday's intraday high. Suggested Options: Aggressive short-term traders will want to use the April 45 Put. Those with a more conservative approach will want to use the April 50 put. Aggressive traders looking for more insulation against time decay will want to utilize the July 45 strike. Our preferred option is the April 50 strike, as it is currently at the money and should provide ample time for the play to move in our favor. BUY PUT APR-50*QFJ-PJ OI=1061 at $2.25 SL=1.00 BUY PUT APR-45 QFJ-PI OI=2681 at $0.75 SL=0.35 BUY PUT JUL-45 QFJ-SI OI= 328 at $3.20 SL=1.50 Annotated Chart of SLAB: Picked on March 21st at $51.35 Change since picked: +0.00 Earnings Date 1/26/04 (confirmed) Average Daily Volume = 1.40 mln Chart = ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ********** 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 Sunday 03-21-2004 Sunday 4 of 5 In Section Four: Leaps: The Hibernation Is Over Option Spreads: It’s Easy Being Green – With Profit ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ***** LEAPS ***** The Hibernation Is Over By Mark Phillips mphillips@OptionInvestor.com Fasten your seatbelts, boys and girls. The ride is about to get bumpy! For the first time in a long time, we have a lot to talk about in terms of what's going on in the market and I don't want to waste any time. So let's get to it. The bear woke from his year-long hibernation and made his first foray out to gnaw on some weak bulls 2 weeks ago. The first hint that perhaps this was more than some mild profit taking was the break of the 50-dma on the DOW on March 8th and the drop through the 50-dma on the SPX 2 days later. There are a lot of factors at play here, but I'm going to try to lay out some of the important issues we need to pay attention to as we head into the April earnings cycle and then the summer doldrums beyond that. Last week, we talked about the recent changes to the PnF charts for the major indices and their respective Bullish percent readings. For the most part, that picture is unchanged, but let's revisit it just the same. First up, let's talk about Bullish Percent (BP). The DOW is still in Bull Correction at 80%, the SPX is still in Bull Correction, but gave up a bit of ground to 77.2%, and the NDX actually managed to hold at 44% in Bear Confirmed status. As I said, very little change here. But turning to the actual PnF charts of the major indices, we see that the picture has worsened from a bullish standpoint. The Sell signal on the DOW lengthened, stretching the bearish price target down to 9400, which is significantly below the bullish support line at 9550. In the PnF sense, a break below 10050 will issue another Sell signal and give credence to the notion that the DOW has significantly further to fall before finding strong support. The SPX is still a long ways from issuing any sort of bearish PnF signal, but as you'll see below, there are some serious problems brewing for the bulls here. But for now, the bulls don't have any warning signs flashing in terms of either BP or PnF charts. What the bears will want to see is a rebound back to the 1140 level, giving a 3-box reversal up and then a break down under the 1100 level. That is the most likely scenario for a future PnF Sell signal and you can bet we'll be watching that picture closely. The PnF chart of the NDX looks downright ugly. The current Sell signal on the PnF chart has a target of 1390 and we got really close to that on Friday, with the close at the low at 1398. It is the pattern on the PnF chart that causes the most concern though, as the failed rally attempt was turned back right at the bullish support line and a break to 1390 or below will give a reinforcing Sell signal. If you take the time to look, you'll notice that the NDX is now drawing a bearish resistance line, which rests up at 1470. And reinforcing that resistance, we can see the 50-dma (1484) on the standard price chart starting to curl down for the first time in a year. Aside from the NASDAQ, I'd have to say that the big picture from the PnF and BP world is indeterminate. There are some signs of weakness, but nothing conclusive yet. It is the rest of the picture I want to paint this afternoon that I think will have the bulls sitting up and taking notice. First up, let's revisit the monthly chart of the SPX, something we haven't done for several months and I think you'll agree it is due for another look. Monthly Chart of the S&P 500 I'm the first to admit, I really didn't think the market would make it this high, but they don't call it the Great Humiliator for nothing. But the POTENTIAL bearish divergence we were looking for late last year appears to still be on course. Note how price ran into a veritable brick wall at the 50-month moving average and has since tipped over pretty convincingly. We do have a bearish cross on the monthly Stochastics, but that won't really confirm until at least the fast line (blue) crosses down out of overbought territory. Right now we have much higher oscillator highs and a slightly lower price high. That's textbook bearish divergence if it confirms. Next up, let's take a look at price action from the standpoint of Dow Theory. As I've detailed in the past, Dow Theory looks at the inter-relationship of the different DOW indices -- Industrials, Transports and Utilities. I view the action between the Industrials and the Transports as the most significant and if the charts can be believed, we're at a very important inflection point right now. Daily Chart Montage -- Dow Industrials vs. Dow Transports The Transports surged to a new high in late January, along with the DOW pushing through the 10,600 barrier. New highs on both indices, confirmed by new highs on the Utilities (not shown) was a Bull Confirmed signal, but there were a lot of internal factors pointed to this being a weak confirmation. The first hint of a problem was the Industrials pushing to a new high in mid-February, but with the Transports having broken down and posting a much lower high. The key event to watch after that lower high on the Transports was whether or not the 2/03 low of 2815 would be violated. Sure enough, that low was taken out with the weakness in the past couple weeks, and that is the first leg of a Dow Theory Bear Confirmed signal. Next we turn our attention to the Industrials. As we've discussed, the DOW suffered a significant breakdown, taking out the 50-dma and then smashing through horizontal support near 10,400. That plunge didn't stop until just under the 10,100 level and it appears that rebound is already losing steam. If the Industrials break below the 10,092 low of 3/15, then we'll have a confirmed Dow Theory Bear signal. The trifecta and final confirmation will come from the Utilities breaking their own 50- dma and taking out the 3/12 low of 272. Take a look at the weekly charts of both the Transports and the Industrials and you can see the Stochastics are in full-on power dives towards oversold territory. They might turn on a dime and give short-cycle bullish reversals starting on Monday, but that isn't the way I'd place my bets. But let's not stop there when there is so much other very interesting data to look at. Next up is our trusty friend the VIX. Putting aside the issues of the integrity of the data due to the recalculation that was put in place last year, I think we can state that the VIX is coming back to life. Weekly Chart of the VIX This is the third time since last April that the VIX has attempted to move above the upper boundary of the descending channel. Both of the earlier attempts in August and September were short-lived, but this time things look a bit different. Not only did the VIX close over the top of the channel a week ago, but this week it spent the entire week ABOVE the top of the channel. I may be the eternal optimist, but it certainly looks like the VIX is finally moving out of the doldrums that have kept it becalmed for the better part of the past year. We've talked a fair amount in the past about the fictional rally in the DOW and the fact that when we pull out currency effects, we're left with a market that has been flat-lined for much of the past year. With all the strength seen in the metals of late, I thought it would make sense to take another look in that area. First up is the DOW vs. Gold chart that we've looked at in the past. Weekly Chart of the DOW Industrials vs. Gold With