The Option Investor Newsletter Wednesday 03-24-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Markets Meander Midweek Futures Wrap: See Note Index Trader Wrap: Mixed trade on strong February durable goods Traders Corner: The Big Picture Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-24-2004 High Low Volume Advance/Decline DJIA 10048.23 - 15.41 10108.15 10007.49 1.81 bln 944/1850 NASDAQ 1909.48 + 7.68 1922.51 1896.91 1.81 bln 1385/1646 S&P 100 534.49 - 0.66 537.95 532.00 Totals 2329/3496 S&P 500 1091.33 - 2.62 1098.39 1087.06 RUS 2000 557.63 - 3.29 562.26 556.13 DJ TRANS 2761.83 - 1.29 2772.29 2743.46 VIX 19.81 - 0.86 20.83 19.45 VXO 20.49 + 0.04 21.34 19.85 VXN 26.06 - 0.78 26.97 25.77 Total Volume 4,085M Total UpVol 1,842M Total DnVol 2,153M 52wk Highs 178 52wk Lows 48 TRIN 1.25 PUT/CALL 0.88 ******************************************************************* Markets Meander Midweek by James Brown Stocks seesawed sideways on Wednesday as the major averages tested support only to see the rebound fail in the afternoon hours. The Dow Industrials and the S&P 500 index both posted their fifth loss in a row while the NASDAQ managed to end its losing streak with a bounce in the semiconductor sector. Rotation seemed to be the agenda for the session as investors took money out of oil services, gold, natural gas and broker- dealers while buying semiconductors, software and hardware issues. The more optimistic of the market pundits were calling for a bottom in the NASDAQ while the less sanguine commentators reduced today's bounce to nothing more than mild short covering. Wednesday's economic data was positive but it failed to produce any lasting results against the new backdrop of terrorism fears. This morning French police reported finding a bomb under the Paris to Basel, Switzerland railroad. Meanwhile in the Mid East the U.S. closed their embassy in the United Arab Emirates (UAE) under new threats of violence. Global markets were mixed. The Japanese NIKKEI jumped nearly 84 points to 11,364 while the Chinese Hang Seng rallied almost 90 points to 12,678. European stocks were mostly down with the French CAC index suffering the worst declines compared to Germany and Britain. Commodities were making news as gold pulled back for the first time in eight sessions as the U.S. dollar turned in a strong day. Gold futures closed down $2.60 to $417.40 an ounce. Crude oil was also a major story after both the American Petroleum Institute and the Department of Energy both reported a significant build up in oil supplies last week. Crude oil futures dropped 44 cents to $37.01 a barrel but well off its lows of the session at $36.65. The pull back had no affect on gasoline prices, which hit a new all-time (average) high of $1.74 a gallon. Some industry experts are predicting fuel prices near $3.00 a gallon as we approach the summer driving season. The pull back in oil fed the profit taking in the oil and oil service stocks but the trend is still up for crude oil futures. OPEC is still considering its previously announced April production cuts and talk is growing that we'll see $40-42 per barrel prices. Looking more closely at the major averages you'll see the Dow, The S&P 500 and the NASDAQ Composite all churning sideways the last three sessions but with a trend of lower highs. Fortunately, the Dow is holding support at the 10,000 mark while the NASDAQ is holding support at the 1900 level. The bad news is that short-term technicals for both look weak again. Meanwhile the S&P 500 is churning sideways under old support at 1100 and the longer it stays here the more 1100 becomes resistance. Chart of the Dow Industrials: Chart of the NASDAQ Composite: Chart of the S&P 500: Some of the trader talk this morning was focused on concerns that the economic recovery was in jeopardy even though the Durable Goods order and the New Home Sales numbers were positive. Durable goods are products made to last at least three years. The Commerce Department reported that February's durable goods rose a better than expected 2.5% above estimates for 1.7%. This seemed especially bullish considering that January's numbers were revised lower to a 2.7% decline. Driving the gains were strong improvements in aircraft, computers and motor vehicles. Homebuilders are living up to their word that business is good. The New Homes Sales numbers raced to a 5.8% gain in February to an annualized rate of 1.16 million units. This surpasses the old high of 1.09 million units. I suspect we'll see this number run even higher as the weather continues to improve. The good news here is that new homes are big boost to the economy as consumers buy new furnishings and appliances. The historically low interest and mortgage rates should keep this trend in place and underpin the economic rebound. Speaking of a rebound we might see one in shares of Microsoft soon. As previously announced the EU antitrust commission officially declared its fine of $612 million against MSFT for its monopolistic-style of business. The $612 million or 497 million euro fine is less than the maximum the EU could have levied, which was just over $3 billion but still qualifies as the largest fine like this ever levied. MSFT plans to appeal the fine and the decision that would impose restrictions on how MSFT can do business in the EU including sharing their code so that rivals can make competing applications. Industry experts say the appeal will tie up the decision in the court system for four to five years. More importantly for investors analysts believe that MSFT, who has been sitting on close to $53 billion in cash and adding to its hoard at close to $1 billion per quarter, can finally make a decision about what to do with all that money. That's not to say that MSFT is out of the legal woods just yet but many are expecting MSFT to announce a major stock buyback and/or a huge one-time cash dividend. One of Goldman Sach's analysts speculated that MSFT could declare a one-time cash dividend in the $10 to $20 billion range. That's anywhere from 92 cents to $1.84 a share compared to the current dividend of 16 cents annually. Shares of MSFT, which have been weak for 9 weeks straight, bounced higher by more than 1 percent but remain in its current downtrend. One of the most important developments on Wednesday occurred after the closing bell. Applied Materials (AMAT), the world's biggest producer of semiconductor equipment, held its