The Option Investor Newsletter Thursday 04-22-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Size Matters Futures Markets: See Note Index Trader Wrap: "see note" Market Sentiment: Fearless! Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 04-22-2004 High Low Volume Adv/Dcl DJIA 10461.20 +143.90 10496.61 10292.28 2.21 bln 2437/ 834 NASDAQ 2032.91 + 37.30 2035.39 1991.47 2.14 bln 2105/1061 S&P 100 555.24 + 6.04 556.76 547.24 Totals 4542/1895 S&P 500 1139.93 + 15.84 1142.77 1121.92 W5000 11154.54 +160.20 11174.70 10978.22 SOX 480.48 + 1.70 485.81 468.09 RUS 2000 593.24 + 10.02 593.67 582.28 DJ TRANS 3006.96 + 52.50 3007.01 2948.54 VIX 14.61 - 0.99 15.98 13.86 VXO (VIX-O)14.59 - 1.07 16.36 14.17 VXN 21.35 - 1.47 22.94 20.94 Total Volume 4,748M Total UpVol 3,604M Total DnVol 1,107M Total Adv 5101 Total Dcl 2198 52wk Highs 337 52wk Lows 152 NasTRIN 0.78 TRIN 0.76 PUT/CALL 0.63 ************************************************************ Size Matters by Jim Brown It appears that size and quality does matter when it comes to earnings and Thursday was a banner day for quality results. Good news was breaking out all over and analysts were pounding the table about the new bull market. Is it a new bull market or just a lot of bull? Dow Chart - Daily Nasdaq Chart - Daily Wilshire-5000 Chart - Daily According to market reporters earnings suddenly rocketed to the forefront and considering the economics today it was about time. Jobless Claims fell slightly to 353,000 but that marks the second week over the 350K level. That level is used as a benchmark for adding or deleting real jobs from the market. The prior week was revised up to 362K. Analysts are still blaming the seasonal adjustments for Easter as the reason for the jump. The March PPI surprised to the upside with a +0.5% jump and well over estimates of +0.2%. Core prices rose at a slower rate of +0.2% for those of you that don't use food or energy. A +1.5% jump in food prices was the main reason for the headline bounce. For the first quarter finished goods have already risen +5.1% and although much of that was due to energy it is still a warning sign for the Fed that inflation is knocking on the door. The Chicago Fed National Activity Index (CFNAI) dropped to 17 in March from 47 in February. This was the seventh consecutive month of expansion but the lowest month since October. The +308,000 jobs created in March added +0.09 to the headline number and it was only the fourth positive contribution by employment in the last four years. The CFNAI is seen as confirmation that the economy is still growing but the drop in the expansion rate is troubling. If rates rise soon the housing sector will slow and that could push the numbers back into negative territory very quickly. By far the best report of the day was the Monthly Mass Layoffs which showed that there were only 920 mass layoffs in March that impacted 92,554 workers. This the second consecutive month under 100,000 and bodes very well for the coming Jobs report. If jobless claims remain low as well as layoffs then we can assume companies have reached their minimum level of employment and could be ramping up again soon. Manufacturing still accounted for the largest number of layoffs with one third of the total. Strong earnings as we have been seeing this week would also make companies more comfortable about maintaining payrolls and adding additional workers. According to the bobble head reporters on stock TV economics were not the motivating force today. According to them the earnings picture finally took the lead and positive comments from numerous companies combined together to produce a rebound back to a two week high. Rate fears that were blamed for the Tuesday decline were forgotten and entire two day hiccup was erased. When we discuss these things you should always remember that nearly 50% of our daily trading is done by computer programs launched by funds and institutions. This is up from a little over 20% just a couple years ago. These programs come and go daily with some buying and some selling. As long as they are balanced there is no material impact to the market. When we suddenly get several large programs that move in the same direction without any offsetting activity we get a major market event. This is what happened on Tuesday and again today. On Tuesday at approximately 2:30 we saw several sell programs triggered and the selling was blamed on Greenspan comments. With Alan Greenspan scheduled to speak again the next morning nobody was ready to buy the dip. More sell stops were hit and the drop accelerated. The selling was not especially heavy for the entire day, only for the duration of the sell programs. Volume was only moderate at 4.2B shares across all markets. The market had been moving higher that morning but fear of Greenspan was prompting some underlying profit taking all day. The sell programs just accelerated the event. It was not a watershed day. It was simply a reaction event made worse by the lack of buyers. Traders were concerned it would carry over into Wednesday but Greenspan said nothing new and it turned into a false alarm. The exact reverse occurred today. The market opened down and we bounced along the 10300 level for about an hour. At 10:30 a strong buy program triggered taking us to new highs for the day. Once those highs were made new programs appeared and we raced to just over the 10400 level where we rested for a couple hours. Shorts without stops were caught off guard and were forced to bite the bullet in increasing numbers when there was no immediate sell off. At 1:25 those shorts hoping for an end of day retracement were surprised when another strong buy program appeared to push us within 13 points of 10500. Short covering held us there and we closed with little or no selling. Dow Chart - 30 min Advance-decline Chart (programs) Despite the numbers on the board it was not a blowout. The volume was strong at 4.8B shares across the board but up volume was only 3:1 over down volume. Advancers only beat decliners by little more than 2:1. It was simply a day where the buy programs outnumbered sell programs and it was helped by positive earnings chatter. On the chart above you can see the marked moves where large programs pushed the indexes around. A plus/minus change in the A/D line of 1000 issues in a single 30 min period in the middle of the day is not created by retail buying and selling. Advance-decline - Chart (normal) I chose today to elaborate on the program activity because the TV announcers were tripping all over themselves trying to explain how the bullish earnings news had prompted this massive buying. Surprise, the news today was no different than the news on any other day this week. The rate picture is still the same. In fact Bernanke spoke today and said the Fed was in policy transition mode, indicating the Fed was preparing to raise rates. Nobody blinked. Wayne Angel, a prior Fed governor, was on TV saying he thought +50 points in May would be the right move. Nobody blinked. There were multiple terror events around the world and a train wreck in Korea potentially killing 3000 people and the markets did not blink. The markets go up and down based on money flows into funds and asset allocation by major institutions. Retail traders simply go along for the ride. Those pulling the trigger on those buy programs probably did so because of the long term