The Option Investor Newsletter Monday 04-12-2004 Copyright 2004, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Stocks Rebound on Relief Rally Futures Wrap: See Note Index Trader Wrap: See Note Traders Corner: The Good, The Bad, The Earnings & The Quickies Traders Corner: Floating the Turnover Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 04-12-2004 High Low Volume Advance/Decline DJIA 10515.56 + 73.53 10526.27 10443.81 1.37 bln 1500/1313 NASDAQ 2065.48 + 12.60 2069.45 2057.64 1.47 bln 1793/1318 S&P 100 559.49 + 3.37 560.10 556.12 Totals 3293/2631 S&P 500 1145.20 + 5.88 1147.29 1139.32 RUS 2000 599.65 + 1.77 603.04 597.88 DJ TRANS 2933.82 + 6.94 2945.79 2926.84 VIX 15.28 - 0.98 16.12 15.00 VXO 15.44 - 0.39 16.26 15.30 VXN 20.37 - 1.01 20.88 20.23 Total Volume 3,182M Total UpVol 1,996M Total DnVol 1,138M 52wk Highs 414 52wk Lows 57 TRIN 0.80 PUT/CALL 0.77 ******************************************************************* Stocks Rebound on Relief Rally by James Brown Stocks soared quickly higher at the open on Monday as investors breathed a sigh of relief that the holiday-long weekend passed without a terror-related incident. This allowed traders to focus on the Q1 earnings season, which is about to hit in force starting tomorrow. More than 700 companies are expected to report this week. Expectations for corporate profits to rise 17- 20% above last year's period have generated a bullish under current for the markets. However, some professional investors are worried if the rebound from the March lows has already baked in a strong earnings performance. Money poured into energy stocks with the OIX oil index (+1.54%) and the OSX oil services index (+2.42%) turning in today's best gains. Driving the move was a 70-cent jump to $37.84 a barrel in crude oil futures. The International Energy Agency released their latest forecast showing worldwide consumption of oil will rise for the sixth consecutive month. While that's not a surprise given the U.S. economic rebound, expanding global economy and the voracious appetite from China's red-hot economy the breakout over resistance at $37 a barrel is a new 20-year high. Airlines, who suffer from higher fuel costs as crude rises, were understandably lower today (XAL -1.21%). Benefiting from the rise in oil were refiners. Dow component ExxonMobil (XOM) rose 2.1%, ConocoPhillips (COP), the U.S.'s largest refiner, added 1.7% and Valero Energy (VLO) soared 4.2%. Meanwhile retail gas prices hit another new all-time high at $1.786 a gallon. Overall the U.S. stock markets were broadly higher with only a few sectors posting minor losses. The Dow Industrials added 73 points to break above what could have been resistance at 10,500. The NASDAQ Composite rose just under 13 points to 2065 and the S&P 500 added close to 6 points to 1145. Unfortunately, market internals were probably a little less bullish than I might have expected. Advancers outnumbered decliners 15 to 13 on the NYSE and almost 18 to 13 on the NASDAQ. Up volume was only 742 million versus 607 million in down volume on the NYSE. The NASDAQ turned in a stronger 10-to-4 ratio of up over down volume. However, total volume was very light on both exchanges. Chart of the Dow Industrials: Chart of the NASDAQ Composite: Chart of the S&P 500 Index: Boosting the Industrials this morning was Dow component DuPont (DD) who started the day by announcing plans to cut 6% of its workforce or 3,500 jobs. Investors applauded the news by sending the stock higher 1.45%. DD said the layoffs would result in a restructuring charge for its second quarter earnings of 17 to 19 cents per share. More than countering DD's positive influence on the Dow was Disney's (DIS) 2% drop on comments from a Bank of America analyst who expects that Comcast will drop its unsolicited $54 billion bid to buy Disney. Also limiting the Dow's gains today was a 1% decline in Hewlett-Packard (HPQ) after a Goldman Sachs analyst suggested investors sell the stock. The hardware company is seeing more and more competitive pressure in its crucial printer and ink business from the likes of Dell. This morning also brought earnings reports from the likes of Gannett Corp (GCI) and the New York Times (NYT). Both companies announced a strong turnaround in March ad revenues with GCI seeing 10% growth (+25% for its USA Today operations) and the NYT reporting 8.6% ad growth. For the first quarter GCI reported earnings of $1.00 per share, which was inline with estimates. The NYT managed to beat estimates by 2 cents with net income of 38 cents per share. Raising earnings estimates was Kimberly-Clark (KMB) the well- known maker of Huggies diapers and Kleenex brand facial tissues. Their press release said the company expects Q1 earnings of 91 cents a share compared to previous estimates in the 85-87 cent range. Management cited strong "top-line growth, along with success in reducing costs and a slightly lower effective tax rate. Net sales for the quarter increased approximately 10 percent to $3.8 billion." The company also said its full year numbers should be toward the high end of its $3.55-3.65 range but they'll be forced to raise prices on some products to offset rising raw materials. One of the most closely watched sectors today was the semiconductor industry. The SOX added 0.67% and looks poised to breakout over resistance at the 520 level if Intel issues some good news at their earnings report Tuesday after the closing bell. Analysts expect Intel to report earnings of 27 cents per share, which is nearly double the 14 cents from a year ago. Of course many on Wall Street are curious to see where Intel's revenue number will fall. Early last month Intel guided revenues lower to the $8.0-8.2 billion range. Hopefully Novellus Systems' (NVLS) earnings report tonight is a positive