annual meeting. AMAT's CFO told analysts that the chip sector recovery was still in the "early stages not the later stages" of development. AMAT said they see a huge opportunity in the flat- panel market for TV and monitor screens. This positive sentiment for the LCD market was echoed by Corning (GLW) earlier today. AMAT also announced a three-year $3 billion stock buy back program. This is great news that could really boost the nascent rebound in the chip stocks tomorrow. Today's bounce in the SOX back above the simple 200-dma is a good start but to see some follow through tomorrow would be pretty encouraging and lend some much needed strength to any NASDAQ rally attempt. Micron Technology (MU), another chipmaker, announced its earnings after the close today. Analysts were looking for a loss of 6 cents a share compared to a loss of 64 cents a share last year. MU turned in a loss of 4 cents but fell short of consensus revenues estimates at $1 billion for the quarter. While the stock traded lower after hours we've come to expect a "sell the news" reaction. More importantly is MU's earnings performance, which might help set the mood for the April earnings season. We've already heard from dozens of companies that have pre- announced positive earnings but it may actually take the onset of earnings season to jog investors out of the current market malaise. Tomorrow brings the weekly initial jobless claims data. Estimates are suggesting a small uptick in claims from last week's 336,000. We'll also hear the latest and final GDP revision for the fourth quarter but no one expects any change from the previous reading at 4.1%. Thursday morning also brings the February existing home sales numbers, which economists have predicted to rise to 6.12 million units. News junkies can also look for the Help Wanted index to be announced. I don't expect any of these to be market movers and Wall Street may continue to ignore all the economic data until the April 2nd non-farm payrolls job report a week from this Friday. However, I would keep my ears open for any positive comments from Nokia's annual shareholder meeting being held tomorrow after the close. ************ FUTURES WRAP ************ 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 ******************** Mixed trade on strong February durable goods The major indices finished today's trade rather mixed with decliners outnumbering advancers, where technology shares showed some sign of life after February's durable goods orders, which rose a stronger-than-expected 2.5%, suggested increased factory production. Orders for durable goods, which are made to last at three years, were lead by aircraft, computers and motor vehicles. A 9.9% increase in transportation equipment drove the advance, chalking up the largest rise since July 2002. Excluding transportation, new orders fell 0.3% in February, the first decline in three months. Demand for military aircraft surged 61.1% after a 37.3% fall in January and civilian aircraft gained 33.8% after a 32.5% decline. Demand for motor vehicles was up 5.0% from a 4.4% retreat in January. If there was any question that transportation-related components can be volatile on a month-to-month basis, January and February's comparisons give observation of how volatile some of the transportation components can be. New orders for computers and related products rose a seasonally adjusted 2.1% in February. In the past year, new orders for IT products rose 19.6%. By comparison, new orders for all durable goods have increased 8.0% for the previous 12 months. Orders for communications equipment continued to climb in February, increasing 5.5%. In January, new communications- equipment orders soared 65.1%. Economists say as the economy grows and businesses expand, they need new telephones and communications equipment to equip new offices and factories. Non-defense capital goods excluding aircraft, a proxy for business spending, was up 1.1% in February after dipping 0.3% the month before. Market Snapshot / Internals - 03/24/04 Close The Semiconductor Index (SOX.X) 468.14 +2.19% exerted itself as today's sector winner, and helped boost the tech heavy NASDAQ-100 Index (NDX.X) 1,381.86 +0.86% to an 11.82-point gain. Market breadth at the A/D line was notably negative at the NYSE, while NASDAQ's A/D finished fractionally negative with decliners outnumbering advancer by an 8 to 7 margin. This tells us that buyers were very focused in today's trade, and not a broad-based round of buying. Pivot Matrix - We'll look at my QCharts U.S. Market Watch table in a minute, but some notes I made intra-day, and on the above Pivot Matrix table is today's high for the SPX came just under its WEEKLY S1, while the Semiconductor Index (SOX.X) 468.14 +2.33%, which can be a key sector for NDX/QQQ trade, did see trade at its WEEKLY Pivot, which does begin to suggest the making of a near-term rebound for technology shares. With the SOX.X having been one of the weaker technology sectors in recent weeks, today's relative strength versus other sectors, may indicate that some bears may have been doing some short-covering in today's session. U.S. Market Watch - 03/24/04 Close I say "short-covering in the semiconductors" largely because the Networking Index (NWX.X) 255.17 -0.49%, which finished down fractionally, didn't seem to get nearly the bullish response from the February durable goods data as the SOX.X did. I thought the financials (red squared) really kept a lid on bullishness for the SPX and OEX, and would note how in the past 20-days (20-day Net %), we're starting to see some "equalization" of percentage losses among technology and financial, as the past bullish leadership from financials may well have been pulled lower by weakness in technology. I get the observation from today's trade, when making the simple comparison between the NYSE Composite ($NYA.X) 6,375.67 -0.66% and the NASDAQ Composite (COMPX) 1,909.48 +0.4%, that recent week's leading weakness in the COMPX, was still playing itself out today. Could it be that we're about to witness a trade, where the COMPX, or 4-lettered stocks, start a rebound, while some of the 1, 2 and 3-lettered stocks listed at the NYSE still see decline, where percentage losses between the two start to narrow? Never say "never," but I would have looked, or at least be looking for better A/D breadth than what the NASDAQ showed today. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals For a third-straight session, the QQQ are showing some daily low support near its WEEKLY S2, and perhaps some relative strength as it relates to the WEEKLY Pivot levels. After the closing bell, shares of SOX.X component Micron Technology (NYSE:MU) $15.81 -0.06% fell to a last tick of $15.20 after reporting quarterly earnings. I mention this as it might dampen some of today's enthusiasm toward semiconductors at the open, and might have the QQQ a little weak back toward its DAILY S1 of $34.08, but if buyers (bears short covering too) believe the QQQ is somewhat oversold, I'd look for some type of support at that $34.01-$34.08 level, where a move back above $34.38 builds thought a bounce is underway, where trade above $34.76 gives some more meaningful sign of strength. An eyeball target for a good oversold bounce in my mind would be something near $36.00. S&P 500 Index Chart (SPX.X) - Daily Intervals CNBC's Alexis Glick made comment of some unusual, or heavier than normal put selling in the SPX today, and I made some notes in the Market Monitor on her comments. I posted today's top three most active options in the SPX, where the VIX.X 4.16% decline with 1,100 puts (SPTRT) being most active, married with some out the money calls, might suggest some option trade, where traders are looking for a rebound. If so, keep an eye on tomorrow's DAILY S1 of 1,086 and VIX.X. If the VIX.X jumps higher and SPX breaks 1,086, then SPX could unravel further lower. Conversely, and SPX above 1,100 with imploding VIX.X and still heavy put selling, could certainly suggest a rebound in the making. I could perhaps tie a QQQ $36 and SPX of 1,123 together, which we all remember were last month's "Max Pain" levels, where I would have to think formidable resistance to a bounce would be found. Now... I'm going to try and outline what I think might be the setup for a near-term "bear trap" type of move, which might be set up perfectly in the Dow Industrials (INDU). Here's what I'm thinking. Just as we heard that Dow 10,000 would be formidable resistance as the INDU approached this level from the lows, we've heard, or I've been hearing, Dow 10,000 major support. On Monday, and then again today, the INDU found support at ... you got it... 10,000. Now that all bulls have been told that 10,000 is support, it might be a "trick" that it gets broken intra-day, then reversed back higher. How else do you get a bull to finally give in that break the psychological support level? Dow Industrials (INDU) Chart - Daily Intervals "Be Alert" is a trade scenario that traders might be cognizant of near-term. The INDU hasn't actually traded 10,000 at this point, and it might not, but I would have to think there are a lot of bullish stops, just ripe for the picking, on an intra-day break below 10,000, and a reversal back higher, once the stops are cleared out. A bullish trader that would want to play this type of trade could do so, but then follow with a stop just below the day's low, but where bullish entry wouldn't be taken until a move back above WEEKLY S1, or DAILY Pivot (10,554 + 10 points = 10,564). Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** The Big Picture by Mark Phillips mphillips@OptionInvestor.com It has been a long time since I wrote about my thoughts concerning the macro view of the markets -- where they are, why they are here and where they are likely headed. Based on the selloff of the past couple weeks, I think it is high time I dusted off the topic. A word of caution though: if you can't put aside your biases and look at the cold hard facts, you aren't going to like what I have to say. Also, this treatise got far more involved than I initially anticipated -- that seems to happen to me a lot lately - - so make sure to pour yourself a frosty beverage and get comfortable before diving in. We've been blessed over the past year with a tremendous bear- market rally. Call it a cyclical bull market if that sets better, but make no mistake about it, the dominant trend of the U.S. equity market is down and it has been since early 2000. Four years later, the economy is struggling to get back to humming on all cylinders again, despite the most massive dose of fiscal and monetary stimulus the world has ever seen. I've seen reports pointing out that the current rate of monetary growth is running somewhere in the $1.2-1.5 TRILLION area on an annualized basis. That's simply obscene and it should make it crystal clear why the value of the dollar has been plunging these past 2 years. Everyone with a pulse and three brain cells to rub together can see that the current administration's talk of a 'strong dollar policy' is a complete joke. Quite honestly, I find it astounding that the dollar hasn't fallen further in the face of such rampant monetary inflation. As I've noted in the past, there are two types of inflation -- monetary-driven and demand-driven. We're currently facing both of these demons, but the one that is the hungriest right now is the monetary type. The Fed has printed so much money that the price of everything that isn't manufactured elsewhere and imported has risen substantially. From energy to precious and industrial metals to 'soft commodities' the prices have been soaring for months. Jonathan talks about the action in the CRB index in his Futures Wraps and in the Market Monitor window on a regular basis. Let's take a look at a chart of the CRB index and put a face on the monster. Monthly Chart of the CRB Index First things first, the CRB index represents a basket of raw goods and commodities. These are different from manufactured goods, as they can't be made more cheaply (at least not significantly so) through the application of new technology via Alan Greenspan's 'productivity miracle'. This chart shows the price of these raw goods as they are pressured by two factors -- the value of the currency in which they are priced and the supply/demand dynamic. There are certain commodities like Copper that are seeing an increasing demand component to the rise in price; of that there is no doubt. But I do find it interesting that the CRB has risen just under 45% since early 2002. Depending on what currency (or basket of currencies) is used for the comparison, the Dollar has fallen 30-45% in the same span of time. Even using the very conservative 30% number, we're faced with the fact that two-thirds of the rise in the CRB is strictly due to the fall in the