outlook as earnings continue to beat expectations. That part is true. If a fund is sitting on a large pile of cash and the Tuesday crash and Wednesday speech failed to break support at 10300 then why not take advantage of the best buying opportunity over the last month? It does not even take guts or conviction. Index funds have to invest the money and the best market timing they can do is buy the dips whenever possible. Does that mean the rally was false? Does it mean we are not going to see any summer doldrums? No to both questions. It means nothing except some shorts got squeezed. You cannot make market decisions based on single day events. Granted it was a bullish event but it was just one day. It was a very bullish day for sentiment. Company after company raised guidance and made glowing statements about the future. Comments from Caterpillar were repeated almost hourly day. The company CEO said "it appears the world's economy will have one of the strongest, broadest recoveries in years." CAT raised its profit outlook to +65% to +70% growth from the prior forecast of +40%. That was just an example of similar comments from dozens of companies. Thursday was the heaviest earnings schedule for the April cycle with 70 S&P 500 companies reporting along with hundreds of others. After the close we got several high profile reports including MSFT, AMZN, AMGN, BRCM, GLW, MCHP, XLNX and PSFT. Microsoft blew away estimates of 28 cents with profits of 34 cents and Microsoft was uncharacteristically bullish in its comments. CFO John Connors said 2004 has been a great year and we see a very bright future for the company and its shareholders. It did not announce plans for its $56B in cash but did say it will announce some news before the companies analyst meeting in July. Many expect a larger dividend, possibly a one time cash disbursement and some acquisition plans. The resolution of numerous antitrust cases recently has reduced the need to hoard cash. The company said it saw broad based demand and solid execution across all segments. They said demand increased in servers, PCs and in overall technology spending. The MSN division also returned to profit status and Xbox sales rose +30%. Life is good at Microsoft today. The stock jumped nearly $2 in after hours trading. They also raised estimates for the current quarter. They raised estimates for PC growth for the rest of the year but lowered estimates for 2005. Amazon posted its third straight quarterly profit with earnings of 26 cents compared to a loss of -3 cents in the same quarter last year. Revenue jumped +41%. Amazon beat analyst estimates but the stock fell after the news. AMZN still forecasts a profit for the coming quarter but the guidance left some confused and suggested earnings could decline on lower margins. Considering AMZN has stretched its profits to quarters where it has always had losses and sales are continuing to increase it is evident the business model is working well and the short term volatility should pass. Amazon is getting into the search engine business and keyword click sales. That is a pure profit effort and their billions of page views will capitalize on that space. Broadcom beat the street by two cents but the good news was the upgraded guidance. BRCM said earnings in the current quarter should increase by +10%. They said bookings had been very strong into April and they were seeing broad increases in demand. They bragged about the strength in the broadband market and claimed it was their fastest growing segment. XLNX, another chipmaker posted earnings of 36 cents against estimates of 25 cents and raised guidance going forward. This is getting to be a repeating pattern. Those beating are leading the pack and raising estimates while a few stragglers are still catching up. It is a stock by stock problem related to product mix but the chip sector is definitely improving. Other chips reporting tonight included IDTI +1, MCHP +2, TQNT +1, VTSS inline, MCRL inline, MSCC +1. Corning beat estimates of five cents with an eight-cent gain and raised guidance. They said demand for liquid crystal display panels remained very strong. They did say they did not see telecom recovering until 2005. They said LCD sales grew +16% for the quarter and demand was growing faster than expected. These are just some of the positive reports seen today but the overall picture continues to be strong. American Express said travel fees rose +23% for the quarter as Americans suddenly increased their rate of travel. Sabre raised their estimates as well saying bookings were climbing quickly. Starwood Hotels said business travel had increased faster than their expectations in just the last couple months. Credit card companies are posting strong profits and saying debtors are making payments faster and weak credits are decreasing. Maytag said orders were increasing to the point where materials shortages were becoming a problem. Norfolk Southern said rail shipments were growing strongly. UPS said package growth across all segments was strong with international shipments especially strong. Ryland Homes said new orders were the highest in company history at nearly 5,000 homes. They also closed a record 3,000+ homes in the first quarter. The strength in the home marketplace bodes well for the entire economy as we move into the spring buying season. Yes, earnings are great, the economy is growing and everyone has accepted that rate hikes are on the way. What is wrong with this picture? Nothing and that scares me. Bad things tend to happen when all the news is good. The Dow ran back to begin testing its April resistance and that test could come as early as tomorrow. 10550 has been tested five times in April and failed each time. A breakout there could attract more buyers who were planning on waiting out the summer doldrums. The Nasdaq has the same resistance hurdle at 2070 and while it had a strong +37 point run today it is still well below that level. The tech news after the bell has failed to really juice the futures with the S&P +3 and the Nasdaq +12. Not big numbers considering the number of positive surprises. The problem we have to face is not something we can point to and wait for the announcement. It is not terror, rates or rising economy. It is expectations. All the good news is already priced into the market and investors will have to decide if they want to buy at the highs while knowing that future quarters will not be this strong. Stranger things have happened and we will have to wait out the rest of April to see if that occurs. Today was the largest day of the cycle and we will start to see shorter list of earnings schedules beginning next week. Most of the big guys have already reported and the sterling numbers normally decline from here as the lower quality companies report later in the cycle. For Friday I would be very cautious about buying any bounce unless 10550/2070 is broken. With weekend event risk ahead the odds are slim we are going to make that break tomorrow. If it is going to happen I would bet on a Monday attempt. I would instead look at buying any dip in anticipation of any potential gains next week. We are far from out of the woods but that may be daylight just up ahead. Is it a new bull market or just a lot of bull? We will know soon. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_042204_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 ************************************************************** **************** MARKET SENTIMENT **************** Fearless! - J. Brown Stocks soared on Thursday when for one brief moment investors ignored their interest rate fears, the violence in Iraq and concerns over the Presidential election to focus on the trainload of positive earnings reports. Okay, I may be exaggerating a bit but Alan's soothing words on Wednesday appeared to do the job or investors finally came to their senses and realized that a bump or two in interest rates wouldn't kill the economy. It didn't hurt to have outstanding profit numbers from the likes of Caterpillar (CAT), a Dow-component, and EBAY. The profits continued to soar with a strong report from MSFT and AMZN after the close, although AMZN was trading lower on the news. Normally we tend to see profit taking after a big move like today and facing the weekend it wouldn't surprise us a bit to see traders taking money off the table since there is always an event risk of some new terrorist attack. However, MSFT's news could keep the tech sector in the green and potentially push the NASDAQ toward resistance at 2050-2075. Market internals were very bullish. Advancing stocks tackled decliners 22 to 6 on the NYSE and 2 to 1 on the NASDAQ. Up volume swamped down volume 17 to 5 on the NYSE and 3 to 1 on the NASDAQ. Total volume was very strong. The volatility indices collapsed back toward their lows indicating almost zero investor fear! ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8263 Current : 10461 Moving Averages: (Simple) 10-dma: 10409 50-dma: 10433 200-dma: 9935 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 886 Current : 1139 Moving Averages: (Simple) 10-dma: 1132 50-dma: 1133 200-dma: 1069 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1072 Current : 1485 Moving Averages: (Simple) 10-dma: 1468 50-dma: 1456 200-dma: 1404 ----------------------------------------------------------------- Volatility has completely collapses. Alan Greenspan has helped soothed the markets' fears over rates and now investors can focus on earnings. CBOE Market Volatility Index (VIX) = 14.61 -0.99 CBOE Mkt Volatility old VIX (VXO) = 14.65 -1.01 Nasdaq Volatility Index (VXN) = 21.35 -1.47 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.63 977,611 617,591 Equity Only 0.54 800,523 430,109 OEX 1.05 25,119 26,499 QQQ 3.18 31,920 101,593 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 77.8 - 1 Bull Confirmed NASDAQ-100 56.0 + 2 Bear Correction Dow Indust. 83.3 - 7 Bear CONFIRMED S&P 500 75.4 + 0 Bear Confirmed S&P 100 77.0 - 2 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 ----------------------------------------------------------------- ! Sorry! There are not ARMS/TRIN moving average numbers today. Errors with our data provider prevented us from providing trustworthy material. 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 2197 2040 Decliners 635 1054 New Highs 166 141 New Lows 60 26 Up Volume 1746M 1514M Down Vol. 467M 569M Total Vol. 2218M 2113M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 04/12/04 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 We continue to see little change in commercial traders' positions. Small traders are adding to positions and remain bullish although there is a decent jump in new shorts. Commercials Long Short Net % Of OI 03/23/04 401,456 418,732 (17,273) (2.1%) 03/30/04 407,987 420,624 (12,673) (1.5%) 04/06/04 409,429 419,471 (10,042) (1.2%) 04/12/04 412,827 419,910 ( 7,083) (0.9%) 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 03/23/04 130,648 89,943 40,705 18.5% 03/30/04 130,112 81,937 48,175 22.7% 04/06/04 130,262 80,174 50,088 23.8% 04/12/04 135,840 89,090 46,750 20.8% 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 Commercials have reduced the long positions and added to their shorts, which is bearish for the markets. Small traders remain net long and have increased their bullish positions significantly. Commercials Long Short Net % Of OI 03/23/04 268,647 294,930 (26,283) ( 4.7%) 03/30/04 265,492 305,797 (40,305) ( 7.1%) 04/06/04 270,904 328,862 (57,958) ( 9.7%) 04/12/04 261,889 341,163 (79,274) (13.1%) 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 03/23/04 131,879 59,210 72,669 38.0% 03/30/04 123,494 59,550 63,944 35.0% 04/06/04 148,737 46,235 102,502 52.6% 04/12/04 172,473 52,274 120,199 53.5% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Almost no change in commercial traders' positions here. The same can be said for small traders. Commercials Long Short Net % of OI 03/23/04 52,014 34,017 17,997 20.9% 03/30/04 52,749 67,967 (15,218) (12.6%) 04/06/04 54,862 34,762 20,100 22.4% 04/12/04 54,144 34,432 19,712 22.3% 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 03/23/04 9,884 12,887 (3,003) (13.2%) 03/30/04 8,928 16,551 (7,623) (30.0%) 04/06/04 7,971 20,721 (12,750) (44.4%) 04/12/04 8,297 20,746 (12,449) (42.9%) 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 Still no change in commercial traders' positions here either. It's an even race between longs and shorts. Small traders have actually grown more bearish. Commercials Long Short Net % of OI 03/23/04 23,048 22,119 929 2.1% 03/30/04 23,642 22,180 1,462 3.2% 04/06/04 23,101 22,108 993 2.2% 04/12/04 23,501 22,748 753 1.6% 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 03/23/04 8,344 6,734 1,610 10.7% 03/30/04 7,020 6,711 309 2.3% 04/06/04 7,316 8,085 (769) (5.0%) 04/12/04 6,136 7,450 (1,314) (9.7%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Thursday 04-22-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ESRX Dropped Puts: LEH, PD, UTSI Call Play Updates: BEC, MIK, WFMI, ZBRA New Calls Plays: BBY, MBG, UOPX Put Play Updates: AMG, QLGC New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Express Scripts - ESRX - close: 79.75 change: +0.39 stop: 74.95 It may seem strange to be dropping ESRX tonight, especially with the stock closing at new all-time highs, but this is one of those times where discretion seems the better part of valor. We finally got the breakout to new highs that we were expecting and it's entirely possible that the rally could continue right into earnings next Wednesday. However, with the stock seeming to stall just below $80 the past 3 days, we're concerned that the rally may peter out heading into the weekend or early next week. Rather than take that risk, let's close the play on a high note, with a solid gain. Traders willing to hold for higher levels should be super stingy and use a tight stop just under the 10- dma. Remember, our initial target for the play was $80, so today's $79.75 close is really close enough. Picked on April 4th at $75.36 Change since picked: +4.39 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 1.05 mln Chart = PUTS: ***** Lehman Brothers - LEH - cls: 77.81 chng: +1.81 stop: 78.25 Twice in the past two weeks, the bears took a serious run at the downside in shares of LEH, and both times they were unable to put together a serious challenge of the 200-dma, which was our target for the play. Yesterday's dip to just above $75 was the best they could do and the stock came roaring back today, ending just below the 10-dma. While we saw a similar bounce last week, this one feels stronger than the one from last week and we're going to duck out of the play here for a modest gain. The stock could very easily roll over and head down to test the 200-dma