sign for the industry. NVLS turned in earnings of 11 cents per share, which beat consensus estimates of 10 cents and a nice improvement over last year's 8 cents per share. Revenues were better than expected at $262.9 million for the quarter. NVLS said shipments soared 36% in the first quarter. Furthermore the company guided Q2 earnings higher to 18-20 cents compared to analysts' estimates of 18 cents. For some investors trading semiconductor stocks isn't exciting enough. No, the new thrill ride on Wall Street are small cap security companies. If you watching the MarketMonitor today you already know about TBUS and MACE as Jeff Bailey kept us posted on their 73% and 133% one-day gains. However, you may not have heard about IPIX's 51% gain, ICTS' 71% gain and ARTX's 14% gain. Almost every single one of these small cap stocks, and I do mean small cap, were trading near $2.00 in the last week to three weeks but they've since exploded with 100%, 200% and 1000% gains as investors search for ways to play the rise in "geo-political" tensions. I'm certainly not making any recommendations on how to trade these. Personally, I tend to enjoy the fireworks from the sidelines where I can't get burned. Tomorrow brings a couple of economic reports on top of the parade of earnings announcements. The business inventory numbers and retail sales for March should be out before the opening bell. We'll also hear earnings from Dow Jones (DJ), Dow component Johnson and Johnson (JNJ), Merrill Lynch (MER), Pepsi Bottling (PBG), State Street Bank (STT) and Infosys Technologies (INFY) before the opening bell. Overall the broad-based rally was encouraging and I expect to see more of the same tomorrow. Let's cross our fingers and hope that Intel doesn't kill the momentum with any ill-placed comments in their conference call on Tuesday night. ************ FUTURES WRAP ************ Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_041204_1.asp ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** The Good, The Bad, The Earnings & The Quickies By Mike Parnos, Investing With Attitude Here are some quickies. It’s earnings season. There should be some positive and some negative earnings. Hopefully, they will balance themselves out and the market will be at this same level at Friday’s expiration. A word of warning. These premiums were based on Thursday’s closing prices. Three days have gone by and the premiums will not likely be the same. More than likely, they will be less. So, enter these trades only if you believe there is enough premium left to make them worthwhile. April Expiration Quickies These quickies can be hazardous to your wealth. In past months we’ve had many more winners than losers. The losers can be expensive, though. These are hypothetical and educational plays, but readers have been known to roll the “quickie” dice. Should you be so inclined, only use hypothetical money you can afford to lose. __________________________________________________________ April Quickie #1 – Iron Condor SPX – 1139.32 Sell 10 SPX April 1120 puts Buy 10 SPX April 1110 puts Credit: $1.05 ($1,050) Sell 10 SPX April 1160 calls Buy 10 SPX April 1170 calls Credit: $.90 ($900) Total net credit and potential profit of $1,950. Maximum profit range of 1120 to 1160. __________________________________________________________ April Quickie #2 – Iron Condor RUT – 597.88 Sell 10 RUT April 580 puts Buy 10 RUT April 570 puts Credit: $.90 ($900) Sell 10 RUT April 610 calls Buy 10 RUT April 620 calls Credit: $1.35 ($1,350) Total net credit and profit potential of $2,250. Maximum profit range of 1120 to 1160. __________________________________________________________ April Quickie #3 – QQQ Strangle - $36.94 Buy 10 QQQ April $38 calls @ $.10 ($100) Buy 10 QQQ April $36 puts @ $.15 ($150) Total debit of $.25 ($250) If the QQQs make a quick move in the next five business days, be prepared to take some profits. Even if you can close out the position for $.50, you’ve doubled your risk. __________________________________________________________ Those Friendly Reminders The premiums quoted on the above educational trades are based on Thursday’s closing bid/ask prices. On Monday, the premiums will likely be different due to market movement and/or the additional two days of time erosion. In a few instances, when the bid/ask spread is wide, we figure you may be able to shave off a nickel here and there. Be careful. If a stock gaps up or down, it may change the entire dynamic of the trade. Don't skydive without a parachute. Just because you have a pulse and evidence of brain activity doesn't mean you a trader. And make sure you thoroughly know the intricacies of a strategy before you trade. The money you save may be your own. __________________________________________________________ APRIL CPTI POSITIONS April Position #1 – SPX Iron Condor – 1139.32 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 – 597.88 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 - $101.62 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 – $102.52 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). Adjustment: We rolled out to the May $110 calls and took in another $1.25. Our cost basis is now only $.20. However, we sold a strike price that is $5 less than our long $115 call. That means we are exposed for the $5 difference between the $110 call and the $115 call. ______________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.94 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. We’re going to try and roll out our April $34 calls to the May $34 calls for about $.15. We’ll have to wait until closer to expiration to deal with the $37 puts that are right at the money. 