The Option Investor Newsletter Sunday 03-28-2004 Copyright 2004, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. In Section One: Wrap: Fear Factor! Futures Market: See Note Index Trader Wrap: BIG WEEK Editor's Plays: Catch the Rocket? Market Sentiment: Not Convinced Ask the Analyst: Breaking down .... the Dow Industrials 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 03-26 WE 03-19 WE 03-12 WE 03-05 DOW 10212.97 + 26.37 10186.6 - 53.48 10240.1 -355.47 + 11.63 Nasdaq 1960.02 + 19.55 1940.47 - 44.26 1984.73 - 62.90 + 17.81 S&P-100 543.52 - 0.16 543.68 - 6.24 549.92 - 18.53 + 3.91 S&P-500 1108.06 - 1.68 1109.74 - 10.83 1120.57 - 36.29 + 11.91 W5000 10840.18 - 12.80 10852.9 -115.20 10968.2 -346.24 +141.50 SOX 479.25 + 15.90 463.35 - 21.75 485.10 - 19.15 + 1.99 RUT 572.92 + 2.18 570.74 - 12.10 582.84 - 16.70 + 13.98 TRAN 2835.90 + 49.07 2786.83 - 76.26 2863.09 - 29.98 - 9.12 VIX 17.33 - 1.82 19.15 + 0.85 18.30 + 3.82 - 0.09 VXO 17.21 - 1.95 19.16 + 0.44 18.72 + 3.92 + 0.04 VXN 23.04 - 2.95 25.99 + 0.69 25.30 + 3.22 - 0.79 TRIN 0.89 1.93 0.44 1.40 Put/Call 0.77 1.03 1.05 0.79 ****************************************************************** Fear Factor! by Jim Brown Was it the end of the bounce or just fear of weekend event risk that sent the indexes plummeting at Friday's close? We will have to wait for Monday's open to tell if the highs set Friday afternoon will be surpassed. Considering the big gains from Thursday a simple positive close would have been bullish and it looked like a sure thing until 3:PM. Traders capped a very boring consolidation day with a dramatic plunge back to negative territory. Sounds bad but it wasn't despite what the talking heads said. The indexes ended down only single digits and the bulls will gladly take a single digit loss for every triple digit gain. Dow Chart - 180 min Nasdaq Chart - 180 min For what it is worth the economic calendar on Friday was relatively light. The Personal Income for February rose by +0.4% compared to estimates for only +0.3% with upward revisions in several components for January. This report was generally positive although spending slowed to its lowest rate since October. Savings were up +1.9% and that is a product of weakening consumer sentiment in February. The final Michigan Consumer Sentiment for March was also released and it jumped to 95.8 from 94.4 in February and recovered from a weaker initial number two weeks ago. This could be seen as a consumer rebound now that the economy appears to be getting over its February blahs. The initial campaign blasts are history and voters are beginning to glaze over with the claims and counter claims. Jobs still appear to be getting stronger and there was no follow on to the Madrid attacks. Americans have a very short memory when it comes to things happening outside the country and this jump in sentiment proves that. The majority of the gains were in the present conditions component which jumped from 103.6 to 106.8 while the future expectations component was barely changed at 88.8 from 88.5. That expectations component is down from 100.1 in January but as I have said before it is likely due to candidates trashing the economy in their speeches. There were a couple of notable stock events on Friday and one was the jump in GE stock. GE rose $1.25 intraday after a Merrill Lynch analyst put the stock on its Focus One list. He said the pressure on the stock over the last several weeks was artificial due to acquisition pressures. GE issued nearly $4B in new stock on March 8th to cover the Vivendi acquisition and stock has trended down almost daily since then. That was not the extent of the problem. GE has also agreed to buy Amersham for $9.5B in stock and that deal is expected to close on April 8th. The Merrill analyst said that up to 50% of the Amersham stock, representing about 150 million GE shares, is in the hands of arbitragers. He expects about 15 million shares of GE to be shorted daily for the next two weeks as the arbitragers continue to hedge their Amersham position. If you owned a share of Amersham stock worth $30 today and you were going to be given a share of GE stock in two weeks for every share you owned then you have the risk that GE stock will decline during that period. Since the acquiring company normally declines as the exchange date approaches you can hedge your long position by shorting the GE stock. If it was worth $30 at the announcement and you short it at $30 then you don't care if it drops to $25 before the exchange. You get your new GE share at $25 in exchange for your Amersham share and you cover your short at the same time on the market. You now have a GE share at $25 and $5 in cash and odds are good your GE will now rise with the acquisition pressure off. What surprised everyone was the +$1.25 jump intraday. With the 150 million share overhead supply the upgrade from Merrill probably caught a lot of shorts unprepared. If the stock was going to move up over $30 then they don't want to be hedged with shorts. See the problem? 68 million shares of GE changed hands and while existing shorts were running for cover those that wanted to short higher were eagerly jumping on the wagon. The stock ended up only 40 cents but there was plenty of excitement. On the Nasdaq the big winners from Thursday were the losers on Friday just as you would have expected. The majority of the losses occurred at the close and appeared to be just normal profit taking. The biggest weakness for the day was the Semiconductor Index which remained positive for only about 30 min at the open and was weak the rest of the day. The index tried to make a run to positive territory at 4:15 but closing selling quickly sent it to the low of the day. The Russell was by far the strongest index with the small caps leading the charge from the opening bell and never looking back until the profit taking at the close. The Russell rebounded to 575 before stalling and that is almost exactly the resistance level where it failed the prior week. The Dow rallied to 10250, also the beginning of last weeks resistance and tried valiantly to break out but was unsuccessful. The Nasdaq rallied to 1977 and only three points below the 1980 resistance I mentioned on Thursday night. This is exactly what I hoped would happen only I wanted the indexes to close in positive territory. The closing profit taking was sharper than most expected given the intraday gains. We wanted to move closer to resistance and be prepared for a continuation move on Monday as end of quarter window dressing increases. Those bulls faced with rising indexes Friday afternoon were pleased to see the closing drop. In hindsight I think we cleared some intermediate sell stops on the afternoon bounce and the drop at the close set us up for a better entry point on Monday. The bullish viewpoint is looking for window dressing, expecting quarter end fund flows and the potential for positive economic reports to convince investors the economy is growing and the correction is over. That requires faith and it is just one viewpoint. It also may not be a long-term view and just a potential a trading bounce. If that was the bullish case there is also a bearish side. The bearish side is more technical and would point to all the critical resistance levels ahead. The bears would see the negative close as lack of follow through and evidence that the resistance levels will hold. I put those resistance levels on the charts below and you can quickly see that moving higher will not be that easy. Current resistance levels and Friday's close: Resistance - close Dow 10300 - 10219 Nasdaq 1980 - 1962 NDX 1430 - 1419 S&P 1120 - 1108 R2000 575 - 572 SOX 490 - 480 Nasdaq Chart - 45 min Dow Chart - 45 min S&P Chart - 45min SOX Chart - 45min Russell Chart - 45min NDX Chart - 45min The bulls expect the market to move up on Monday and I would agree with that analysis as long as we have no weekend events. I think the end of quarter window dressing and fund flows will help start the week with a positive spin. I also think the potential for a positive jobs report on Friday will give us a positive bias. The problem remains the resistance just overhead and the barrage of economic reports midweek. The market has been short term oversold and the rebound on Thursday remedied that and the intraday bounce on Friday was definite follow through in my view. I expected selling into the close, just not so severe. It is that weekend fear factor that caused profits to be booked. I have netted out the opposing viewpoints above with this scenario. I could see a positive Monday as we again test resistance. That sets us up for the real test. There will be no specific need to sell as the profit taking already occurred on Friday. If we get to those resistance levels above then we will see if the rebound has legs. Another positive jump in Consumer Confidence on Tuesday could help build investor confidence but the NAPM, PMI and Factory Orders on Wednesday will have to confirm. Holding at resistance until those Wednesday reports will be tough unless the rally is real. If the bulls have decided the bottom is behind us then all of this will be mute and we will forge ahead regardless of the news. Even then the bulls have an uphill battle ahead and it is not going to be easy. Thursday and Friday will be critical turning points with the ISM and Jobs. The consensus estimate for the ISM is only 60.5 and that would be the second consecutive monthly decline. A better than expected ISM number might really help quiet the bears. The Jobs report on Friday is expected to produce 100,000 jobs and after seeing estimates trounced soundly for the last several months the pundits are being very quiet. Eventually we are going to see a change in this number. We have had positive job creation for the last six months despite the actual numbers being lower than expected. While a 100K gain would sure make politicians breath better a negative number would not be a disaster. We have put up with the less than expected news and the outsourcing debate for so long that a slightly negative number would not be the end of the world. Remember the drastic drop in the Mass Layoff report, the better than expected Help Wanted Index and the continuing downtrend in Jobless Claims? They could actually be signaling a real improvement in jobs. This is what investors will be hoping for as they decide to buy or sell stocks at resistance next week. There was a new threat beginning to appear on the horizon that investors will eventually have to face. The Fed fielded six speakers this week and more than one analyst saw the implied warning in their speeches. The subtle new message starting to creep into the tone of their words is "rates have been too low for too long." They have not come right out and said there is a change in the wind but they appear to be prepping the bond market to be ready. Bonds saw their biggest one-day drop for the month on the new Fed tone. We are at a critical turning point. A move over these resistance levels next week for whatever reason would be very bullish. We could see some strong short covering and the improvement in bullish sentiment could drag buyers back from the sidelines. We have seen the bearish sentiment surge over the last three weeks as it does with every correction. The gloom and doom preachers are trotted out for every news program to do battle with the perma bulls. The bulls have the opportunity to send them back into hibernation for several more weeks if they can only break through last weeks ceiling. We have ringside seats to the greatest show on earth and next week could signal the direction for weeks to come. Is the correction over or just getting started? This week should provide the answer. 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 ******************** BIG WEEK By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE – A big week for the Indexes - they sold off sharply of course into mid-week then rebounded strongly. The tip off that stocks might be bottoming came from the fact that they couldn't take em lower after 3 days where intraday lows were being made in the same approximate area. Hey, it they can't take em down, there's no where else to go when the bargain hunters come in – who is going to sell em when the indices are already driven so far down from their peaks. The S&P 100 for example retraced nearly 2/3rds of the it's last upswing. Retracements of 62 to 66% is as much as I expect and still have it be a "retracement" – rather than a complete return to the prior lows. The bottom line is that, while I had some still-lower price objectives, taking a look (below) at the same charts and looking some of the factors favoring an upside reversal leads me to the conclusion that the correction has mostly run its course. This is not to say that the market will resume a very strong upward course as before, but given an ok to good jobs number, good earnings reports coming up, etc. the market will be poised for some more upside. FRIDAY'S TRADING ACTIVITY – Stocks ended a bit lower Friday as an earlier rally faded and selling, mostly seen as profit taking, brought the Indexes down on the day. There was not much appetite, by short-term traders at least, to hold positions over the weekend after a volatile week. Profit-taking was the preferred action. Traders were also slightly jittery about terrorism after the inflamed situation in the mid-east after and around Israeli actions in killing the Hamas leader. Plus the 9/11 commission meetings were in the headlines all week as well. The Standard & Poor's 500 (SPX) closed at 1108, down 1.1. For the week SPX was unchanged. The Dow (INDU) was off 5.8 points at the close – it was up 26 points on the week after its 170 point rally of Thursday. The Nasdaq Composite (COMPX) was down 7 points to 1960 and up on the week by nearly 20 points or approximately 1%. Stocks got a boost early from the U of M (University of Michigan) consumer sentiment index – it rose to 95.8 from 94.4 in February, in its final reading for this month. The expectations were for a bit lower than this. For March, the index rose to 106.8 from 103.6 in February. Airlines were up, as were financial stocks, gold, utilities, internet and networking. The SOX semiconductor index was down over a percent on profit taking type selling and this seemed to be the major factor in a late Nasdaq decline. GE was up over a percent, after Merrill Lynch featured the company on its focus list – well, I remember this list from my days at Mother Merrill. On the downside, MMM (3M) fell over 1 percent as did Intel (INTC), with another Dow stock, McDonald's off some 2% - of course this has to be seen against the strong trend the stock has been in, rallying even when the rest of the Dow was declining recently. All in all, Friday was not an eventful day and the volume was lackluster, especially when compared to Thursday's fireworks. OTHER MARKETS – Gains in the market this past week, cut into bond demand for which seemed expensive - yields TOO low – if we are to believe the stock market trend and the expectations for good economic growth. In currencies, the euro fell slightly against the dollar, on speculation that the European Central Bank will move to cut interest rates MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: Key resistance in the S&P 500 (SPX) still looks to be 1125 per the chart below. I thought that the break of the 1100-1105 area could lead to a further fall to 1080, maybe 1060 at some point. NOT! My trading envelopes told the story. The second "touch" to the lower trading band and to the trendline drawn from the Aug-Sept lows PLUS a bullish RSI divergence was more suggestive of a reversal back to the upside. And forget the idealized price targets. I'll show the bullish RSI divergence on the Dow chart further on – this divergence shows up on all the NYSE-related indices. There is one further indicator that is worth noting here with the SPX chart however – my Call to Put indicator which got as low as it typically goes ahead of a rebound did bottom some 6 trading days ahead of the low. It was only a day late! Typically, there is a next tradable bottom that occurs after low readings like can be seen below, within more like 1-5 days. Pretty much on "schedule" however – certainly with the cluster of lows that occurred mid week. Such advance warning means that we have to then zero in on factors that will pin down the reversal more closely than 1-5 days! S&P 500 Index (SPX) – Weekly chart: I thought to also revisit the weekly chart for the bigger picture. And on a weekly closing basis I can better this that SPX is still within its broad uptrend channel. This is the case however, ONLY if weekly closes turn up from here. I would also note that the decline of last week has again pulled the 8-week RSI momentum indicator lower and it is suggesting that this market is approaching an oversold condition. This of course only implies some further rally potential. At least we can figure that the probability for further sharp declines is lessening. S&P 100 Index (OEX) – Daily chart: Key overhanging resistance appears on the chart as 558-560. Major support is at 525. The correction has now completed a Fibonacci 62% retracement of the November to January advance. This is a good indication that a bottom may be in place. Stay tuned on that. I suggested last week that OEX could be pulled to 530 or a bit lower – 527 was a target I had. We could still get there but the low made last week looked pretty convincing – this is not to say that there won't be some backing and filling for a time ahead of the release of Q1 2004 earnings. INDICATORS – The main note is the oversold stochastic. Rally potential is suggested. As long as the recent lows hold, OEX has potential for call buyers for sure. More can be seen next on the hourly chart. S&P 100 Index (OEX) – Hourly chart: I suggested last week a point to take profits on puts was at or below 540. The move "gave" more than that. Still a heck of a profit if you got in anywhere around resistance implied by the top end of the hourly downtrend channel. Minor support looks now to be 538 per the notation on the hourly chart. Resistance is at 552. I anticipate support developing on any decline to the 535-538 area. Key trendline support is in the 530 area. I would watch for the next retreat and an oversold hourly stochastic on a 21-hour setting to judge a possible entry point for calls. If you bought on the last decline when OEX went sideways around 535 and bit under, showing the support in that area, it looks good to hang in with calls. Dow Industrials (INDU) Daily: As could be anticipated by the big fat even round number at 10,000, the Dow held fast. And, a significant RSI divergence set up as this indicator did not fall to a new low along with the Dow Average. A divergence like is suggesting a solid upside reversal and so far that is what it looks like happened. 