The Option Investor Newsletter Thursday 06-03-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Waiting for Jobs Futures Markets: See Note Index Trader Wrap: See Note Market Sentiment: Traders Brace for Jobs Report Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-03-2004 High Low Volume Advance/Decline DJIA 10195.91 - 67.06 10281.92 10193.78 1.21 bln 725/2109 NASDAQ 1960.26 - 28.72 1983.86 1960.26 1.50 bln 846/2170 S&P 100 543.92 - 3.66 548.40 543.87 Totals 1571/4279 S&P 500 1116.64 - 8.35 1125.31 1116.56 RUS 2000 562.44 - 11.12 573.56 562.44 DJ TRANS 2962.96 - 38.89 3001.13 2962.92 VIX 17.03 + 0.95 17.04 16.16 VXO 17.34 + 1.10 17.45 16.44 VXN 23.93 + 1.32 23.98 22.86 Total Volume 3,391M Total UpVol 709M Total DnVol 2,643M 52wk Highs 103 52wk Lows 82 TRIN 1.58 PUT/CALL 1.13 ************************************************************ Waiting for Jobs Jonathan Levinson An afternoon decline picked up speed and urgency as the session drew to a close, with the Dow declining 67.06 to finish at 10195.91 and the Nasdaq losing 28.7 to close at 1960.3. While volume was light overall there were big upside moves in the volatility indices, with the VXO rising 6.77% to close at 17.34 and the QQV rising 7.03% to close at 22.07, well off its lows below 19. After the bell, the selling accelerated with the futures setting lower lows. Breadth was decisively negative with decliners more than doubling advancers on the NYSE and Nasdaq, with down volume tripling up volume on the two exchanges- on the AMEX, down volume nearly sextupled up volume. Daily Dow Chart The Dow closed right on the ascending support line that forms a rough pennant against the declining resistance off the mid- February high. Its equivalent on the Nasdaq futures was broken to the downside today, helped along by the strong selling after 4PM, but on the Dow it held. While the daily cycle oscillators remain in upphases, we saw in last week's discussion that the weekly and monthly cycles remain down. This suggests that the daily cycle upphase is corrective within that longer-duration downtrend, which lines up with the pattern of lower lows and lower highs since February. A break below the rising daily support line, which will occur if tomorrow sees a failure to close in the green, suggests that the daily cycle upphase is coming to an end and should pave the way to a retest of the 9900 level or lower. A move above 10290, current resistance for the daily cycle upphase, should set up a test of 10360. If pulls can break that upper descending resistance line, they'll have a shot at turning this pattern into a bull wedge, but to do so will take a lot of buying from here. Daily Nasdaq Chart The Nasdaq closed below the rising pennant support line, and unlike the Dow, its 1o-day stochastic left off with the suggestion of a bearish kiss. The descending upper resistance line from February wasn't even touched, and a rollover from this lower, weaker high would be very bearish indeed. Note that the close was also below the 50 day EMA, with the 22 day EMA next support just above 1950. Next support is at 1940, followed by 1920. A close above 1996 should see a test of upper descending resistance at 2015, which would have bears significantly antsier than they currently are, as that same bull-flag interpretation discussed above would be on the table above that level. Before the bell, it was announced that the ECB would leave its overnight rate unchanged as expected. The US Dollar Index had been strong overnight and remained so on the release the news, with US equity and bond futures negative approaching 8:30 and the release of key US economic data. The Q1 non-farm productivity revision came in above the 3.7% estimated at 3.8%, up from the 3.5% initially reported. Unit labor costs exceeded expectations of .5% annual rate, posting 8%. This indicates greater than expected inflationary pressures on US corporations. Initial jobless claims were also released at 8:30AM, with the seasonally-adjusted number of new claims down 6K to 339K, missing expectations of 335K for the week. The total number of workers receiving unemployment assistance rose 65K to 3M, which is a 5- week high. The week moving average of initial jobless claims rose by 4,250 to 341K, and the previous week's reading was revised up by 1K to 345K. Bonds spiked lower on the release of the productivity numbers, but bounced immediately when the disappointing employment data hit the wires moments later. The productivity data reflected greater than expected inflation, but also an impressive worker- output-per-hour reading that shows the fastest productivity gains in over 30 years. Whether this is the result of unprecedented outsourcing of jobs or a genuine increase in domestic output-per- hour is a key interpretive question, but for the moment the persistence of US unemployment remains an important fly on the recovery's wedding cake. The record indulgence in debt at all levels of North American society sponsored by the Fed's reflationary / stimulative policies is less tenable if workers are unable to grow their salaries at a rate sufficient to keep ahead of broader price