dollar. Let's be kind and attribute the other 33% to increasing demand, most likely from overseas as the Far East transitions from largely agrarian to industrial economies. Here's a different view, with the dollar factored out of the equation. I've talked about these ratio charts in the past, where we are effectively denominating the primary symbol in another 'currency' It doesn't matter if it is another paper currency or a tangible asset like gold, silver or crude oil. It felt a bit dishonest to use a base commodity as the underlying currency, since they are part of the CRB. So I settled back onto an old favorite, the Euro Index. The scale isn't quite right, largely due to the way the data was created going back before the Euro actually became a currency, but the trend and scale (to an acceptable tolerance) the Euro data is accurate. Weekly Chart of the CRB vs. the Euro Index Relative to the Euro, the CRB has been losing ground since the peak in 2000. That's about as clear as we can be -- the rise in the CRB is due to inflation. Here's the part that we have to understand if we hope to get a handle on the big picture. It doesn't matter what the source of the inflation is -- whether monetary or increasing demand -- it makes the stuff we buy more expensive. "But wait a minute", I can hear you say, "why is it that everything hasn't gone up in price by 30-45% over the past 2 years?" That's where the Asian manufacturers have been saving our bacon in recent years. They may be vilified in the press for taking American jobs, but I dare say it is an irreversible trend. If the Chinese can make a TV for $200 and turn a profit while it costs $500 to manufacture the exact same TV here at home, which one are you going to buy? Unless you've got more money than sense, you're going to buy the $200 set. It's called Capitalism and it is at the core of the market-based economy. Americans have been able to continue consuming due in large part to the fact that the manufactured products they buy have NOT risen in price. It's a good thing too, with the rate at which costs have been rising for healthcare, energy, food and education. So while the Fed has been creating inflation by running the printing presses night and day, the Asian manufacturers have been importing deflation and up until recently, it has been fairly well balanced. Once again, I can hear you muttering in the background about the fact that the official government statistics show only very slight inflation and the Fed keeps telling us that we should want more inflation. Obviously there's a disconnect somewhere, but what is it? Look under the hood of the CPI/PPI reports and you'll notice that they do not count the price rises in the volatile food, energy, housing and healthcare areas -- exactly the things that have been rising in price so rapidly. And that assumes that the BLS is actually giving us real data without massaging it to hide the offensive data. The recent monkey business with the delayed PPI reports has certainly caused me to question the integrity of that report. But I'll let you draw your own conclusions. How much have your health care costs or energy costs risen over the past 2 years? How does that correlate with the fall in the dollar? Let's talk about employment for a few minutes. We get the weekly and monthly job/employment statistics and we can clearly see that there aren't enough new jobs being created to fuel sustained economic growth. Or are there? The data reported is flawed on two levels. First it fails to take into account those who are unemployed (or working below there capabilities) and no longer collecting unemployment insurance. These people do not show up in the statistics. The other huge problem is the complete lack of accounting for those of us that have moved into the realm of the self-employed. There are a tremendous number of professionals that have simply left the corporate world and are hiring themselves out on a contract basis. While we still must pay taxes, there is no record of us in the employment statistics. These two flaws make the employment data from the government wholly unreliable in terms of gauging true job growth/contraction. Much has been made of the strong GDP numbers from the past few quarters and the fact that it has been compelling evidence of strong economic growth. I have a theory about this strength in GDP though. Remember our discussion above about the decline in the dollar? How is GDP measured? Is it measured in units of widgets produced and services delivered? Nope! It's measured in terms of dollars! Well if all the stuff that we're producing is being sold into the marketplace, where it must be purchased with less valuable dollars, doesn't it make sense that it will take more dollars to buy the same product or service as compared to a year ago? Certainly companies will do what they can to keep the costs of their products and services low in order to remain competitive on the open market, but they still need to make a profit. I would find it very plausible that a sizable portion of the GDP growth that we're seeing is directly related to currency effects. How about the Retail Sales numbers? They're also reported in actual dollar volume, not product volume. So that means we can be seeing the periodic reporting of increasing sales numbers, when in fact it represents actually moving LESS product out the door, as it takes more dollars to buy the same products. That effect is still muted due to the deflation being imported from Asia, but I think you can see the issue I'm driving at. I'm sorry, but I have a hard time seeing how that fits in with an improving economic picture. Now let's bring our focus back to the stock market. For the past year, the market has been rallying on the expectation of an improving economy. But something significant has changed in the past couple weeks. All the news coming out of the government and from corporate leaders is bullish, but all of the sudden nobody cares. Good news comes out and they sell, bad news comes out and they sell. Hmmmm...it seems vaguely reminiscent of another period of time in the not-so-distant past, doesn't it? Everyone has a theory about what's causing the market to drop, from terrorism to uncertainty about the election to any one of a dozen other external factors. I think it may be true that these are triggering events, but 3 months or 6 months ago, these very same events would have been