The Option Investor Newsletter Thursday 05-13-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Inflation Returns Futures Markets: See Note Index Trader Wrap: See Note Market Sentiment: Breadth Improves Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 05-13-2004 High Low Volume Adv/Dcl DJIA 10010.74 - 34.40 10074.11 9970.93 1.69 bln 1481/1709 NASDAQ 1926.03 + 0.40 1937.87 1914.10 1.56 bln 1373/1709 S&P 100 536.23 - 0.94 539.39 533.91 Totals 2854/3418 S&P 500 1096.47 - 0.81 1102.77 1091.76 W5000 10650.61 - 7.20 10713.69 10607.62 SOX 459.57 - 2.30 464.75 455.08 RUS 2000 547.17 - 1.82 552.40 545.00 DJ TRANS 2859.79 + 12.50 2866.02 2838.00 VIX 18.86 + 0.72 18.92 17.97 VXO (VIX-O)19.39 + 0.90 19.78 18.41 VXN 28.11 + 0.49 28.33 27.37 Total Volume 3,597M Total UpVol 1,642M Total DnVol 1,916M Total Adv 3187 Total Dcl 3853 52wk Highs 48 52wk Lows 275 NasTRIN 0.78 TRIN 1.02 PUT/CALL 1.01 ************************************************************ Inflation Returns by Jim Brown Traders worst nightmares began to resurface today with a higher than expected PPI report. The overnight gain in the futures was erased in minutes and the markets opened under a rate cloud once again. It is a picture of things to come as the economy grows so do prices and the Fed can't be far behind. Dow Chart - Daily Nasdaq Chart - daily Russell-2000 Chart - Daily SOX Chart - Daily Jobless Claims jumped from 318K to 331K last week and only slightly higher than consensus. No real news there other than the 4-week moving average fell to 336K and the tenth week under 350K. This is the lowest level since the economy began to recover. The trend is continuing to decline and that suggests job creation is still growing. As long as claims remain under 350K per week we should continue to add 175K of jobs per month based on historical norms. Retail Sales for April fell -0.5%, well below consensus and well below the +2.0% gain in March. The culprit is higher gasoline prices and the undeclared energy tax that is ripping cash out of consumer pockets. Auto sales are dropping with a -1.8% fall for the month and shared the top of the loser list with apparel at -2.0%. Building supply stores also lost ground as rising mortgage rates slow home buying. This was a material change from the +11% gain in March. Sure sounds like trouble ahead. This was the first monthly decline in the headline number since September and helped to fan the flames of worry over the declining consumer. With the summer doldrums ahead the retail outlook is not exciting with oil prices continuing to rise. Oil prices rose to close over $41 per barrel today, a new 13-year high and spot prices of unleaded gasoline were above the level of the futures. This represents surging demand as the summer driving season begins and suggests some really high prices for the summer. Analysts claim a surge in output by OPEC would not necessarily help demand because all the oil tankers are chartered to full capacity and there is nothing left to press into service to haul oil. The big report today was the PPI, Producer Price Index, which jumped +0.7% and more than twice consensus estimates at +0.3%. Energy prices were the main culprit once again with the core rate, minus food and energy, rising at only +0.2%. If you do not eat or drive your inflation is only moderate. The talking heads were trying to downplay the headline number but a closer inspection shows the inflation rate of intermediate materials rose +1.37% for the month. Even if you take out food and energy that number rose +1.12%. This is pure inflation and at a high rate. Crude materials rose +3.0% and Foodstuffs rose +3.65%. This immediately knocked the bloom off the pre-market futures and the Dow opened down -75 points. Fear of a faster than expected rate hike scenario sent the yields on the ten-year note to 4.85% and a new two-year high. Mortgage rates knee jerked to new recent highs and all eyes became even more focused on the June-30 Fed meeting. This is going to be a critical period on the market calendar. The Fed will raise rates and Iraq will be turned over to Iraq rule on June-30th. 2Q earnings begin July 7th with YHOO and the Democratic convention starts three weeks later. Everyone will be handicapping the race as democrats grab the spotlight. The Olympics should begin two weeks after the convention assuming they finish the preparations and terrorists take a holiday. It is going to be a tough news environment over the summer. Fear of these news events probably had a lot to do with the lack of any follow through from yesterday's rebound. There may also have been some fear of Dell's earnings tonight but Dell did come through and hit their estimates of 28 cents. There were numerous analysts debating the results after the bell and Dell dropped more than $1 in after hours trading. There were as many excuses as there were analysts but the main sticking point was a drop in margins. Higher Dram costs and faster growth in lower margin businesses impacted the overall margin. Not a big deal in my opinion. Dell like Cisco has grown so large that they lack any real earnings leverage and are forced to grow the old fashioned way. Dell did see very strong growth in software, peripherals and in its Asian business with China seeing a jump of +33%. Dell is locked in a global battle with HPQ and they are competing on a price level that prevents them from raising prices to adjust for pricey components. Dell is still opting for more market share instead of more profit. Dell issued inline guidance of 29 cents for the current quarter. Dell had been expected to beat by a penny according to the whisper numbers but the higher memory costs prevented it despite a beat on revenue by +$100 million. ADI posted better than expected earnings and beating by +4 cents. ADI said profit more than doubled on strong demand for consumer electronics. ADI guided higher for the current quarter as well. ADI makes chips for cell phones and other consumer goods. BEAS took it on the chin after reporting inline revenues but said license revenues failed to hit its targets. BEAS lost -1.50 in late trading. ADIC posted a surprise loss -2 cents and said sales were falling amid rising expenses. Estimates were for a profit of six cents. The stock dropped -25% in late trading. There was also good news making the rounds with Intel, Dell and others saying they were raising their capex spending as customer demand increased. Dell said corporate demand was at a 3.5 year high. That can't be bad news. Unfortunately the big brokerages are still cautioning about potential tech weakness ahead. Merrill issued a comment that the odds of a bear market in tech are increasing and hedge funds added to their short positions. In the last hour of trading on Wednesday when the massive short squeeze was in progress there was over $26 billion in volume on the QQQ and SPY. The closer we get to a 200dma failure the more funds are hedging their bets. Currently open interest on