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 – 556.12 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. Cash position is $3,320 ($1,620 plus the unused $1,700). April Positions: OEX Bull Put Spread - $556.12. Sell 5 OEX April 515 puts and buy 5 contracts of April 505 puts for credit of $.90 (x 5 contracts = $450). Sell call against long 540 call. Sell 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 ************** Floating the Turnover Lately I have become a little skeptical about technical analysis or maybe the correct word would be jaundiced. This has happened over the years because just when I had found the indicator or combination of indicators that gave me an edge something always seemed to stop working. I was turning yellow (jaundiced) and I needed something to give me back the pink passion I had for research. Just like a new pair of shoes can put new vigor into a woman's wardrobe, I needed a new kind of technical analysis to put the verve and vigor back into my analyst's toolbox. I may have just found those new pair of shoes. Qcharts has a new study that was introduced in version 4.3 called the Float Turnover Channel. Since I had never heard of this study (actually Jeff Bailey has touched on it but didn't quite understand it) I decided to do some research. I truly didn't expect much but what I found was terribly exciting. The Float Turnover Channel is based on Float Analysis "invented" by Steve Woods. The definition of Float Analysis is: by adding up volume cumulatively and comparing it to the number of shares actually available for trading (the float), we can see areas on a chart where the stock goes through a change of ownership. We can see where the Smart Money is accumulating at the bottom and we can see were they get out at the top. But before I blast off let's define some terms so we can get on an equal footing. The Float is defined as all the shares available for trading by the public that are not owned by the company's management. Or the number of freely traded shares in the hands of the public, the number of outstanding shares less the shares owned by management. The Float Turnover is the approximate time it takes for the float to change ownership, a proxy for a change of ownership. It is the amount of time it takes for a stock's cumulative volume to equal its floating supply of shares and the price range of this "turnover." It implies that a large percentage of the stock's ownership has changed hands. For example, if a stock's float has 50 million shares actively trading and the volume for the last four weeks was exactly 50 million shares, then the float's turnover would be a four-week span starting from the current date and going back to the day when a cumulative total of the volume equaled 50 million shares. However we never know exactly when a complete turnover of shares traded has occurred because we don't know the intentions of the traders or investors. Some long-term investors may hold onto a stock through thick and thin, through ups and downs and some short-term traders may buy and sell several times during that time it takes for the float to go through one hypothetical turnover. Here is how the Float Turnover Channel is calculated. Starting on any given day and working backwards, the current day's volume is added to the previous day's volume which is added to the next previous day's volume and so on. As each cumulative volume number is added to the previous number, it is compared to the stock's float and when the cumulative volume total is equal to or greater than the float two horizontal lines are plotted on the chart. The top line shows the highest price reached during the backward count, and the bottom line, the lowest price. The lines extend backward from the starting date to the bar, where the float has gone through one complete turnover. The Float Turnover Channel lines that look like a moving average are the footprints’ left behind from previous float turnovers and are created by plotting only the top right and lower right corner points of the current float turnover on a day-to-day continuum basis. They allow us to see previous float turnover trading ranges and breakout points. The Float Turnover study also has 50% Channel lines, which are created exactly the same as the 100% channel lines discussed above except they are tracking a float turnover that is exactly half the actual float number. It has been found that these 50% float turnover lines are often the point where support or resistance occurs in a stock's price movement. There are vast differences between stocks when it comes to float analysis. Some stocks with a small float may take months or years to go through one complete turnover, while other stocks with large floats may have a rapid turnover in a matter of days. Some stocks may have a turnover lasting several months and then come under heavy accumulation and have quick turnovers of just a few days. For example, I have seen TASR's float turnover last only two days. Now, of course, not all stocks are candidates for float analysis. First you all you want stocks that are trading a couple hundred thousand shares a day and are breaking out of bases. There are three basic types of breakouts: 1. Stocks that are trending down and are continuously going through the bottom channel line. Then reverse and break out above the top channel line with volume. 2. Stocks that are trending up and are continuously going through the top channel line. Then reverse and break down below the bottom channel line with volume. 