unable to tank the market. Why? Sentiment has changed and I think it is changing because of the facts I've laid out above. Professional investors are coming to realize that the economic recovery is a clever fiction that is built on a foundation of wet sand. The first big wave that comes in can be devastating. This is the primary worry that Alan Greenspan deals with day in and day out. He knows he can't raise interest rates until business growth (i.e. job growth) begins to improve substantially, but on the other hand, he knows at some point inflation will get moving fast enough that he'll have to act to curtail the money supply. If job growth isn't robust enough by that point in time, odds are very strong that raising rates would drop the economy back into recession. I'm pretty sure that's not the legacy he's shooting for and for that reason, I expect he won't raise interest rates this year. Is that enough to keep the economy on a weak expansionary path? I wish I knew the answer. But I think the market is giving us it's vote quite clearly. I want to leave you with one final chart, a monthly view of the S&P 500. This is the same chart we looked at in the LEAPS column over the weekend, but with one added technical feature. Monthly Chart of the S&P 500 I've been looking for this bearish divergence to materialize for several months now and it looks like it is beginning to come to fruition. What is really telling is the fact that price began to tip over almost exactly at the 50% retracement of the entire bear market decline of 2000-2002. This is a very common occurrence for rallies out of the first leg of a bear market. We can see similar size rebounds off of several relative lows from the Nikkei bear market that began in 1989 and we can also see similar size rebounds along the way of the 1930s bear market in the DOW. Does that mean our bear market will follow the price pattern of either of those historic bear markets? No, but there is precedence for the 50% retracement value and for that reason I think it is significant that this is the level from which we began to roll over. As should be clear, it is my contention that we've seen the top for the bull market rebound off the October 2002 lows and we are now in the process of working our way back down the chart. I strongly believe that it won't be a straight down affair though, and I suspect there will be a strong effort made to keep the bear at bay. One market axiom is not to fight the Fed. Doing so over the past year was a painful experience for those who tried. Another important axiom is to not fight the primary or dominant trend. That trend has been upward for much of the past year, but I believe we're now resuming the dominant bearish trend that began 4 years ago, and after a year of slumber, the bear is hungry. Remember the discussions we've had in the past where we looked at the price action in the DOW, denominating it in different 'currencies' like gold, silver and even crude oil? My contention all along has been that the rally in equities over the past year has been nothing more than a reflection of the deterioration in the dollar. It worked well for short-term traders playing the upside and harvesting profits over the past year. But it appears that game is ending. We took another look at these alternatively- scaled DOW charts in last weekend's LEAPS column and I think the charts speak for themselves. If you missed that column, I'd strongly recommend heading over there and taking a look at the charts. We've touched on a number of important questions in this long commentary today. Will the Fed be able to hold off the ravages of the bear until economic recovery truly arrives? Are we in economic recovery now or is it a mirage? What can we expect from the dollar? What is true inflation and what direction is it headed? Will interest rates rise later this year? If so, what will the likely trigger event be. What is the future for the employment picture and how can we best read it? The answers to these questions are open ended and they also connect to other pieces of the overall puzzle such as what is the future for housing, gold, other commodities, and energy prices? Lurking in the background is the political picture in the U.S., which has become significantly murkier in recent weeks, with the very real possibility of a change in administration. Such a change will force investors to contend with the possibility of losing certain pieces of the stimulus put in place by the Bush administration, most notably the tax cuts, especially as they pertain to capital gains. Enough investors are asking these same questions to inject some serious doubt into the equation and that means volatility. It doesn't matter whether the long-term trend of the market is up or down, so long as it picks a direction and moves that way in a fairly methodical fashion. That sort of action has been sorely lacking for several months, but with the VIX making a solid move over 20 recently, it appears the market is moving out of its funk. Certainly the intraday price action in both the broad market indices and individual stocks has been more tradable over the past couple weeks. Uncertainty has come back into the market and with uncertainty comes volatility and with volatility comes more dynamic price ranges. It's starting to look like the rest of the year could be enjoyable for intraday trading once again. However, I suspect it will be a more volatile ride and it will become increasingly hazardous to our financial health to become married either to a position or a market bias. Keep Your Eye On The Ball! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* 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. 