10,400 is key overhanging resistance. Any pullback to the 10,000-10,101 area now looks like a place to add to DJX calls. Stay tuned. Nasdaq Composite (COMP) Index – Daily: I've long thought and been saying that 1900 would be as low as the Composite would go and I may be proven RIGHT! Right? 1920-1925 is the area to watch for support. Support, at the lower end of the hourly downtrend channel is at 1920, then 1900. 1980 is where I have highlighted near resistance as we see repeated hourly highs in this area. 2000 is key resistance as implied by this being at the top end of the broad hourly downtrend channel. There is some way to go to now get the longer of my two stochastic models back to the lower extreme. I would watch this indicator for when it does. If this occurs in the 1920-1925 area or even back in the low-1900 area, it seems favorable for buying the Nasdaq calls again. Nasdaq 100 (NDX) Index: I suggested last week support looked to around 1400, then at 1380. I also favored call purchases bought on a decline into support, with an exit at 1370 – the Wednesday low was 1368 and the weekly close, 1415. Go figure - and hard to figure this kind of entry ahead of the fact. If holding calls with an entry in the 1380-1400 area, the exit point technically where the further rally potential is called into question would be if NDX closed below 1380. I should also note that from the 1380 area to the Friday high at 1430 was a 50 point move and I was looking only for a 40 point trading objective. As to the chart, I prefer taking a look just at the QQQ tracking stock for the Nas 100 this week. Nasdaq 100 tracking Stock (AMEX:QQQ)– Daily & Hourly: I've been thinking that QQQ might get back to the 34 area (or a bit under) and it did – imagine that. But that is where the support was suggested based on prior lows and the low end of the hourly trend channel and so on. QQQ does have a habit of trading fairly predictably within its hourly trend channel. The stock is being turned back around 35.5 right now. Resistance at the upper boundary of this channel is at 36. Buy dips, such at back to 34.5 and under, with an exit point or sell stop at 33.8. For those short the stock or holding puts held from week before last, my advice from last week's column was to take the profits and run if QQQ got to the $34 area – I hope you cashed in! TRADER'S CORNER article – My past week's article (3/23/04) was on technical patterns that were seen at or after the prior top – namely, a rounding top formation on the Dow as well as a Head & Shoulder's top pattern and the "bear flag" that formed ahead of last week's sharp decline. See – http://www.OptionInvestor.com/traderscorner/tc_032304_1.asp Please e-mail on any question(s) related to trading/technical analysis tools of interest. Good Trading Success! ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ************** Editor's Plays ************** Catch the Rocket? Last week it looked like we were going to be able to buy SYMC at the bottom of the uptrend channel at $42. The tech correction was in full swing and even the super stars were being taken to the cleaners. What a difference a week makes! SYMC did pull back to $42, actually just under $41 on the Monday massacre and then rocketed to new highs before the week was out at $46.50. If you had the patience to wait for the targeted $42 entry and the courage to buy the dip in the face of a market meltdown then you were handsomely rewarded. SYMC was one of my end of year stock suggestions and I had to chase it for all of January before finally biting the bullet at $39. The recommended option was the Jan-05 $40 call at $4.75. It is $9.90 today and I have big hopes for it by January-2005. Symantec Chart - Daily ******************* DNA traded down to $100.45 this week from its $114 high. ******************* Instant Replay We did not even come close to triggering the DJX puts at Dow 10300 last week. Monday gapped down about -100 points and that was the end of that scenario. However it appears we may get another chance at the same play. The Dow rebounded to 10271 on Friday before selling off at the close. If we do not have any negative events over the weekend I expect another rally attempt on Monday. The 10325 level remains very strong resistance and we probably will not make it through on the first attempt if at all. I want to leave last weeks potential put play active and let's see what happens. I want to target 10300 as an entry point to buy the April $102 DJX puts. I would estimate they would cost $1.00 with the Dow at 10300. The stop loss would be Dow 10400 and the profit target will be Dow 10100. This is a slight change from last week with a higher profit target. However, if we do head south again I would not be eager to jump out at 10100 as a lower low could be in our future. If we do break through the 10325 level then our 10400 stop should be just a short covering burst away. I am still using April options as there will be an almost immediate resolution of either outcome so time is not a factor. Dow Chart - 45 min **************** MARKET SENTIMENT **************** Not Convinced - J. Brown Whether you're a bull or a bear you have to admit that Thursday's rally was pretty impressive. It was very widespread and market internals were strongly bullish. Tech stocks really bounced sharply. It seemed like the Monday through Wednesday test of support for the major averages had suddenly satisfied everyone's need for a correction (with the Dow & S&P down more than 5% and the NASDAQ down 11%) and AMAT's positive comments on Wednesday night waved the big green "go" flag. What was truly impressive was that the markets were mildly positive through most of Friday and only closed in the red with single digit losses in a last hour sell-off. But the real question is whether or not this is a true turnaround or just an oversold bounce. I get the feeling that many traders are not yet convinced. They're cautiously optimistic and would like to buy the bounce but the new background of geopolitical risk may call for a bit more courage than they're used to summoning. The rise in gold to new 2 1/2 month highs over the $420 level is a sign of traders seeking a safe haven both from terrorism risk and poor economic data. Now odds are that once earnings season starts all eyes will focus on corporate profits and many of the so called experts believe this could re-start the rally at least into early summer. Right now I agree with them, although it's been a little disappointing to see all the positive pre-announcements fail to generate more good will than they have. However, the immediate focus is the Friday jobs report. All the clues are suggesting it should be positive but we've been let down so many times now no one wants to get their hopes up (or stick their neck out). Keep your ears open for the consumer confidence numbers on Tuesday. A positive reading there could help soothe investor fears and prime the pump for a stronger launch into the earnings season. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 7929 Current : 10212 Moving Averages: (Simple) 10-dma: 10167 50-dma: 10481 200-dma: 9820 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 843 Current : 1108 Moving Averages: (Simple) 10-dma: 1106 50-dma: 1134 200-dma: 1056 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1014 Current : 1415 Moving Averages: (Simple) 10-dma: 1402 50-dma: 1471 200-dma: 1382 ----------------------------------------------------------------- Volatility indices took a deeper drop than you might have expected given the major averages closing in the red on Friday. The culprit may be investor attitudes that the worst is behind us and we've seen the correction everyone was looking for. CBOE Market Volatility Index (VIX) = 17.35 -0.53 CBOE Mkt Volatility old VIX (VXO) = 17.21 -0.55 Nasdaq Volatility Index (VXN) = 23.04 -0.66 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.77 584,342 449,027 Equity Only 0.62 482,828 300,893 OEX 1.04 21,297 22,126 QQQ 1.97 17,771 34,951 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 70.4 + 0 Bull Correction NASDAQ-100 38.0 + 0 Bear Confirmed Dow Indust. 76.7 + 0 Bear Confirmed S&P 500 72.6 + 1 Bear Confirmed S&P 100 77.0 + 0 Bull Correction 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: 0.84 10-dma: 0.87 21-dma: 0.84 55-dma: 0.87 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 1484 1546 Decliners 1346 1504 New Highs 87 79 New Lows 14 15 Up Volume 897M 737M Down Vol. 701M 789M Total Vol. 1610M 1546M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 03/23/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders pared back their positions in both long and short plays but they remain next short, which is a change in sentiment over last week. Small traders significantly altered their short positions but remain net long. Commercials Long Short Net % Of OI 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% 03/23/04 401,456 418,732 (17,273) (2.1%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 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% 03/23/04 130,648 89,943 40,705 18.5% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Commercial traders chopped off a large chunk of open positions from both their longs and shorts and what was left behind is their most bullish reading in weeks. Small traders are still bullish too. Commercials Long Short Net % Of OI 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%) 03/23/04 268,647 294,930 (26,283) ( 4.7%) 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 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% 03/23/04 131,879 59,210 72,669 38.0% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 We see the same reduction in outstanding positions in the NDX futures but commercial traders have become more bullish on the NASDAQ while small traders have become bearish. Commercials Long Short Net % of OI 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% 03/23/04 52,014 34,017 17,997 20.9% 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 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% 03/23/04 9,884 12,887 (3,003) (13.2%) 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 Ouch! Commercial traders have switched from bullish to almost bearish with a large drop in long positions and a big jump in shorts. Meanwhile small traders have moved from strongly bearish to bullish. Commercials Long Short Net % of OI 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% 03/23/04 23,048 22,119 929 2.1% 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 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%) 03/23/04 8,344 6,734 1,610 10.7% Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** *************** ASK THE ANALYST *************** Breaking down .... the Dow Industrials This week we saw further deterioration in the various major market bullish % indicators, and this has my e-mail full of various questions regarding what stocks may be viable put or short candidates, as well as questions on how far we might begin looking for the major markets to decline. In order to try and answer several questions with one article, we'll start with "what we know" and work from their. In the OptionInvestor.com Index Trader Wrap from 03/22/04, we took a look at the Dow Industrials (INDU) 10,212.97 point and figure chart, and this weekend, I'm going to use the Dow Industrials as an example of how a trader/investor can begin what may be an important exercise in assessing downside risk, where we begin to see more internal damage taking place in the various bullish percent indicators. I've chosen the Dow Industrials as my example index, as it is a rather simple index to keep track of, with just 30 stocks comprising this major market average. Let's first start with "what we know" or some preliminary technicals, where for the first time since this great bull market took hold in March of 2003, the Dow Industrials has done something it hasn't done since March of 2003, where we have seen two consecutive point and figure sell signals. This is DIVERGENCE from the past, and should have traders and investors taking a more defensive approach to investing or trading in their investment accounts. Dow Industrials (INDU) - 50-point box scale I've marked a few details on the INDU's point and figure chart, where the BOLD RED CIRCLES at 10,400 and 10,050 mark two consecutive point and figure sell signals. Those traders/investors that would like to view a point and figure chart can do so for FREE at www.stockcharts.com. There are TWO basic DOWNSIDE RISK assessments that traders and investors may be making at this point. ONE downside risk assessment is the current bearish vertical count of 9,400, which was generated by the long column of Os from 10,700 to 10,100. While bearish vertical counts can be exceeded, but sometimes never met, a bearish vertical count is a good starting point to begin assessing downside risk. Since bearish counts are sometimes never achieved, a SECOND downside risk assessment can be made to the INDU's rising bullish support trend (BLUE +), where should the INDU's point and figure chart see a 3-box reversal, with a trade at 10,100, would have the bullish support trend at 9,700. It would be inaccurate to assume that a Dow Industrials decline to 9,700, or 9,400 could then be translated to either similar percentage declines in the S&P 100 (OEX.X), S&P 500 Index (SPX.X), or the more volatile and tech-heavy NASDAQ-100 Index (NDX.X), but one could begin to sense that a Dow Industrials decline to either the 9,700 level or 9,400 level would most likely find other major market averages seeing a decline. Again... the INDU is a good index to begin breaking down, as a trader/investor can more easily comprehend and review 30 point and figure charts, than they can 100 charts (OEX and NDX) or 500 charts (SPX). Once a trader/investor has started assessing downside risk, with potential lower levels of trade and the bearish vertical count, they can also begin to understand RISK, along with internal strength or weakness as depicted by the Dow Industrials Bullish % ($BPINDU). Before we move on, traders and investors should understand that the Dow Industrials is a very general representation of the U.S. markets, but 30 stocks can by no means be a full representation of an overall market containing more than 10,000 stocks listed on the three major exchanges here in the U.S. With that said, the INDU still gives us a very simplistic, or easy way of beginning to grasp what has taken place, and what we can begin looking, or monitoring for, in the future. Dow Industrials Bullish % ($BPINDU) - 2% box scale Some traders/investors had questions regarding the bullish % indicators, and one of the most simplistic ways to understand the 6 market stages, which the bullish % charts hopes to describe, is to think of a roller coaster ride. Lets begin with the with the March 2003 lows, where in BROWN, I've marked an entry at the beginning of March (RED 3 on a point and figure chart) where the Dow Industrials Bullish % had fallen to roughly 12%, which meant that of the 30 Dow components, only 4 stocks had their point and figure charts still showing a buy signal associated with the chart. In early March, the INDU Bullish % reversed up from "bear confirmed" status to "bull