the break of the year-long rising trendline last week, the picture looks pretty ominous from where I sit. Gold really hasn't moved up very far since its recent pullback, but this trend break could be an early sign that mining stocks are going to be coming back into favor. I'm sure you've noticed that Silver has been on the move as well, as it often moves in tandem with gold. It has been a bit of a laggard to the yellow metal until fairly recently and then it really took off. If we use it to measure the strength of the equity market, we get a more exaggerated picture. Weekly Chart of the DOW Industrials vs. Silver The ascending trend vs. silver broke much earlier, as the price of silver sky-rocketed through the $6.00 level and just kept right on soaring. If we view silver as a currency, we can see just how much more valuable it has become in relation to the paper shares of the DOW. Now as we know, silver is both a precious metal and an industrial metal. Gold has been rather stagnant for the past couple months as it endeavors to build a new higher base from which it can launch the next leg of what I feel will be a history- making bull market. On the other hand, silver has been soaring. Could it be the demand for industrial metals is rising? What's one of the key industrial metals that can be used as a metric for whether an economy is heating up? If you guessed copper, give yourself a pat on the back! Weekly Chart of the DOW Industrials vs. Copper All right, I don't care how you slice it, that is an ominous picture. When the DOW vs. Copper ratio broke support just under 100, it just went into absolute free-fall. You see all of these metals represent something tangible that has intrinsic value. The DOW does not. Oh sure there's the nebulous assumption of value as when you buy shares of the DOW, you're getting a piece of 30 companies that provide a stream of earnings, some of which is returned to share-holders in the form of dividends. With the exception of MO with a yield of 4.94%, the dividend yield from the rest of the DOW is a joke and I don't see how anyone can justify buying the DOW even at these levels and thinking that they're buying anything with intrinsic value. No, they're buying a piece of paper solely on the hope that it will go up in price so they can then sell it to someone else at a higher price. With dividend yields absurdly low and P/E ratios absurdly high by historical measures, none of my readers should mistake buying the DOW at current levels as anything close to purchasing a tangible asset. That said, I wouldn't say that equities can't rise to even higher levels. It just won't happen on the basis of value. Trading the swings is one thing and a practice that we traders engage in on a regular basis. But 'buy and hold' investing at this level is simply insane, in my "never to be" humble opinion. Coming back to our DOW/Copper chart, that action is largely due to the price action in copper, as up until the past 2 weeks, the DOW had essentially been flatlined for weeks. So let's take a look at a chart just of copper and see what it has to say. Weekly Chart of the DOW Industrials vs. Copper In order to show all the pertinent details, I had to go to a monthly timeframe, as we can see the futures price is now back to testing the highs from 1995. A very clear double bottom formation formed between mid-1999 and late 2001, then price broke above the multi-year descending trendline in early 2003 and then we got a confirmation of the double-bottom pattern as price moved through 95 late last year. That's when the price of the metal simply took off. Copper is up nearly 40% in less than 3 months. What is going on here?? Copper is NOT a precious metal at all -- it is simply an industrial metal and its price tells us one of two things. Either demand is strongly rising or else we're getting a very clear confirmation of rampant inflation. On the one hand, we can clearly see the root cause for a demand- driven rise in price. China and much of the Far East are coming on line and building up industrial economies of their own and they are demanding vast quantities of everything from copper to crude oil to steel. Vast quantities of global production are moving overseas due to the cost of labor, and that (along with Greenspan's productivity miracle) are causing a nearly non- existent rebound in domestic employment. But the little talked about reality is that at the same time, China and India are in the process of building up strong industrial economies so that in the future they can be self sufficient. The other side of the coin is perhaps investors have peeked around the curtain and seen the reality that Emperor Greenspan really does have no clothes. All the protestations that risks between inflation and deflation are roughly balanced is a ruse. Imports from China and much of the far east are the equivalent of imported deflation. This is being countered by the unprecedented levels of monetary inflation that the Fed has engaged in over the past 3 years. Print enough dollars and their value will go down. While that works great for debtors -- like the U.S. government that is seriously up to its eyeballs and getting deeper to the tune of half a trillion dollars per year -- it has a long-term inflationary effect. Not by making products more expensive, but by making our dollars worth less and rapidly on the way to worthless. I think what we're seeing in the Copper chart and to a lesser extent on the Silver chart is the vote by the big money pros that the Fed is going to win and that monetary inflation is going to beat imported deflation, at least over the near term. We've seen that reality borne out in the recent CPI reports and with last week's release (finally) of the PPI, we saw that even with an extra six weeks of time to manipulate the data, the headline number came in at 0.6%. I don't care how the wonks at the BLS want us to view the data on an annualized basis, I do my math the old-fashioned way. Multiply 0.6% by 12 months and I get 7.2% as an inflation rate. I wonder what we'll see when the February numbers arrive. I've gone on much longer than I originally intended to with this discussion, but as noted at the top, I told you there was a lot to cover. And in reality, I've glossed over a lot of issues, simply due to the lack of time and space. In a nutshell, I think the commodities markets are talking, no make that screaming at us that inflation is here right now. The Fed got their wish and will get the privilege of doing battle with the inflation monster again. I expect we'll see inflation come on much more strongly in the months ahead and even if the employment market does not improve, the Fed will be forced to act by raising interest rates to cool off the rampant price rises that are already incredible. Just remember, if you want to understand the absolute core of what is happening in ALL financial markets, it is all about the dollar. Greenspan and Bernanke have printed literally tons of them and that additional supply has significantly lessened their value. As a result, everything that is denominated in dollars is rising. Real estate, stocks, bonds, commodities, art, jewels, it's all the same. The value in dollars is rising, even though the TRUE value hasn't changed. All right, I could go on about this topic for several more pages, but I must get to the individual plays before I run into my deadline. Fortunately, it was a pretty calm week for our playlist, all except for our SMH play. So let's take a look, before it gets any later. Portfolio: SMH - If the Semiconductors are the key to the Technology market, then the picture is turning downright ugly. We've waited long enough for this play to come to fruition and it looks like we're finally going to be rewarded. Support for the SOX in the $470-475 area finally broke on Friday and the index fell right to its 200- dma. The SMH broke down below the bottom of its descending channel and closed beneath its 200-dma ($37.88). More importantly, the PnF chart finally issued that elusive Sell signal with the trade under $38 and now we have a bearish price target of $30 to work with. I would expect a near-term bounce, but the bearish trend got a lot stronger last week. Continue to keep stops at $42.50 and look for next support in the $36-37 area. My expectations are for a decline to at least the $32-33 level before a solid bottom can