the QQQ May-34 puts is 650,000. The May-35 puts are 350,000. These are huge bets the 200-day averages are going to fail. This bearish sentiment is depressing buyers and the rebound from Wednesday failed to show any follow through. I have heard several stories about why that rebound may have occurred but I think it was purely technical to start and aided by a couple buy programs. On Tuesday I suggested that the 200dma on the SPX at 1078 was very strong support and could produce our best chance of a rebound. We hit 1078 three times on Wednesday with no material penetration. The corresponding 200dma on the S&P futures was 1075.50 and the low for the day was 1075.25. Personally I think we saw a couple strong buy programs on a rebound from technical support on very oversold conditions. The result was a severe short squeeze and a rebound to prior resistance levels. Had there been any real change in buying sentiment we should have seen some follow through on Thursday. The Dow did recover from the morning PPI dip but could not hold any gains over 10050. It was a battle just to stay over 10K at the close. The current 200ema is 10003 and 200sma is 10017 and the Dow closed right between them at 10010. The index fought those levels for the last two hours of trading and failed to find conviction on either side. The Nasdaq was also stuck just above its 200ema at 1915 and just below the simple 200 at 1943. It closed flat after trading a dozen points on either side of zero and 1930 seems to be solid resistance. With all the negative bias and the two trips to 1880 earlier in the week we should be thankful just to hold over 1900 for the last three closes. The Dell, BEAS, ADIC, ADI news after the close initially sent the futures into the cellar but they did recover some lost ground while waiting for the Nikkei to open. On Thursday the Nikkei closed down -328 at 10825. This is nearly -1400 points from the April 26th 12195 high. If the Nikkei falls again tonight the U.S. markets could quickly test their 200dma support once again. Bonds are continuing to crash on the potential for future rate hikes but it did not hinder the quarterly refunding this week. The 10-yr notes went off at 4.848% with a bid to cover of 2.78. That was the strongest ratio since August-2001. Indirect bidders, a group that included foreign banks, bought 43% of the notes sold. This was very strong and up from 19.9% in the March sale. The 5% level is a level that will attract numerous large buyers and the PPI jump this morning pushed the yield very close to that level. A safe 5% yield can look very attractive to many institutions instead of stocks when the market is shaky. For Friday we have the CPI, Consumer Price Index, and numbers like we got on the PPI this morning will not be met with much excitement and probably not many buyers. We will also get the Business Inventories, Industrial Production and Michigan Sentiment. None of those are expected to be shockers but just more evidence the economy is growing slowly. If the Nikkei trades down tonight there could be more weekend event risk than usual. The last few Friday's have been mixed with both gains and losses but the last two Friday's have been losers. There is no real trend and this near the 200 day averages we could find about as many bargain hunters as sellers. The wild card is fund flows. With the market hitting new lows this week we could be seeing fund withdrawals and Friday could be a pay the piper day. I could find no reporting of fund flows today and that is normally negative. They want to advertise when money is flowing in but not when money is flowing out. Bottom line, I am still in sell the rally mode and the Dow has strong resistance at 10150 and 10200. Another major dip under 10K may not be bought and the bulls have got to be nervous after barely hanging on to that level for four days. The Nasdaq still has strong resistance at 1930, 1950 and 1965 and very few buyers. Another drop under 1900 could be the signal for the next leg down. Next Friday is option expiration and recently the prior week has seen lots of option related volatility. Tomorrow could be really exciting or really boring depending on who finds conviction first. 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_051304_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 **************** Breadth Improves Jonathan Levinson Today's pullback following yesterday's sharp intraday upside reversal saw volatility increase, but breadth improved, as the number of new highs rose against new lows for the NYSE and Nasdaq. Up volume over down volume was nearly even on the NYSE and Nasdaq, slightly higher for the NYSE and slightly lower for the Nasdaq. The exception was for the AMEX, with the number of new lows increasing from yesterday and with down volume 6x up volume. Volume was moderate on all 3 exchanges. For tomorrow, we have the 8:30 release of the Core CPI for April, estimated at +.2%. At 9:15, there's industrial production and capacity utilization for April, estimated at .5% and 76.7% respectively. Michigan sentiment is last at 9:45, estimated at +96. These reports will hopefully catalize a move out of the range that held through Wednesday, and give us a clearer indication of direction for the coming week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8416 Current : 10010 Moving Averages: (Simple) 10-dma: 10159 50-dma: 10314 200-dma: 10017 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 912 Current : 1096 Moving Averages: (Simple) 10-dma: 1105 50-dma: 1122 200-dma: 1078 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1103 Current : 1417 Moving Averages: (Simple) 10-dma: 1413 50-dma: 1440 200-dma: 1416 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 18.86 +0.72 CBOE Mkt Volatility old VIX (VXO) = 19.38 +0.89 Nasdaq Volatility Index (VXN) = 28.11 +0.49 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.01 684,749 692,405 Equity Only 1.89 145,455 274,349 OEX 2.97 27,000 80,245 QQQ 0.57 127,770 72,608 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 62.4 - 2 Bear Confirmed NASDAQ-100 34.0 + 1 Bear Confirmed Dow Indust. 