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The Option Investor Newsletter Wednesday 03-24-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Spreads, Combinations & Premium-Selling Plays: Looking For A Bottom... Watch List: Growing More Oversold ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade ket Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ************ DROPPED PUTS ************ None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Looking For A Bottom... By Ray Cummins Stocks ended mixed Wednesday after a volatile session punctuated by a lack of conviction among both market bulls and bears. The Dow Jones Industrial Average closed down 15 points at 10,048 amid a decline in its brokerage, banking and aluminum components. The NASDAQ climbed 7 points to finish at 1,909 as semiconductor shares rebounded from a recent slump. The S&P 500 Index ended 2 points lower at 1,091, as gold, oil services, steel, healthcare, metals & mining, and insurance shares drifted lower. Volume was 1.5 billion on the NYSE and 1.8 billion on the technology exchange. Decliners outpaced advancers by almost 2 to 1 margin on the NYSE, while gainers had a slight edge over decliners on the NASDAQ. The bond market moved lower with the 10-year note down 5/32, while its yield climbed to 3.71%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 03/23/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 AMLN APR 22 21.80 22.41 0.61 5.82% 3.21% * APPX APR 33 32.48 40.97 0.90 5.98% 2.77% NEOL APR 15 14.65 19.12 0.35 5.57% 2.39% NKTR APR 20 19.20 19.96 0.76 8.43% 4.17% * OSTK APR 25 24.30 28.40 0.70 7.25% 2.88% APPX APR 33 32.73 40.97 0.65 5.76% 1.99% ASKJ APR 25 24.15 28.89 0.85 9.04% 3.52% CLZR APR 11 11.07 12.98 0.17 4.72% 1.54% JNPR APR 22 21.85 23.79 0.65 7.82% 2.97% NEOL APR 15 14.65 19.12 0.35 6.74% 2.39% PDII APR 22 21.80 25.01 0.70 8.31% 3.21% SWIR APR 22 22.15 31.00 0.35 5.03% 1.58% APPX APR 33 33.03 40.97 0.35 4.71% 1.06% BRCM APR 35 34.55 37.44 0.45 4.64% 1.30% ELN APR 15 14.65 19.70 0.35 9.84% 2.39% OSTK APR 22 22.25 28.40 0.25 4.47% 1.12% PCLN APR 20 19.75 22.72 0.25 4.90% 1.27% SYMC APR 40 39.40 42.00 0.60 4.89% 1.52% XMSR APR 25 24.40 26.86 0.60 7.74% 2.46% YHOO APR 40 39.40 44.08 0.60 5.13% 1.52% APPX APR 35 34.45 40.97 0.55 6.27% 1.60% ASKJ APR 25 24.55 28.89 0.45 7.51% 1.83% CMC APR 30 29.60 31.28 0.40 4.72% 1.35% CSGS APR 15 14.65 16.17 0.35 7.65% 2.39% ECLG APR 17 17.20 19.82 0.30 6.26% 1.74% JILL APR 17 17.15 18.96 0.35 6.38% 2.04% MGAM APR 22 22.05 23.84 0.45 6.80% 2.04% PBY APR 25 24.50 26.50 0.50 5.97% 2.04% SUPG APR 7 7.15 9.95 0.35 16.86% 4.90% Positions in Amylin (NASDAQ:AMLN) and Nektar (NASSDAQ:NKTR), although positive, have been closed to limit potential losses. Neopharm (NASDAQ:NEOL) is a candidate for exit on any further downside activity, as is XM Satellite Radio (NASDAQ:XMSR). NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield SEAC APR 20 20.40 14.75 0.40 7.86% 1.96% CECO APR 55 55.65 49.00 0.65 5.59% 1.17% ERES APR 35 35.30 26.61 0.30 4.73% 0.85% FARO APR 30 30.40 20.27 0.40 7.33% 1.32% AFCI APR 25 25.50 20.75 0.50 8.84% 1.96% FLSH APR 22 22.75 18.20 0.25 5.62% 1.10% ADTN APR 35 36.30 29.24 0.80 9.56% 2.20% DISH APR 35 35.65 33.02 0.65 6.34% 1.82% PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status APOL 77.82 83.99 APR 65 70 0.60 69.40 0.60 Open BZH 111.90 104.20 APR 95 100 0.70 99.30 0.70 Open KBH 78.71 77.85 APR 65 70 0.55 69.45 0.55 Open COF 73.50 71.75 APR 60 65 0.50 64.50 0.50 Open HUG 52.95 49.77 APR 45 50 0.50 49.50 0.27 Closed SYMC 44.64 42.00 APR 37 40 0.35 39.65 0.35 Open DNA 106.82 100.82 APR 90 95 0.60 94.40 0.60 Open FDX 71.59 71.59 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 Hughes Supply (NYSE:HUG) has reversed course in conjunction with the Homebuilders/Building Materials segment, and we are closing the position to limit potential losses. Beazer (NYSE:BZH) is on the "watch" list. Since no directional recommendations were made with the index-based credit spreads (both bullish and bearish positions were published), we will not be tracking them in the portfolio. However, we will continue to offer suggested strike prices for conservative spreads with the OEX and SPX each month on expiration week-end. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status ADBE 36.46 38.61 APR 45 40 0.55 40.55 0.55 Closed DISH 35.50 33.02 APR 42 40 0.30 40.30 0.30 Open NVLS 31.15 29.15 APR 37 35 0.35 35.35 0.35 Open VSEA 40.85 36.27 APR 50 45 0.60 45.60 0.60 Open COGN 29.54 28.63 APR 35 32 0.35 32.85 0.35 Open SFA 31.96 30.80 APR 40 35 0.55 35.55 0.55 Open BBBY 39.04 38.80 APR 45 42 0.25 42.75 0.25 Open MSTR 52.64 48.90 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 As noted last week, the bearish spread on Adobe (NASDAQ:ADBE) was a candidate for early exit after the recent earnings-related rally. Although the position is currently profitable, conservative traders should consider closing the play to limit potential losses. Since no directional recommendations were made (both bullish and bearish plays were published) with the index-based credit spreads, we will not be tracking them in the portfolio. However, we will continue to offer suggested strike prices for conservative spreads with the OEX and SPX each month on expiration week-end. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status GLBC 13.86 16.57 APR 15 12 1.80 2.50 Open? SNP 40.74 37.80 APR 40 40 5.70 5.70 Open CCMP 44.55 41.26 APR 45 45 5.90 5.75 Open AMX 35.66 37.20 MAY 35 35 3.65 4.30 Open AIG 74.28 70.00 MAY 75 75 5.60 7.00 Open SLB 65.13 62.14 MAY 65 65 6.75 6.50 Open Global Crossing (NASDAQ:GLBC) "gapped" higher at the open on the first day after the play was offered, however traders who paid a slightly higher price to enter the straddle were rewarded with a small short-term gain. 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 - 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AGI - Alliance Gaming 32.35 *** Hot Sector! *** Alliance Gaming (NYSE:AGI) is a diversified, worldwide gaming firm that designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines. The company also designs, integrates and sells highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with over 240,000 game monitoring units installed worldwide. The company conducts its gaming operations under the name Bally Gaming and Systems. AGI - Alliance Gaming 32.35 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 30 AGI PF 155 0.45 29.55 5.4% 1.5% * __________________________________________________________________ ASKJ - Ask Jeeves $29.01 *** Uptrend Intact! *** 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 $29.01 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 1687 0.40 24.60 6.6% 1.6% * SELL PUT MAY 22.5 AUK QX 15 0.60 21.90 4.9% 2.7% SELL PUT MAY 25 AUK QE 75 1.20 23.80 7.2% 5.0% __________________________________________________________________ ENDP - Endo Pharmaceuticals $22.68 *** A Big Day! *** Endo Pharmaceuticals (NASDAQ:ENDP) is a specialty pharmaceutical company specializing in pain management. The company is engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain. The company's primary area of focus is analgesics, with