alert" status at 16%. As time passed, we see the INDU bullish % rising further, as more and more stocks began generating point and figure buy signals, as demand (X) began outstripping supply (O). By mid-May (after RED 5) the INDU Bullish % achieved "bull confirmed" status at roughly 52%, when 16 of the 30 Dow components' point and figure charts were showing point and figure buy signals. As demand (X) really started to outstrip supply, the INDU Bullish % continued to rise as more and more stocks were generating point and figure buy signals. Despite the extremely high levels of RISK (levels above 70% are deemed higher levels of bullish risk) the INDU bullish % went through several gyrations when reversing to "bull correction", then back up to "bull confirmed," then back down to "bull correction," then back up to "bull confirmed," then back down to "bull correction," and just recently we observe DIVERGENCE, or a CHANGE, when the INDU Bullish % now reads "bear confirmed," and at a high level of BULLISH RISK. I circles all six phases from "bear confirmed" to "bull confirmed" on the INDU Bullish % chart, where trader/investors can begin to see, feel, and understand the 6 stages of market condition, while also observing time intervals between the stages, which can be quick, and sometimes long-lasting. Stock market analysis can be complex when we begin trying to analyze all the reasons "why" bullishness or bearishness is occurring. However, a trader/investor, maybe Rip Van Winkle, who has been asleep for sometime and wasn't aware of what geopolitical events, or economic cycles have been experienced, could probably look at a bullish % chart, and begin to understand how a market will rise as demand outstrips supply, and how a market will decline as supply overtakes demand. A very simplistic approach to these cycles is the belief that a market accurately anticipates good news as stocks rise, and once a markets value is deemed appropriate, or excessive, then supply from selling and profit taking sets in, and markets then fall to an appropriate value for whatever reason, which is usually fully realized at a bottom. Traders and investors that have been monitoring the markets the past three months have seen the markets rise in January, but then begin declining in February and March. Is something wrong? Does the MARKET know something about the future that is yet to be revealed? Or are market participants just looking to take profits, and systematically begin removing BULLISH RISK after a massive amount of gains have been accumulated in the past year? Let's begin to look at the some of the Dow 30 components, and begin to try and comprehend what has taken place. Here we will try and truly get a "feel" for what has started to take place, but in chronological order. Since the INDU Bullish % ($BPINDU) has reversed lower to "bear confirmed" status after signaling bullishness since March of 2003, I will be focusing more on the BEARISH activity that has taken place, which has the INDU Bullish % reversing into its "bear confirmed" market condition. Dow Industrials Table - 03/26/04 Close What I've done with the above table, is sorted at the top, the 7 Dow components, that currently have a point and figure sell signal associated with their supply/demand chart. AT&T (NYSE:T) $19.99, gave a reversing lower point and figure sell signal back in October of 2003, and since that time, has not been able to generate a reversing higher point and figure buy signal. Since we are really trying to focus on what has been taking place the past couple of months, I really wanted traders/investors to begin to feel, and observe what is taking place, when Caterpillar (NYSE:CAT), Intel (NASDAQ:INTC) and United Technologies (NYSE:UTX) generated sell signals. Before we do this, I want to explain some things in the above table. I've listed the bearish vertical counts (COLUMN E) of the 7 stocks that have generated point and figure sell signals. Those in BLUE are bearish vertical counts that are currently under construction, where a 3-box reversal back higher, would then have the bearish vertical count fully constructed. Please note that United Technologies (NYSE:UTX) has already exceeded its bearish vertical count of $88. One thing I learned recently, is that for every $1 decline in a Dow component (the INDU is PRICE weighted) that $1 decline equates to roughly 7 Dow points (7.4100 to be exact). At the bottom of the table, I totaled all of the Dow components' closing prices, multiplied by 7.41, which equals 10,214.24, and very close to Friday's close of 10,212.97. What this information can allow us to do, is begin to understand the potential downside implications of the 6 stocks (exclude UTX for now) to their currently calculated bearish vertical counts, should they be achieved. In COLUMN F, I subtracted current price (COLUMN D) from the bearish count (COLUMN E) and multiplied by 7.41 to get a sense for what impact these 6 stocks alone may have on the INDU. In COLUMN F:ROW 11, these bearish vertical counts, if achieved would have negative impact of 386.14 Dow points. We should understand that a 386.14 decline assumes the remaining 23 components, along with UTX, which already exceeded its bearish vertical count, remained unchanged. Still, with this observation alone, we can begin to sense, observe some potential downside, in a "bear confirmed" market environment. I also tabulated those Dow components bullish vertical counts, where point and figure buy signals are still associated with the supply/demand charts (ROWS 12-34: COLUMN G) and when subtracting COLUMN D from COLUMN G and multiplying by the scale factor of 7.41, can tabulate potential BULLISH implications of those stocks that have not yet achieved their current bullish vertical counts, which remain in play, until a negating point and figure sell signal is generated. Here we can begin to once again utilize the INDU Bullish % ($BPINDU) and begin to understand that there is probably a high probability at this point, as the bullish % begins to decline from a high level of BULLISH RISK, that we will most likely see more stocks generating point and figure sell signals. For ROWS 12-34 : COLUMN B, I placed the price level where those stock still showing a point and figure BUY signal associated with the chart, would generate a SELL signal on the respective stock's supply/demand chart. Those stock in ROWS 12-34 were then sorted as to which stocks were CLOSEST to FURTHEST from generating a reversing point and figure sell signal, as of 03/26/04 close. In a "bear alert" or "bear confirmed" market environment, assessing DOWNSIDE RISK to a point and figure sell signal is essential for a trader/investor that may be LONG/BULLISH a stock, where no bearish vertical count is available. Let's now take a look at Caterpillar (CAT), Intel (INTC) and United Technologies (UTX) and make some chronological observations of how market internals can weaken, where a trader, especially a bearish trader, begins to try and uncover trading opportunities for shorting stocks, when using some recent deterioration, to then carry over to other trading opportunities. Caterpillar (CAT) - $1 box scale Caterpillar (CAT) is perhaps an excellent stock to tie in with the INDU Bullish % ($BPINDU) when trying to grasp the concept of the various phases of a market cycle, while also making some observations as to how the bullish % can depict a HIGH level of BULLISH risk, and LOW level of bullish risk. Beginning in the lower left corner, CAT gave a triple top buy signal at $48, and was perhaps one of the first stocks to generate a buy signal, which helped the INDU Bullish % reverse up to "bull alert" status. BULLISH RISK was LOW, and the stock was saying "buy me." CAT's bullish vertical count column hinted at a bullish target of $69, even though the U.S. was at war with Iraq. As you can see, CAT achieved its bullish vertical count of $69, before it generated a "sell signal" at $68, when in September (after RED 9) the INDU Bullish % was in "bull correction" status. The more extreme amounts of bullishness may have had CAT generating a reversing upward point and figure buy signal, and once again establishing a bullish vertical count of $99. However, on January 28, 2003, CAT generated a reversing lower point and figure sell signal, which negated the bullish vertical count. Is something wrong with CAT? Or has BULLISH RISK simply become too HIGH, and the market is removing that BULLISH RISK in the form of profit taking, where supply (O) has began to outstrip supply? We could assume either, but history suggests that BULLISH RISK is currently being removed, and could continue to the current bearish vertical count of $66.00. Traders/investors can study the point and figure chart of CAT, and begin to understand how a stock will decline to a point, then rally, then decline, and begin to say to themselves, "if I had sold at a certain price level, then this was the eventual outcome. For those that have a FREE trial with www.dorseywright.com or have a subscription to their point and figure charting site, CAT is classified as belonging to the "Machinery and Tools" Bullish % (BPMACH), which similar to the INDU Bullish % is currently in "bear confirmed" status at 66%. One begins to associate some MARKET and SECTOR weakness at a high level of BULLISH RISK. Intel (INTC) - $0.50 & $1.00 box scale Intel (INTC) has been the 3rd most recent Dow Component (behind T and CAT) to generate a reversing lower point and figure sell signal. Here too we see in March of 2003, INTC generated a point and figure buy signal, constructed a bullish vertical count that hinted at $27.50, and being one of the earlier stocks to generate a reversing higher buy signal, it too achieved and exceeded its bullish vertical count. On February 23, 2004, INTC has exhibited its first sign of meaningful weakness when it generated a double bottom sell signal at $29. According to www.dorseywright.com, they classify INTC as belonging to the Semiconductor Bullish % (BPSEMI), which is currently "bear confirmed" status at 36%. Here we can make a rather important observation as it relates to BULLISH RISK, as well as sector weakness when comparing the Machinery and Tools group to the Semiconductors group. There is GREATER WEAKNESS in the Semiconductors, but there may be a HIGHER DEGREE of BULLISH RISK still to be found in the Machinery and Tools group. United Technologies (UTX) - $1 box scale Once again traders/investors can begin to see great similarity in the supply/demand chart of UTX with those we looked at above. UTX is perhaps more similar to that of CAT than INTC, but observations as to the INDU Bullish % ($BPINDU) at HIGH LEVELS of BULLISH RISK, and the earlier weakness in UTX, as well as the lower lows and lower high distribution pattern become somewhat obvious. Stockcharts.com has calculated what I call a "secondary bearish vertical count," which point and figure chartists will sometime calculate if a stock achieves and exceeds its initial bearish vertical count. This is often done in the EARLY stages of a bullish % reversal, when there may still be a HIGH LEVEL OF BULLISH RISK still found in a market, where as that risk is removed in the form of lower price, that pickup of broader selling can have stocks that have lead the decline, falling further, as most market participants become less willing to step in front of the broader market decline, instead looking for a sign of strength to then begin bullish buying. Dorsey/Wright and Associates classifies UTX as belonging to its Aerospace Airline Bullish % (BPAERO) which is currently "bear alert" status at 52% and after reversing straight up from a very oversold level of 20% in March of 2003, would currently take a reading of 18% to achieve "bear confirmed" status. This is just a starting point, but begins to lay some groundwork for traders and investors to build on. Again.... you can view FREE point and figure charts at www.stockcharts.com, or try a 2 week FREE trial subscription at www.dorseywright.com. I don't have enough time to review all of the Dow components in this article, but traders and investors can begin studying other charts, make some ties with the various market bullish % indicators, to get a better feel for the markets. Jeff Bailey ************* COMING EVENTS ************* ----------------- Earnings Calendar ----------------- Symbol Co Date Comment EPS Est ------------------------- MONDAY ------------------------------- EN Enel S.p.A. Mon, Mar 29 -----N/A----- N/A SCS Steelcase Inc. Mon, Mar 29 After the Bell -0.05 ------------------------- TUESDAY ------------------------------ BNG Benetton Group Tue, Mar 30 -----N/A----- N/A KMX CarMax, Inc Tue, Mar 30 Before the Bell 0.21 ELP Co Paran Energia Tue, Mar 30 After the Bell N/A MBT Mobile Telesystems Tue, Mar 30 -----N/A----- N/A SCO Scor Tue, Mar 30 -----N/A----- N/A ------------------------ WEDNESDAY ----------------------------- AM American Greetings Wed, Mar 31 Before the Bell 0.65 ATYT ATI Technologies Wed, Mar 31 Before the Bell 0.16 BBBY Bed Bath & Beyond Inc.Wed, Mar 31 After the Bell 0.44 BBY Best Buy Co., Inc. Wed, Mar 31 Before the Bell 1.39 CC Circuit City Stores Wed, Mar 31 Before the Bell 0.36 CIG Co Energ Minas Gerais Wed, Mar 31 -----N/A----- 0.90 E ENI SpA Wed, Mar 31 -----N/A----- 1.71 MON Monsanto Company Wed, Mar 31 Before the Bell 0.56 ------------------------- THUSDAY ----------------------------- GUC Gucci Group NV Thu, Apr 01 Before the Bell 1.17 MSM MSC Industrial Direct Thu, Apr 01 -----N/A----- 0.25 PIR Pier 1 Imports, Inc. Thu, Apr 01 -----N/A----- 0.54 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Co Name Ratio Payable Executable 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 CACB Cascade Bancorp 5:4 Apr 2nd Apr 5th UUU Universal Security 4:3 Apr 5th Apr 6th DKS Dicks Sporting Goods, Inc 2:1 Apr 5th Apr 6th FCFS First Cash Finl Serv Inc 3:2 Apr 6th Apr 7th CRDN Ceradyne, Inc 3:2 Apr 7th Apr 8th DWCH Datawatch Corp 2:1 Apr 8th Apr 9th FOSL Fossil, Inc 3:2 Apr 8th Apr 9th GBTS Gateway Finl Holdings 21:20 Apr 8th Apr 9th -------------------------- Economic Reports This Week -------------------------- All eyes are on Friday's non-farm payrolls (jobs) report. Potentially a market mover is the consumer confidence number on Tuesday and the Factory orders & Chicago PMI on Wednesday. The April earnings season is just around the corner! ============================================================== -For- ---------------- Monday, 03/29/04 ---------------- None ----------------- Tuesday, 03/30/04 ----------------- Consumer Confidence (DM) Mar Forecast: 86.0 Previous: 87.3 ------------------- Wednesday, 03/31/04 ------------------- Factory Orders (DM) Feb Forecast: 1.4% Previous: -0.5% Chicago PMI (DM) Mar Forecast: 61.0 Previous: 63.6 ------------------ Thursday, 04/01/04 ------------------ Initial Claims (BB) 03/27 Forecast: N/A Previous: 339K Auto Sales (NA) Mar Forecast: 5.5M Previous: 5.3M Truck Sales (NA) Mar Forecast: 7.9M Previous: 7.7M Construction Spending (DM) Feb Forecast: -0.1% Previous: -0.3% ISM Index (DM) Mar Forecast: 59.8 Previous: 61.4 ---------------- Friday, 04/02/04 ---------------- Nonfarm Payrolls (BB) Mar Forecast: 100K Previous: 21K Unemployment Rate (BB) Mar Forecast: 5.6% Previous: 5.6% Hourly Earnings (BB) Mar Forecast: 0.2% Previous: 0.2% Average Workweek (BB) Mar Forecast: 33.8 Previous: 33.8 Not on the calendar but worth noting is the February PPI report that has yet to be given a release schedule from the government. 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 ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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The Option Investor Newsletter Sunday 03-28-2004 Sunday 2 of 5 In Section Two: Watch List: Another Mixed Bag Dropped Calls: None Dropped Puts: IVGN, RIMM ************************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 ************************************************************** ********** Watch List ********** Another Mixed Bag ___________________________________________________________________ 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. ___________________________________________________________________ Cigna Corp - CI - close: 57.43 change: +0.75 WHAT TO WATCH: Some of the health-related insurance stocks have been rather strong lately. We think CI might be a bullish candidate if it can breakout over the $58.00 level. Technical we do need to worry about resistance with the gap down in February and the gap up in January but the general trend has been bullish the last several weeks. We would also watch Aetna (AET). AET has been very strong and rather resistant to profit taking. Chart= --- Beazer Homes - BZH - close: 105.93 change: +1.28 WHAT TO WATCH: Homebuilders have been very strong and a lot less volatile than the rest of the market. The orderly pull back in shares of BZH appears to be ending and traders are buying the dip to its 40-dma. Bulls might want to target a move back toward its highs near $112.50 with a stop loss near $103. Currently its P&F chart bullish target id $114.00. Chart= --- DST Systems - DST - close: 45.08 change: +0.27 WHAT TO WATCH: Here's another stock where we see traders buying the dip toward the 40-dma. Of course this time it happens to coincide with price support and previous resistance at the $44.00 mark. DST's MACD is close to producing a new bullish signal and the stock appears to be climbing higher in an ascending channel. Immediate resistance is the $47.00 mark but we'd target $50.00. Chart= --- Capital One Financial - COF - close: 73.65 change: +1.45 WHAT TO WATCH: We would keep an eye on COF. It would appear like the stock is forming a relatively flat reverse head-and-shoulders pattern. Look for a bullish breakout over $75.00 (or 75.10) before targeting a move to $80.00. Although if this is an H&S pattern then we should be able to target $82.00. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- IP $41.58 +0.63 Intl Paper and MWV, another paper player, have both been moving in a wide trading range over the last few months. Both appear to have hit the bottom of their range and are bouncing higher. MWV does look a little more bullish with a higher low versus IP's lower low. TM $73.01 +1.95 - If you don't mind a lot of gap opening each morning then Toyota Motor Corp might be a play for you. The stock rallied to new three-year highs on Friday with big volume. JCI $58.90 +0.70 - JCI looks stuck in a trading range under resistance at $60.00. If the range is still in effect then the next stop should be $56.50. Otherwise look for a bullish breakout over the $60 mark. ADBE $39.49 -0.55 - We're still looking for a convincing breakout over resistance at $40.00 for this software maker. JHF $42.60 +0.34 - The relative strength in JHF is pretty impressive and its MACD's new buy signal looks good too but we need to see a new relative high. A close over $43.50 might work. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ************************** 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 ^^^^^ None PUTS ^^^^ Invitrogen - IVGN - close: 69.04 chg: +0.30 stop: 70.01 We struggled with the decision on whether to keep IVGN or not. As of Thursday's close we were ready to drop it and had planned to exit on a Friday dip to reduce our losses. So why consider keeping it on when it traded higher on Friday? Well for one thing the stock confirmed that the $70.00 level is resistance when it traded toward $70 twice and failed both times. IVGN now has both its 21-dma and its 100-dma converging near the $70 mark to strengthen resistance there. On top of it all the last hour sell-off in the markets looks very tempting if you're feeling bearish but we believe it's just profit taking from Thursday's rally. Our confidence is also eroded by the bullish MACD signal, which takes longer to form than the short-term RSI and stochastics. We're going to close the play here maybe look for a move under the $66.00 mark, which would make the recent consolidation look more like a bear flag pattern. Picked on March 11 at $ 67.26 Change since picked: + 1.78 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 910 thousand Chart = ---- Research In Motion - RIMM - cls: 89.68 chg: +0.46 stop: 90.01 This looks like a case of setting the stop loss too tight. We knew RIMM was volatile but we weren't expecting it to rally past the $90.00 level again. Unfortunately, after Thursday's market- wide ramp up RIMM got some good news after settling with Good Technology. The new license agreement between the two companies will dismiss the pending lawsuits they have against each other. RIMM shot up to $91.20, just under resistance at its 10 & 50- dma's before sinking again. If the stock closed under the $89 level more aggressive traders might want to use the recent pop as an entry point for new bearish positions but keep an eye on the NASDAQ. If the market continues to rally shorting RIMM is probably not a profitable move. Picked on March 23 at $ 86.64 Change since picked: + 3.04 Earnings Date 04/07/04 (confirmed) Average Daily Volume: 6.1 million Chart = *********** 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. ************************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 ************************************************************** ********** 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 03-28-2004 Sunday 3 of 5 In Section Three: Current Calls: LXK, MGG New Calls: AVID, NEM Current Put Plays: ETN, SLAB New Puts: LTR ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ****************** CURRENT CALL PLAYS ****************** Lexmark Intl. - LXK - close: 89.40 change: -0.91 stop: 87.25 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: Thursday's broad market rally sent LXK up to close above $90 for the first time ever and the early strength on Friday gave the appearance of bullish continuation. That bullish thought only lasted about as long as the sound of the opening bell and the stock was pushed back under $90. One more rally attempt before lunch and then the stock headed lower into the end of the day. Nothing severe, mind you. But it does make one wonder if the stock will ever be able to sustain a breakout over $90. The first likely support is at the 10-dma (currently $88.71) and then last ditch support resides at roughly $87.50, near last week's double bottom. If those lows are broken, then it's a safe bet that LXK's uptrend will break and we'll want to exit post haste. That's why our stop is so tight at $87.25. Either LXK breaks out with conviction or takes us out of the play for a small gain. Should a strong rebound from support set up early next week, that can be used for new entries, but keep in mind that pullback entries at this point in the rally carry greater risk. The more conservative approach to new entries would be to wait for a breakout over $91.10, providing evidence that the rally still has some legs. 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 May $95 Call, while the more conservative approach will be to use the May $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-90*LXK-DR OI=2348 at $2.15 SL=1.00 BUY CALL APR-95 LXK-DS OI=1234 at $0.65 SL=0.35 BUY CALL MAY-90 LXK-ER OI=1127 at $4.20 SL=2.50 BUY CALL MAY-95 LXK-ES OI= 197 at $2.15 SL=1.00 Annotated Chart of LXK: Picked on March 14th at $85.77 Change since picked: +3.63 Earnings Date 4/19/04 (unconfirmed) Average Daily Volume = 1.04 mln Chart = --- MGM Mirage - MGG - close: 45.65 change: -0.04 stop: 43.25 Company Description: MGM MIRAGE, one of the world's leading and most respected hotel and gaming companies, owns and operates 12 casino resorts located in Nevada, Mississippi, Michigan and Australia, and has investments in two other casino resorts in Nevada and New Jersey. The company is headquartered in Las Vegas, Nevada, and offers an unmatched collection of casino resorts with a limitless range of choices for guests. Guest satisfaction is paramount, and the company has approximately 40,000 employees committed to that result. Its portfolio of brands include AAA Five Diamond award winner Bellagio, MGM Grand Las Vegas -- The City of Entertainment, The Mirage, Treasure Island ("TI"), New York-New York, Boardwalk Hotel and Casino and 50 percent of Monte Carlo, all located on the Las Vegas Strip; Whiskey Pete's, Buffalo Bill's, Primm Valley Resort and two championship golf courses at the California/Nevada state line; the exclusive Shadow Creek golf course in North Las Vegas; Beau Rivage on the Mississippi Gulf Coast; and MGM Grand Detroit Casino in Detroit, Michigan. The Company is a 50-percent owner of Borgata, a destination casino resort at Renaissance Pointe in Atlantic City, New Jersey. Internationally, MGM MIRAGE also owns a 25 percent interest in Triangle Casino, a local casino in Bristol, UK. (source: company press release) Why We Like It: (Original Write up from Thursday) Casino stocks have been one of the strongest sectors of the market this year. MGG alone is up 22% YTD and doesn't show any signs of slowing down. Recently Merrill Lynch raised its 2004 earnings estimates for MGG and lifted their price target from $44 to $53. A lot of the Vegas hotel chains have been turning in some impressive numbers in their room pricing power, which is up significantly from last year. Add a little bit of consumer fears about traveling overseas and major players in Vegas and Atlantic City should continue to see an increase in customers above and beyond what they might see from an improving economy. Coincidentally, Bank of America reiterated their "buy" rating the same day Merrill did. We like the bull flag breakout today combined with a turnaround in MGG's short-term technicals. This is a new all-time closing high for the stock and we're going to target the $50 level, which is well below the $61 price target forecasted by its P&F chart. Should MGG see a pull back traders can look to buy the dip to $45.00-44.50. We're going to stick our stop loss at the 40-dma where MGG found support earlier this week. Weekend Update: We were sort of looking for a pull back and suggested traders use a dip to the $45.00-44.50 level as an entry point but MGG's low on Friday was only $45.34. We still suspect MGG might pull back a bit more so it might pay to be patient here and time your entry point. Suggested Options: Earnings are coming up less than three weeks from now and we don't plan to hold over the report. That means we can probably get away with using April calls, which expire two days after MGG reports. More conservative traders may feel more comfortable using May or June calls. BUY CALL APR 40 MGG-DH OI= 136 at $5.70 SL=3.75 BUY CALL APR 45*MGG-DI OI=2689 at $1.80 SL=0.95 BUY CALL MAY 45 MGG-EI OI= 103 at $2.65 SL=1.30 Annotated Chart: Picked on March 25 at $ 45.69 Change since picked: - 0.04 Earnings Date 04/14/04 (unconfirmed) Average Daily Volume: 597 thousand Chart = ************** NEW CALL PLAYS ************** Avid Technology - AVID - cls: 46.15 change: +0.21 stop: 42.99 Company Description: Avid Technology, Inc. is the world leader in digital nonlinear media creation, management, and distribution solutions, enabling film, video, audio, animation, games, and broadcast professionals to work more efficiently, productively, and creatively. (source: company press release) Why We Like It: With the markets setting up for a rebound from their recent lows we felt that AVID might offer a great way to play the bounce. Brokers have grown more bullish on the stock this last month with Piper Jaffray upgrading AVID from "market perform" to "out perform" and raising their price target from $55 to $60. Roth Capital followed suit several days later and upgraded AVID from "buy" to "strong buy" with their price target set at $64. Both analysts are bullish about AVID's prospects in the second half of this year. We also like the technical picture on AVID's daily chart. Shares have put in a "W" style double bottom and is challenging resistance in the $45-46 range. We like its bullish P&F chart as well, which appears to have set a strong foundation and currently points to a $54 price target. The stock does have some significant overhead technical resistance at its 100 & 200-dma's so we are going to use a TRIGGER at $47.35 to open the play for us on a breakout above resistance. Until then we'll be content to watch. More aggressive traders who might consider buying a dip can look for a bounce above the $44 level or maybe its 50-dma near $44.50. We'd like to target price resistance at the $55 mark as our exit strategy but watch the descending trendline on the chart below. Suggested Options: AVID's earnings are expected on or around April 15th. That only gives us just under three weeks. For some traders that may not be enough time, especially since we don't plan to hold over the announcement. April options expire on the 16th, which add more risk should AVID move south. We're still going to suggest the April calls but the May or June calls are available. BUY CALL APR-45*AQI-DI OI=645 at $3.10 SL=1.55 BUY CALL APR 50 AQI-DJ OI= 85 at $0.90 SL= -- BUY CALL MAY 45 AQI-EI OI= 86 at $4.50 SL=2.25 Annotated Chart: Picked on March xx at $ xx.xx <-- see trigger Change since picked: + 0.00 Earnings Date 04/15/04 (unconfirmed) Average Daily Volume: 663 thousand Chart = --- Newmont Mining - NEM - close: 46.15 change: +0.94 stop: 43.00 Company Description: Newmont Mining Corporation is a holding company and is principally engaged in gold mining. As of the end of 2002, the company had gold reserves of 86.9 million equity ounces and an aggregate land position of approximately 63,000 square miles. NEM has operations in North America, South America, Australia, New Zealand, Indonesia, Uzbekistan and Turkey. In 2002, the company obtained more than 69% of its equity gold production from politically and economically stable countries, namely the United States, Canada and Australia. Why we like it: After more than 2 months of consolidating its impressive bull run, it looks like the gold sector is ready to resume its upward trend. The April futures contract broke out over two months of resistance at $420 last week and shares of NEM followed suit on Friday. Gapping open above $46, it actually looked like the stock was just going to gap and go until the bulls had their enthusiasm curbed, first by the news that the company was delaying a shipment of 30,000 ounces due to a 3 week shutdown at a Nevada plant. It quickly became clear this news was inconsequential though, as the company still left the full-year gold sales guidance at 7.0-7.2 million ounces. After reading the full press release, investors decided the news didn't really matter and went back to buying before the end of day selling knocked the legs out from everything, even the miners. To its credit, NEM managed to hold above the opening gap and the breakout still looks solid. What's so significant about the breakout is that for the first time since January, NEM is on a PnF Buy signal. That signal was created as NEM pushed through $46, which was also horizontal resistance from the past couple months. Thursday's rally was pretty strong as well, with price bouncing from the area of the 20-dma ($43.49) and 30-dma ($43.54) and just above the 50-dma ($43.27). This combination of moving averages should now prove to be very strong support on any pullback. Recall the PnF Buy signal? It gives a new bullish price target of $55, so once again the stock has room to run. That said, we're not real excited about chasing the stock higher at this point. At a minimum, NEM should retrace to fill in Friday's gap and we could easily see a dip into the $44.00-44.50 area. Such a dip would make for the ideal entry point. We'll initially target a return to the $50 resistance level and should a breakout materialize, $55 looks like a reasonable goal. Place initial stops at $43. Suggested Options: Shorter Term: The April $45 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 $47 Call, while the more conservative approach will be to use the May strikes. Our preferred option is the May $47 strike, as it is currently near the money and should provide sufficient time for the play to move in our favor. BUY CALL APR-45 NEM-DI OI=13903 at $2.10 SL=1.00 BUY CALL APR-47 NEM-DW OI= 6431 at $0.85 SL=0.40 BUY CALL MAY-47*NEM-EW OI= 886 at $1.90 SL=1.00 BUY CALL MAY-50 NEM-EJ OI= 3052 at $1.10 SL=0.50 Annotated Chart of NEM: Picked on March 28th at $46.15 Change since picked: +0.00 Earnings Date 2/04/04 (confirmed) Average Daily Volume = 6.27 mln Chart = ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ***************** CURRENT PUT PLAYS ***************** Eaton Corp. - ETN - close: 54.27 change: -0.23 stop: 56.60*new* 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: Oversold rebounds tend to be a violent affair and that was certainly the case on Thursday, as ETN hitched a ride on the northbound train that was the rest of the market. Bouncing from the intraday low of $52.74, the stock pushed as high as $74.75 by the end of the day. Friday's action was largely forgettable due to the light volume and the very small range, but it did show that there wasn't enough conviction to continue Thursday's rally. The $55-56 level is now shaping up as strong resistance, with the first hurdle being the 10-dma ($55.04). In this steady decline, we can expect to see short-term rebounds in the path of lower highs and lower lows, and the failed rebounds will be the best opportunity for fresh entries. Resistance at $56 is really the key, as that level was a real price magnet on the way down and we shouldn't see the stock able to close back over that level as long as this downtrend is intact. Our target at the 200-dma ($49.97) still looks reasonable. Lower stops to $56.60, which should be above the 20-dma ($56.80) on Monday. 