3. Stocks that make long sideways moves and do not break above or below either channel line for a long time and then break out of either the top or bottom with volume. Once a breakout has happened always wait for the pull back to the channel or approximately 50% of the channel but with light volume. The channel lines and 50% of the channel are support lines when a stock’s price is moving up and away from an accumulation bottom formation and they are resistance lines when a stock’s price is moving down and away from a distribution top formation. Avoid stocks that are making 'wide and loose' formations. These have prices that move above their float turnover channel, then below, and then back above only to then move below again, making a back and forth wide and loose look. With these stocks, it is very difficult to tell if a breakout or a breakdown is valid. The stocks that are easiest to analyze are those that have floats that are turning over every 50 to 100 days at accumulation bottoms and 10 to 50 days at distribution tops. Long low volume bottom formations are the best for moves to the upside. Short high volume distribution tops are the best for moves to the downside. Avoid stocks that are turning over extremely fast because they tend to give a lot of false signals. These would be the stocks that have float turnovers in the 1 to 10 day range. They are hard to analyze. An exception to this would be a stock that has had a long run up (continually moving through the top float channel line) and hasn't broken below its lower float turnover channel line during the entire run. Then right at the top it crashes through the bottom line. Look for strong volume to accompany the breakout or breakdown. On the upside, this indicates a lot of money moving into the stock. On the downside, this indicates a lot of money moving out of the stock. Follow the money. Well this introduction has given you an idea of what to look for I will follow up with another article that has examples of what I have just detailed here. I also have lost a little of my yellow coloring and am starting to return to a much more natural color pink. Remember plan your trade and trade your plan. Jane Fox ************************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. 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The Option Investor Newsletter Monday 04-12-2004 Copyright 2004, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Leaps: Is It Already Baked In? Stop Loss Updates: CAT, PDCO, ZBRA, CFC Dropped Calls: None Dropped Puts: AHC Watch List: Mixed Bag ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade ket Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ***************** LEAPS FROM SUNDAY ***************** Is It Already Baked In? By Mark Phillips mphillips@OptionInvestor.com That's a really big question, as we could be referring to the question of whether strong earnings are already factored into the market or we could be talking about whether improvements in employment, the economy or the geopolitical situation are already incorporated into the current levels for stocks. As we've talked about on numerous occasions, it isn't as simple as just looking at the news and deciding whether it is good or bad. It is in comparing it to the prior expectations that we can start to make some intelligent decisions as to whether or not the news should be bullish or bearish for a given stock or the market as a whole. Clearly, we can see from the market's reaction on Thursday, YHOO's stellar earnings report (along with the split announcement) were not expected by the market. There we have a clear case of positive, unexpected news driving an individual stock and its sector (Internets) sharply higher, as expectations were ratcheted up a few notches. It certainly didn't hurt the performance of our EBAY play! There are clearly some bullish expectations for this earnings season and we can expect to see some strong upside surprises and probably some stellar misses as well. But on the whole, we'll likely see a solid performance from the April earnings cycle. But we know the market is a forward-looking mechanism, right? April earnings will tell us what has already happened. The more important data will be what the corporate chieftains have to tell us in the way of future guidance for next quarter and more importantly for the remainder of the year. For clarity on that front, we'll simply have to watch and see what interesting tidbits come to light in the next few weeks. Further clouding the picture will be what the prospects are for inflation, job growth and of course interest rates. The bond market has been telling us for a while that it didn't see any serious chance of the Fed raising rates before the election in November and quite possibly not until 2005. But that all changed in dramatic fashion with the bond market implosion that followed the most recent Jobs Report. The bond junkies made it clear that they viewed the report as sending a clear message that the timetable of interest rate increases had been moved up. That surge in yields was the largest seen in many years and the lack of a meaningful drop back over the past week hints that it was more than just a knee-jerk move. Does that mean the Fed will move rates at the May meeting? I think that is highly doubtful, but not out of the question. More likely, the Fed will verbally prepare investors for the reality that interest rates will rise sooner, rather than later. When that process begins, it will place yet another burden on Corporate America, that is already struggling with astronomical energy costs and the uncertainty of who will sit in the White House next January and what it will mean in terms of taxes. The taxation factor will weigh directly on consumers' minds as well, especially in the next week, as they hurry to finish up their 2003 returns ahead of the April 15th filing deadline. The month of March delivered the first decent correction in the market in the past year and market participants wisely harvested profits ahead of the next directional move. Early last week, we completed a sizable retracement of that drop. The remainder of