66.7 - 3 Bear Confirmed S&P 500 59.0 - 1 Bear Confirmed S&P 100 61.0 - 3 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.07 10-dma: 1.02 21-dma: 1.02 55-dma: 1.01 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 1374 1321 Decliners 1471 1726 New Highs 24 37 New Lows 103 49 Up Volume 806M 783M Down Vol. 897M 722M Total Vol. 1716M 1519M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/04/04 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 Commercials reduced their longs and increased shorts slightly, while small traders added to longs and covered shorts. Commercials Long Short Net % Of OI 04/12/04 412,827 419,910 ( 7,083) (0.9%) 04/20/04 409,729 421,456 (11,727) (1.4%) 04/27/04 406,927 416,244 ( 9,317) (1.1%) 05/04/04 397,964 417,175 (19,211) (2.4%) 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 04/12/04 135,840 89,090 46,750 20.8% 04/20/04 136,699 92,982 43,717 19.0% 04/27/04 133,775 90,535 43,240 19.3% 05/04/04 137,112 80,201 56,911 21.6% 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 added to longs and maintained their shorts, while small traders significantly reduced their long positions and added to shorts. Commercials Long Short Net % Of OI 04/12/04 261,889 341,163 (79,274) (13.1%) 04/20/04 275,985 355,555 (79,570) (10.1%) 04/27/04 291,365 370,549 (79,184) (12.0%) 05/04/04 316,840 370,781 (53,941) ( 7.8%) 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 04/12/04 172,473 52,274 120,199 53.5% 04/20/04 186,799 69,137 117,662 46.0% 04/27/04 175,788 69,613 106,175 43.3% 05/04/04 119,308 74,407 44,901 23.2% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders increased their long positions and short positions, but the net addition to longs was sufficient to set a new high bullish reading of the year for the second week in a row. Small Traders added slightly to longs and more heavily to shorts, setting a new most bearish reading of the year - Commercials Long Short Net % of OI 04/12/04 54,144 34,432 19,712 22.3% 04/20/04 54,852 35,964 18,888 20.8% 04/27/04 54,196 33,948 20,248 23.0% 05/04/04 56,931 35,209 21,722 23.6% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 21,722 - 05/04/04 Small Traders Long Short Net % of OI 04/12/04 8,297 20,746 (12,449) (42.9%) 04/20/04 8,538 19,431 (10,893) (39.0%) 04/27/04 9,008 20,347 (11,339) (38.6%) 05/04/04 10,247 24,764 (14,517) (41.5%) Most bearish reading of the year: (14,517) - 05/04/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders added slightly to longs and maintained their short positions, while small traders added slightly to longs and covered shorts. Commercials Long Short Net % of OI 04/12/04 23,501 22,748 753 1.6% 04/20/04 24,156 22,009 2,147 4.7% 04/27/04 23,676 22,009 1,667 3.6% 05/04/04 24,296 22,181 2,115 4.6% 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 04/12/04 6,136 7,450 (1,314) (9.7%) 04/20/04 5,997 9,631 (3,634) (23.3%) 04/27/04 5,998 8,868 (2,870) (19.3%) 05/04/04 6,262 8,155 (1,893) ( 9.2%) 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 05-13-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: LTR Call Play Updates: ADP, JNJ New Calls Plays: LXK Put Play Updates: AMZN, CTX, WHR, APOL, GM, MSTR New Put Plays: CAKE, MBG **************** 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: ***** Nonw PUTS: ***** Loews Corp - LTR - close: 58.24 change: +1.34 stop: 57.75 Thursday, LTR bounced on 1.7 times average daily volume, handily taking out our newly lowered stop. As we mentioned in Tuesday's write-up, LTR had been holding to the support offered by the 100- dma, several times piercing it, but always closing above it. LTR's failure to replicate MO's behavior, with MO another company among the seven named in the DOJ's case again the tobacco companies, began worrying us. That's what prodded us to begin encouraging play participants last week to set stops according to the losses they were incurring in their options positions due to lost volatility and time premium, in addition to any stops we had set according to the stock's price. Those creeping movements are deadly to options prices. We also lowered the stop aggressively so that the play would be stopped the moment LTR showed any strength. It displayed that strength Thursday. While it's possible that LTR could find resistance at the trendline of lower highs from its daily chart, near $60.50, Wednesday's doji on big volume and then today's rise on big volume smelled to us of capitulation followed by buying as all sellers were flushed out. Picked on May 03 at $ 57.74 Change since picked: + 0.50 Earnings Date 04/29/04 (confirmed) Average Daily Volume: 419 thousand 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 ******************** Auto. Data Proc. - ADP - close: 45.83 change: -0.44 stop: 43.25 After a bullish start to the week, shares of ADP stalled near the $47 level and have been pulling back on light volume. The fact that the stock couldn't really continue higher without a pullback is probably due to price hitting the top of the long-term rising channel. What is encouraging is the way the stock has been holding above the $45 level, demonstrating that old resistance is being turned to new support. Strong support in the $44-45 area is reinforced by the 10-dma ($45.43), 20-dma ($45.10) and 30-dma ($44.83). That gives us the confidence to buy rebounds from this support area in anticipation of a return to the top of the channel and hopefully a breakout in the near future. With daily oscillators turning down though, we don't really need to be in a hurry to initiate new positions. The setup will be more attractive if we can get a test of that support at the same time that daily Stochastics are once again turning up from within oversold territory. Stops should be maintained at $43.25 for now. Picked on May 9th at $46.03 Change since picked: -0.20 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.04 mln --- Johnson & Johnson - JNJ - close: 54.93 change: -0.31 stop: 52.75 We stated at the outset that JNJ was unlikely to be a fast-moving play and it has certainly lived up to that advance billing. After just a bit of bullish follow-through early this week, the stock has fallen back into a consolidation pattern. Price is holding firm near the $55 level, while the 20-dma ($54.37) rises to reinforce support near $54.50. At the same time, the daily oscillators are turning downwards. Look for a successful rebound from above $54 to coincide with the oscillators beginning to turn up from oversold (preferably in the middle of next week) as the logical point for opening new positions. While JNJ isn't likely to soar upwards in rapid fashion, neither is it likely to move against us in volatile fashion. Target longer-term entries on the pullbacks and look for a rally up near the $60 level. Stops should be maintained at $52.75. Picked on May 9th at $55.30 Change since picked: -0.37 Earnings Date 4/13/04 (confirmed) Average Daily Volume = 7.23 mln ************** NEW CALL PLAYS ************** Lexmark Intl. - LXK - close: 94.03 change: +1.86 stop: 89.75 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: Continuing to set itself apart from the rest of the broad market, LXK is once again in the process of a strong rebound from its supportive 50-dma ($90.62). Over the past several months, the stock has repeatedly found strong support at the 50-dma, and each rebound from that average has led the stock to break out to new multiyear highs. After topping out at $97 in early April, the stock has gone through a healthy consolidation phase, working its way back down to strong support at $90 and Tuesday's rebound from that level held the possibility of another solid rally attempt. The bulls delivered on that possibility over the past 2 days, with the stock jumping on strong volume. Today's rally above the $94 level broke both the short-term descending trendline and issued a new PnF Buy signal, complete with a bullish price objective of $103. With the stock having already given a solid breakout signal, we have no need of an entry trigger on the play. Aggressive traders can enter the play on a breakout over today's $94.38 high, looking for follow-through up to the April highs at $97. Those traders looking for a better entry point can target a mild pullback towards the $92 level as their catalyst to open new positions. While the PnF chart says the $103 level is a viable target, we'll set our sights a bit lower, looking for a trade at $100 as the signal to harvest gains on the play. Support looks very strong near the $90 level, so we'll set our stop initially at $89.75, just under the 50-dma, as well as the intraday lows of the past month. 