ahead of the weekend, but it could just as easily blast through our $78.25 stop. This looks like a great opportunity to take the money and run. Picked on April 6th at $81.77 Change since picked: -3.96 Earnings Date 3/16/04 (confirmed) Average Daily Volume = 2.26 mln Chart = --- Phelps Dodge - PD - close: 70.84 chg: +1.74 stop: 71.01 See what happens when we get greedy? On Tuesday we suggested traders take profits but maybe consider leaving open a small position to take advantage of what looked like an impending breakdown through support at $70.00. Sure enough PD did break support and traded to $67.05 on a big drop in copper prices. However, the markets rebounded in the afternoon and PD's Wednesday candlestick looked like a "hammer" or one-day reversal. We lowered the stop loss to $71.01 in hopes of leaving the play open and seeing PD roll over again under $70.00. The stock may indeed by rolling over with some weakness this afternoon but the huge rally in the broader markets was enough to lift PD through our stop loss at $71.01. Picked on April 13 at $ 75.15 Change since picked: - 4.31 Earnings Date 04/28/04 (confirmed) Average Daily Volume: 2.3 million Chart = --- UTStarcom, Inc. - UTSI - cls: 28.98 chng: +1.90 stop: 28.25 We noted on Tuesday that UTSI was certainly due for an oversold rebound and that with the proximity of its earnings report, we didn't have time to weather an oversold bounce and still have time for the stock to drill to new lows. For that reason, we aggressively tightened our stop to just above the first level of resistance we could find on the daily chart. In hindsight, that was a stroke of genius (or luck, if you prefer), as the stock soared 7% higher today in response to several press releases less than a week ahead of earnings on the 27th. The stock gapped higher, clipped our stop before lunch and continued grinding higher right into the closing bell. Needless to say, all positions should now be closed. Picked on March 30th at $29.38 Change since picked: -0.40 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 3.12 mln Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Beckman Coulter - BEC - cls: 57.95 chg: +1.05 stop: 54.75*new* Putting together back to back gains shares of BEC surge ahead on stronger than average volume and above minor resistance at $57.00. News is quiet on the stock but BEC looks poised to hit the $60.00 level soon. We're going to raise our stop loss to $54.75. Traders looking for new entry points might want to look for dips to the $56-57 levels. Picked on April 18 at $ 56.16 Change since picked: + 1.79 Earnings Date 05/03/04 (confirmed) Average Daily Volume: 333 thousand Chart = --- Michaels Stores Inc. - MIK - cls: 52.31 chng: +1.06 stop: 48.50 Fresh from its breakout to new all-time highs on Tuesday, MIK didn't miss a beat yesterday. MIK gave a quick blip down and the closed near its high of the session and that was followed by today's strong rally, that drove the stock to fresh highs. As we mentioned in the initial writeup, the conservative approach is to enter on pullbacks near support, ideally at the 10-dma ($50.08). Barring that opportunity, taking the breakout entry is the way to go and traders got a solid shot at that setup this morning. Those instructions still fit this play, with a dip to the 10-dma or a breakout to new highs both making sense for new entries, depending on an individual's tolerance for risk. We're maintaining our stops at $48.50 tonight. Picked on April 20th at $51.23 Change since picked: +1.08 Earnings Date 5/26/04 (confirmed) Average Daily Volume = 336 K Chart = --- Whole Foods Market - WFMI - cls: 79.25 chng: -0.15 stp: 76.50*new* "I think I can, I think I can", you could almost hear WFMI chanting over the past couple days. Three days now, the stock has been testing the old highs at $79.25 and so far it hasn't been able to maintain a breakout. But to its credit, there hasn't been much of a retracement either. Sure, there was today's opening pullback near $78, but that just turned out to be an entry point for more aggressive traders. That was actually an encouraging rebound, as it suggested that old resistance at that level has now changed to support. Another dip near $78 can be used for new entries, as can a bonified breakout over the $80 level. Earnings are set to be released on May 5th, so we'll still got time for the stock to break out and make a move towards our higher target in the $83-84 area. But let's protect ourselves by getting a bit more aggressive with our stop tonight, raising it to $76.50, just under the 10-dma ($76.74). Picked on April 15th at $76.01 Change since picked: +3.24 Earnings Date 5/05/04 (confirmed) Average Daily Volume = 687 K Chart = --- Zebra Technologies - ZBRA - cls: 75.86 chg: +1.49 stop: 72.50*new* Something lit a fire under shares of ZBRA on Wednesday. The stock climbed the entire session. Today's widespread market rally helped push the stock through resistance at $75.00. Could this be an earnings run up? Let's hope so. ZBRA only has three trading days left before it announces earnings on the morning of April 28th. That means we'll be dropping the play on Tuesday the night before. Considering the short time frame left for this play we're not suggesting any new positions. Normally, we'd probably adjust the stop loss to yesterday's low and keep it near support. However, with only three days left we're going to raise the stop to $72.50. Picked on April 11 at $ 73.26 Change since picked: + 2.60 Earnings Date 04/28/04 (confirmed) Average Daily Volume: 332 thousand Chart = ************** NEW CALL PLAYS ************** Best Buy Co - BBY - close: 54.95 change: +1.51 stop: 51.99 Company Description: Minneapolis-based Best Buy Co., Inc. is North America's leading specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The Company's subsidiaries operate retail stores and/or Web sites under the names: Best Buy (BestBuy.com), Future Shop (FutureShop.ca), Geek Squad (GeekSquad.com), and Magnolia Audio Video (Magnoliaav.com). The Company's subsidiaries reach consumers through more than 750 stores in the United States and Canada. (source: company press release) Why We Like It: On your mark. Get set. Go! The RLX retail index has rallied right to resistance and looks poised to breakout to new all-time highs. This also looks like a good chance to capture a similar move in BBY as it readies itself for a breakout over resistance at $55.00. You may remember that BBY reported earnings on March 31st. The numbers were strong and the stock gapped up above resistance at $50.00 and its simple 200-dma. It has spent the last three weeks consolidating those gains and building what appears to be a reverse head and shoulders pattern. We're going to use a TRIGGER at $55.05 to capture a breakout over resistance. Such a move would be a bullish breakout of its reverse H&S pattern and produce a triple-top buy signal on its P&F chart. If the H&S pattern holds true then bulls can target a run to the $65.00 level. However, our first target is a much more reasonable move to resistance at $60.00. Suggested Options: Short-term traders can choose between the May and June options. Our choice is probably the June 55s or the May 50s. BUY CALL MAY 50 BBY-EJ OI= 5166 at $5.50 SL=3.25 BUY CALL MAY 55 BBY-EK OI=14814 at $1.80 SL=0.95 BUY CALL JUN 55 BBY-FK OI=11738 at $2.95 SL=1.50 Annotated Chart: Picked on April xx at $ 00.00 <-- see TRIGGER Change since picked: + 0.00 Earnings Date 03/31/04 (confirmed) Average Daily Volume: 3.6 million Chart = --- Mandalay Resort Group - MBG - cls: 61.02 chg: +1.57 stop: 58.99 Company Description: Mandalay Resort Group owns and operates 11 properties in Nevada: Mandalay Bay, Luxor, Excalibur, Circus Circus, and Slots-A-Fun in Las Vegas; Circus Circus-Reno; Colorado Belle and Edgewater in Laughlin; Gold Strike and Nevada Landing in Jean and Railroad Pass in Henderson. The company also owns and operates Gold Strike, a hotel/casino in Tunica County, Mississippi. The company owns a 50% interest in Silver Legacy in Reno, and owns a 50% interest in and operates Monte Carlo in Las Vegas. In addition, the company owns a 50% interest in and operates Grand Victoria, a riverboat in Elgin, Illinois, and owns a 53.5% interest in and operates MotorCity in Detroit, Michigan. (source: company press release) Why We Like It: America's economy is improving. That much is clear. So where are American's going to spend their leisure time? Many are choosing to do it in Vegas with the dollar so weak overseas and traveling to Vegas is perceived as safer than traveling overseas. MBG broke out to new highs in March only to surge again in early April with a positive earnings pre-announcement. MBG said its revenue per available room was rising strongly and slot machine revenues were up nearly 30%. The stock has spent the last two weeks consolidating its gains but now looks ready to run higher again with technical support at its 21-dma. We're going to use a TRIGGER at $61.51 to open the play so we can catch MBG breaking out over minor resistance at $61.50. More conservative traders might want to wait for a new high over $62.20. The stock is certainly long-term overbought, there is no denying it but we'll start the play with a stop loss under Wednesday's low (once we're triggered). MBG doesn't announce earnings for a while but look for several of its rivals to report this week and turn in good news! Suggested Options: We like the June calls. Our favorite would be the June 60s. BUY CALL JUN 60 MBG-FL OI= 862 at $3.60 SL=1.80 BUY CALL JUN 65 MBG-FM OI= 271 at $1.45 SL=0.75 Annotated Chart: Picked on April xx at $ 00.00 <-- see TRIGGER Change since picked: + 0.00 Earnings Date 06/03/04 (unconfirmed) Average Daily Volume: 1.1 million Chart = --- Univ. of Phoenix - UOPX - cls: 93.87 chng: +3.87 stop: 87.50 Company Description: University of Phoenix Online is the computerized, digital delivery system of the University of Phoenix. It is a provider of accessible, accredited educational programs for working adults. It began operations in 1989 by modifying courses developed by University of Phoenix' physical campuses for delivery via modem to students worldwide. UOPX offers accredited degree programs in business, education, information technology and nursing. A student can participate in UOPX's classes through a Pentium-class personal computer, a 56.6K modem and an Internet service provider. Students retrieve lectures, questions and assignments from instructors then review them offline. They also have access to online research libraries and services, as well as other professionals with whom they can share ideas, debate issues and learn from each other's experience. University of Phoenix is part of Apollo Group, Inc., the parent company of University of Phoenix. Why we like it: Aside from a bit of volatility due to rumors of accounting problems at one of the other extended education firms, UOPX (and its parent APOL) have been on one monstrous rally since bottoming near the $22 level back in the summer of 2002. Since then, UOPX has more than quadrupled in price and one could make the argument that it is getting a bit pricey at these levels. With a PE ration north of 75, that would certainly seem to be a rational point. That is, until we take a look at the PnF chart. After a slight pullback in March, the stock broke out with a vengeance, continuing the bullish move that began in January. In late March, we got a fresh Buy signal and today's breakout to new all- time highs gives investors renewed belief in the stock's ability to reach its bullish price target of $112. While that is entirely possible, we'll be more than happy to hitch a ride from near current levels to the century mark, which is likely to offer at least token resistance. With volume surging on Thursday, this could be the beginning of a momentum move towards that goal and that helps to make the case for momentum entries on a breakout over $94. However, the market has been rather crazy of late, so our preference would be for entries on a pullback near mild support at $92 or stronger support at $90. Note that the 10-dma ($90.33) will reinforce that support, helped along by the 20-dma at $89.17. One interesting thing about today's action is that the stock's strong rally seems to have been related to an upgrade from Legg Mason, as the stock had its rating raised from Hold to Buy. That isn't the strange part though. At the same time, the firm downgraded UOPX's parent company APOL from Buy to Hold. Both stocks ended the session with strong gains and at new all-time highs. Clearly we'll need to monitor the price action in APOL for confirmation of what to expect from UOPX. We're starting coverage with a generous stop at $87.50, just under last week's intraday low. That should give plenty of room for a decent pullback to test support before continuing higher. Suggested Options: Shorter Term: The May $90 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the June $95 Call, while the more conservative approach will be to use the June $90 Call. Our preferred option is the June $95 strike, as it is currently just out of the money and should provide sufficient time for the play to move in our favor. BUY CALL MAY-90 UBY-ER OI= 106 at $5.60 SL=3.50 BUY CALL MAY-95 UBY-ES OI= 191 at $2.55 SL=1.25 BUY CALL JUN-95*UBY-FS OI= 25 at $4.50 SL=2.75 Annotated Chart of UOPX: Picked on April 22nd at $93.87 Change since picked: +0.00 Earnings Date 3/12/04 (confirmed) Average Daily Volume = 177 K Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Affiliated Mgrs - AMG - cls: 51.30 chng: +1.00 stop: 53.50 After a non-stop $7 slide, AMG was overdue for a rebound and that's precisely what transpired on Thursday, although the rebound was a bit stronger than we would have liked. The downtrend is still very much intact and a bounce from the $50 area was to be expected due to its proximity to the 50% retracement of the November-March rally. But yesterday's doji and today's strong bullish candle combine with Tuesday's large red candle to offer a bullish reversal pattern, along with the daily Stochastics, which are threatening to turn up in bullish fashion. The good news is that today's bounce came on rather light volume, at least compared to the recent selloff. We've already tightened our stop to $53.50, which is protected by both the 38% retracement ($52.54) and the 10-dma ($53.02). Let's give this rebound time to peter out and then look for an entry on a rollover below what should be strong resistance near $52.50. On the outside chance that today's bounce is reversed on Friday, a dip near the 200-dma ($48.63) should be used in order to gain a favorable exit from the play at our target. Picked on April 18th at $52.91 Change since picked: -1.61 Earnings Date 4/28/04 (unconfirmed) Average Daily Volume = 559 K Chart = --- QLogic Corp. - QLGC - close: 28.14 change: -0.02 stop: 29.50 If ever there were a picture of "pinned to the mat" QLGC is it. Even with the NASDAQ-100 gaining an impressive 2.37% on Thursday, QLGC was held down for a loss of a couple pennies as the stock consolidates its recent fall. While it is certainly possible that the stock could rebound from here, we're betting on another breakdown as the company's earnings report approaches, currently scheduled for next Wednesday. With earnings that close, we obviously don't have a lot of time left to play and we certainly don't have time to weather an oversold rebound. We've already lowered our stop to $29.50, just over near-term resistance and where the 10-dma ($29.74) will be by tomorrow. We aren't advocating new entries at this time due to the nearness of earnings. It's time to look for favorable exits from the play. Our initial target of $25 is still in play if the stock were to break down again heading into the weekend. But barring a major catastrophe, it appears unlikely that QLGC will reach that lower target of $20 ahead of the report. Picked on April 13th at $31.00 Change since picked: -2.86 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 4.49 mln Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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The Option Investor Newsletter Thursday 04-22-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Bulls Stampede on Thursday Option Spreads: Many Happy Returns Of The Day Traders Corner: Better Results Through Redundancy ********** WATCH LIST ********** Bulls Stampede on Thursday ___________________________________________________________________ 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. ___________________________________________________________________ Magna Intl Corp - MGA - close: 83.44 change: +1.20 WHAT TO WATCH: MGA has been struggling with resistance in the $83-84 range for the last nine months. Now, after the big rebound from the March low, MGA is once again fighting to breakout over $84.00. The consolidation over the past three weeks has been pretty tight ($82-84). We'd probably consider bullish positions on a move over $84.00 and play it for any sort of earnings run into its May 6th announcement. Chart= --- Cognizant Technology - CTSH - close: 48.70 change: +1.48 WHAT TO WATCH: The test of support at $40.00 and its 200-dma a few weeks ago also happened to be a test of its P&F support. That proved to be a great entry point for brave bulls. Now CTSH is poised to breakout over resistance at $49.00 after three weeks of consolidation. Earnings were a couple of days ago so we don't have to worry about avoiding the announcement. More aggressive traders could use a trigger over $49.00. More conservative traders might want to use a trigger over $50.00. We would target a move to the $55 level. Chart= --- Yahoo! Inc - YHOO - close: 57.95 change: +3.01 WHAT TO WATCH: A very strong earnings report from EBAY last night launched the entire Internet sector into the stratosphere. YHOO did its best to keep up with a 5.5% gain on strong volume. While we like the breakout bullish entry points are probably best considered on a dip back toward the $56.00-57.00 levels. It will be interesting to watch if YHOO pulls back on profit taking tomorrow or if the rally continues powered by AMZN's strong earnings report after the bell tonight. Chart= --- Analog Devices - ADI - close: 46.21 change: +0.21 WHAT TO WATCH: We've had ADI on the watch list before and we've been following it in the MarketMonitor as well. The stock has been trading in a sideways channel between $44-45 and $50-51 for months. The recent pull back to $45.00 and its simple 200-dma looks like a bullish entry point. Yet to be honest we're surprised that ADI didn't bounce more strongly on Thursday with the markets in rally mode. Traders can still consider bullish positions here but we'd probably have a stop loss at today's low. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- BGP $25.21 +0.50 - The mover over $25.00 proved to be a breakout over round-number resistance a new multi-year highs for Borders Group, the bookstore chain. The stock doesn't move that fast but it might be a decent covered call candidate. AMZN $48.86 +3.14 - A strong earnings report from EBAY sent traders into a buying mood for AMZN who announced their own earnings report after the bell on Thursday. The bullish breakout over resistance at its 100 & 200-dma combined with its better than expected earnings should sent the stock higher on Friday. ITT $80.25 +2.57 - We like the breakout over resistance at $79.00 and resistance at $80.00 but we usually don't play stocks this close to their earnings announcement, which was today. ************************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 ************************ Many Happy Returns Of The Day By Mike Parnos, Investing With Attitude Let’s return to the discussion of investment returns. We haven’t talked about it for a while and I know some traders still find it a little confusing. Below is a recent sequence of emails with a CPTI student who had a tough time accepting the fact that last month our “hypothetical” CPTI portfolio returned about 32% on the “hypothetical” money we put to work in the “hypothetical” market. I think you’ll find it enlightening. Now that we have all the “hypotheticals” out of the way, let’s get to the meat and potatoes – or, should I say, the “hypothetical” meat and potatoes. However, the weight I gain from said meat and potatoes is anything but hypothetical. _____________________________________________________________ Hi Mike. While my investment style normally involves selling naked puts and I ordinarily focus on the naked put section of the newsletter, last night I read something you wrote that caught my eye concerning investment return. You seemed to be focused on the ratio of premium earned to amount at risk. Is that really the correct way of looking at it? It seems to me that you're ignoring a critical piece of the equation, which is probability of outcome. Depending on how many standard deviations away the strike prices are in your iron condor plays, the results, as you calculate them, can be a little deceiving. For example, while a ratio of $6,050 premium to $18,950 at risk looks like a good return on the surface, if the probability of staying within the profitable range is insufficient, then the actual results can be quite different. Take, for example, strike prices just one standard deviation from the mean. That would suggest about a one in three chance of falling outside the range and incurring a maximum loss. If we earn $6,050 in two of three months, but lose $18,950 in the third month, that wouldn't be a very good result. Note that I haven't actually tried to determine how many standard deviations were involved in your specific trade, I'm just using it as a hypothetical situation. Am I missing something in this analysis? Ray Ray, Life is not all black and white. Neither is trading. There are an abundance of gray areas. Just because the posted risk may have been $18,950, it doesn't mean I would have allowed the positions to get all the way to that point. As all good CPTI students know, there are a variety of adjustments that can be made when a specific trade looks like it's going bad. As far as probability of profit is concerned, I try to