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. There are May strikes available , but not at the $52 level, so our suggestion for longer-term traders is to stick with the July strikes. Our preferred option is the April 55 strike, as it is currently in the money and should provide ample time for the play to move in our favor. BUY PUT APR-55*ETN-PK OI= 204 at $2.00 SL=1.00 BUY PUT APR-52 ETN-PX OI= 80 at $1.00 SL=0.50 BUY PUT JUL-52 ETN-SX OI= 130 at $2.55 SL=1.25 Annotated Chart of ETN: Picked on March 11th at $54.82 Change since picked: -0.55 Earnings Date 1/21/04 (confirmed) Average Daily Volume = 589 K Chart = --- Silicon Labs. - SLAB - close: 52.21 change: +0.08 stop: 54.00 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: If the Semiconductor sector (SOX.X) is the leader for the overall Technology market, then Friday's price action told us a lot. While the rest of the market tried to build on Thursday's gains, the SOX languished in negative territory and then led the final- hour selloff. There wasn't any significant technical damage done, but it does tell us that at best the SOX is still searching for a bottom. There's no doubt that the early rally in shares of SLAB had us a bit nervous, especially when the stock was hitting its high of $53.89, just under our $54 stop. But the reversal from that high looks very bearish on the daily chart and congratulations go out to those that took advantage of the failed rally to enter the play. More conservative players can look for a drop back under $52 as bearish confirmation and an opportunity to open new positions. By Monday, the 20-dma ($54.17) should be under $54 and will help to protect our stop. Watch the action in the SOX for confirmation that SLAB is heading lower. We now know there is solid support in the $49-50 area, but once it gives way it should be a fairly swift trip down to the 200-dma just over $45. Suggested Options: Aggressive short-term traders will want to use the April 50 Put. Those with a more conservative approach will want to use the April 55 put. Aggressive traders looking for more insulation against time decay will want to utilize the May strike. Our preferred option is the April 50 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 QFJ-PK OI= 817 at $4.00 SL=2.50 BUY PUT APR-50*QFJ-PJ OI=1920 at $1.40 SL=0.75 BUY PUT MAY-50 QFJ-QJ OI= 79 at $3.10 SL=1.50 Annotated Chart of SLAB: Picked on March 21st at $51.35 Change since picked: +0.86 Earnings Date 1/26/04 (confirmed) Average Daily Volume = 1.50 mln Chart = ************* NEW PUT PLAYS ************* Loews - LTR - close: 58.08 change: -0.49 stop: 59.25 Company Description: Loews Corporation, a holding company, is one of the largest diversified financial corporations in the United States. Its principal subsidiaries are CNA Financial Corporation (NYSE: CNA), Lorillard, Inc., Diamond Offshore Drilling, Inc. (NYSE: DO), Loews Hotels, Bulova Corporation, and Texas Gas Transmission, LLC. (source: company press release) Why We Like It: It could be tough surfing ahead for conglomerate LTR. Back on March 11th all the major tobacco players took a dive after Prudential downgraded the biggest producer Phillip Morris (a.k.a. the Altria group) due to concerns over increased litigation risks for the industry. Further depressing tobacco companies is the uncertainty over the Presidential election. Bush has been focused on more pressing issues but Kerry has made it no secret that he plans to raise taxes on cigarettes by at least $1 per pack. Compounding LTR's problems is its exposure to the oil service sector with its Diamond Offshore business. Investors have been rotating out of oil stocks the last several days now that many suspect we've seen the top in oil prices. While it remains to be seen if oil's bullish run is over the relative weakness in shares of LTR is pretty evident. The stock has broken support at the $60 mark, at the $59 level that held up in late February, at its 40-dma and is just barely holding support at $58 and its 50-dma. The lack of bounce and the failed rally on Friday look pretty bearish. However, we are going to use a TRIGGER to open the play for us. Our entry price will be $57.74, which would require LTR to breakdown below its low on Wednesday near $57.80 and its 50-dma currently at $57.75. If we are triggered we'll start the play with a stop loss at $59.25. Suggested Options: Since LTR isn't expected to announce earnings until May we feel more confident suggesting the May and June puts versus the April puts that expire in three weeks. The May 60's look good but they don't have much open interest. Try the June 60's. BUY PUT MAY 55 LTR-QK OI= 20 at $1.15 SL=0.60 BUY PUT MAY 60*LTR-QL OI= 0 at $3.30 SL=1.65 BUY PUT JUN 60 LTR-RL OI= 70 at $3.80 SL=1.90 Annotated Chart: Picked on March xx at $ xx.xx <--- see trigger Change since picked: + 0.00 Earnings Date 02/12/04 (confirmed) Average Daily Volume: 421 thousand Chart = ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ********** 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 03-28-2004 Sunday 4 of 5 In Section Four: Leaps: Where Has All The Fear Gone? Option Spreads: So You Want To Go Dancing On A Minefield? Traders Corner: Spotting Index Tops and Bottoms ************************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 ************************************************************** ***** LEAPS ***** Where Has All The Fear Gone? By Mark Phillips mphillips@OptionInvestor.com Last week I made no secret of my belief that the bear has returned and that he's hungry. We've definitely seen an inability for any lasting rally attempt over the past week, but the broad market is trying to put in a near-term bottom. The DOW managed a close back over 10,200 on Friday, the NASDAQ is back over 1950 and the SPX almost closed over 1110. But here's the real problem. All of those closes are below key resistance that must be broken through to reignite a bullish trend in the near term. Just to completely confuse everyone, I'll state that I think each of those resistance levels will be broken as we head into the April earnings cycle and the primary reason for that conviction is that bullish sentiment (or the "Buy the Dip" compulsion) is still very strong. Nowhere is that reality more evident than in the action of the VIX last week. The fear started to seep out of the market before the closing bell rang on Monday and despite a slight drop in the market on Tuesday and Wednesday, the VIX was already dropping significantly. Translation: No fear of the downside. The VIX plunged on Thursday (as we should expect with such a strong broad market rally), but Friday's continued slide in fear makes little sense, as the market actually lost ground. Let's look at it a little differently. The VIX is right back where it was on March 11th, the day the SPX plunged to 1106 at the close. The SPX is right back at that level this weekend, but we've clearly suffered some significant technical damage since then in the form of some breaks of key support levels and Bullish Percent readings, which we'll get to in a bit. Bullish sentiment is still strong and what we're seeing is a rapid dissipation of fear as investors buy the dip. To me, one key is the Semiconductor sector and unless the SOX can close well above the $510 level (the site of its descending trendline), it is going to be very difficult for the broad market to sustain any rally. The DOW Theory Bear Confirmed signal is still in place and we shouldn't be quick to dismiss it. That said, I suspect that we're going to see a renewed bullish thrust into the April earnings cycle, after which the bears will likely become more aggressive, taking advantage of the "Sell in May and Go Away" trend that is likely to reassert itself. We can't underestimate the potential impact to investor sentiment of the indecision regarding who will control the White House following the November election and the terrorism issue is having a pronounced effect as well. Enough about those nebulous issues though, let's see what has happened on the technical front in the past week. First up is our view of the Bullish Percent charts and the DOW is flashing a warning flag, with its reading dropping to 76.67% and changing the status to Bear Confirmed. That's the first bearish signal from that index in over a year. The BP reading on the SPX gave its own bearish signal last week, dropping to 72.6% and making the transition to Bear Confirmed. With the NDX Bullish Percent slipping below 40%, we now have all three of the major indices in Bear Confirmed and the DOW and the SPX have a lot of room to fall. Looking at the PnF charts of the 3 major indices, we can see that the DOW is still on a Sell signal with its 9400 target still intact. The worry is that a trade over the 10,350 level will have the DOW back on a PnF Buy signal. It is this potential that kept me from adding a new Put play on the DJX this weekend. I still think the downside is the best way to play for the longer term, but I want to see cleaner technicals before taking that plunge. Clearly, we're still a long ways from seeing a PnF Sell signal on the SPX chart, but last week's drop did create a High Pole warning, which puts the bulls on notice that perhaps conditions are changing. The PnF chart of the NDX is rather interesting, as the 1390 price target was easily exceeded and then we got a snapback rally to the 1430 level, right on the edge of reversing to a Buy signal. My view on this index is that we're likely to see that buy signal, but the new bearish resistance line at 1460 is liable to be a very tough nut to crack. It lines up nicely with the bearish resistance line on the COMPX, which is currently at 2010. Speaking of the COMPX, it is also on a Sell signal and achieved its bearish price target of 1900 last week. It would take a rally to 1990 to give a new PnF Buy signal, but then the bulls will have to contend with the bearish resistance line. Looking at the Bullish Percent chart, the COMPX is (as we should expect) also in Bear Confirmed status at 59.56%. I don't know about you, but that's an awful lot of information that is pointing to a very clear return of the bear. Even if the PnF charts of the major indices are able to generate new Buy signals, I'll be suspicious of them having much upside continuation due to the Bullish Percent charts, the DOW Theory Bear Confirmed signal and a lack of strength from the market- leading Semiconductor sector. What About The Dollar? I get a lot of questions concerning the action in the dollar, especially with it continuing to try to mount a credible rebound. I think the key picture we need to keep in mind is this view of the US Dollar index (DX00Y), which shows the price action of the dollar relative to a basket of other paper currencies Weekly Chart of the US Dollar Index (DX00Y) That's a pretty clear picture to me! We're seeing a rebound in the DX00Y, not so much because of renewed strength in the dollar, but because the other currencies it is compared to in this index have been undergoing some much needed profit taking. Remember, this index doesn't tell us anything about absolute value. It is a measure of our fiat currency against the other major fiat currencies. If looking for a real measure of value, it will be found in looking at tangible assets and my personal favorite for that study remains the price of gold. We've talked for months now about the reality that the rise in gold is related to the fall in the dollar and the fact that we haven't really seen any significant upside in the dollar relative to other major currencies like the Euro. We know that gold broke out above significant resistance on Friday, but at the same time, we see the DX00Y moving up. That seems to be a disconnect. But when we understand what is happening below the surface, it becomes easier to understand the big picture. The dollar strengthened against foreign currencies last week and that's what we see on the chart above. What we don't see is that it wasn't the value of the dollar actually rising, but the value of those other currencies falling that created the big green candle last week. What we're starting to see right now is the VERY early stages of the next leg of the bull market in gold, as all currencies are starting to weaken against the one currency (gold) that can't have its value destroyed through monetary inflation. We aren't there yet, as gold has yet to notch new highs against the Euro, Swiss Franc, Australian Dollar or even the Canadian Dollar. But it is making significant progress in that direction. The one that caught my attention this weekend was the chart of the continuous Gold Futures contract vs. the Canadian Dollar. Weekly Chart of Gold vs. the Canadian Dollar The breakout to its best levels in over a year is encouraging, but I would be surprised to see much more upside without a bit of retracement, as the chart is now running into resistance at the rising trendline. But it is an early sign that the bull market in gold is gaining traction once again. We should keep a sharp eye on this ratio chart, especially as it approaches the early 2003 highs. Note that similar tests will be occurring against many of the major currencies near the same time. When gold breaks out to new multi-year highs against multiple currencies in addition to the dollar, the gold bulls will be frolicking to their hearts' content. At the same time, we can be assured that the US Dollar Index will more than likely be trading significantly below its recent lows. I'll be keeping a close watch on this developing story and let you know as it becomes more mature. Remember we've been talking about the need for Gold to gain traction against other currencies in order to kick off the next powerful leg of the gold bull market. But we have other ways of viewing the picture in the near-term while we wait for that major development. Last week's new PnF Buy signal on the Continuous Gold Futures contract is one such metric. With the breakout over $420, gold issued a new PnF Buy signal, and the new bullish price target is $492. I've seen a lot of talk about the $500 level being a pivotal level for gold and based on the new picture on the PnF chart, I think we'll see that objective tested in the months ahead. I think that's enough talk on the big picture issues for this week. Now let's turn our attention to our list of active plays and see what excitement occurred in the week just past. Portfolio: SMH - Despite a strong rebound in the Semiconductor sector in the middle of last week, the SMH is still on course towards lower lows. The initial break of the 200-dma did find renewed buying interest, but it seemed to stall near the $40 resistance level on Friday. Despite the tight range of Friday's session, the reversal from resistance and close at the low of the day does not give the bulls a warm feeling. SMH is still in its 3-month descending channel and it would take a move above the top of the channel at $41 to suggest a trend change. Of course, the 50-dma is lying in wait just above that level to reinforce that resistance, so any bullish reversal is going to have an uphill battle. That reality is clearly conveyed by the strong Sell signal on the PnF chart, which now has a bearish price objective of $28, right at the bullish support line. NEM - As noted in the Market Monitor on Friday, NEM finally made a very bullish move with its breakout over the $46 level, resistance that had been turning back each rally attempt over the past couple months. This breakout generated a new PnF Buy signal along with a tentative bullish price target of $55. Obviously the near-term objective will be for a move back to the recent highs near $50 and we can expect significant resistance near that level. But the price action in the price of gold is similarly encouraging, with last week's breakout over the $420 level suggesting a move to at least the recent highs near $430. Last week's move through $420 puts the PnF chart for gold on a new Buy signal as well, with the tentative price target at $492. Support for NEM should now be strong in the $43 area, so traders still looking for entries into this play should target dips into the $44-45 area. Note that with last week's breakout, we've raised our stop to $40, which is below the consolidation lows and the 200-dma. HD - There's still no resolution to the tight range consolidation that HD has been mired in for the past several months, but it is rather disconcerting to see the stock holding up so well in light of the recent bout of selling in the broad market. Once again on Friday, the stock closed right up against the top of its long-term descending channel and we can't rule out a move above that level. Key resistance above that point comes in near $38 and then at the 200-week moving average just over $39. As noted before, we're bucking the trend on the PnF chart with this play, as we wait for resolution of the tight consolidation. Keep stops in place at $41 and watch for a weekly close under $35 as confirmation that the bears are gaining the upper hand. MLNM - With continued weakness in most of the broad market last week, the action in shares of MLNM has not been particularly encouraging, with the stock having now broken below both the rising trendline and the 100-dma. Key support now is at the 200- dma near $16 and as long as the stock can remain above that level, our bullish bias remains intact. The one concern right now is the fact the PnF chart is on a Sell signal, with a downside