be put in place. NEM - We've had to wait longer than I initially expected, but gold and gold stocks appear to be in the final stages of building their higher base. No significant support levels were violated in this pullback from the recent highs, as gold, the XAU index and our NEM play have all held up well above their respective 200-dmas. The dollar may be just about done with its oversold bounce and if that is in fact the case, we can look for NEM to resume its upward trend quite soon. The first sign that the bullish trend is really resuming will be for NEM to move back over $46 on a closing basis and then we can feel comfortable raising our stop to $40. For now though, we're still in consolidation mode, so our stop remains down at $37. Near-term dips into the $42-43 area are still viable for fresh entries. Our insurance put served its function by protecting our position throughout the past few months of consolidation. Since March options expired on Friday, we no longer have any insurance on the position, but I'm thinking it may no longer be necessary. HD - As if to just cause us a little added consternation, HD bounced back pretty strongly last week. Rebounding back into the middle of the bear flag pattern we've been watching, the stock pushed right up to the top of the long-term descending channel near $37 before rolling over on Friday. The jury is still out on whether the bulls or the bears are going to win this stalemate, but my vote still goes with the bears. Look first for a breakdown under $35 and then the 200-dma to confirm the downtrend is getting underway. One note from the weekly chart that looks encouraging is the fact that we have a confirmed bearish crossover on the Stochastics oscillator. I still like entries near the top of the falling channel, with stops placed comfortably above strong resistance and the 200-week moving average at $41. MLNM - It looks like we could have indeed gotten a better entry point by waiting for a dip to the $17 level or below, but MLNM hasn't really given us any cause for concern yet. Well actually, there is one potential problem and that is the fresh PnF Sell signal, that came complete with a bearish price target of $14.50. Fortunately, that is above our $14 stop, so things still look all right. MLNM did dip below the bottom of its rising trendline, but recovered back above it by the end of the week. The stock remains in the consolidation zone that it has inhabited for the past 3 months, with the bottom of that horizontal channel holding firm near $16.75 last week. I still like entries near current levels, but more conservative traders may now want to wait until the stock can get back over $19.50 and issue a new Buy signal before playing. One note about MLNM and its PnF chart -- it has given a number of false Sell signals in the past year, none of which have achieved their respective targets. And throughout this process over the past year, MLNM has yet to challenge its bullish support line. CHK - Without sounding blasi, I have to say not much of substance happened with our CHK play last week. It continues to be confined within its lower rising channel that we pointed out last week. Natural gas prices are still supporting a bullish position here and we're now just waiting for the necessary consolidation to run its course before the bullish trend reasserts itself. CHK is holding up much better than the broad market, so that is one more notch in favor of the play. Look for a breakout over $13.50 to confirm the bulls are once again gaining traction and maintain stops at $11. SNDK - Given the carnage in the Semiconductor sector last week (especially on Friday) I'm actually pleased with the performance of our new bullish play on SNDK. The stock did fall back towards support, but not with any great conviction. This continues to feel like some healthy consolidation before the stock can finally get moving back up the charts. The first milestone that will confirm the stock's bullish prospects will be a breakout over the $30 level. On the other hand, a break below the February low near $23.50 would be a serious concern. Maintain stops at $21.50. LUV - It really hasn't been a very encouraging start to our LUV play, but given the weakness in the rest of the market and particularly the Transports, it's hard to fault the stock. It's still holding within the descending channel and we won't have a strong bullish indication until it can close above the top of that channel (currently $14.25). Further weakness just gets us closer to what our initial entry point was supposed to be, and I favor rounding out to full positions on dips near the $12.00-12.50 area. This is an aggressive play, as we're attempting to pick a bottom in a weak sector, but I think it is a warranted risk, given the stock's performance over the past few years. Watch List: TYC - We've seen TYC struggling to hold above support for the past couple weeks, after notching a new recent high above $30. So the question we have to ask is "Is the trend reversing?" That's a valid question, as we can see on the weekly chart that the Stochastics have given a confirmed Sell signal, dropping out of overbought again. As noted previously, that has happened twice before in the past year and both times presaged a bullish entry point. So I'm inclined to stick with the dominant pattern on the daily chart, that of a continually rising channel that has contained price for the past year. Our entry target at $26 is still near the bottom of the channel and just over the 100-dma, so that strategy still makes sense. Buy a bounce from the bottom of the channel and set a liberal stop at $23, which should then be under the 200-dma. EBAY - After the technical damage that has been done to the overall market in the past 2 weeks, I'm having some serious second thoughts about our EBAY play. Weekly Stochastics are threatening to give a sell signal and support at the 50-dma is weakening. EBAY is set to report earnings on April 21st, so if there's going to be a run into the event, it will likely start in the next week or two. We'll stick with the action plan of buying a dip under $67 and then rebound back above. But I want to put the caveat in that this is a very aggressive play, given its rich valuation, extended nature on the daily, weekly and monthly charts and the nascent weakness in the overall market. The other side of the coin is that EBAY is showing tremendous strength relative to all the major indices. I still like the play, but understand the risks before venturing in. Radar Screen: WMB - I'm still on the fence about initiating a Portfolio play on WMB. Strength in the energy sectors has helped the stock stabilize above the 200-dma, but we have the issue now of a Sell signal on the PnF chart with a price target down at $5.50. I still favor a wait and see attitude here, especially with the weakness we're seeing in the rest of the market. APA - More and more, it looks like we missed our ride on APA. Rather that weakening with the rest of the market, the stock is flirting with a breakout to new highs. I'm never wild about initiating new bullish long-term plays at new all-time highs, so clearly we just need to wait for a better entry. If APA makes a solid breakout, then I think we'll have to drop it and hope for a better opportunity in the future. GM - I really expected to see more of a bounce in GM thatn what we saw last week, but then I really wasn't expecting to see the overall market behave this badly either. I like the downside in the stock, but with weekly Stochastics already oversold, I just can't see a viable entry at this time. My hope is that we'll see a strong bounce from the 200-dma and that bounce will run out of gas below the top of the long-term descending channel. When that move rolls over up near the $50-52 areas, then we'll have a technical setup that we can sink our teeth into. DJX - I said I wouldn't consider another bearish DJX play until the market gave us a compelling reason to do so. Well, I think from all the commentary above, you can see that the market has obliged on that front. I'll be listing a new Watch List play on the DJX next weekend, and we'll be targeting entries in the $104- 105 area, with a downside objective near $96. I would have added it this weekend, but I simply ran out of time. Closing Thoughts: If it sounds like I'm getting a bit more conviction to the downside, then I've amply conveyed my mindset. There are a lot of things beginning to work in the bears advantage, with PnF Sell signals on the DOW and NDX, the SOX breaking down, the VIX coming back to life, a lack of real employment growth and rampant inflation (to the point that even the government bean counters can't hide it). We can't go whole hog bearish, but I think we can start thinking about the downside for position trades. I still think it will be into 2005 before either the bottom of the equity market falls out or we see rising interest rates from the Fed, but that view is subject to change based on what we see from the PPI/CPI reports in next month or two. Regardless of what emerges on that front, it looks like investors are starting to wake up to the reality that perhaps the bear market of 2000-2002 was just on holiday -- it didn't go away. Have a great week! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: TYC 03/07/04 $26 JAN-2005 $ 30 ZPA-AF CC JAN-2005 $ 25 ZPA-AE JAN-2006 $ 30 WPA-AF CC JAN-2006 $ 25 WPA-AE PP JUL-2004 $ 25 TYC-SE EBAY 03/14/04 $67 JAN-2005 $ 70 ZQX-AN CC JAN-2005 $ 65 ZQX-AM JAN-2006 $ 70 YEU-AN CC JAN-2006 $ 65 YEU-AM PP JUL-2004 $ 60 XBA-SL PUTS: None New Portfolio Plays None New Watchlist Plays None Drops None ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ************************ Option Spread Strategies ************************ It’s Easy Being Green – With Profit By Mike Parnos, Investing With Attitude The profits continued to flow. This month we didn’t need to back up the truck to carry them away. A hatchback will do. But the CPTI now has an additional $1,950 in its coffers, compliments of speculators everywhere. The March option cycle was the fourth cycle in the second year of tracking our Couch Potato Trading Institute portfolio. With our $1,950 profits, we’ve now accumulated a total of $11,430 in five short months. _________________________________________________________________ Summary Of March Positions OEX Iron Condor – Profit: $1,440 RUT Iron Condor – Profit: $2,200 MNX Iron Condor – Loss: $500 BBH Siamese Condor – Loss: $1,150 Total Profit: $1,950.00 _____________________________________________________________ REVIEW OF MARCH CPTI POSITIONS OEX (S&P 100 Index) Iron Condor – 543.68 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). Maintenance: $12,000. Profit: $1,440. 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. Profit: $2,200 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). Total net credit was $.90 ($1,800). Our range was violated and we closed the position for $2,300. We took in $1,800. Result: $500 loss. BBH (Biotech Index) - Siamese Condor - $144.62 Sold 10 BBH March $145 calls and sold 10 BBH March $145 puts for credit of $6.95. Bought 10 BBH March $160 calls and 10 BBH March $130 puts for debit of $.70. Total net credit was $6.25 ($6,250). Our profit (safety) range & bailout points were $138.75 to $151.25. We closed the position for a loss of $1.15 ($1,150). ______________________________________________________________ NEW APRIL CPTI POSITIONS (From Thursday’s Column) April Position #1 – SPX Iron Condor – 1109.78 We sold 4 SPX April 1075 puts and bought 4 SPX April 1050 puts for credit of: $2.50 (x 4 contracts = $1,000). Then we sold 10 SPX April 1170 calls And bought 10 SPX April 1180 calls for a 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 – 570.74 We sold 10 RUT April 530 puts and bought 10 RUT April 520 puts for a credit of $1.10. Then sold 10 RUT April 610 calls and bought 10 RUT April 620 Calls for a credit of $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 Sold 10 XAU April 95 puts and bought 10 XAU April 90 puts for a credit of $.85 (x 10 contracts = $950). Sold 10 XAU April 110 puts and bought 10 XAU April 115 puts for a credit of $.55 (x 10 contracts = $550). Total net credit: $1.40. Potential profit: $1,400. Maximum profit range $95 to $110. Safety range: $93.60 to $111.40. _____________________________________________________________ April Position #4 – OSX Calendar Spread Plus – 105.56 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. Bought 10 OSX June $115 calls (36 delta) and sold 10 OSX April $115 calls (23 delta) at a cost of $2.15 ($2,150). We also put on an April $100/$90 bull put spread and took in an extra $.70 ($700) to reduce the cost basis to $1.45 ($1,450). ______________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $34.75 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 – 543.68 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 maturing in seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We’re trading the remaining $26,000 to generate a “risk free” return on the original investment. Long Term: 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) March: Bought back 3 OEX March 585 calls for $.10 & sold 3 of March 560 calls for $1.35. A credit of $1.25 x 300 = $375.00. March: Bought back March 560 calls for $.15, locked in profit of $120 x 3 = $360. Current cash position is $3,320 ($1,620 plus the unused $1,700). April: New Position OEX Bull Put Spread - $543.68 Sell 5 OEX April 515 puts and buy 5 contracts of April 505 puts for credit of $.90 (x 5 contracts = $450). Sell 5 OEX April 570 calls for $1.35 (x 5 contracts = $675). _____________________________________________________________ MARCH QUICKIE RESULTS – Batting 100% We were three for three this month. March quickies yielded a total of $3,700 of profit. Combination of luck and skill. That’s a great combination. Quickie #1: RUT – 570.74 – Iron Condor Sold 10 RUT March 560 puts & bought 10 RUT March 550 puts for a credit of $.65 (x 10 contracts = $650). Sold 10 RUT March 600 calls and bought 10 RUT March 610 calls for credit of $.80 (x 10 contracts = $800). Total net credit of $1.45. Potential profit: $1,450. Result: $1,450 profit. Quickie #2: BBH – 143.62 – Siamese Condor Sold 10 BBH March $145 calls and sold 10 BBH March $145 puts. Bought 10 BBH March $155 calls and 10 BBH March $135 calls. Total net credit of $3.45 (x 10 contracts = $3,450). The closer BBH finished to $145, the more we’ll make. BBH finished at $143.62. We bought back the $145 put for $1.45. Profit: $2,000. Quickie #3: QQQ - $34.75 – Straddle Bought 10 QQQ March $36 puts and bought 10 QQQ March $36 calls for a total debit of $1.00 ($1,000). We risked a buck. QQQs tanked at end of the day Friday. Sold the $36 put for $1.20. Profit: $200. _____________________________________________________________ EOY Update QQQ ITM Strangle - $34.75 Early last week we bought back our $38 call for a nickel and rolled down to the $36 call for $.95. Then, we rolled from the March $37 put to the April $37 put for $.30. Total of $1.20 x 10 contracts = $1,200. We own the 2005 $33 calls and the $2005 $43 puts. Thus far (in three months) we have taken in $4,200. March OEX Iron Condor – 543.68 We sold 15 March OEX 595 calls and bought 15 March OEX 605 calls for a credit of $.55. Then we sold 15 March OEX 545 puts and bought 15 March OEX 535 puts for a credit of $.95. Our total net credit is $1.50 (x 15 contracts - $2,250). Our maximum profit range was 545 to 595. We took in $2,250. We were the victims of a last hour downdraft and the OEX settled at 543.68. That means we give back $1.32 of the $1.50 we took in. Our profit was a whopping $270.00 ($.18 x 15 contracts). Hey, it covered commissions with enough left over for a massage and a . . . . Some OI traders got out earlier and kept a larger portion of their profits. Good for you! New EOY Position: April OEX Iron Condor – 543.68 Sell 15 OEX April 510 puts and buy 15 OEX April 500 puts. Then, sell 15 OEX April 570 calls and buy 15 OEX 580 calls for a total credit of about $1.55 (x 15 contracts = $2,325). Maintenance: $15,000. Profit potential: $2,325. Maximum profit range of 510 to 570. _____________________________________________________________ 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. ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ********** 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 Sunday 03-21-2004 Sunday 5 of 5 In Section Five: Spreads/Straddles/Combos: A Vote Of "No Confidence!" ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ************************ SPREADS/STRADDLES/COMBOS ************************ A Vote Of "No Confidence!" By Ray Cummins The major equity averages plunged Friday, giving back all of their recent gains, as investors showed their concerns about the sluggish economic recovery. The Dow Jones industrial average finished 109 points lower at 10,186 with defense firm United Technologies (NYSE:UTX) leading the dive in the blue-chip average. The technology-laden NASDAQ Composite Index slid 21 points to 1,940 as semiconductor shares continued to slump. The Standard & Poor's 500 Index dropped 12 points to close at 1,109, with steel stocks among the few groups enjoying buying pressure. The quadruple-witching expiration of options led to choppy trading with moderate volume. Roughly 1.4 billion shares changed hands on the New York Stock Exchange and about 1.6 billion shares traded on the NASDAQ. Declining issues swept past advancing stocks by a 3 to 2 margin on both the NYSE and the technology exchange. The bond market drifted lower with the price of the 10-year benchmark note falling 5/32 while it's yield climbed to 3.78%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 03/19/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield LSCP MAR 17 17.10 20.27 0.40 6.20% 2.34% PCLN MAR 22 21.70 24.61 0.80 7.85% 3.69% AMLN MAR 20 19.55 23.65 0.45 6.42% 2.30% ATRX MAR 22 22.05 24.41 0.45 6.79% 2.04% BRCM MAR 37 36.95 37.95 0.55 4.29% 1.49% OSTK MAR 20 19.35 30.01 0.65 10.25% 3.36% NEOL MAR 17 16.95 20.80 0.55 10.48% 3.24% ADEX MAR 20 19.55 20.00 0.45 8.22% 2.30% ALXN MAR 20 19.70 22.29 0.30 6.05% 1.52% APPX MAR 30 29.70 42.61 0.30 4.59% 1.01% ATRX MAR 22 22.20 24.41 0.30 6.03% 1.35% MRVL MAR 37 37.10 41.55 0.40 4.40% 1.08% NEOL MAR 17 17.30 20.80 0.20 5.25% 1.16% OSTK MAR 20 19.70 30.01 0.30 6.70% 1.52% SEPR MAR 17 17.25 46.47 0.25 5.37% 1.45% ADEX APR 20 19.45 20.00 0.55 5.64% 2.83% ALXN MAR 22 22.05 22.29 0.24 5.55% 2.04% KMRT MAR 30 29.65 38.13 0.35 6.19% 1.18% NEOL APR 15 14.55 20.80 0.45 6.79% 3.09% OSTK MAR 25 24.65 30.01 0.35 9.74% 1.42% PKZ MAR 25 24.60 28.66 0.40 8.63% 1.63% AAPL MAR 25 24.65 25.86 0.35 9.53% 1.42% AMLN APR 22 21.80 23.65 0.70 6.68% 3.21% APPX APR 32 32.48 42.61 0.90 5.98% 2.77% ASKJ MAR 25 24.70 30.73 0.30 10.09% 1.21% NEOL APR 15 14.65 20.80 0.35 5.57% 2.39% NKTR APR 20 19.20 20.22 0.80 8.87% 4.17% OSTK APR 25 24.30 30.01 0.70 7.25% 2.88% APPX APR 33 32.73 42.61 0.65 5.76% 1.99% ASKJ APR 25 24.15 30.73 0.85 9.04% 3.52% CLZR APR 11 11.07 13.90 0.17 4.72% 1.54% JNPR APR 22 21.85 24.86 0.65 7.82% 2.97% NEOL APR 15 14.65 20.80 0.35 6.74% 2.39% PDII APR 22 21.80 24.99 0.70 8.31% 3.21% SWIR APR 22 22.15 31.93 0.35 5.03% 1.58% APPX APR 33 33.03 42.61 0.35 4.71% 1.06% BRCM APR 35 34.55 37.95 0.45 4.64% 1.30% ELN APR 15 14.65 20.00 0.35 9.84% 2.39% OSTK APR 22 22.25 30.01 0.25 4.47% 1.12% PCLN APR 20 19.75 24.61 0.25 4.90% 1.27% SYMC APR 40 39.40 42.80 0.60 4.89% 1.52% XMSR APR 25 24.40 27.67 0.60 7.74% 2.46% YHOO APR 40 39.40 45.75 0.60 5.13% 1.52% Positions in Rambus (NASDAQ:RMBS), Semtech (NASDAQ:SMTC), and Interdigital (NASDAQ:IDCC) have previously been closed to limit potential losses. Ade Corp. (NASDAQ:ADEX), Amylin (NASDAQ:AMLN) and Nektar (NASSDAQ:NKTR) are on the early-exit list. New plays in Pep Boys (NYSE:PBY) and Invision Technologies (NASDAQ:INVN) were not available due to "gap-up" activity on the day after the plays were published. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AAII MAR 25 25.40 7.87 0.40 7.47% 1.57% CMTL MAR 35 35.45 23.27 0.45 7.46% 1.27% FLML MAR 35 35.35 24.72 0.35 6.02% 0.99% MHS MAR 35 35.45 32.45 0.45 4.40% 1.27% CECO MAR 55 55.50 47.66 0.50 4.96% 0.90% ECLG MAR 22 22.85 20.32 0.35 10.15% 1.53% ESI MAR 50 50.30 28.99 0.30 4.96% 0.60% ISSI MAR 17 17.85 14.19 0.35 11.45% 1.96% SEAC APR 20 20.40 14.31 0.40 7.86% 1.96% NTLI MAR 70 70.50 58.60 0.50 6.27% 0.71% CECO APR 55 55.65 47.66 0.65 5.59% 1.17% ERES APR 35 35.30 27.32 0.30 4.73% 0.85% FARO APR 30 30.40 22.15 0.40 7.33% 1.32% AFCI APR 25 25.50 21.94 0.50 8.84% 1.96% FLSH APR 22 22.75 19.29 0.25 5.62% 1.10% The new position in Nam Tai Electronics (NASDAQ:NTE) was not available due to bearish activity on the day after the play was published. PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status CERN 46.09 43.64 MAR 35 40 0.60 39.40 0.60 Closed DNA 98.25 104.85 MAR 85 90 0.70 89.30 0.70 Closed ESRX 70.58 73.91 MAR 60 65 0.65 64.35 0.65 Closed NBR 46.97 45.30 MAR 40 42 0.25 42.25 0.25 Closed BSX 41.94 39.98 MAR 35 37 0.25 37.25 0.25 Closed CEC 34.06 35.95 MAR 30 32 0.36 32.64 0.36 Closed ONXX 36.80 36.07 MAR 30 35 0.55 34.45 0.55 Closed OSTK 29.27 30.01 MAR 22 25 0.30 24.70 0.30 Closed RYL 85.72 87.33 MAR 75 80 0.50 79.50 0.50 Closed GS 107.09 102.66 MAR 95 100 0.65 99.35 0.65 Closed MICC 22.06 18.70 MAR 18 19 0.12 18.63 0.07 Closed VIP 83.25 92.45 MAR 70 75 0.65 74.35 0.65 Closed MTH 71.09 74.62 MAR 60 65 0.70 64.30 0.70 Closed APOL 77.82 84.11 APR 65 70 0.60 69.40 0.60 Open BZH 111.90 105.10 APR 95 100 0.70 99.30 0.70 Open KBH 78.71 77.28 APR 65 70 0.55 69.45 0.55 Open COF 73.50 72.40 APR 60 65 0.50 64.50 0.50 Open HUG 52.95 51.22 APR 45 50 0.50 49.50 0.50 Open SYMC 44.64 42.80 APR 37 40 0.35 39.65 0.35 Open DNA 106.82 104.85 APR 90 95 0.60 94.40 0.60 Open FDX 71.59 71.28 APR 65 70 0.85 69.15 0.85 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Spreads on Sears (NYSE:S), Synopsys (NASDAQ:SNPS), Microstrategy (NASDAQ:MSTR) and Guidant (NYSE:GDT) have previously been closed to limit losses. Beazer (NYSE:BZH) is on the "watch" list. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status CYBX 27.04 22.56 MAR 35 30 0.65 30.65 0.65 Closed SOHU 29.05 24.40 MAR 40 35 0.60 35.60 0.60 Closed KLAC 54.24 49.65 MAR 65 60 0.60 60.60 0.60 Closed IACI 31.92 29.16 MAR 37 35 0.30 35.30 0.30 Closed NVLS 33.26 29.92 MAR 40 37 0.30 37.80 0.30 Closed BBBY 40.62 38.26 MAR 45 42 0.30 42.80 0.30 Closed LLTC 40.03 35.88 MAR 45 42 0.25 42.75 0.25 Closed PIXR 65.76 62.99 MAR 75 70 0.55 70.55 0.55 Closed SFNT 37.96 37.87 MAR 45 40 0.60 40.60 0.60 Closed UTEK 26.28 21.88 MAR 35 30 0.60 30.60 0.60 Closed AMZN 44.87 42.80 MAR 55 50 0.50 50.50 0.50 Closed CTAS 42.77 41.48 MAR 50 45 0.60 45.60 0.60 Closed CCU 43.44 41.73 MAR 50 45 0.60 45.60 0.60 Closed ADBE 36.46 39.85 APR 45 40 0.55 40.55 0.55 Closed DISH 35.50 33.10 APR 42 40 0.30 40.30 0.30 Open NVLS 31.15 29.92 APR 37 35 0.35 35.35 0.35 Open VSEA 40.85 37.50 APR 50 45 0.60 45.60 0.60 Open COGN 29.54 28.69 APR 35 32 0.35 32.85 0.35 Open SFA 31.96 31.23 APR 40 35 0.55 35.55 0.55 Open BBBY 39.04 38.26 APR 45 42 0.25 42.75 0.25 Open MSTR 52.64 50.76 APR 65 60 0.60 60.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The bearish position in Icos (NASDAQ:ICOS), which is positive, as well as the spreads in Neurocrine Bisosciences (NASDAQ:NBIX), OSI Pharmaceuticals (NASDAQ:OSIP), and Multimedia Gaming (NASDAQ:MGAM) have previously been closed to limit losses. Adobe (NASDAQ:ADBE) is a candidate for early exit after Friday's earnings-related rally. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status LEN 55.58 55.20 MAR 55 55 2.40 2.75 Closed TEK 29.59 31.05 MAR 30 30 1.45 1.60 Closed TTWO 32.03 34.29 MAR 32 32 3.20 3.00 Closed SNP 40.74 39.02 APR 40 40 5.70 5.70 Open CCMP 44.55 41.40 APR 45 45 5.90 5.75 Open AMX 35.66 37.81 MAY 35 35 3.65 4.30 Open AIG 74.28 72.10 MAY 75 75 5.60 6.50 Open SLB 65.13 63.66 MAY 65 65 6.75 6.50 Open Hovnanian (NYSE:HOV) was the "play of the month," offering up to a $8.00 gain on $7.00 invested. Straddles in Martek Biosciences (NASDAQ:MATK), Bear Stearns (NYSE:BSC) and Forest Labs (NYSE:FRX), which is now profitable, have previously been closed to preserve capital. Prices for the new positions in American International (NYSE:AIG) and Schlumberger (NYSE:SLB), as well as any potential gains (max. value) for existing straddles, will not be accurate this month as I did not monitor the portfolio during my recent absence from the market. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - COVERED-CALLS Our approach to this strategy, which does not focus on stock ownership or bullish movement, considers the covered write as a single entity with a primary goal of obtaining a continuous (monthly) return on investment with reduced downside risk. __________________________________________________________________ Indices Continue To Correct... By Mark Wnetrzak The correction that started a few weeks ago continues to hamper the major averages and forces one to have a defensive near-term outlook. With the market's technical indications being rather bearish and a defensive posture in place, it's a good time for added vigilance. Conservative traders should re-evaluate their current portfolio positions and select only the most favorable issues for new plays. Even though covered-calls do hedge against near-term weakness, they are not a panacea for protracted bearish activity. This is most likely my last week for the covered-call section as it moves towards a monthly or semi-monthly schedule, with none other than Ray Cummins at the helm. It's been fun! Trade Wisely! __________________________________________________________________ NEW COVERED-CALL CANDIDATES __________________________________________________________________ ROXI - Roxio $5.19 *** On The Rebound! *** Roxio (NASDAQ:ROXI) provides a comprehensive family of PC-based software products that allow customers to create, manage, customize and share digital content. The company's software is reliable, easy to use and compatible across a broad range of operating systems. Its Easy CD & DVD Creator, Toast and WinOnCD products allow users to take digital music and burn custom playlists to CD, archive digital photos and videos to DVD or archive and share large data files, such as PowerPoint presentations, by storing them on a CD. Roxio's PhotoSuite product enables users to capture, edit and share photographs on a PC or over the Internet. Its VideoWave product enables users to capture and combine edited video clips, graphics, photographs, music and narration to create a video that can be shared on CDs, DVDs, videotape or over the Internet. Roxio climbed higher this week after the company raised revenue guidance, citing strength in its CD-software and Napster online music segment. Reasonable speculation with a cost basis near long-term support. APR-5.00 RXU DA LB=0.55 OI=962 CB=4.64 DE=28 TY=8.4% __________________________________________________________________ ABMD - Abiomed $7.81 *** Bracing For A Rally? *** Abiomed (NASDAQ:ABMD) is a developer, manufacturer and marketer of medical products designed to safely and effectively assist or replace the pumping function of the failing heart. The company's BVS (bridge-to-recovery) 5000 Biventricular Support System is a heart assist device for the temporary treatment of all patients with failing, but potentially recoverable, hearts in the U.S. The company's first-generation AbioCor Implantable Replacement Heart, a battery-powered implantable replacement heart system, is the subject of an ongoing initial clinical trial that began in July 2001. The AbioCor is intended to extend life and provide an improved quality of life for end-stage acute and chronic heart failure patients. The company is also engaged in research and development relating to other devices to assist or replace the pumping function of the heart. ABMD has been in a lateral consolidation for several months and investors who believe the trend will continue can use this position to profit from that outcome. APR-7.50 IBU DU LB=0.75 OI=930 CB=7.06 DE=28 TY=6.8% __________________________________________________________________ ADCT - ADC Telecommunications $2.66 *** Cheap Speculation *** ADC Telecom (NASDAQ:ADCT) is a supplier of broadband network equipment, software and systems integration services that enable communications service providers to deliver high-speed Internet, data, video and voice services to consumers and businesses worldwide. The company offers its products and services through two segments: broadband infrastructure and access; and integrated solutions. The broadband infrastructure and access business focuses on broadband connectivity products for a variety of communications network applications, digital subscriber line offerings for the telecommunications industry and IP-based offerings for the cable industry. The integrated solutions business focuses on systems integration services and operations support system software. Traders can speculate on the near-term performance of the issue with this position. Target-shooting a lower "net" debit will raise the potential yield and increase the downside protection. APR-2.50 TLQ DZ LB=0.30 OI=175 CB=2.36 DE=28 TY=6.4% __________________________________________________________________ LGND - Ligand $18.84 *** Earnings Rally *** Ligand Pharmaceuticals (NASDAQ:LGND) discovers, develops and markets new drugs that address critical unmet medical needs of patients in the areas of cancer, pain, men's and women's health or hormone-related health issues, skin diseases, osteoporosis and metabolic, cardiovascular and inflammatory diseases. LGND's drug discovery and development programs are based on proprietary gene transcription technology, primarily related to intracellular receptors and signal transducers and activators of transcription. The company markets five products in the U.S.: AVINZA for the relief of chronic, moderate to severe pain; ONTAK for treatment of patients with persistent or recurrent cutaneous T-cell lymphoma (CTCL); Targretin capsules and Targretin gel for the treatment of CTCL in patients who are refractory to at least one prior systemic therapy, and Panretin gel for the treatment of Kaposi's sarcoma (KS) in AIDS patients. Ligand has rallied sharply since reporting earnings in early March and investors can use this position to speculate on the company's future share value. APR-17.50 LQP DW LB=2.00 OI=301 CB=16.84 DE=28 TY=4.3% __________________________________________________________________ NANX - Nanophase Technologies $9.01 *** Entry Point? *** Nanophase Technologies (NASDAQ:NANX) is engaged in creating and the engineering of nanocrystalline materials. Products include, among others, coated materials as ingredients for sunscreens, Nanophase's largest application, and uncoated materials as ingredients for personal care applications, including anti-fungal aids, automotive catalytic converters and abrasion-resistant flooring. A growing new product area for Nanophase is the production of engineered nanomaterials, and their dispersion in a variety of media, for various electronics polishing applications. They work collaboratively with various companies in meeting their application needs, providing value-enhanced solutions for commercial applications in multiple global markets. The Nanotech industry has been on fire, especially after President Bush's signing of the 21st Century Nanotech Research and Development Act. With the recent consolidation in Nanophase, this position offers investors who remain bullish in the industry a reasonable entry point near technical support. APR-7.50 NSY DU LB=1.75 OI=245 CB=7.26 DE=28 TY=3.6% __________________________________________________________________ AKS - AK Steel Holding $5.45 *** Steel Sector Gets Hot! *** AK Steel Holding (NYSE:AKS) operates through its wholly owned subsidiary, AK Steel Corp., as a fully integrated producer of flat-rolled carbon, stainless and electrical steels. The steel operations of the company consist of 7 steelmaking and finishing plants located in Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon steels, including coated, cold-rolled and hot-rolled products, as well as specialty stainless and electrical steels that are sold in slab, hot band and sheet and strip form. Steel products are primarily for sale to the domestic automotive, appliance, industrial machinery and equipment, as well as construction markets. Reasonable speculation on an emerging sector with a cost basis near support. APR-5.00 AKS DA LB=0.60 OI=375 CB=4.85 DE=28 TY=3.4% __________________________________________________________________ TELK - Telik $28.08 *** New Drug Speculation *** Telik (NASDAQ:TELK) is a biopharmaceutical company working to discover, develop and commercialize small-molecule drugs to treat serious diseases, including cancer and diabetes. Telik's most advanced product development programs include TLK286, which it expects to enter a Phase III registration trial beginning in the 1st-quarter 2003; TLK199, which is in a Phase I-IIa trial, and TLK19781, which is in pre-clinical safety studies. TLK286 is a small-molecule tumor-activated cancer drug that the company is evaluating initially to treat cancers that are resistant to standard chemotherapy drugs. TLK199 is a small-molecule bone marrow stimulant being developed for the treatment of blood disorders associated with low white blood cell levels. TLK19781 is a proprietary, orally active small-molecule insulin receptor activator for the potential treatment of Type II diabetes and other conditions related to insulin resistance. Investors who like the company's drug pipeline can speculate on the near-term performance of the issue with the potential of owning TELK at a price near technical support. APR-25.00 ZUL DE LB=3.80 OI=2366 CB=24.28 DE=28 TY=3.2% __________________________________________________________________ Legend (for play descriptions above) LB - Last Bid price OI - Open Interest CB - Cost Basis or break-even point DE - Days to Expiration TY - Target Yield (monthly basis) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Supplemental Covered Calls ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. __________________________________________________________________ Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield IMM 15.59 APR 15.00 IMM DC 1.75 300 13.84 28 9.1% MERX 21.58 APR 20.00 KXQ DD 2.60 2 18.98 28 5.8% ENER 7.98 APR 7.50 EQI DU 0.85 59 7.13 28 5.6% RHAT 19.22 APR 17.50 RCV DW 2.50 4575 16.72 28 5.1% OSIP 38.81 APR 30.00 GHU DF 10.10 4968 28.71 28 4.9% ELN 20.00 APR 17.50 ELN DW 3.20 10112 16.80 28 4.5% IPXL 21.55 APR 20.00 UPR DD 2.35 997 19.20 28 4.5% BMRN 8.08 APR 7.50 NUR DU 0.85 454 7.23 28 4.1% TLCV 10.95 APR 10.00 TKU DB 1.30 1675 9.65 28 3.