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. But with May options expiring next week, the June strikes probably are the wiser choice. Longer Term: Aggressive longer-term traders can use the June $100 Call, while the more conservative approach will be to use the June $95 Call. Our preferred option is the June $95 strike, as it is currently near the money and should provide sufficient time for the play to move in our favor. ! Alert - May options expire next week! BUY CALL MAY- 90 LXK-ER OI=2404 last traded @ $4.60 BUY CALL MAY- 95 LXK-ES OI=2738 last traded @ $1.25 BUY CALL JUN- 95*LXK-FS OI= 344 last traded @ $3.40 BUY CALL JUN-100 LXK-FT OI= 382 last traded @ $1.55 Annotated Chart of LXK: Picked on May 13th at $94.03 Change since picked: +0.00 Earnings Date 4/19/04 (confirmed) Average Daily Volume = 1.06 mln ************************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 ******************* Amazon.com - AMZN - close: 43.61 chg: +0.59 stop: 44.75 Before beginning the discussion of AMZN's trading pattern, I wanted to note that different quote sources displayed a different closing value for AMZN. Thursday, AMZN continued the bounce off the midline support of its descending regression channel on average volume. Other Internet-related stocks such as YHOO and ASKJ also posted gains, although YHOO's was minimal, while the $RLX, the retail index, lost ground. So how much danger attends this play now? While AMZN bounced, producing a solid white candle, the rising formation still fits the parameters of a bear flag formation. Although AMZN also closed above the 10-dma, the first time it's done so since 4/28, the bounce stopped squarely at the 50-dma and below the bottom of the early April gap. The play is in danger of being stopped on a continued bear-flag bounce, but we were encouraged to see these signs. We were also encouraged to see that although stochastics punched up above the signal line and RSI hooked up, MACD remains flat. We would not encourage new plays at this time. Although this looks like a bear-flag rise, it could instead be a rise back toward the top of the descending regression channel. Picked on May 02 at $ 43.60 Change since picked: - 0.01 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 8.4 million Chart = --- Centex Corp - CTX - close: 45.24 change: +0.44 stop: 49.35 Since Tuesday, CTX has continued higher, with that move accompanied by volume only 60 percent of average daily volume. We counseled that those waiting for the ideal bounce-and-rollover entry into CTX be particularly watchful of volume patterns, and this one delivers just what we want to see. Now CTX just has to deliver that rollover entry. We're watching for a bounce up to and rollover from $46-47, with a 50 percent retracement of the last flagpole plunge at about $46.77. Although some might also consider any rollover entry from below the 200-dma, we'd like to see CTX turn down below that 50 percent retracement or from a level that overshoots it by only a little. U.S. 30-year mortgages reached an eight-month high Thursday, at 6.34 percent, according to one headline. Ten-year yields, linked to mortgage rates, bumped above a long-term resisting trendline, but created a small-bodied candle that gapped above that resistance. That means that the yield perhaps just overshot that trendline and might turn down below resistance again, giving some relief to interest-rate-sensitive sectors, something we don't want to see happen. Despite today's rise in the ten-year-yields and the reported highs in the mortgage rates, the DJUSHB, the Dow Jones US Home Construction Index, posted gains, although the daily candle looked anything but strong as it clung to the 200- dma. Still, those considering a play in CTX would hope to see the DJUSHB tumble below that 200-dma. So far, so good, and we hope we're getting close to our ideal entry in this play. Picked on May xx at $ xx.xx (See rollover entry.) Change since picked: - x.xx Earnings Date 04/20/04 (confirmed) Average Daily Volume: 2.0 million Chart = --- Whirlpool Corp - WHR - close: 64.44 chg: +0.32 stop: 65.76 Although Thursday's rise in WHR was accompanied by higher-than- normal volume, we did find some encouraging signs when examining the daily chart. That wasn't one of them, of course, as bear flags should be accompanied by smaller-than-normal volume. Neither was it encouraging to see WHR move above and close over the 10-dma, something it hadn't done since the middle of April. Encouraging signs included the small-bodied candle formed at resistance. That resistance is composed of the recent horizontal resistance at $65.00, as well as the trendline of the H&S-ish formation on its weekly chart, with that neckline now at about $64.70. A small note of encouragement came from RSI, trying to flatten even as WHR rose. Of course, the potential for a reversal signal, hinted at by that small-bodied candle at the top of this week's rise, must be confirmed by a bearish red candle forming below Thursday's candle. Tuesday, we suggested that traders might consider new entries on rollovers beneath $65.00, but cautioned that any rises toward that level should take place on lower-than-normal volume, rather than the higher-than-normal volume seen on Wednesday and Thursday's bounces. Because of that higher-than-normal volume, we would not suggest new entries at this time. We will reevaluate this weekend after observing Friday's action. Picked on May 05 at $ 64.69 Change since picked: - 0.25 Earnings Date 04/21/04 (confirmed) Average Daily Volume: 555 thousand Chart = --- Apollo Group - APOL - close: 90.75 change: +1.15 stop: 96.50 Performing exactly as we scripted it, APOL is continuing its rebound from the 50-dma ($88.32) and is right on course for a retest of strong resistance in the $92-93 area. Oscillators are turning up nicely and price should reach that resistance just about the time the oscillators are topping out in overbought territory. Then it will simply be a matter of entering the play on a rollover from that resistance at the same time that the oscillators begin to turn down. Of course, traders that would prefer to enter on weakness can certainly entertain