target of $14, right at the location of our stop. For now, we wait for this consolidation to run its course, hopefully with the stock able to hold above the 200-dma until the weekly Stochastics reach oversold and turn back up. Traders looking for new entries should wait for at least an upturn in the weekly Stochastics and preferably for a close back over the 50-dma. CHK - Considering the still strong action in the price of Natural Gas, the weakness in shares of CHK is a bit perplexing. Last week, the stock broke down out of the lower channel we had been watching and the weekly Stochastics are looking rather week midway in their cycle towards overbought. At the same time, support is holding firm near $12 and the stock is still bullish on its PnF chart. In addition to that support, there is the 200-dma, which is now over the key $11.50 level. It would take a break below $11.50 to turn the picture bearish, as that would constitute a new PnF Sell signal, as well as a break of the 200-dma. In order to reinforce the bullish picture, we need to see a solid breakout over the $13.50 level, which capped the rally in early March. Right now, we're right in the middle and that suggests continued consolidation until the next catalyst arrives to break the range. In the meantime, bounces from above $12 look good for continuation entries, but keep those stops in place at $11. SNDK - While it would have been nice to see the stock hold onto all its intraday gains on Friday, I must say it was a very encouraging week for our SNDK play. The stock began to bounce strongly on Wednesday and then soared through near-term resistance at $27.40 and the 50-dma on Thursday. That's a nice start, but the first real test of the stock's strength will come near $30, at the early March highs and the 200-dma ($30.30). Beyond there is the bottom of the January gap and the 100-dma near $31. It won't be an easy road, but SNDK appears to be starting to make progress towards reversing its downtrend of the past several months. Note that the descending trendline from the November highs crosses right at $30 right now, so that increases the significance of the stock's reaction when it reaches that level. Raise stops to $23, which is just under the late February low. LUV - Clearly our entry was a bit premature, but the tail end of last week provided some encouraging price action. LUV finally rebounded from the $13.25 area and actually moved through the top of the falling channel. Of course it looked a lot more encouraging early on Friday, with price holding near the $14.20 level and the end of day selloff is a bit discouraging. Next week, we need to see a closing breakout over the 50-dma and then we can set our sights on next resistance in the $15.50-16.00 area. LUV isn't likely to be a fast mover, but Friday's more than 2% rally in the XAL index along with the $TRAN closing in positive territory are a couple of encouraging developments. Watch List: TYC - Watching the rally in shares of TYC on Thursday, I was beginning to have second thoughts about being so stingy with our entry point at $26. But the weakness seen on Friday renewed my resolve to wait for the exact pitch we're seeking. The bottom of the channel is currently just over $26, with the 100-dma at $26.24. I think we still have to wait for a test of the $26 level before taking a position. EBAY - There's no question that our EBAY play is one of the more aggressive plays we've listed of late, but that case could have been made at several points along its steady rally over the past year. Last week's selloff provided the entry point we were looking for and for better or for worse, EBAY moves to the Portfolio this weekend. Radar Screen: WMB - We continue to see WMB in a broad consolidation pattern as it builds a wedge, which is due to break in the very near future. Resistance is being found at the 100-dma and support at the 200- dma and weekly Stochastics are giving the nod to the bulls with a slight upturn in the oscillator. It may be that this is the place to put on a bullish position, but since it isn't a position I would take with my own money at this time, I obviously can't suggest that you do so by moving it to the Watch List. Let's watch a bit longer and wait for this wedge to resolve itself. APA - Once again, APA was rejected near its highs, but the trend of higher lows is still intact as well. Natural Gas prices continue to support a bullish play, but doing so near all-time highs does not seem a wise decision. The PnF chart looks quite bullish, but also very extended so far above its bullish support line. I suspect we'll see a more significant pullback before we can really make a case for a long-term bullish play. The problem with that approach right now is that a drop below $39 will create a PnF Sell signal. This is not the place to enter a bullish play and I still think a pullback into the $35-36 area will provide the best setup for bullish entries. Definitely, wait and see is the best approach right now. GM - With the DOW trying to build a new base above 10,000, GM is trying to build a new bottom of its own right here near $45. With weekly Stochastics bottoming in oversold territory, the odds of a bounce are looking pretty solid and we'll want to see how that bounce plays out before seriously considering a bearish play on GM. There should be strong resistance in the $48-50 area and then the top of the long-term descending channel is lying in wait up near $53. We definitely need to wait for a better technical setup for a downside play, but GM is still firmly on that bearish Radar Screen. DJX - Second thoughts. I was all ready to add a new Watch List play on the DJX until I took a look at the PnF charts this weekend. My bearishness was based on the PnF Sell signal on the DOW, with the price target of 9400. I was looking for an entry in the 10,400-10,500 area. The problem is that a trade at that level would negate the current Sell signal with a new Buy signal. Also, I noted that the DJX has yet to issue a Sell signal or even a 3- box reversal into a column of O's. I still have a bearish view for the broad market, but I can't make a good technical case for a long-term bearish play on the DJX, at least not here. So let's leave this one on the Radar Screen until we can see more clarity. Closing Thoughts: I hope I haven't confused anyone this week, with my talk of near- term strength in the broad market, within the context of a developing bearish outlook for the remainder of the year. At the heart of what we should expect in the near term is still-strong bullish sentiment. A single decent-sized correction isn't going to change investor sentiment, especially after a year of the market's going up. It will take time, more broken support levels and a developing trend of lower highs and lower lows before the public's appetite for stocks begins to cool. For now, we can still expect the dips to be bought, but with less enthusiasm, resulting in that pattern of lower highs. If the SOX really is the market-leading sector, we can see how grudgingly the bulls have given up ground in recent months. If the broad market follows suit, we can expect the nature of the coming decline to be of a similar nature -- two steps down and one step up. Failed rallies can be used to initiate bearish positions, and at least for a bit longer, selloffs (in the right stocks) can be used for initiating bullish positions. Keep a sharp eye on the VIX as a measure of when bullish sentiment really starts to fade. When we see the broad market snap back from oversold conditions, but the VIX fail to drop as quickly as we've seen lately, that will tell us that the excessive bullish optimism is starting to cool. 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 PUTS: None New Portfolio Plays EBAY - eBay Inc. $66.24 **Call Play** When we put EBAY on the Watch List a couple weeks ago, I hope I sufficiently conveyed the reality that this is a more aggressive bullish play. Last week's price action is precisely why it carries greater risk. The stock has been VERY strong for years and with the strong price performance in recent months, there's no reason to expect that trend to reverse anytime soon. At the same time, if sentiment does reverse, EBAY has a long ways to fall. We were looking for a dip to the $66 level to provide a bullish entry point. Unfortunately, the stock sliced right through that level, almost hitting $64 before subsequently rebounding back through our $66 trigger on Thursday. I was really torn about adding it to the Portfolio following that rebound, primarily because the dip and rebound left a fresh PnF Sell signal in its wake. Along with that Sell signal comes a new price target down at $57. That's not what we want to see. But looking at the Sell signals in recent months, I see that both of them resulted in an almost immediate rebound and rally to new highs. Since we can see that PnF Sell signals on EBAY have not been working for anything except to signal high-odds bullish entry points, we're going to plow forward with our entry and hope for the best. Should this sell signal actually stick, we're protected by our protective put. If the pattern of the past several months holds true, then we can expect a rally to new highs in the weeks ahead. For the record, our entry was taken on Wednesday, as the stock closed back over the $66 level. We need to see a close back over the 50-dma and then continuation over the $70 level to provide the reassurance that the bulls are still in charge. We'll set our stop initially at $62, which is just below the lows of the past few months, as well as the 100-dma. BUY LEAP JAN-2005 $70 ZQX-AN $ 6.40 BUY LEAP JAN-2006 $70 YEU-AN $11.10 BUY PUT JUL-2004 $60 XBA-SL $ 2.50 **Protective Put** New Watchlist Plays None Drops None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************************ Option Spread Strategies ************************ So You Want To Go Dancing On A Minefield? By Mike Parnos, Investing With Attitude The only thing more dangerous than skydiving is a new option trader with a checkbook. It’s been said that a fool and his parachute are soon parted. Let’s see if we can pull in the reins on that checkbook before the money takes flight. CPTI students have written asking about why we buy the out of the money wings on our Iron Condors and Siamese Condor trades. It’s called self-preservation. However, for those who like to walk on the wild side, there are ways to head off disaster. Catastrophes – we can’t control. But, we can dodge a small caliber bullet or two, if we have to. But, trading uncovered options is like taking a knife to a gunfight. _____________________________________________________________ The Short Strangle The Short Strangle consists of the sale of a put and a call with different strike prices, but the same expiration month. The objective is for the stock to finish, at expiration, between the sold strikes. The two options will then expire worthless, you’ll keep all the credit and live happily ever after. The Short Strangle is really the Iron Condor’s evil twin. Our old friend, the Iron Condor, is simply a Short Strangle that has protection in the form of long puts and calls purchased one strike further out-of-the-money respectively. Let’s look at an example. Keep in mind that this example is hypothetical and for educational purposes only. It is NOT intended as a recommendation. PDLI closed Friday at $22.93. It has support at about $20 and resistance at about $25. For this example, we’ll use a 10- contract position. Putting On The Trade – This is the easy part. The only requirements are that you’re breathing, have a checkbook and are two sandwiches short of a picnic. Plus, you must have the highest trading approval level from your brokerage firm to trade “uncovered” options. Brokerage firms usually assign this level only to traders who have extensive experience and who have substantial assets. Sell 10 contracts of the PDLI May $25 calls @ $.90 = $900 Sell 10 contracts of the PDLI May $20 puts @ $.60 = $600 Total amount of credit taken in = $1,500 Your Exposure – Both the sold puts and calls are uncovered. The puts (and you) are exposed from the sold strike ($20) down to zero while the calls have unlimited exposure from the sold strike ($25) to the moon. Now that sounds a little melodramatic, but technically it’s true. That’s why brokerage firms are careful about handing out “uncovered” approval levels. Inexperienced traders are less likely to know how to make necessary adjustments when an “uncovered” option strike is threatened or violated. There are horror stories about traders who lost six figures trading naked options. Then, they turned around and sued the brokerage firms who allowed them to trade – and WON! Unbelievable! There are plenty of slip-and-fall-give-me-a-call attorneys who now specialize in stock market cases. Maintenance If you are able to put on the Short Strangle trade, your brokerage firm will want to hold some money, or assets, in your account for their (and your) protection. The stock price is part of the equation, so the requirement will vary daily as the stock price moves. This is money you will need to leave in your brokerage account in the form of cash or other marginable securities. The Formula Here is how to calculate the maintenance requirement for naked positions. PDLI at $22.93. To simplify our calculations, we’ll round this off to $23. The initial margin requirement for the transaction is 20% of the underlying stock plus the credit received, less the amount out of the money. 20% of the value of the underlying ($23) = $4.60 Add premium received from the May $25 call: $.90 Total: $5.50 ($4.60 + $.90) Subtract amount out-of-the-money: $2.00 = $3.50 ($5.20 - $2.00) Margin Requirement: $3.50 x 100 = $350 per contract For a 10 contract position: $350 x 10 contracts = $3,500 Since we’re putting on TWO uncovered positions, we have to calculate both sides and the maintenance held is the HIGHER of the two figures. The maintenance amount will vary day to day as the underlying (PDLI) moves up and down. If PDLI moves against you, the brokerage firm will require additional funds for maintenance. Also, if the calculated results are less than 10% of the value of the underlying ($23), the maintenance figure will default to 10%. Adjustments When the stock is about to violate one of the sold strikes or an important support or resistance level, you have to be prepared to act. This is your first line of defense. You can (using the short call as an example): 1. Close out the short position by buying back the short call. 2. Roll the short call out to a later month at a higher strike. You may have to increase the number of contracts to make up the deficit. 3. Close out the short call position and sell an additional number of puts to make up the deficit. 4. Buy an appropriate number of shares of stock to cover the short call. 5. Buy a deep in-the-money call to cover the short call. Well, there it is -- the Short Strangle. For all its glory, it’s risky, but if you have the approval level, and you find a stock with a nice wide trading range, you can generate a nice monthly cash flow. Whatever you do, think it through. Know the strategy inside and out. Write me if you have questions. Whatever you decide, have a plan in place for either outcome. If the trade moves against you, you’ll be prepared. If it works, you can afford to stay at home for the next three days and watch the Home Shopping Network – and maybe even buy something. _____________________________________________________________ APRIL CPTI POSITIONS (From Thursday’s Column) April Position #1 – SPX Iron Condor – 1108.06 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 – 572.92 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 - $102.54 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 – $100.82 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 -- $35.22 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: Oct. $33 puts and Oct. $34 calls – credit of $1,900. Nov. $34 puts and calls – credit of $1,150. Dec. $34 puts and calls – credit of $1,500. Jan. $34 puts and calls – credit of $850. Feb. $34 calls and $36 puts – credit of $750. Mar. $34 calls and $37 puts – credit of $1,150. 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 – 543.52 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). 