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ APPX - American Pharma Partners $42.61 *** Another 2004 High! *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty drug company that develops, manufactures and markets injectable pharmaceutical products, focusing on the oncology, anti-infective and critical care markets. The company is one of the largest producers of injectables, with more than 130 generic products in more than 350 dosages and formulations. APPX - American Pharma Partners $42.61 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 35 AQO PG 2245 0.55 34.45 6.3% 1.6% __________________________________________________________________ ASKJ - Ask Jeeves $30.73 *** A Strong Sector! *** Ask Jeeves (NASDAQ:ASKJ) is a provider of Internet-wide search, providing consumers with authoritative and fast ways to find relevant information to their everyday searches. Ask Jeeves deploys its search technologies on Ask Jeeves (Ask.com and Ask.co.uk), Teoma.com, and Ask Jeeves for Kids (AJKids.com). In addition, to its internet sites, Ask Jeeves syndicates its monetized search technology and advertising units to a network of affiliate partners. The company is based in Emeryville, California, with offices in New York, Boston, New Jersey, Los Angeles, London and Dublin. ASKJ - Ask Jeeves $30.73 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 25 AUK PE 1463 0.45 24.55 7.5% 1.8% __________________________________________________________________ CMC - Commercial Metals $34.14 *** Steel Stocks Rally! *** Commercial Metals (NYSE:CMC) manufactures, recycles, markets and distributes steel and metal products and related materials and services through a network of locations located throughout the United States and internationally. The company's business is organized into three major segments: manufacturing, recycling and marketing and distribution. The manufacturing segment is made up of the steel group and Howell Metal Company. The recycling segment processes secondary metals, or scrap metals, which will be used as a raw material by producers of new metal products. Products in the marketing and distribution segment are standard commodity items. CMC - Commercial Metals $34.14 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 30 CMC PF 35 0.40 29.60 4.7% 1.4% __________________________________________________________________ CSGS - CSG Systems $16.66 *** Comcast Dispute Resolved! *** CSG Systems International (NASDAQ:CSGS) provides next-generation billing and customer care solutions for the cable television, satellite, advanced Internet protocol services, next-generation mobile and fixed wireline markets. The company's combination solutions, delivered in both outsourced and licensed formats, enables clients to deliver customer service, improve operational efficiencies and rapidly bring new revenue-generating products to market. CSG and its wholly owned subsidiaries serve more than 265 telecommunications service providers in over 40 countries. The firm serves its clients through its two operating segments: the Broadband Services Division and the Global Software Services Division. CSGS - CSG Systems $16.66 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 15 QGA PC 559 0.35 14.65 7.6% 2.4% __________________________________________________________________ ECLG - eCollege.com $20.32 *** E-Learning Sector Rebound? *** eCollege.com (NASDAQ:ECLG) is a provider of technology, products and services that enable colleges, universities, primary and high schools, grade schools and corporations to offer online classes for distance, on-campus and hybrid learning. The firm's unique technology enables it's customers to reach students who wish to take courses at convenient times and locations via the Internet. Its customers can also use its technology to supplement on-campus courses with an online environment. In addition, the company offers services to assist in the development of online programs, including online course and campus design, development, management and hosting as well as ongoing administration, faculty and student support. ECLG - eCollege.com $20.32 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 17.5 EGU PW 91 0.30 17.20 6.3% 1.7% __________________________________________________________________ JILL - J. Jill Group $19.05 *** Rallying Retailer! *** The J. Jill Group (NASDAQ:JILL) is a multi-channel specialty retailer of women's apparel, accessories and footwear. The company markets its products through catalogs, retail stores and an e-commerce website. J. Jill has two business segments, direct and retail, and each segment is separately managed and utilizes distinct distribution, sales and inventory management strategies. The direct segment markets merchandise through its catalogs and an e-commerce website. The retail segment markets merchandise through retail stores. The firm's target customers are active, affluent women ages 35 to 55, who want comfort and styling, from relaxed career clothing to sophisticated casual weekend wear, in a broad range of sizes. JILL - J. Jill Group $19.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 17.5 JUI PW 91 0.35 17.15 6.4% 2.0% __________________________________________________________________ MGAM - Multimedia Games $25.35 *** Entry Point? *** Multimedia Games (NASDAQ:MGAM) is the leading supplier of interactive electronic games and player stations to the rapidly growing Native American gaming market. The company's games are delivered through a telecommunications network that links its player stations with one another both within and among gaming facilities. Multimedia Games designs and develops networks, software and content that provide its customers with a range of gaming systems. The company's development and marketing efforts focus on Class II gaming systems and Class III video lottery systems for use by Native American tribes throughout the United States. MGAM - Multimedia Games $25.35 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 22.5 QMG PX 746 0.45 22.05 6.8% 2.0% __________________________________________________________________ PBY - Pep Boys $26.16 *** Next Leg Up? *** Pep Boys -- Manny, Moe & Jack (NYSE:PBY) is engaged primarily in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The company operated its stores in 36 states and Puerto Rico and its primary operating unit is its Supercenter format. Its operates over 600 Supercenters and one Service and Tire Center, having an aggregate of 6,527 service bays, as well as 12 non-service/non-tire format Pep Boys Express stores. The Supercenters serve "do-it-yourself" (retail) and "do-it-for-me" (service labor, installed merchandise and tires) customers. PBY - Pep Boys $26.16 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 25 PBY PE 15 0.50 24.50 6.0% 2.0% __________________________________________________________________ SUPG - SuperGen $10.39 *** New Drug Speculation! *** SuperGen (NASDAQ:SUPG) is a pharmaceutical company dedicated to the acquisition, rapid development and commercialization of new oncology therapies for solid tumors, hematological malignancies and blood disorders. The firm has three key compounds: Nipent, Orathecin and decitabine. Nipent is marketed the treatment of hairy cell leukemia. SuperGen is close to completing Phase III studies for Orathecin, its lead drug candidate, and has submitted the first two (out of three total) sections of a rolling New Drug Application with the FDA. SuperGen is also conducting Phase III clinical studies of decitabine in myelodysplastic syndrome. The company's portfolio of products includes generic daunorubicin for a variety of acute leukemias, Mitozytrex, cancer vaccine Avicine, Partaject-delivered busulfan and inhaled versions of Orathecin and paclitaxel. SUPG - SuperGen $10.39 "SPECULATIVE" PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 7.5 UQG PU 2230 0.35 7.15 16.9% 4.