the holiday-shortened week delivered little in the way of clarity as to what to expect as we head into this earnings season and that leaves us with a fairly clean slate to work with. My expectation is that we'll probably test the recent highs before the April earnings season is complete, but I'm doubtful that we'll see a meaningful upside breakout. Following earnings, it's hard to say what the next catalyst will be for an upside move and we do have the nagging reality of a potential rise in interest rates to keep the bulls in check. The recent rash of PnF Sell signals on the major indices have been reversed, bullish percent readings are still quite high (except in the case of the NDX, which has now reversed to Bear Correction at 52%), and technically things look bullish. This is balanced against volatility levels that are historically still quite low, with the VIX once again trolling around the 16 level. With the new PnF Buy signal on the DOW and a price target of 11,600, you'd think I'd be excited to do a DJX LEAP Call play here, right? Well, all things being equal I probably would. The issue that rests in my frontal lobe keeping me from pursuing such a course of action is the view we've taken of looking at the rally of the past year in light of different currencies. That view hasn't changed one iota and unless the dollar weakens considerably more in the near-term, my thinking is that rangebound trade is the more likely scenario. As a matter of fact, if we were to expand our view of the DOW vs. Euro chart to encompass the 1996-2004 timespan, we can see quite clearly a H&S top formation building. There's nothing concrete there yet, (just as there's nothing concrete yet on the bearish divergence on the monthly S&P chart we've been looking at), but it is yet another potential situation that long term bulls on these two indices must beware of. I would have liked to include those two charts this weekend, but for some reason my chart capture program is feeling uncooperative. They're both long-term enough though that we can update them next weekend. If it sounds like I'm hedging my bets this week, then you're right on target! I can't make a convincing argument for a major downside move and I think much of the positive expectations for the April earnings cycle are already factored into equity prices at current levels. It is entirely possible that we'll see a breakout to the upside in the weeks ahead. It's just as likely that we'll see the broad market churn in the range already defined since the start of the year. That makes this a stock-picker's market (I hate that term, but I think it applies here) at least until we move through the month of April. I think we're well-positioned to take advantage of continued near- term bullishness with our long plays and we have a few candidates that could shape up for new plays both on the long and short side in the weeks ahead. Now is the time to monitor what happens in the market, and adjust our bias and our playlist accordingly in the weeks ahead. So without further ado, let's head over to look at the specific plays and candidates and see what the holiday- shortened week just completed had to offer. Portfolio: NEM - Consolidation appears to be the name of the game in the gold sector over the past couple weeks. It wasn't that long ago that I was getting excited all over again with the breakout over $46, generating a new PnF Buy signal, but the stock has been largely stagnant since then. This lack of directionality can be blamed on the fact that the price of gold has been unable to break out over its January highs near $430, which is itself attributable to the renewed strength in the dollar, due to thoughts that interest rates in the U.S. will be rising soon following the most recent Jobs Report. As we've covered here ad nauseum, the gold bull is a difficult beast to ride and it requires an uncommon level of patience to do so. As long as the Fed continues to print money at anywhere near the current rate, the long-term decline in the dollar should continue, at least relative to gold. Remember, the next significant event in this gold bull market will be when gold breaks out to new multi-year highs against the other currencies like the Yen Euro and Swiss Franc. Until then, we can be content to sit and wait for the natural price action to unfold. Maintain stops at $41 (which would create a new PnF Sell signal) on our NEM play. HD - What can I say? HD remains stuck in a rut, stuck in a rut, stuck in a rut...and is not going anywhere of substance. We need a breakdown under $35 (and preferably below the 200-dma) to give any conviction to our bearish thesis. On the other hand, a breakout over $40 would tell us that we're on the wrong side of this play. Until one of those scenarios play out, we've no choice but to wait and see. Prospects for rising interest rates should put downward pressure on the stock, but that effect has been muted, to say the least. MLNM - Traders searching for guidance from MLNM's daily price chart have got to be tearing their hair out! Slight breakouts from the recent consolidation met with a slight breakdown and now we're headed right back into the heart of that consolidation range again. On the weekly chart, we can still see the semblance of a bullish trend, and it appears that key support is now found near the $16.50 level. The late March dip to that level successfully filled the December gap and now the stock is free to pursue a strong upside move -- at least that's what I'm hoping for. My biggest source of concern is the fact that the PnF chart is currently on a Sell signal and we need to see a trade at $19.50 to negate that signal. Last week the Biotechnology index (BTK.X) was turned back from just below its March lows and MLNM will need to see renewed