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. Bought back March 560 calls for $.15, locked in profit of $120 x 3 = $360. April: New Positions OEX Bull Put Spread - $544.31. We sold 5 OEX April 515 puts and bought 5 contracts of April 505 puts for credit of $.90 (x 5 contracts = $450). We sold calls against long 540 calls. Sold 5 OEX April 570 calls for $1.35 (x 5 contracts = $675). New cash position is $2,640 plus unused $1,700 = $4,340. _____________________________________________________________ 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, first look under "Education" on the OI home page and click on "Traders Corner." For more recent columns, you can look under “Strategies” and click on “Combinations.” They're waiting for you 24/7. ____________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP _____________________________________________________________ Couch Potato Trading Institute Disclaimer All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations. The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable investor might receive utilizing these strategies. ************** TRADERS CORNER ************** CONTRIBUTOR INFORMATION – Leigh Stevens is a weekly contributor to OptionInvestor.com and is the author of Essential Technical Analysis from John Wiley & Sons (www.essentialtechnicalanalysis.com). He is former PaineWebber Senior Technical Analyst with both a futures and equities background. Leigh covered Stock Index futures at PaineWebber, now UBS. After managing technical analysis products for Dow Jones Telerate, he authored a stock market column for CNBC.com while serving as a Cantor Fitzgerald Vice President, working with the Equities Trading Division. Spotting Index Tops and Bottoms By Leigh Stevens [SYNOPSIS - ] Simple but powerful techniques exist to spot intermediate to major tops setting up in the Stock Indexes. Three patterns involve 1.) Moving Average Envelopes, 2.) Price/Oscillator Divergences (using the RSI), and 3.) a 10-day average of NYSE daily Up Volume for bottoms. The first two work with all Indices and the third is used for the S&P and Dow. There are two principle ways of trading stock indexes in a leveraged way: using stock index futures and using stock index options, such as the S&P 500 (SPX), the S&P 100 (OEX) and the Dow Jones Index (DJX) options. The futures markets do not offer as much leverage as the stock index options can involve (plus offers limited risk) but avoids problems inherent in dealing with the time premiums involved in buying stock index calls and puts. The fact that premiums for index options get quickly inflated in a strongly trending and/or volatile market means that astute market timing tends to be even more critical. It is common to be right on the trend in index options but not make any money if inflated index options premiums erode faster than the market moves in the direction chosen. I found early on that in index futures like the S&P I could buy and sell (short) breakouts and make money but lose on the trade when buying call or put options like the OEX, after the breakout move occurred. I learned that to make a consistent and optimal profit I needed to anticipate the price and time frame when the market was making a significant top or bottom and buy index options ahead of market reversals. This way the premiums were reasonable and I could more comfortably hold a position for some time when a move was especially strong. I share three situations with technical indicators that may not be seen frequently, but when they do occur, are highly advantageous for purchasing index call and put options. This is not the only way to trade or the only techniques I use to spot market trends or reversals, but the following three do often highlight high potential trades ahead of trend reversals. These techniques are quite simple and actually offer a protection against them being "over-used" so to speak. There is a tendency not to believe overly simple techniques. Does everyone do what Warren Buffet does? Most of us don't have the patience for waiting just for the right time and price (cheap) that he does. Yet it's not that complex, but he does to buy and sell ahead of the crowd – you buy em when nobody wants em or mostly so. 1. Stock Indexes and Moving Average Envelopes - I am speaking about simple moving average trading envelopes or "bands". John Bollinger, in his Bollinger Bands, factors in volatility and standard deviation, but I primarily use what is called the "envelope" study or indicator. A simple moving average (not smoothed) of the close is selected as a value against which is plotted an upper and lower line set at some percentage above and below that average. I've found over many years that the S&P indices [both the 500 (SPX) and the 100 (OEX)], as well as the Dow Industrials will tend to trade around 3-4 percent above or below a 21-day moving average on the Daily charts. I use a 21 "length" setting for the moving average and don't use the envelope technique on hourly or intraday time frames – I have used it for the bigger trend picture. The stock market, as represented by the S&P 500 Index in an “average” market cycle or in a normal trend period, will tend to see prices fluctuate in a range that is approximately 3-4 percent above or below the 21-day moving average. As we are interested in also seeing the high and low extremes relative to the envelope lines, bar or candlestick charts are used exclusively. In a strong trend, the band or envelope parameters will expand to 4-5% or more to contain within the envelope lines most of the highs and lows. I demonstrate and use moving average envelopes for the Indexes only. The technique works for the Nasdaq also, especially the Composite, but the envelopes are typically wider, such as 5-6%. Due to the bouts of volatility associated with earnings, business developments, etc., moving average envelopes in individual stocks tend to work less consistently than for the indexes, which "smooth" out the individual stock "hiccups" and reversals. Seven characteristics categorize the tendencies of market action and behavior that are commonplace relative to moving averages and their upper and lower envelopes in the stock indexes: 1. Determination of what moving average to use was found by what “works” in indexes most often. The biggest variation is with the percentages above and below this line. I use a 21-day moving average for daily charts in all stock indexes. 21 is part of the Fibonacci number series: 1,3,5, 8, 13, 21, etc. 2. A common starting point for the index envelope percentage is 3% in the S&P and Dow. The envelope size varies from trend to trend and market to market. For an envelope size that “works” – for example, the percent figure that contains within it 90% of the price swings above and below the moving average -- start with 3% and expand or contract the envelope size as is appropriate for the dominant trend. 3. If the last high was 3% above the moving average, I anticipate the next significant downswing low as being 3% under the average as will be seen in my chart example. The upper and lower lines also suggest the price area is where the market is at an extreme relative to how it trades a majority of the time, during periods of low volatility and in a trading range market. 4. If prices cross above the moving average, assume that this line may act as support on pullbacks and the next rally will have the potential to advance to the upper envelope line. If the stock or other item is in an uptrend, the envelope line may act as a rising line of resistance for multiple rallies – the rally tops will often then hug or move up along the upper envelope line. However, the rate of increase will typically slow at that point - the index will not always reverse on a move to or above the upper envelope line. 5. If prices cross below the center moving average, assume that this line will act as resistance on any rebounds and that downside potential is to the lower envelope line. If the trend is down, the envelope line may act as a falling support line and there may be multiple downswings that touch or hug and move down along the lower envelope line. 6. In an uptrend, look for confirming reasons to buy declines when the lower envelope line is reached – this area will both define where the stock or other item is both "oversold" and the specific price area that offers a opportune buying opportunity. If in a downtrend, sell advances to the upper envelope line – this area will help define where the market is both "overbought" and the specific price area that may be most opportune as a selling point. 7. Even if there is an extension of a price swing to above or below the envelope lines, the probability for a significant further move in that direction is limited, especially if the price swing is a counter-trend move relative to the dominant trend. At a minimum, there should be a reaction (a countertrend move) once prices are above or below the envelope line in question. A trader looking for initial or additional entry buy points in index calls often improve their risk to reward trade potential if they wait for prices to dip to the lower envelope line, especially when other key indicators line up to confirm that the market is ripe for a trend reversal. Put buyers should do the reverse and be watchful for signs of rally failures or resistance when the index approaches to or above the upper envelope, especially when other key indicators are suggesting a possible trend reversal as we will be seen next in Figure 1 – FIGURE 1 – Number one in my analysis of the trend and market condition for the Stock Indexes is to study the moving average envelope indicator, such as shown in Figure 1 of the S&P (SPX) chart. The envelope percentage is set at 3.5%. After the first advance to the upper envelope line in early-2004, SPX repeatedly hit resistance in the 1155-1160 area and did not again advance to the upper envelope line, suggesting waning upside momentum. The subsequent formation of a "line" of resistance and a possible double and triple top was not enough to convince most market pundits that the market was ripe for a fall. The sideways trading range could also be viewed as a consolidation before a next up leg. Something more was needed on a technical basis which is my approach. 2. Oscillator and Price Confirmations and Divergences – Remember the Dow Theory? Charles Dow suggested that the averages should "confirm" each other – if the Industrials went to a new high, the Transportation average should also and vice versus on new lows being made by either average. If they both didn’t move to a new high or low, a market reversal might be setting up. Today we have the idea that certain indicators, especially oscillator type indicators like the RSI, should also move to a peak or new low along with prices. If not, a bullish or bearish "divergence" was suggested which could be occurring as a forewarning of a trend reversal. That the repeated S&P rally failures of late-January through early-March (2004) were put buying opportunities, was strongly suggested by an ongoing and bearish price/RSI "divergence": With each high in the same area (or marginally higher), the RSI was trending lower, as can be seen in the Figure above as highlighted by the downward sloping trendline drawn though the RSI peaks. The reverse situation then developed with the lower downswing low occurring in late-March – the RSI makes a slightly higher high to form a bullish price/RSI divergence. The fact that the SPX was at a second touch to its lower envelope line was a compelling related confirmation of this index being at an extreme – not only showing an oversold condition like a Stochastic or RSI oscillator might suggest but also giving an idea of an opportune price area for buying S&P Index calls. 3. Up Volume Indicator – Volume will often "precede" price. For example, before a market gets to or near a price area that will be perceived as offering “value”, especially a market that is in transition, there will be a contraction of trading activity (volume) to a similar and reoccurring level and this occurrence will tend to precede the most substantial and sustained market rallies. The most significant volume figure is up or advancing volume – this is a count of all shares bought on upticks, or at a price higher than the preceding transaction. Up volume is a true test of buying interest as it reflects willingness to "pay up" for stocks. I use a 10-day moving average of advancing volume for both NYSE and Nasdaq. What is shown on the Figure above is for the NYSE. There is a tendency for any multimonth or multiyear period for there to be a "base" line for this contraction of Advancing or Up Volume (UVol) on a 10-day average (blue line in the lower part of the chart in the Figure) that will tend to be associated with market bottoms. In Figure 1, this baseline figure is when the 10- day NYSE Up Volume average dips to around 525-550 million shares. This baseline level varies from time to time depending on the market cycle - the number itself is not a constant, only the tendency for a contraction to a similar reoccurring area that occurs just ahead of or concurrent with significant lows. Particular levels of declining volume on a 10-day average basis, is not especially predictive for market tops, nor does the market peak as reliably at a particular level of up volume, unlike the case for market bottoms. However, a key consideration is to distrust repeated rally attempts or failures to surmount resistance that occur along with declining Up Volume average for the exchange involved. At tops, when the 10-day advancing volume line turns down and then keeps declining on balance, the downward trend of the line is a good secondary indication that prices will also fall at some point, as was the case when the S&P finally broke sharply in March as seen in the Figure above. Note the strong and sustained advance that developed after the 10- day Up Volume average declined to the baseline area defined by the green level line in the chart above, in late-November 2003, when it also made an approximate double bottom low relative to the month before – looking for confirmation by multiple indicators and patterns is my timing and trading motto. ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! 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The Option Investor Newsletter Sunday 03-28-2004 Sunday 5 of 5 In Section Five: Naked Puts: A Few Bullish Naked Puts Spreads/Straddles/Combos: A Lackluster Finish... ************************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 ************************************************************** ***************** NAKED PUT SECTION ***************** NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield APPX APR 32 32.48 41.07 0.90 5.98% 2.77% NEOL APR 15 14.65 18.19 0.35 5.57% 2.39% OSTK APR 25 24.30 29.82 0.70 7.25% 2.88% APPX APR 33 32.73 41.07 0.65 5.76% 1.99% ASKJ APR 25 24.15 34.53 0.85 9.04% 3.52% CLZR APR 11 11.07 12.96 0.17 4.72% 1.54% JNPR APR 22 21.85 25.37 0.65 7.82% 2.97% NEOL APR 15 14.65 18.19 0.35 6.74% 2.39% PDII APR 22 21.80 24.80 0.70 8.31% 3.21% SWIR APR 22 22.15 33.81 0.35 5.03% 1.58% APPX APR 33 33.03 41.07 0.35 4.71% 1.06% BRCM APR 35 34.55 38.86 0.45 4.64% 1.30% ELN APR 15 14.65 19.65 0.35 9.84% 2.39% OSTK APR 22 22.25 29.82 0.25 4.47% 1.12% PCLN APR 20 19.75 26.00 0.25 4.90% 1.27% SYMC APR 40 39.40 46.26 0.60 4.89% 1.52% XMSR APR 25 24.40 27.63 0.60 7.74% 2.46% YHOO APR 40 39.40 47.13 0.60 5.13% 1.52% APPX APR 35 34.45 41.07 0.55 6.27% 1.60% ASKJ APR 25 24.55 34.53 0.45 7.51% 1.83% CMC APR 30 29.60 30.77 0.40 4.72% 1.35% CSGS APR 15 14.65 16.52 0.35 7.65% 2.39% ECLG APR 17 17.20 20.26 0.30 6.26% 1.74% JILL APR 17 17.15 19.91 0.35 6.38% 2.04% MGAM APR 22 22.05 25.52 0.45 6.80% 2.04% PBY APR 25 24.50 26.70 0.50 5.97% 2.04% SUPG APR 7 7.15 12.68 0.35 16.86% 4.90% AGI APR 30 29.55 33.45 0.45 5.39% 1.52% ASKJ APR 25 24.60 34.53 0.40 6.62% 1.63% ENDP APR 20 19.75 22.67 0.25 4.98% 1.27% NFLD APR 12 12.15 15.00 0.35 12.17% 2.88% PBY APR 25 24.55 26.70 0.45 6.18% 1.83% PLMO APR 15 14.65 18.65 0.35 9.66% 2.39% RSAS APR 15 14.55 16.75 0.45 10.23% 3.09% SHFL APR 40 39.60 47.06 0.40 4.13% 1.01% SYMC APR 40 39.35 46.26 0.65 5.79% 1.65% Positions in Amylin (NASDAQ:AMLN) and Nektar (NASDAQ:NKTR), although positive, have been closed to limit potential losses. 