create a very large range on these Iron Condors. I don't really know how to calculate a "probability of profit" on these positions. But, I sure do like the CPTI Portfolio’s success rate over the last few years since we started keeping track. How would you calculate the return? ____________________________________________________________ Mike, The way I've seen Expected Profit calculated is as follows: (max. profit x probability) - (max. loss x probability) For example: Max profit of $1,000 x 90% = $900 Max loss of $5,000 x 10% = -$500 Expected profit: $400 The probability factors are calculated using a normal distribution and the Black-Scholes formula with critical inputs including volatility and days to expiration. The results are somewhat imperfect to the extent that there is significant probability of outcomes between maximum profit and maximum loss. Aside from that minor defect, the calculations are a pretty good indicator. As for rate of return, I would think it would be equal to the Expected Profit (as calculated above) divided by the margin requirements, but I don't claim to be the expert and there may be a more appropriate measure. Ray Hi Ray, I really appreciate all your effort, but I'm a simple kind of guy. I have my hands full drawing a decent trend line. Trying to calculate all that stuff would drive me crazy and, more importantly, take away from my quality TV time. I'd have to use all my fingers and even a few of my toes to make these kind of calculations. Besides, even if we came up with a figure, it would have no bearing on whether or not the trade will be profitable. I'm a patient guy. Hell, I once sat through four hours of a time- share presentation to get a clock radio, but I have to draw the line somewhere. My "expected" profit is ALL the premium – every damn cent! If a trade goes bad, I better have a Plan B ready -- or I should be trading baseball cards instead of options. I’m still not sure what “probability” has to do with figuring out a return. Isn’t a return based on “after-the-fact” results? The figures I use when posting the trades are what the anticipated return will be IF the trade is successful. If you want to talk about calculating risk vs. reward “prior” to implementing the trade, well, that’s a whole other subject. We might even be able to include “probability” in the decision making process. Here’s a simple way of calculating the return on your investment. Let’s say our account size is about $40,000 – like our CPTI portfolio. Let’s also assume we withdraw our monthly profits each month. If we’ve made $17,500 in six months on a $40,000 size account, isn’t it fair to say we’ve made a return of 43.75% on our account? When you consider that we rarely use the entire $40,000 in a month, I think our results are pretty impressive. There’s a huge base of CPTI students that have had to add an addition onto their piggy banks to accommodate the profits. When you consider those who have compounded their returns by reinvesting their profits, you realize that we’ve just scratched the surface – hypothetically, of course. ____________________________________________________________ MAY CPTI POSITIONS Remember, May is a five-week option cycle. Get comfortable. We’re going to exercise some patience and self-discipline. That’s the best kind of exercise. It beats the hell out of a Stairmaster. It’s more profitable, too – usually. May Position #1 – SPX Iron Condor – 1139.93 We sold 10 SPX May 1080 puts and bought 10 SPX May 1070 puts for a total credit of $1.90 ($1,900). Then we sold 7 SPX May 1175 calls and bought 7 SPX May 1190 calls for a credit of $1.40 ($980). Our total net credit and potential profit is $2,880. Our maximum profit range is 1080 to 1175. Maintenance: $10,500. May Position #2 – RUT Iron Condor – 593.24 We sold 10 RUT May 620 calls and bought 10 RUT May 630 calls for a credit of $1.20 ($1,200). Then we sold 10 RUT May 540 puts and bought 10 RUT May 530 puts for a credit of $1.30 ($1,300). Our total net credit and profit potential is $2,500. Our maximum profit range is 540 to 620. Maintenance: $10,000. May Position #3 – MNX Iron Condor - $148.55 We sold 10 MNX May $152.50 calls and bought 10 MNX May $157.50 calls for a credit of $.80 ($800). Then we sold 10 MNX May $140 puts and bought 10 MNX May $135 puts for a credit: $.95 ($950). Our total net credit and profit potential is $1,750. Our maximum profit range is $140 to $152.50. Maintenance: $5,000. May Position #4 – BBH Iron Condor - $149.76 We sold 10 BBH May $155 calls and bought 10 BBH May $165 calls for a credit of $.70 ($700). Then we sold 10 BBH May $135 puts and bought 10 BBH May $125 puts for a credit of $.70 ($700). Our total net credit and profit potential is $1.40 x 10 contracts = $1,400. Our maximum profit range is $135 to $155. Maintenance: $10,000. _____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.92 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. May $34 calls and $37 puts – credit of $800. Total credit: $8,850. 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 – 555.25 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). Our cash position as of April expiration is $2,640 plus unused $1,700 = $4,340. The April 570 OEX call expired worthless. The OEX 515/505 bull put spread also expired worthless. (Isn’t this fun?) New May Zero Plus Position We sold 5 OEX May 530 puts and buy 5 contracts of May 520 puts for credit of $1.10 (x 5 contracts = $550). We sold a call against our long 540 call. We sold 5 OEX April 575 calls for $1.40 (x 5 contracts = $700). If both of these plays work out, we can add another $1,250 to our cash total – just a little bonus while we wait for the market to go up. ______________________________________________________________ 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 ************** Better Results Through Redundancy by Mark Phillips mphillips@OptionInvestor.com While writing last week's LEAPS column, I was reminded of an important method of confirming the validity of a given trade or market view -- that of looking at a stock or index from multiple viewpoints. It is fairly easy to scan through a list of charts and make an argument for either a bullish or a bearish bias, but frequently a single chart view can be misleading. We've all see stocks that look like a great short on the daily chart, but when we dial out to the weekly view, we can see support levels that will make a significant downward move difficult to achieve. Likewise, an index may look like it is ready to make a bullish move on the daily chart, but when we drill down to the hourly chart, we may see bearish divergence on the Stochastics and MACD oscillators. Both of these are examples of trade setups that may work in our favor, and then again they may not. But the lack of confirmation across multiple timeframes makes the odds of success much lower than if we can find confirmation for a given bias across multiple timeframes. Putting those two scenarios together, what we'd really like to see is the weekly chart having just broken below major support, the daily chart looking like it is just starting a daily cycle and the hourly chart providing clear bearish divergence. Doesn't that sound like a better combination and more likely to result in a successful trade? Intraday traders may very rarely look at the longer timeframes such as the weekly chart, while long-term traders may find little