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Index-Based Credit Spreads As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options and professional traders also employ index spreads in common hedge strategies. Traders who participate in OTM credit spreads often utilize index options because they generally contain favorable "premium" and also provide an underlying instrument less prone to huge, gapping moves. __________________________________________________________________ OEX - S&P 100 Index $543.68 *** Index Spreads *** Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Trading in S&P-100 options will ordinarily cease on the business day preceding the expiration date. OEX options generally may be exercised on any business day before the expiration date. OEX - S&P 100 Index $543.68 PLAY (conservative - bullish/credit spread): BUY PUT APR-515.00 OEB-PC OI=2642 ASK=$3.20 SELL PUT APR-520.00 OEB-PD OI=4633 BID=$3.50 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$519.60 __________________________________________________________________ SPX - S&P 500 Index $1109.78 *** Index Spreads *** Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. These are summed for all 500 stocks and divided by a predetermined base value. The base value for the S&P 500 Index is adjusted to reflect changes in capitalization resulting from mergers, acquisitions, stock rights, substitutions, etc. Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated. SPX options generally may be exercised only on the last business day before expiration. SPX - S&P 500 Index $1109.78 PLAY (conservative - bullish/credit spread): BUY PUT APR-1050.00 SPQ-PJ OI=34045 ASK=$6.00 SELL PUT APR-1060.00 SPQ-PL OI=1 BID=$6.70 INITIAL NET-CREDIT TARGET=$0.80-$0.90 POTENTIAL PROFIT(max)=8% B/E=$1059.20 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ADTN - Adtran $31.43 *** In A Trading Range? *** Adtran designs, develops, manufactures, markets and services a broad range of high-speed network access products utilized by providers of telecommunications services and corporate end users to implement advanced digital data services over both public and private networks. The company's business is arranged with two divisions, the Carrier Networks Division (CN) and the Enterprise Networks Division (EN), to enable it to quickly respond to the needs of the two important market segments that its products address. These two market segments are CN products for use in the service provider's Local Loop, including central office, remote terminal and customer premises, and EN products for use at enterprise headquarters, remote offices and telecommuting locations. Adtran offers more than 500 products built around a set of core technologies, and developed to address high-speed digital communications over the last mile of the Local Loop. ADTN - Adtran $31.43 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 35 RQA DG 1238 0.80 35.80 9.6% 2.2% __________________________________________________________________ DISH - EchoStar $33.10 *** The Downtrend Resumes! *** EchoStar Communications (NASDAQ:DISH) operates through two major business units, the DISH Network and EchoStar Technologies. The DISH Network offers a direct broadcast satellite subscription TV service across the United States with millions of DISH Network subscribers. EchoStar Technologies Corporation is engaged in the design, development, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network and the design, development and distribution of similar equipment for a range of international satellite service providers. DISH - EchoStar $33.10 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 35 UAB DG 4437 0.65 35.65 6.3% 1.8% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Index-Based Credit Spreads As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options and professional traders also employ index spreads in common hedge strategies. Traders who participate in OTM credit spreads often utilize index options because they generally contain favorable "premium" and also provide an underlying instrument less prone to huge, gapping moves. __________________________________________________________________ OEX - S&P 100 Index $543.68 *** Index Spreads *** Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Trading in S&P-100 options will ordinarily cease on the business day preceding the expiration date. OEX options generally may be exercised on any business day before the expiration date. OEX - S&P 100 Index $543.68 PLAY (conservative - bearish/credit spread): BUY CALL APR-575.00 OEB-DO OI=3549 ASK=$0.85 SELL CALL APR-570.00 OEB-DN OI=5526 BID=$1.25 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$570.45 __________________________________________________________________ SPX - S&P 500 Index $1109.78 *** Index Spreads *** Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. These are summed for all 500 stocks and divided by a predetermined base value. The base value for the S&P 500 Index is adjusted to reflect changes in capitalization resulting from mergers, acquisitions, stock rights, substitutions, etc. Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated. SPX options generally may be exercised only on the last business day before expiration. SPX - S&P 500 Index $1109.78 PLAY (less conservative - bearish/credit spread): BUY CALL APR-1170.00 SPT-DN OI=3518 ASK=$2.00 SELL CALL APR-1160.00 SPT-DL OI=5523 BID=$2.90 INITIAL NET-CREDIT TARGET=$1.00-$1.10 POTENTIAL PROFIT(max)=11% B/E=$1161.00 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. __________________________________________________________________ This week we received a number of requests for conservative debit straddles. Unfortunately, with the recent market volatility, the number of theoretically favorable candidates is quite low. That is not to suggest that you can't make money in the strategy, it just means you cannot focus entirely on historical volatility as a method of analysis. In today's search, we have identified one "speculative" debit-strangle candidate. __________________________________________________________________ GLBC - Global Crossing $13.86 *** A Recent Rebirth! *** Global Crossing (NASDAQ:GLBC) offers telecommunications services in business centers, serving corporations by providing a range of managed data and voice products and services. It provides many telecommunications services over a global network that reaches more than 200 major cities worldwide. Through its Global Marine Systems Limited subsidiary, the firm also provides installation and maintenance services for subsea telecommunications systems. In January 2002, Global Crossing and certain of its affiliates filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. In December 2003, the firm emerged from bankruptcy. GLBC - Global Crossing $13.86 PLAY (very speculative - neutral/debit strangle): BUY CALL APR-15.00 GQC-DC OI=209 ASK=$0.85 BUY PUT APR-12.50 GQC-PV OI=35 ASK=$0.85 INITIAL NET-DEBIT TARGET=1.50-$1.60 INITIAL TARGET PROFIT=$0.45-$0.90 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************** 2004 Stock Traders Almanac ************************** Those readers who did not sign up for the end of year special and would still like to get a Stock Traders Almanac this is your chance. For only $44.95 you will get: 2004 Stock Traders Almanac - $34.95 value 2004 Option Expiration Mousepad - $14.95 value Intro to Options Trading Success Video - $84.95 value We had a few sets left and they are $44.95 per set. http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=3596605596 ********** 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
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