breakdown entries on a drop under the $87.50 level, but that is not our first choice. Once below the 50-dma and $87.50, we'll look for a rapid decline down towards our $81 target (also the PnF price target), with the possibility of a near-term bounce off of mild support at $85. Maintain stops at $96.50 for now. Picked on May 11th at $90.32 Change since picked: +0.43 Earnings Date 6/11/04 (unconfirmed) Average Daily Volume = 1.71 mln --- General Motors - GM - close: 44.15 change: -0.33 stop: 47.25 No matter how you slice it, the rebound in shares of GM after the breakdown under $44 has been tepid. When we initiated coverage on the stock, we were looking for a rebound back to at least the 200-dma ($45.44) to set up rollover entries and the best the bulls have been able to manage is a light volume move to just above $45. For most of the past few days, the stock has been consolidating in a sideways manner and the possibility exists that another breakdown may be the best entry point we get. But with the daily oscillators trying to turn up, we'll still hold out hope for a rollover entry in the $45.50-46.00 area. All of the shorter term moving averages have turned down and are clustered in the $46-47 area and should provide very strong resistance to any stronger rebound attempt. Traders preferring to take the breakdown entry should use a trigger of $43.40, just under yesterday's intraday low. Maintain stops at $47.25. Picked on May 9th at $44.60 Change since picked: -0.45 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 5.20 mln --- MicroStrategy Inc. - MSTR - cls: 45.01 chng: +0.58 stp: 48.05 Our MSTR play has certainly offered a volatile ride this week, with a drop to nearly $42, a surge back above $46, another selloff down to $43 and then today's failed rebound that stalled just below $46.50. The stock is building a consolidation pattern in the $43-46.50 area and when price breaks from that range, we can expect that it should have some power behind it. Daily oscillators are creeping higher, but certainly not in a strong manner. The lack of strength can be seen in the volume metrics as well, as volume is markedly lower on the rally attempts and higher on the down days. It was encouraging today to see the way price reversed from just below the 10-dma ($46.62) and traders still looking for entries should do well by stepping aboard on these failed rebound attempts near $46. Recall that our final target for the play is at $40,breakdown entries don't make a lot of sense. We'll maintain our stop at $48.05 tonight, but more conservative traders may want to use a tighter stop just over the 10-dma. Picked on May 6th at $47.02 Change since picked: -2.01 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 414 K ************* NEW PUT PLAYS ************* Cheesecake Factory - CAKE - cls: 40.10 chng: -2.30 stp: 44.10 Company Description: The Cheesecake Factory operated 61 upscale, full-service, casual dining restaurants under The Cheesecake Factory mark in 20 states and the District of Columbia as of March 3, 2003. The company also operated three upscale casual dining restaurants under the Grand Lux Cafe mark in Chicago, Illinois, Los Angeles, California, and Las Vegas, Nevada, as well as one self-service, limited-menu, express foodservice operation under The Cheesecake Factory Express mark inside the DisneyQuest family entertainment center in Orlando, Florida. It also operated a bakery production facility in Calabasas Hills, California, which produces baked desserts and other products for its restaurants and for other foodservice operators, retailers and distributors. It also licensed three bakery cafes under The Cheesecake Factory Bakery Cafe mark to another foodservice operator. Why we like it: The past couple months have not been kind to food-related stocks, especially those that don't cater to the increasingly popular Atkins diet. Stocks like PNRA and KKD have been pummeled in recent weeks and we can add CAKE to the list of victims. The stock has had a string of sharp selloffs since topping out near $49 in early March. The rebound from the March selloff produced a lower high near $48 and then the bears started to get aggressive. A big gap down following its earnings report last month sent the stock plunging below its 100-dma and after a couple weeks of consolidation, the weakness started to intensify again, with CAKE falling to test its 200-dma ($41.41) earlier this week. That measure of support was smashed this morning, with the stock plunging below $40 on very heavy volume. The buyers did manage to put in a feeble rebound near the end of the day, but by then the damage was done, creating a Spread Triple Bottom Sell signal on the PnF chart. That sell signal brings with it a tentative bearish price target of $31, underscoring that there's still substantial downside risk in the stock. Despite that weakness and gloomy prediction for future price action, we are NOT recommending entries on further weakness. The reason is that the PnF bullish support line rests at $39 and we are expecting a rebound from this first test of that support. Instead, we want to focus our attention on the subsequent rollover from resistance, which ought to occur in the vicinity of the $42 level. Between the 200-dma and strong historical resistance (broken support) in the $42-43 area, we have a high- odds zone for targeting new bearish entries. Once below the $39 level, we can expect to see support come in at $38 on the way to our $36 target for the play. Initial stops will be set at $44.10, just over the recent consolidation highs. Suggested Options: Since we're looking for a rebound entry and May options expire next week, there really isn't enough time for a profitable play using front month options. Consequently, we've only listed June strikes for the play. Aggressive traders can use the $40 strike, while the more conservative approach will be to use the in-the- money $45 strike. Our preferred option is the June 45 strike, as it is currently in the money and should provide ample time for the play to move in our favor. ! Alert - May options expire next week! BUY PUT JUN-45*OAQ-RR OI= 1168 last traded @ $4.10 BUY PUT JUN-40 OAQ-RQ OI= 408 last traded @ $2.45 Annotated Chart of CAKE: Picked on May 13th at $40.10 Change since picked: +0.00 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 554 K --- Mandalay Resort Group - MBG - cls: 50.97 chng: -1.49 stop: 53.21 Company Description: Mandalay Resort Group, founded in 1974 as Circus Circus Enterprises, Inc., is in the business of entertainment, with its core strength in casino gaming. The company's asset base, operating cash flow, profit margin, multiple markets and customer counts rank it as a gaming industry leader. (Source: Company Website.) Why We Like It: Early in May, Merrill Lynch downgraded MBG to a neutral rating from its previous buy rating. Saying the "best was behind us," the firm said that the rest of 2004 and all of 2005 might see growth