a portfolio of branded products and generic drugs that cover a broad range of indications, most of which are focused in pain management. ENDP - Endo Pharmaceuticals $22.68 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 20 IUK PD 1012 0.25 19.75 5.0% 1.3% * SELL PUT APR 22.5 IUK PX 151 1.05 21.45 14.0% 4.9% __________________________________________________________________ NFLD - Northfield Labs $15.08 *** Premium-Selling Only! *** Northfield Laboratories (NASDAQ:NFLD) is engaged in the production of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. Its PolyHeme blood substitute product is a solution of chemically modified hemoglobin derived from human blood. PolyHeme simultaneously restores lost blood volume and hemoglobin levels and is designed for rapid, massive infusion. PolyHeme requires no cross-matching and is therefore immediately available and compatible with all blood types. It has an extended shelf life compared to blood. Northfield Labs purchases indated and outdated blood from The American Red Cross and Blood Centers of America for use as the starting material for PolyHeme. It uses a proprietary process of separation, filtration and chemical modification to produce PolyHeme. NFLD - Northfield Labs $15.08 "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 12.5 DHQ PV 735 0.35 12.15 12.2% 2.9% * SELL PUT APR 15 DHQ PC 780 1.25 13.75 23.0% 9.1% __________________________________________________________________ PBY - Pep Boys $26.38 *** Entry Point? *** 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 $26.38 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 81 0.45 24.55 6.2% 1.8% * SELL PUT MAY 25 PBY QE 0 1.00 24.00 5.2% 4.2% __________________________________________________________________ PLMO - palmOne $17.60 *** Profitable Outlook! *** palmOne (NASDAQ:PLMO), formerly Palm, develops, designs and sells Palm-branded, hand-held devices, accessories and the operating system Palm OS. The company was historically organized into two operating segments: the Solutions Group and PalmSource. Now the Solutions Group develops and markets hand-held devices and other accessories to provide the user with a simple, elegant and useful productivity tool. PalmSource developed and licensed the Palm OS and related software, which is referred to as the Palm platform. The Palm platform is the foundation for Palm devices, as well as for devices manufactured by other third-party licensees. PLMO - palmOne $17.60 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 UPY PC 1093 0.35 14.65 9.7% 2.4% * SELL PUT APR 17.5 UPY PW 978 1.25 16.25 20.2% 7.7% __________________________________________________________________ RSAS - RSA Security $16.05 *** Microsoft Ruling = Rally! *** RSA Security (NASDAQ:RSAS) is a provider of electronic security (e-security) solutions that are designed to help organizations ensure the authenticity of the people, devices and transactions involved in e-business. The company's core competencies are in two-factor user authentication solutions, Web access management software, digital certificate management solutions and encryption software. Through its RSA SecurID, RSA ClearTrust, RSA Keon and RSA BSAFE product lines, the company directly addresses critical e-security requirements for e-business. RSAS - RSA Security $16.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 15 QSD PC 848 0.45 14.55 10.2% 3.1% * SELL PUT MAY 15 QSD QC 1 0.85 14.15 7.2% 6.0% __________________________________________________________________ SHFL - Shuffle Master $45.98 *** New "All-Time" High! *** Shuffle Master (NASDAQ:SHFL) develops, manufactures and markets automatic card shufflers for use with card-based table games. The company also develops and markets table games and licenses these products to casinos. Shuffle Master develops and markets slot games and slot game operating systems for slot machines. SHFL - Shuffle Master $45.98 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 40 SFQ PH 241 0.35 39.65 3.6% 0.9% TS SELL PUT APR 45 SFQ PI 286 1.45 43.55 10.2% 3.3% __________________________________________________________________ SYMC - Symantec $43.02 *** The Uptrend Resumes! *** Symantec (NASDAQ:SYMC) provides content and network security software and appliance solutions to enterprises, individuals and service providers. The firm provides client, gateway and server security solutions for virus protection, firewall and virtual private network, security management, intrusion detection, e-mail filtering and Internet content, remote management technologies and security services to enterprises and service providers worldwide. The company views its business in five operating major segments: enterprise security, enterprise administration, consumer products, services and other activities. SYMC - Symantec $43.02 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 37.5 SYQ PU 2620 0.25 37.25 2.8% 0.7% TS SELL PUT APR 40 SYQ PH 4908 0.65 39.35 5.8% 1.7% * ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ LLL - L-3 Communications $56.67 *** Technical Break-Out! *** L-3 Communications Holdings (NYSE:LLL) is a merchant supplier of sophisticated secure communication systems and specialized communication products. Its customers include the United States Department of Defense (DoD), certain United States government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The company has two major business segments, Secure Communication Systems and Specialized Communication Products. LLL - L-3 Communications Holdings $56.67 PLAY (conservative - bullish/credit spread): BUY PUT APR-50.00 LLL-PJ OI=710 ASK=$0.15 SELL PUT APR-55.00 LLL-PK OI=435 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$54.50 __________________________________________________________________ TASR - Taser International $61.80 *** Pure Premium-Selling! *** Taser International (NASDAQ:TASR) develops, assembles and markets less-lethal, conducted energy weapons primarily for use in the law enforcement and corrections market. The company's weapons utilize compressed nitrogen to shoot two small, electrified probes up to a maximum distance of 21 feet. The probes and compressed nitrogen are stored in a replaceable cartridge attached to the base of the weapon. After firing, the probes discharged from the cartridges remain connected to the weapon by high-voltage insulated wires that transmit electrical pulses into the target. These pulses, which the company