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ASCA - Ameristar Casinos $33.58 *** Hot Sector! *** Ameristar Casinos (NASDAQ:ASCA) is a multi-jurisdictional owner, developer, and operator of casinos and hotel and entertainment facilities in local markets. The company owns six properties in five markets located in Missouri, Iowa, Mississippi and Nevada catering to customers primarily residing within a 100-mile radius of its properties. These properties are Ameristar St. Charles, Ameristar Kansas City, Ameristar Council Bluffs, Ameristar Vicksburg and The Jackpot Properties, which are comprised of Cactus Pete's Resort Casino and The Horseshu Hotel & Casino. ASCA - Ameristar Casinos $33.58 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 UWT PF 25 0.30 29.70 4.7% 1.0% * __________________________________________________________________ ASKJ - Ask Jeeves $34.53 *** Another 2004 High! *** 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 $34.53 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 AUK PF 1760 0.60 29.40 9.7% 2.0% * __________________________________________________________________ ERJ - Embraer-Empresa $31.53 *** Technical Break-Out? *** Embraer-Empresa Brasileira de Aeronautica SA (NYSE:ERJ) has grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a firm engaged in the development, production and marketing of aircraft and aviation-related structural parts, components and equipment. The company focuses primarily on the manufacture of regional aircraft. It produces aircraft for commercial aviation, military aviation and corporate aviation and is organized based on the products and services it offers. Under this organizational structure, Embraer operates in four principal segments: regional aircraft, defense aircraft, corporate jet and other related businesses. ERJ - Embraer-Empresa $31.53 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 ERJ PF 66 0.60 29.40 8.2% 2.0% * __________________________________________________________________ IMM - Immtech International $18.50 *** Drug Speculation! *** Immtech International (NYSE:IMM) is a pharmaceutical company focused on the development and commercialization of oral drugs to treat fungal, parasitic, bacterial and viral diseases. The company has development programs that include fungal infections, malaria, tuberculosis, hepatitis, pneumocystis carinii pneumonia and tropical medicine diseases, including the African sleeping sickness (a parasitic disease also known as trypanosomiasis) and leishmaniasis (a parasitic disease that destroys the liver). One of its most significant research developments was the discovery of oral drug delivery technology for dication drugs. This unique proprietary technology temporarily masks the positive charges of the dication, enabling the active compound to move easily across digestive membranes into blood circulation. IMM - Immtech International $18.50 "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 15 IMM PC 175 0.30 14.70 11.4% 2.0% * SELL PUT APR 17.5 IMM PW 60 1.00 16.50 21.6% 6.1% __________________________________________________________________ INSP - InfoSpace $36.45 *** New Acquisition = Rally! *** InfoSpace (NASDAQ:INSP) develops and delivers a wireless and Internet platform of software and application services to a range of customers that span each of its wireline, merchant and wireless business units. Many of the company's products and application services are offered to its customers, which, in turn, offer these products and application services to their customers as their own solutions. InfoSpace provides its services across multiple platforms, including personal computers and non-PC devices. INSP - InfoSpace $36.45 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 IOU PF 570 0.30 29.70 5.7% 1.0% * __________________________________________________________________ MICC - Millicom Cellular $19.90 *** Telecom Sector *** Millicom International Cellular S.A. (NASDAQ:MICC) is a global telecommunications investor with cellular operations in Asia, Latin America and Africa. The company has a number of cellular operations and licenses in countries around the world and the group's cellular operations have a combined population under license of over 500 million people. In addition, MIC operates a GSM clearing house, provides high-speed wireless data services in various countries and has a licenses to develop high speed wireless data services in other areas. MIC also has a major interest in Tele2 AB, an alternative pan-European telecom firm offering fixed and mobile telephony, data network and Internet services. MICC - Millicom Cellular $19.90 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 CQD PW 1449 0.60 16.90 15.6% 3.6% * SELL PUT APR 18.5 CQD PR 164 0.80 17.95 16.8% 4.5% __________________________________________________________________ MNST - Monster Worldwide $24.55 *** On The Rebound! *** Monster Worldwide (NASDAQ:MNST), formerly known as TMP Worldwide, is a global provider of career solutions. The company, through its flagship Interactive product, Monster (www.monster.com), is engaged in online career management. Monster Worldwide is also a worldwide recruitment advertising agency through its Advertising & Communications division and a yellow pages advertising agency through its Directional Marketing division. On March 31, 2003, the company completed the spin-off of the common stock of Hudson Highland Group, previously the eResourcing and Executive Search divisions of Monster Worldwide. MNST - Monster Worldwide $24.55 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 BSQ PX 406 0.30 22.20 6.0% 1.4% * SELL PUT APR 25 BSQ PE 186 1.30 23.70 18.0% 5.5% __________________________________________________________________ TKTX - Transkaryotic Therapies $18.10 *** A Big Day! *** Transkaryotic Therapies (NASDAQ:TKTX) is a biopharmaceutical firm developing therapeutics for the treatment of rare genetic diseases caused by protein deficiencies. TKTX has received approval to market and sell Replagal (agalsidase alfa), an enzyme replacement therapy for the long-term treatment of patients with Fabry disease, in 25 countries, principally in Europe. Among the products the company has developed or is developing are therapeutics for the treatment of rare diseases such as Hunter Syndrome and Gaucher Disease. Another product, Dynepo for annemia related to chronic renal failure, has been approved for European marketing. TKTX - Transkaryotic Therapies $18.10 "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 15 UFT PC 152 0.50 14.50 17.3% 3.4% * SELL PUT APR 17.5 UFT PW 25 1.45 16.05 28.7% 9.0% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************ SPREADS/STRADDLES/COMBOS ************************ A Lackluster Finish... By Ray Cummins The broader equity markets ended the week almost unchanged as investors sold for profits in the wake of Thursday's rally. The Dow Jones Industrial Average slid 5 points to close at 10,212 while the NASDAQ Composite fell 7 points to 1,960. Both indices were affected by losses in technology giants Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). The Standard & Poor's 500 Index was a point lower at 1,108, with oil-related shares among the biggest drag on the market. Trading was light, with 1.32 billion shares changing hands on the New York Stock Exchange while 1.58 billion shares were traded on NASDAQ. Advancers outnumbered decliners 6 to 5 on the Big Board, however breadth was roughly even on the technology exchange. Bond prices drifted lower with the 10-year note down 8/32 while its yield rose to 3.73%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 03/26/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield SEAC APR 20 20.40 14.80 0.40 7.86% 1.96% CECO APR 55 55.65 55.16 0.49 4.22% 1.17% * ERES APR 35 35.30 28.31 0.30 4.73% 0.85% FARO APR 30 30.40 22.54 0.40 7.33% 1.32% AFCI APR 25 25.50 21.66 0.50 8.84% 1.96% FLSH APR 22 22.75 19.50 0.25 5.62% 1.10% ADTN APR 35 36.30 29.93 0.80 9.56% 2.20% DISH APR 35 35.65 33.70 0.65 6.34% 1.82% MTLM APR 40 40.60 34.65 0.60 9.68% 1.48% NIHD APR 35 35.30 33.90 0.30 4.43% 0.85% Conservative traders should consider closing the position in Career Education (NASDAQ:CECO) to limit potential losses. NII Holdings (NASDAQ:NIHD) is on the "watch" list. PUT-CREDIT SPREADS Symbol Pick Last Month L/P S/P Credit C/B G/L Status APOL 77.82 85.94 APR 65 70 0.60 69.40 0.60 Open KBH 78.71 78.71 APR 65 70 0.55 69.45 0.55 Open COF 73.50 73.65 APR 60 65 0.50 64.50 0.50 Open SYMC 44.64 46.26 APR 37 40 0.35 39.65 0.35 Open DNA 106.82 103.64 APR 90 95 0.60 94.40 0.60 Open FDX 71.59 72.79 APR 65 70 0.85 69.15 0.85 Open LLL 56.67 57.92 APR 50 55 0.50 54.50 0.50 Open TASR 61.80 68.98 APR 45 50 0.60 49.40 0.60 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss Hughes Supply (NYSE:HUG) has previously been closed limit losses. Beazer (NYSE:BZH) remains on the "watch" list. CALL-CREDIT SPREADS Symbol Pick Last Month L/C S/C Credit C/B G/L Status DISH 35.50 33.70 APR 42 40 0.30 40.30 0.30 Open NVLS 31.15 30.97 APR 37 35 0.35 35.35 0.35 Open VSEA 40.85 40.09 APR 50 45 0.60 45.60 0.60 Open COGN 29.54 32.32 APR 35 32 0.35 32.85 0.35 Closed SFA 31.96 31.69 APR 40 35 0.55 35.55 0.55 Open BBBY 39.04 39.39 APR 45 42 0.25 42.75 0.25 Open MSTR 52.64 52.01 APR 65 60 0.60 60.60 0.60 Open NTLI 53.12 55.05 APR 65 60 0.60 60.60 0.60 Open SINA 35.96 37.59 APR 45 40 0.70 40.70 0.70 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The bearish spread on Adobe (NASDAQ:ADBE), although positive, has been closed to limit losses. Cognos (NASDAQ:COGN) 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 GLBC 13.86 16.90 APR 15 12 1.80 2.50 Open? SNP 40.74 36.44 APR 40 40 5.70 5.70 Open CCMP 44.55 44.39 APR 45 45 5.90 5.75 Open AMX 35.66 38.23 MAY 35 35 3.65 4.30 Open AIG 74.28 70.19 MAY 75 75 5.60 7.00 Open SLB 65.13 61.47 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 larger 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 - 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DE - Deere & Company $68.23 *** All-Time High! *** Deere & Company (NYSE:DE), together with its subsidiaries, makes and distributes a line of agricultural equipment, a variety of commercial and consumer equipment and a range of equipment for construction and forestry. With its financial services segment, Deere also finances sales and leases by John Deere dealers of new and used agricultural, commercial and consumer and construction and forestry equipment. It also provides wholesale financing to dealers of the foregoing equipment, provides operating loans and finances retail revolving charge accounts. John Deere is also engaged in special technologies operations and provides managed healthcare plans. DE - Deere & Company $68.23 PLAY (conservative - bullish/credit spread): BUY PUT APR-60.00 DE-PL OI=1570 ASK=$0.20 SELL PUT APR-65.00 DE-PM OI=1820 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$64.45 __________________________________________________________________ FFIV - F5 Networks $31.87 *** The Uptrend Resumes! *** F5 Networks (NASDAQ:FFIV) provides a range of integrated products and services to manage, control and optimize Internet traffic. FFIV's core products, the BIG-IP Controller, the 3-DNS Controller and the BIG-IP Link Controller, help manage traffic to servers and network devices in a way that maximizes availability and throughput. The company's iControl Architecture integrates its products and also allows its customers to integrate them with other third-party products. FFIV's solutions address elements required for successful Internet/Intranet business applications, including high availability, high performance, intelligent load balancing, fault tolerance, security and efficient manageability. FFIV - F5 Networks $31.87 PLAY (less conservative - bullish/credit spread): BUY PUT APR-25.00 FLK-PE OI=557 ASK=$0.20 SELL PUT APR-30.00 FLK-PF OI=1512 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.75-$0.80 POTENTIAL PROFIT(max)=17% B/E=$29.25 __________________________________________________________________ MRVL - Marvell Technology $42.67 *** In A Trading Range? *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. MRVL - Marvell Technology $42.67 PLAY (conservative - bullish/credit spread): BUY PUT APR-37.50 UVM-PU OI=782 ASK=$0.25 SELL PUT APR-40.00 UVM-PH OI=2450 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$39.70 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BRL - Barr Laboratories $46.65 *** Next Leg Down? *** Barr Laboratories (NYSE:BRL) is a specialty pharmaceutical firm primarily engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. The company manufactures and distributes more than 100 different dosage forms and strengths of pharmaceutical products in core therapeutic categories, including oncology, female healthcare (hormone replacement and oral contraceptives), cardiovascular, anti-infective and psychotherapeutics. In addition, the company has a proprietary, novel vaginal ring drug delivery system it is using to develop products intended to address a variety of female health issues and unmet medical needs. BRL - Barr Laboratories $46.65 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 50 BAW DJ 104 0.40 50.40 4.1% 0.8% * SELL CALL APR 47.5 BAW DV 154 1.70 48.33 13.4% 3.5% __________________________________________________________________ SCHN - Schnitzer Steel $28.15 *** Premium-Selling Only! *** Schnitzer Steel Industries (NASDAQ:SCHN) collects, processes and recycles metals by operating a metals recycling business in the United States. The company also owns a chain of self-service auto parts stores in the United States, operating under the name of Pick-N-Pull, and is also a maker of finished steel products at its technologically advanced steel mini-mill. As a result of its vertically integrated business, Schnitzer is able to transform obsolete or wrecked auto bodies and other unprocessed metals into finished steel products. In addition, it is a partner in joint ventures that are either in the metals recycling business or are suppliers of unprocessed metals. The company owns interests in five joint ventures that are engaged in buying, processing and selling primarily ferrous metal. Another joint venture is an industrial plant demolition contractor that dismantles industrial plants, performs environmental remediation and sells recovered metals and machinery. SCHN - Schnitzer Steel $28.15 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 33.37 SNQ DV 0 0.30 33.68 7.6% 0.9% * SELL CALL APR 30 SNQ DF 0 0.80 30.80 12.5% 2.6% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AFCO - Applied Films $27.85 *** Sell-Off In Progress! *** Applied Films (NASDAQ:AFCO) is a provider of thin-film deposition equipment to the flat panel display industry, the architectural, automotive, solar glass and web packaging industry. The firm's high-volume, large-area deposition systems are used by customers to deposit thin-films that enhance the material properties of the base substrate. These thin-films provide conductive, electronic, reflective, filter, barrier and other properties that become critical elements of the composition of its customers' products. Additionally, Applied Films sells coated glass substrates to the FPD industry. These products are used as a component in the manufacturing of liquid crystal displays. AFCO - Applied Films $27.85 PLAY (conservative - bearish/credit spread): BUY CALL APR-35.00 UOF-DG OI=117 ASK=$0.25 SELL CALL APR-30.00 UOF-DF OI=44 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$30.55 __________________________________________________________________ CAM - Cooper Cameron $43.90 *** Oil Service "Bears" Only! *** Cooper Cameron (NYSE:CAM) is an international manufacturer of oil and gas pressure control equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems, for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications. Cooper also makes centrifugal air compressors, gas compressors and turbochargers. Its primary operations are organized into three segments: Cameron, Cooper Cameron Valves and Cooper Compression. CAM - Cooper Cameron $43.90 PLAY (less conservative - bearish/credit spread): BUY CALL APR-50.00 CAM-DJ OI=33 ASK=$0.15 SELL CALL APR-45.00 CAM-DI OI=1101 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$45.65 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. __________________________________________________________________ BSTE - Biosite $30.63 *** Probability Play *** Biosite (NASDAQ:BSTE) is a provider of novel, rapid medical diagnostics that improve a physician's ability to diagnose critical diseases and health conditions. The company focuses on disease categories that are in need of improved diagnosis and monitoring, and has adopted a strategy that encompasses the diagnostic continuum from protein validation to point-of-care diagnostics. Through combined expertise in diagnostic discovery and commercialization, Biosite is able to select large market opportunities, access potential markers of disease, identify proteins with high diagnostic utility, apply validated disease markers to advanced testing platforms, bring products to market and educate physicians and other clinicians on new approaches to diagnosis, thereby benefiting patients. BSTE - Biosite $30.63 PLAY (speculative - neutral/debit straddle): BUY CALL JUL-30.00 BQS-GF OI=520 ASK=$3.40 BUY PUT JUL-30.00 BQS-SF OI=356 ASK=$2.80 INITIAL NET-DEBIT TARGET=5.90-$6.00 INITIAL TARGET PROFIT=$2.65-$3.40 __________________________________________________________________ MKSI - MKS Instruments $23.10 *** Earnings Speculation *** MKS Instruments (NASDAQ:MKSI) is a provider of instruments, components and subsystems that measure, control, power and monitor critical parameters of semiconductor and other advanced manufacturing process environments. The company is organized into three product groups: Instruments and Control Systems, Power and Reactive Gas Products and Vacuum Products. The company's products are derived from its core competencies in pressure measurement and control; materials delivery; gas and thin-film composition analysis; vacuum technology; power and reactive gas generation; and control and information management. The company's quarterly earnings report is due April 20, 2004. MKSI - MKS Instruments $23.10 PLAY (speculative - neutral/debit straddle): BUY CALL JUL-22.50 QQB-GX OI=48 ASK=$2.85 BUY PUT JUL-22.50 QQB-SX OI=73 ASK=$2.10 INITIAL NET-DEBIT TARGET=4.60-$4.70 INITIAL TARGET PROFIT=$2.15-$3.10 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... 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