rates for casino and hotel companies slowing. Although Deutsche Bank had reiterated its buy rating in mid-April, investors' opinions and price action appeared to be more in harmony with Merrill Lynch's opinion. Since hitting its April high of $62.20 on April 6, MBG has tumbled, with volume building as it declines. That tumble created a P&F double-bottom breakdown on the P&F chart in late April. This week, candles have been congregating at the 100-dma, but now look ready to tumble below it, perhaps all the way to a test of the 200-dma. We're going to trigger this play with a trade at $50.43, just below Thursday's low. We're targeting $46.25, and will set an initial stop at $53.21 if this play is triggered. Those considering this play should consider some important possible support levels, especially since MBG's decline has already been so steep. Those levels must include the psychologically important $50.00 level, of course. The 30-week average, one closely watched by some market old-timers, lies at $49.18. In addition, the 38.2 percent of the rally off the 2003 low lies at $47.49, with that level also perhaps providing support and possible bounce potential. Suggested Options: Open interest is about equal for all these put options surrounding MBG's current price. Our preference would be for the JUN 47.50 or 50 strikes. ! Alert - May options expire in two weeks ! BUY PUT JUN 47.50 MGB-RW OI= 1614 Last traded @ $1.05 BUY PUT JUN 50.00 MGB-RJ OI= 1465 Last traded @ $1.85 BUY PUT JUN 55.00 MGB-RK OI= 1968 Last traded @ $4.80 Annotated Chart for MBG: Picked on May xx at $ xx.xx (See Trigger) Change since picked: - x.xx Earnings Date 06/03/04 (confirmed) Average Daily Volume: 1.7 million Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! 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The Option Investor Newsletter Thursday 05-13-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: A Boring Day on the Markets Option Spreads: Makin’ Money – Keepin’ It -- & Makin’ More! Traders Corner: Key Reversals and other signs of a recent bottom ********** WATCH LIST ********** A Boring Day on the Markets _________________________________________________________________ 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. _________________________________________________________________ Kindred Healthcare - KIND - close: 47.81 change: -0.54 What to Watch: KIND is in bad health, trying to hold onto the $46.80 horizontal support and its 200-dma, below at 45.81. The P&F chart confirms our diagnosis, with a downside target of $34.00. Because of weekly support near $38-39, we wouldn't suggest hanging on for that downside target, however, but might even suggest a target just over round-number support at $40.00. We would definitely suggest following the stock lower with stops if inclined to hang on through a test of $40 or that $38-39 weekly support. Earnings were 4/26, but those considering a bearish play should be aware that the stock is set for a 2 for 1 split to be distributed 5/27 to shareholders of record 5/10. We would suggest an entry either on a rollover beneath the 50-dma or on a move below Tuesday's low. Chart= --- Panera Bread - PNRA - close: 33.45 change: -4.42 What to Watch: PNRA reported earnings Thursday, with dairy costs being behind trimmed earnings. Saying the declines were overdone, Sidoti & Co upgraded the stock to a buy rating. That buy rating might help it regain some of those lost points. We hope so, because we're looking for a bounce back up to resistance near $34.75-36.00 and a rollover from there for a bearish entry. We would not suggest entries so close to earnings or just after such a steep fall, but list this for traders to watch as it digests some of those losses for a rollover entry. The P&F target is $23.00, but we would suggest setting a target closer to 27.50, just above the 200-week moving average. Note that there's some weekly support in the $31-32 range. Chart= ---- Guidant Corp - GDT - close: 61.85 change: +0.94 What to Watch: We've listed this stock on this page before, but noted Thursday the way it stopped its advance at the 21-dma. The rise was on low volume. The weekly chart depicts a H&S so perfect that we can't believe that it won't confirm. That's a possibility, however, so we'd suggest a trigger. If confirmed, that H&S has a downside target at $45.00. The P&F target is at $50, with the bullish support line way below that, at $45.00, showing some correlation with that H&S target. In addition, the weekly 200-ma crosses just below $45.00. On the way down, we note some weekly support just under $57.00, but strongest weekly support is near $52.15, and we'd suggest that players plan on exiting the position before that level is reached and before the psychologically powerful $50.00. Because the 50 percent retracement of GDT's rally lies at $59.10, we would suggest an entry on a move below the 200-dma, with a trader entering at that point being prepared for a bounce or a several- day consolidation along that important MA. Chart= --- Zebra Technologies - ZBRA - close: 77.50 change: +1.78 What to Watch: Wednesday, ZBRA broke out above a recent consolidation zone, achieving another new high. It sports a P&F buy signal with a target of $89.00. Best entries on a long play would be on tests of the 30-dma. Because ZBRA has been in a strong trend and is reaching new highs, key stops to important MA's, too, such as the 50- or 100-dma, according to an account- appropriate risk level, and follow ZBRA higher as it rises. Those considering this play should be aware of two risks. One is that ZBRA looks quite extended on the weekly chart, making a breakout move a risky one to trade. Another is related to ZBRA's low ADV, at 274,000. That low ADV can exaggerate moves. ZBRA reports some time on July 22-23. 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 ************************************************************** ************************ Option Spread Strategies ************************ Makin’ Money – Keepin’ It -- & Makin’ More! By Mike Parnos, Investing With Attitude You wake up. It’s 3 a.m. You’re dripping with perspiration. You’ve had a dream – a vision. Not your usual dream. No Carmen Electra. No fur-lined handcuffs, silk sheets or Reddi-wip. Oddly enough, you had a premonition that George W. announced the capture of Osama Bin Laden (right before the election, of course). He was found in New Jersey, disguised as a Manager of a 7-11 (Osama, not George W.). On the news, the market spiked up, but not before you were able to buy 4 SPX calls. Managing A Profitable Position Why the perspiration, you ask? Herein lies the dilemma. A substantial profit is staring you in the face. You’re not used to making money because you’re a directional trader. But, even a blind squirrel finds an acorn now and then. The question: Do you take profits? Do you stay for more? Oh, the indecision of it all. Take two Valium and call me in the morning – and read this, before the