strength from the BTK to propel it back into the $19- 20 area. Should the BTK manage a breakout above $565 and MLNM be unable to deliver a trade at $19.50, then I think we'll have to concede defeat and drop the play. That sort of relative weakness would tell us unequivocally that we are not riding a strong horse. In light of the lackluster trade of late, I'm going to reduce our risk in the play, raising the stop to $16, just under the recent low, as well as the 200-dma. CHK - After 3 months of trading in a broad consolidation pattern, it looks like CHK is finally ready to move higher again. Of course it didn't hurt that on Thursday the June futures contract for Natural Gas broke out to a new high. CHK got with the program, surging through the $13.50-13.60 resistance level that has been holding it back these past couple months and a test of the $14 multi-year highs seems likely in the near future. The stock has survived three attempts at a breakdown under $12 and with the 200-dma now at $11.73, I think it is safe to inch our stop up to $11.50 this weekend. Recall that a trade at $11.50 would constitute a new PnF Sell signal, so that is the sensible place for our stop. Once CHK breaks out over $14 and then solidifies that breakout, we'll look to raise our stop even further. Remember, once through $14, CHK will be headed towards next resistance at $16 from 1996-1997. Our job at this point is just to ride this train higher as long as the bullish trend in the Natural Gas sector holds firm. SNDK - It seems every week now is bringing encouraging technical developments for our SNDK play and last week was no exception. Tuesday's strong round of buying smashed through the 100-dma and the 200-dma and the stock just headed higher into the end of the week. The stock has now soundly broken from its descending trend, broken into its gap from late January and appears headed for a test of the mid-January highs near $36. Any pullback now should find firm buying interest in the $29-30 area, and a dip and rebound in that area can be used for secondary entries into the play. As this rally unfolds, the picture on the PnF chart continues to get stronger, with the bullish price target now pointing to $48 as a possible objective. One important feature on the daily chart is the way volume has been expanding lately. That is particularly interesting in light of the weak overall market volume last week. We've got a nice gain in the play right here, and it only makes sense to tighten our stop to above our original entry point and liquidate the protective put. Raise stops to $28, which should be safe under the $29-30 support level, and even if hit, should be high enough to ensure a breakeven or better result on the entire play. Of course, with earnings set to be released next week (Wednesday) conservative traders may just opt to harvest their gains and avoid the risk of holding over the announcement. LUV - As bad as things looked for the Transports and the Airline index (XAL.X) a few weeks ago, there's certainly been a strong turnaround as earnings season gets underway. The XAL has now pushed right back to its 200-dma and is already above the 50-dma and we could be witnessing a turnaround in the group. We certainly can't attribute the resurgence to a substantial drop in energy costs, with Crude rebounding to close just off its contract highs on Thursday. Perhaps, as I speculated at the outset, this is the beginning of the seasonal rebound in the Airline stocks as the peak travel season gets ready to take off. Whatever the cause, our LUV play is now moving in the right direction, having handily cleared the 50-dma and now getting set for a confrontation with the 100-dma just over $15. Of course the strong resistance that will have to be dealt with is a bit higher in the $15.60- 16.20 area, with the 200-dma just above there. With the breakout from the downtrend, I think it should be safe to raise our stops to $12.75, just under the March low. Pullbacks near the 50-dma can be used for continuation entries, as the weekly Stochastics are now clearly in a bullish configuration. EBAY - As impressive as the breakout over $70 was, EBAY gave us another strong performance last week. After consolidating near the $74 level, the stock broke out on strong volume on Thursday in response to the strong earnings report from YHOO. Stepping back a bit and looking at the big picture, I'm struck by the similarity of the stock's price pattern over the past few weeks to what happened late last year. After consolidating below strong resistance (then at $59), EBAY made one failed breakout attempt (early October), then a failed breakdown (mid-November), before a strong breakout that just continued to rise into the mid-$60s. Look what just happened in the past several weeks. In early March, there was an aborted move through the $70 resistance, then a false breakdown in late March (complete with a PnF Sell signal) and then the strong and decisive breakout of the past two weeks. If this really is a repeating pattern, then we should expect that the initial breakout level ($70) should not be threatened again. So I think it is warranted to get more aggressive with our play management here. Let's sell the protective put for its residual value and raise our stop to $70. That should guarantee no worse than a breakeven for this position and I'm expecting EBAY to continue higher ahead of earnings (scheduled for 4/21). Of course the conservative approach may be to harvest gains ahead of the report, but I'm inclined to stick with this play and go for the gusto, especially with the newly bullish PnF chart, which is now giving us a tentative bullish price target of $99. Watch List: TYC - As the price action continues to unfold, I'm growing less enthusiastic for a bullish move in