calls TASER-Waves, temporarily overwhelm the normal electrical signals within the body's nerve fibers, impairing the subjects' ability to control their bodies or perform coordinated actions. The company's primary product is the Advanced Taser, a unit designed primarily for law enforcement. TASR - Taser International $61.80 PLAY (less conservative - bullish/credit spread): BUY PUT APR-45.00 QUR-PI OI=94 ASK=$0.55 SELL PUT APR-50.00 QUR-PJ OI=642 BID=$1.20 INITIAL NET-CREDIT TARGET=$0.70-$0.80 POTENTIAL PROFIT(max)=16% B/E=$49.30 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MTLM - Metal Management $34.00 *** A Big "Down" Day! *** Metal Management (NASDAQ:MTLM) is principally engaged in the business of collecting and processing ferrous and non-ferrous metals in the United States. The company collects industrial scrap and obsolete scrap, processes it into reusable forms and supplies the recycled metals to customers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters and metals brokers. These services are provided by its recycling facilities located in 13 states. MTLM - Metal Management $34.00 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 40 MQB DH 55 0.60 40.60 9.7% 1.5% * SELL CALL APR 35 MQB DG 0 2.00 37.00 18.1% 5.4% __________________________________________________________________ NIHD - NII Holdings $31.18 *** Consolidation In Progress! *** NII Holdings (NASDAQ:NIHD) provides digital wireless communication services targeted at meeting the needs of business customers with four operating companies located in Latin American markets. The company was formerly known as Nextel International. Its principal operations are in major business centers and related transportation corridors of Mexico, Brazil, Peru and Argentina. It also provides analog specialized mobile radio services through two companies in Chile. NIHD - NII Holdings $31.18 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 QHQ DG 5040 0.30 35.30 4.4% 0.8% * SELL CALL APR 33.37 QHQ DQ 1938 0.60 33.98 7.3% 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NTLI - NTL Incorporated $53.12 *** The Downtrend Continues! *** NTL Incorporated (NASDAQ:NTLI) provides communications services to residential, business and wholesale customers. The company offers residential telephony, cable television and Internet access services. NTL also provides national and international carrier telecommunications, satellite and radio communications, as well as digital and analog television and radio broadcast transmission services. NTLI - NTL Incorporated $53.12 PLAY (conservative - bearish/credit spread): BUY CALL APR-65.00 NUD-DM OI=3067 ASK=$0.55 SELL CALL APR-60.00 NUD-DL OI=1071 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$60.55 __________________________________________________________________ SINA - SINA Corporation $35.96 *** In A Trading Range? *** SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $35.96 PLAY (less conservative - bearish/credit spread): BUY CALL APR-45.00 NOQ-DI OI=3125 ASK=$0.30 SELL CALL APR-40.00 NOQ-DH OI=3379 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.70-$0.80 POTENTIAL PROFIT(max)=16% B/E=$40.70 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ No straddles or strangles today... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ********** Watch List ********** Growing More Oversold ___________________________________________________________________ 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 Inc - MSTR - close: 47.71 change: -1.19 WHAT TO WATCH: Yuck! The GSO software index was one of Wednesday's best performing sectors behind the chips but shares of MSTR were not participating in the rebound. Today marks the third day in a row that MSTR has closed under support at its $50.00 mark and its simple 200-dma. The combination of Tuesday- Wednesday's sessions looks like a bearish failed rally pattern under resistance. There is additional support near $45 but more aggressive bears might try for a move toward the $40 level. Chart= --- United Technologies - UTX - close: 84.05 change: -0.33 WHAT TO WATCH: This Dow component does not look healthy but it has managed to hold support at its simple 200-dma for the last three sessions. The bad news is that there was very little bounce today or yesterday for that matter. The stock is down about 14% from its February highs and looks very oversold after five weeks of selling. Should the 200-dma not hold as support there is additional support at $82.50 from October-November and more support at $80.00 from August-September and its P&F chart. Of course UTX has broken numerous support levels already in the last month so there's no guarantee these will hold either. On the other side of the coin the more this stock drops the more it will look like a value play. We'd watch UTX for a move above its 10-dma. Chart= --- Borg Warner - BWA - close: 79.78 change: -1.52 WHAT TO WATCH: Okay, okay we've been kicking ourselves for days now about not taking the short when BWA broke through the $90.00 level. It did pause at support near $85 for several days but the downtrend has picked up speed and on rising volume. The close under the $80 mark looks like bad news but BWA should have more support at its simple 200-dma near $78.00. This stock is looking very oversold down almost 20% from its January highs. We'd probably watch BWA for a bounce from its 200-dma. Chart= --- Amazon.com - AMZN - close: 39.63 change: -0.60 WHAT TO WATCH: Yuck! AMZN has really been on the losing end of the recent declines. Shares are down three days in a row and today's decline broke support at the $40 mark. Currently its P&F chart points to a $32 price target, which is close to its June 2003 lows. The only thing that might make us hesitate to open new bearish positions is the recent six-week bearish consolidation looks like a descending channel. If that's the case then AMZN is at the bottom of that channel now and should bounce soon. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- CVX $85.88 -1.59 - Today was a major breakdown in the oil and oil service stocks. The OSX oil service index was the worst performing sector. Stocks like CVX and COP have broken their 50- dma's and look vulnerable to more profit taking. RSE $51.63 -0.47 - Watch RSE for a bounce from its 40-dma near the $50.00 mark. ******************* 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. 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