market opens. In the meantime, let’s spend some time exploring a few of the ways to manage a profitable position. Get some rest before you read this. Lots of numbers. It’s even OK to take a pill. Never fear; we’ll work on your chemical dependencies later -- after you’ve made a lot of money. Setting The Scene Last month, when the SPX was trading at 1120, you bought two of the May SPX 1120 calls for $23.50 ($4,700). In the two weeks, the SPX moved up to 1140. Below is the option chain for the May SPX calls. Strike Bid Ask May 1120 call 33.50 34.50 May 1130 call 28.50 29.50 May 1140 call 23.50 24.50 May 1150 call 18.00 19.00 May 1175 call 8.50 9.50 Grab & Run Take Your Profits. Hey! You guess right. Your spent $4,700 for your May 1120 calls. Now they’re worth $6,700 ($33.50 x 200). You can grab your $2,000 profits and go on a vacation. Now that you’re rich, call Carmen Electra. Maybe she’ll go out with you. Remember, she married Dennis Rodman, so, obviously, she’s not too picky. If you have body piercings, your chances are even better. Bull Call Spread Are there more profits to be had? How much are you willing to risk to find out? How can you lock in some profits, but still participate in additional upward movement? Let’s convert part of your trade into a bull call spread. a) Sell one of your two calls and take $3,350 off the table. Your total initial investment was $4,700. All that remains at risk is $1,350 ($4,700 - $3,350). Now, you still have one May 1120 call remaining. If you think that the SPX still has further to go, you can sell the May SPX 1150 call, take in $18.00 ($1,800) and position yourself to participate in a possible additional ten points of upward movement. (see option chain above) By taking in the $1,800, you have effectively locked in $450 on the entire position. If the SPX closes beyond 1150, your remaining 1120 call will have a value of $30 and you will have a potential total profit of $3,450 ($3,000 + $450). b) You would also take profits on one of the 1120 calls. Then, if you’re more aggressive, instead of selling the 1150 call, you could sell the 1175 call. You’d take in $8.50 ($850), reduce your risk to $500 ($1,350 - $850), and position yourself to participate in the next 35 points of upside. If the SPX finishes over 1175 at May expiration, your 1120 call would be worth $55 and you’d take in $5,000. Your potential profit would then be $5,000 less the remaining $500 of risk = $4,500. That would require a substantial move, but stranger things have happened. c) You could sell the 1150 call on BOTH of your 1120 calls and take in $3,600 ($18.00 x 200). Your risk would then be only $1,100. If the SPX continues its rise and finishes above 1150, you’ll be in great shape. Your two 1120 calls would be worth a total of $6,000 ($30 x 200). Your net profits would then be $4,900 ($6,000 - $1,100). d) You could just hold onto the 1120 calls – and pray. This technical name for this strategy is: S-T-U-P-I-D. Why? Because you’re not only risking your $2,000 profit, but also your original $4,700. Will you have the self-discipline to adhere to a trailing stop? Who are you kidding? Get serious. Take your profits. There is no re-hab for stupidity. Yin vs. Yang What would a CPTI student do? Well, I’m torn between grabbing the entire $2,000 profit and bull call spread choice “c.” As you probably know by now, I believe that directional trading is akin to coin-flipping. If you subscribe to the Yin-Yang philosophy, you know that for every good thing that happens, something bad will happen. For every $2,000 profit you make in directional trading, something will happen to balance it out. You probably won’t lose an appendage or suffer a paper cut. It will be something in between – and it won’t be pretty. More To Come Today’s discussion has covered only a few alternatives of how to manage a profitable position. There are more choices that we will discuss in future columns. However, for now we’re in danger of information overload and are nearing the point of diminishing returns. We’ve dealt with your dream. We may not find Osama in New Jersey, but hopefully you now have more insight into how to handle profits – just in case. I thought I saw Osama last month at a Burger King in Kalamazoo. Or, maybe that was Elvis. You know how easy it is to confuse the two. ________________________________________________________________ MAY CPTI POSITIONS A little over a week to go to expiration. It’s been a long five- week option cycle. We’ve exercised amazing patience. Let’s hope the market cooperates and rewards our patience – and discipline. May Position #1 – SPX Iron Condor – 1096.44 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 – 547.17 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 - $141.71 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 - $148.05 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 -- $35.01 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 – 536.23 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 and the OEX 515/505 bull put spread expired worthless. New May Zero Plus BPS 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 May 575 calls for $1.40 (x 5 contracts = $700). Today (Thursday), when the market tanked, we bought back the May 575 call for $.15 ($75). This locked in $1.25 profit on the 575 call. Then, we still have two weeks left, so we sold 5 of the May 560 calls for $1.15 ($575). If these plays work out, we can add another $1,175 + $575 ($1,750) to our cash total – just a little bonus while we wait for the market to go up. OSX Calendar Spread Plus - $98.40 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). We rolled out our April $115 call and took in $1.20 - further reducing our cost basis to $.20. Then, aggressive traders (which we are in this strategy) put on the May $100/$90 bull put spread and took in $.95. So, now we are a "plus" $.75. In the best-case scenario, the OSX will finish just below $110 at May expiration. __________________________________________________________ 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 ************** Key Reversals and other signs of a recent bottom By Leigh Stevens lstevens@OptionInvestor.com I was watching the market yesterday (Tuesday, 5/12/04) when the major indices fell to new lows for the recent decline and then rebounded substantially off intraday lows. You could be watching the evening news and hear that the Dow for example, was up 25 points and not think anything remarkable was going on, but there was. And there were definite signs of at least an interim bottom if not "the" low for the recent correction, as suggested by different patterns that formed and different indicators. I'll go through these various patterns and indicators and suggest what I anticipate finding technically when a significant reversal occurs – this apparent recent reversal was to the upside, but the same conditions, patterns and indicators would hold for a downside reversal; e.g., a move to a