shares of TYC. While the stock remains in its bullish rising channel, I can't ignore the potential H&S top that appears to be forming over the past 2 months, with the neckline just below our $27 entry target at the 100-dma. That said, I could just as easily make the case for this being an extended period of consolidation ahead of the next bullish move. If that latter interpretation is correct, then we still ought to be targeting entries at the bottom of the channel. Despite my trepidation, I'm going to stay the course, looking for entries on a test of the $27 level. If filled, we'll use a liberal stop at $23.50, now just under the 200-dma. Hopefully my comments this week convey my view that this is now a more aggressive play candidate. Radar Screen: WMB - If you've been following the price action in shares of WMB with me, I think you would agree that the price action has been rather inscrutable of late. There's no doubt that the recent bullish breakout from the short-term neutral wedge looks encouraging, but I don't care for the lack of follow-through, especially with the continued strength in the price of Natural Gas. Since it is too difficult to structure a good risk to reward play in this stock, I'm going to remove it from consideration this week. Let's focus our attention elsewhere. APA - Continuing to build its bullish wedge and threaten to break out to the upside, APA has been very unwilling to give us what I would consider a viable entry point. The stock may very well break out in the near future, but I don't like the prospects of chasing the stock higher. We'll remain passive on this one if it does break out. I still view a pullback to strong support in the $35-36 area as the best way to participate in the bullish trend. Absent that, we'll leave it alone. If APA does break out and continue higher above $45, we'll remove it from consideration as a potential play. GM - The 50-dma has been stiff resistance for GM over the past couple weeks and it certainly looks like a stock that wants to head lower. But with the weekly Stochastics now starting to turn bullish, I have the distinct impression that a bullish move is about to unfold as we head into the April earnings parade. On one hand, I'm tempted to initiate a Watch List play here, looking for a rejection at the top of the long-term falling channel. On the other hand, I don't want to enter a bearish play when the weekly Stochastics are clearly just starting to turn the other way. Let's remain on the sidelines through the company's earnings report (April 20th) and then re-evaluate. DJX - Along with the rest of the market, the DJX had a nice rebound off the March lows and is now sitting right in the middle of what we can view as a broad consolidation zone from 10,000- 10,700. The PnF chart is bullish, with a target of 11,600 and I think it is very difficult to make a case for either a strong bullish or bearish long-term trade on this index right here. If forced to choose, I think I'd have to go with the long side, but beyond the April earnings cycle I'm hard-pressed to see what the bullish catalyst will be. At the same time, I can't see what the bearish catalyst would be to initiate a strong downtrend either. My gut feel here is that the DOW will remain rangebound throughout the summer and leading up to the November election unless we see more evidence of strong growth and sharp increases to earnings guidance in the weeks ahead. Of course on the bearish side of the coin, if the Fed were to start raising short-term rates earlier than anticipated, that could have a pronounced bearish effect. At this juncture though, it is little more than conjecture. That's not a viable basis for a long-term trade, so let's just wait and watch for now. EK - Following our most recent failed attempt at playing the downside in EK, I've had some interesting discussions with readers about giving it another shot. I've been slow to come to the conclusion that my readers are right and it is time to start thinking about trying this one again. But now isn't the time, in large part due to the weekly Stochastics, now almost buried in oversold. The other unknown factor is how the removal from the DOW will affect the stock over the short-term. Better to let that dynamic play out and then we can look to once again enter the dominant downtrend. We'll take our cue from the weekly oscillator here and look to move EK onto the Watch List when the oscillator once again nears overbought, provided price is still meandering below the long-term falling trendline, now at $28.50. If we do manage to get a favorable setup for the play, we'll be targeting a return to the 2003 lows near $20. AIG - In an impressive show of force, AIG staged a strong breakout last week, hitting its best levels since early 2002. A quick look at the weekly chart shows that the stock has potential up to the $85 level and possibly into the low $90s. That view is confirmed by the PnF chart, with a new Buy signal and a tentative bullish price target of $91. I was tempted to add the stock to the Watch List this weekend on that alone, but I'm inclined to be a bit cautious due to the unknown impact of the stock's addition to the DOW. It "should" have a bullish impact, but that assumes that there wasn't a lot of buying over the past several sessions in anticipation of the index reshuffling. Let's let this one play out for a week and if it still looks good, we can officially add it to the Watch List next weekend. For those eager beavers that can't wait, my view is that a dip near the $73 level should make for a solid entry into this bullish trend. But make sure to use a stop at $68 (just under the March lows) in case of a sharp reversal. Closing Thoughts: Despite looking at over 200 "leap-able" stock charts this weekend, I saw very