use for the hourly or shorter-term charts. Let me suggest that no matter what your typical holding time for your trades that your results will very likely improve if you filter out the mediocre candidates by looking across the different timeframes for clues as to both the longer- and shorter-term influences at work. But that's really only one part of the equation, one that I'm sure we're all familiar with to varying degrees. Where our results can really improve is when we look for confirmation of a trade bias completely outside of our normal trading viewpoint. If you think I'm about to talk about Point & Figure (PnF) charting, then you're right on the money. As we know, PnF charts don't care one whit about timeframe or volume or buy and sell programs or oscillators. There is only one component to PnF charts - price. That specific focus helps to remove much of the noise present on our normal bar or candle charts and provides important insights as to the dominant forces at work in a given security or index. If you've been reading my articles for awhile, you've already been forced to come up to speed with basic PnF charts. Either that, or you've decided I don't know what I'm talking about and have quit reading my stuff. But then one has to wonder what you're doing back here this afternoon. GRIN The point I want to make is that it isn't enough to just look at the standard scale on the PnF charts. If you do, it's the equivalent to doing all of your analysis using only the daily chart. It is a 2-dimensional, myopic view and if you limit yourself in that way, you're liable to miss out on some important clues. Let's look at a very simple example by viewing the chart of the NASDAQ Composite on both a weekly and daily timeframe. NASDAQ Composite Weekly Chart Starting with this weekly view, there were certainly plenty of false Sell signals on the weekly Stochastics over the past year and until January none of them proved fruitful. What's a bear to do? How about take a look at the PnF chart? It wasn't perfect to be sure, but as you can see by pulling up the PnF chart shown at the bottom of this article, we can see that it does a good job of keeping us out of trouble. There are some one-box sell signals on the way up, but we didn't get a strong Sell signal until the 2000 level finally cracked. It didn't leave much room for profiting on the recent downside move, but it did keep an over-eager bear out of trouble for much of the rally of the past year. NASDAQ Composite Daily Chart Now let's say we are inclined to play the bearish crossover in the weekly chart shown up above. See how dialing down to the daily timeframe helps to illuminate some clearer entry points, giving us 3 distinct opportunities to enter the 2-month downward trend? Here we had the weekly and daily candle charts in our favor and after the break below 2100, we had the standard scale PnF chart in our favor as well. Three out of four isn't half bad! But here I go getting ahead of myself and talking about the PnF charts before we've looked at them. We'll get to that in a minute. But first, take note of the green annotated "Buy?" signals on the daily and weekly charts above. Any guesses on why I've shown those circles with a "?"? Simply put, I want us thinking about more than just those candle charts. Whenever we're looking to change directions on a given symbol, our first reaction should be to pull up the PnF chart and see whether it gives us permission or if it is saying to be patient and look for a play back in the direction of the previously dominant trend. As you'll see below, the PnF charts have helped to provide a great deal of clarity in recent months NASDAQ Composite PnF Chart - Standard 10-Point Box The initial break below 2100 put this standard scale PnF chart on a Sell signal and at that point we have a pretty clear runway for playing the downside in the weekly and daily charts above. Take another look at that daily chart and look how the 2100 level lines up with the first Sell signal on that view? Alright, but what I really want to focus on is where the chart turns bullish. Note that the PnF chart above gave us a new Buy signal with the late March push through the 1990 level, and that was good for a run up to the 2070 level. Not bad and certainly good for short-term traders. But I'll suggest that bullish position traders should still be on the sidelines. Why? Take a look below! Ah, but first I want to call your attention to the 1900 level on the chart above. Not only is it the current target, but it was the site of the prior target -- perfectly achieved -- from the initial Sell signal in late February. What is the significance of the 1900 level right now? A bounce from that level will now give us a double bottom setup, which will be to the bulls liking. Let's not talk about the consequences of a break below that level right now, as it isn't that pleasant. NASDAQ Composite PnF Chart - Standard 10-Point Box It's this view of the COMPX that I really think speaks volumes. We saw on the standard scale chart that the 1070 level stopped the past rally and here we can see the significance of that level. If it had traded 2080, we would have been back on a PnF Buy signal on this larger and more significant price scale. So how do we put it all together in the here and now? If looking to trade bullish, aggressive traders could actually target a breakout over the 2040 level as it would be a confirmed bullish signal on the standard scale PnF chart. But we don't necessarily buy the initial breakout at that point. Why? Because the 20- point scale chart hasn't yet joined the party. Instead, we should look for a subsequent pullback to oversold on the daily chart up above as a bullish entry point. Traders looking for more confirmation would keep their eye on the 20-box scale chart and not play bullish (remember this is for position traders) until seeing a Buy signal over 2080. By the way, take note of the fact that both the 10-point and 20- point box scale charts are currently showing a 1900 bearish price objective (denoted by the red lines). When the price objective lines up like that across multiple scales, I've found it is usually a good idea to pay attention -- even though it has already been achieved in terms of the 20-point box scale. Note there's nothing magical about the 20-point box size. Who's to say but what a 30-point or 50-point scale might not provide a better tool. That's the beauty of trading -- there are infinite possibilities and ways of looking at the market. Don't be afraid to experiment a little. Hopefully this helps to demonstrate how we can use confirming timeframes (or scales) and different chart types together in order to increase our odds of being on the right side of a given trade. I know this has been a really cursory view, but if there's a desire for coverage in greater depth, you know what to do. Just drop me an email and let me know. In the meantime, experiment not only with the different timeframes on the symbols you're trading, looking for confirmation of your trade bias, but do the same trick with your PnF charts, looking for confirmation across multiple scales as well. Remember, this is experimentation and education time. There are no mistakes and there are no dumb questions. This is how we learn new and hopefully profitable lessons. Have Fun!! Have a great weekend! 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