new high, followed by an immediate decline and close below the prior day's low. KEY REVERSALS – Some reversal patterns are formed in only 1-2 sessions of whatever time duration (e.g., hourly, daily, weekly) being watched and you may hear the term "key" upside or downside reversals used for these situations. Sometimes a price spike, where the high or low is noticeably above or below the close, warns of a trend reversal. Certain candlestick patterns that form in one session are anticipated to mark a trend reversal; e.g., the "hanging man" or "hammer". At the opposite extreme are patterns that form over an extended duration such as are described in technical analysis as "broadening" tops or bottoms. The discussion here is of the type called key reversals on a bar (or candlestick) chart, measuring the High, Low and Close (HLC) or most commonly the Open as well (OHLC charts). A strong sign of a trend reversal and which is often the start of a intermediate or long-term trend change is the formation of 1 or 2-day key reversals. By the way, the definition of a key reversal is only loosely defined in technical analysis. For example, the most common definition of what is usually called a reversal up day or reversal down day and also sometimes called a "key reversal up" or "key reversal down" day: 1. Reversal up day – a day where there is a lower intraday low than the prior day, followed by a close above the prior day’s CLOSE. Such days are fairly common and I resist calling this set of conditions, a "key" reversal – in fact, there is no agreed upon textbook definition of what exactly makes a reversal a key reversal. I learned it one way, others another way. 2. Reversal down day – a day where there is higher high than the prior day, followed by close that is below the prior day’s close. What I consider to be a more significant and what makes a reversal a KEY reversal, either up or down, is this definition: 1. Key Upside reversal – a day (or hour, week, etc) where there is a lower low than the prior "bar" or prior two bars AND the close is above the high of the prior bar or the prior 2 trading periods. I will use an example on the daily charts for this so will start to say "day" instead of "bar" – the point being that reversal patterns occur on intraday charts like 15, 30 or 60 minutes, and on daily, weekly and monthly charts. 2. Downside key reversal day: a day where there is a higher intraday high than the prior day (same as the above "reversal down" definition) OR prior 2-days AND the CLOSE is below the prior day’s LOW (a 1-day key reversal down) or, of the prior 2- days (a 2-day key reversal down). The key reversal term does tend to be applied most often to a daily time frame or daily chart. The pattern of a move to new low, followed by a reversal that is above the prior day's HIGH doesn't happen as often and is often then a more definitive sign for a reversal. And, that is what occurred with the Dow Average in this view on the Daily chart – The fact the last LOW here was substantially below the prior low is reinforcing for the upside key reversal. Significant tops and significant bottoms are emotional events and are often extreme. Selling accelerates as more and more traders and investors dump stock, UNTIL there it (the selling) gets "exhausted". Short-term traders sense this and start covering short positions and there is a rapid rebound. LOOK FOR MULTIPLE SIGNS OF A REVERSAL Next is another chart of the same Index, or the Dow average in this case, showing more historical data along with some indicators and other highlights of other patterns – The first thing to note is that the reversal occurred in the area of a prior top of significance as can be seen at the dashed green line. Here comes the old adage that: 1. Support (once broken) "becomes" resistance (later on) and 2. Resistance becomes Support. Prior sellers in this area, realizing their "mistake" in selling too soon, are happy buyers in the same area once this index gets back to the same (price) area. 200-DAY MOVING AVERAGE – This is a key average in stocks for institutional money managers especially. As long as the longer-term outlook for stocks remains favorable (it is) there is a tendency for buying stocks when an average or index dips under its 200-day moving average. There was only ONE close below the 200-day moving average, which is hard to see on the chart above, but it was on the left most bar in the 3-days that are within the yellow circle. CHECK FOR AN OVERSOLD/OVERSOLD EXTREME – The Dow reached my "classic" level for an oversold extreme, where the 14-day Relative Strength Index (RSI) as seen above, got to the lower line with a reading at 30. Sometimes and in some markets, the level that I might use for "oversold" level will be at or around 25. (This is common in commodity markets.) I tend to go with the figure in the major stock indices that has marked prior lows in recent weeks or months. LOOK AT OTHER INDEXES Examining the other Indexes related to the Dow 30 (INDU) and going back to my discussion above about 1 and 2-day key reversals, a 2-day upside key reversal is apparent in the S&P 500 Index (SPX) per the close up of recent days action in the chart below – With SPX there is a new intraday low, followed by a close above the prior 2-days high making it, in a sense, an even "stronger" indication of a significant upside reversal. IS THE INDEX BOTH OVERSOLD AND IN A PRICE AREA TYPICAL OF A BOTTOM? It is one thing to see oversold readings on the oscillator type indicators like the RSI and Stochastics, but another to see that AND also use a simple 21-day (at center) average and the 3% envelope lines and see that recent lows were at the lower envelope. These trading envelopes or bands often marks the upper and lower boundaries of the S&P trading range, as seen in the chart below - There is a complete explanation of the construction, use and the interpretations I make of moving average envelopes for the Indexes that can be found at – http://www.OptionInvestor.com/traderscorner/tc_022604_2.asp IS THERE AN EXTREME OF BULLISH OR BEARISH "SENTIMENT"? YES, big time here. The extreme is the amount of equity put volume on a daily basis relative to call volume on the CBOE. A nearly equal level of put volume relative to total equities call volume is highly correlated or associated with a bottom within 1- 5 trading days. This is seen in the chart above – with my custom indicator (i.e., not found elsewhere), not only on a 1-day basis which is enough to suggest a bottom is near but also on 5-day moving average basis as shown in the magenta line tracking the 1-day reading (blue line). There is a complete explanation of the construction, use and the interpretations I make of my call to put indicator for the Indexes that can be found at – http://www.OptionInvestor.com/traderscorner/tc_021904_2.asp Good Trading Success! ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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