little that made me want to jump aboard, either to the long or the short side. The broad market appears to be consolidating ahead of its next directional move and with the number of cross-currents acting on the equity market, I can make valid arguments for long or short on many symbols. To me, that is a warning sign that there is insufficient clarity. Echoing my closing comments from last week, I think we're well loaded with a nice selection of bullish plays, some of which are now performing quite nicely. There is very little to choose from on the short side right here, with most "short-able" candidates only offering the ability to try picking a top in an established and extended uptrend (no thanks!) or an opportunity to play the downside when the weekly oscillators are already buried in oversold. Once again, no thank you! A good trading friend of mine recently reminded me that if I'm looking at a chart (or group of charts) and the trade isn't immediately obvious, then perhaps there isn't a high-odds trade there at all. Taking that advice to heart, I have to say that is the case with most charts I viewed this weekend. So let's just stick with what is currently working and wait for the next trade setup to scream "What about me?" at us. At the very least, the first full week of earnings ought to help provide clarity as to what the majority of market participants are thinking and that should help to illuminate what we're looking for in terms of long- term plays. 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 $27 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 None New Watchlist Plays None Drops None ***************** STOP-LOSS UPDATES ***************** CAT - call play Raise stop from $78.95 to $79.99 PDCO - call play Raise stop from $70.99 to $71.75 ZBRA - call play Raise stop from $68.00 to $69.99 CFC - put play Lower stop from $90.51 to $89.25 ************* DROPPED CALLS ************* None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ************ DROPPED PUTS ************ Amerada Hess Corp. - AHC - close: 66.05 change: +1.99 stop: 65.50 The continued rise in energy prices on Monday was too much for bears in AHC, and the stock finally broke firmly above its descending trendline, triggering our stop in the process. This is a bearish play that didn't work one bit in our favor, but we're actually pretty happy about it, as our entry trigger kept us out of trouble. Recall we were looking for a breakdown under the 50- dma to trigger the play to active status and since that never happened, there was never an opportunity to get on board and get hurt by the rally of the past few days. Clearly we're dropping the play from consideration tonight. Picked on April 1st at $63.15 Change since picked: +2.90 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 905 K ************************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 ************************************************************** ********** Watch List ********** Mixed Bag American International Group - AIG - close: 76.77 change: +0.50 WHAT TO WATCH: Continuing to hold up well throughout last week, AIG delivered more of the same on Monday and looks as though it could continue to power higher, first to $80 and then to $85. Target entries on a pullback to support in the $74-75 area, and then hold on for a bullish run up to the next level of resistance. Chart= --- Invitrogen Corp. - IVGN - close: 73.78 change: -0.43 WHAT TO WATCH: Looking for a rollover candidate? Shares of IVGN appear to be doing just that, having failed to scale the $76 resistance level and now beginning to tip over, confirmed by the rolling daily oscillators. Use an entry trigger under the 50-dma and target a drop to the March lows near $65. Use a tight stop at $76. Chart= --- Johnson Controls Inc. - JCI - close: 56.68 change: -0.04 WHAT TO WATCH: we've been monitoring JCI for a few weeks now, noting how it is stuck in a range between $56-60. We're looking for a break of that range to signal the next strong tradable move and based on the heavy selling volume, the downside may have the nod. Look for a break under $56 to trigger entries, targeting a drop first to the 200-dma and then to stronger support near $50. Chart= --- Quest Diagnostic - DGX - close: 84.10 change: +0.55 WHAT TO WATCH: While the rise has been lethargic so far, shares of DGX look like they are poised for a strong bullish move, as the pattern of higher lows and higher highs is inching its way towards strong resistance just under $86. Aggressive traders can enter on a break above today's high, while the more conservative approach will be to wait for the trade at $86. A break to new highs will open the door for a rally towards next resistance at $90 and possibly a run at the all-time highs near $96. Chart= --- =================== On the RADAR Screen =================== APA $43.22 - While not quite able to hold its breakout today, APA did make a convincing early move over $44, hitting new all-time highs and issuing a new PnF Buy signal. The pullback from the highs may be setting up another solid bullish entry. Target entries on a rebound from above $42, the site of the near-term rising trendline and look for a rally into the $47-48 area, as energy prices continue to rise. RYL $79.37 - Is the housing bubble about to burst? With interest rates apparently on the rise, housing stocks have been showing some weakness again and shares of RYL plunged again on Monday, coming to rest on the 200-dma. Trigger entries on a break under that average and target a drop back near the January lows just over $70. Keep an eye on the $75 level though, as it is possible that level will provide support for the next bounce. ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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