inflation. On that topic, oil was once again a dominant topic in the headlines. It was reported in the early morning that Iraq's oil minister stated that his goal is to reach 2 million bpd production for export and overall output of 2.8 million bpd this year. Just after the bell, Qatari Oil Minister Abdullah al- Attiyah announced that OPEC had agreed to increase oil output by 2 million bpd immediately, with an additional 500,000 bpd increase to follow in August. Oil futures rose on the news, which was less of an increase than anticipated by traders. As Reuters reported, "This is bullish," said Nauman Barakat of brokers Refco in New York. "Forget the promise of another 500,000, this is just plain two million. The market was convinced it would get 2.5 million so this could wave a red flag to the bulls." From OPEC's most recent press release today: Having reviewed market developments since its 130th Meeting, held on 31 March 2004, as well as the supply/demand outlook, the Conference noted with concern that, as a result of several factors, prices have continued to escalate, despite the efforts by OPEC Member Countries to meet market requirements. These factors are mainly the robust growth in demand in the USA and China, which had not been fully anticipated; geopolitical tensions; and refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications. Combined, these factors have led to unwarranted fear of a possible future supply shortage of crude oil, which has, in turn, resulted in increased speculation in the futures markets with substantial upward pressure on crude oil prices. Given current high and volatile prices and prevailing concerns regarding supply security, and in order to ensure continued, robust, global economic growth, especially in the economies of fellow Developing Countries, the Conference decided to increase the OPEC production ceiling (excluding Iraq) to 25.5 mb/d, with effect from 1 July 2004, and to 26 mb/d, with effect from 1 August 2004, in order to ensure adequate supply and give a clear signal of OPEC’s commitment to market stability and to maintaining prices at acceptable levels to both producers and consumers. The Conference also decided to convene an Extraordinary Meeting in Vienna, Austria, on 21 July 2004 to review market developments. Shortly following that release, it was announced that the United Workers Union of Venezuela oil workers had voted to commence a general strike at all industrial installations of the state-owned Ecopetrol to commence on June 22, 2004. I was unable to determine the amount of oil that such could involve. The Department of Energy reported crude oil stocks up 2.8M barrels for the week ended May 28. Gasoline supplies rose 1.3M barrels and refineries ran at 94.9% capacity. Distillate inventories rose by 200,000 barrels, and U.S. natural gas stocks rose by 87 bcf to 1.564 trillion cubic feet. The American Petroleum Institute delayed its data today, citing technical difficulties, but later announced an increase in crude stocks by 860,000 barrels and in distillate inventories 1.4M barrels. For the day, crude oil futures finished lower by 1.88% at 39.21. At 10AM, the Commerce Department released the April factory report, with factory orders falling 1.7% following March's 5% gain, the steepest decline since April 2003. Expectations were for a drop of 1.2%. Durable goods orders were revised lower to a 3.2% drop rom the previously reported 2.9%, the largest drop since September 2002. Non-durables were unchanged. The May non- manufacturing index dropped to 65.2%, missing expectations of 66.3% following the record 68.4% April reading. Readings over 50 are said to indicate expansion overall. President Bush announced that CIA director George Tenet will resign in July for personal reasons, praising his "superb" job. There was speculation that the move was somehow related to the President's meeting with private counsel yesterday and the ongoing "Wilsongate" affair, but overall reaction to the news was muted. In corporate news. there was a slew of May updates from retailers. Some highlights include Sears, Roebuck (S) reporting that May domestic same-store sales fell 3.7% y-o-y and total sales fell 4.7% to $2.08B. WMT reported a 5.9% y-o-y increase in same-store sales, led by its Sam's Club chain, with total sales up 13% to $21.43B. Costco (COST) reported a 16% y-o-y same-store increase, with total sales for the month rising 19% to $3.8B. May Department Stores (MAY) reported same-store lower by 3.8% from May 2003, with total sales down 2.7% to $978M. Kohl's (KSS) reported same-store sales higher by 5% y-o-y and total sales higher by 20% to $815.8M. Nordstrom (JWM), pronounced "Nahdstram" in the Commonwealth of Massachusetts, reported May same-store sales up 9.4% from May 2003, and total sales higher by 12% to $499M. Gap (GPS) reported a 6% same-store increase and net sales of $1.2B for May. The RLX closed lower by .47% at 403.64. After the bell, INTC gave its mid-quarter update, raising its Q2 revenue target to $8B - $8.2B and upping its estimate for gross margins to 60%-61%. Analysts had been expecting revenue of $7.98B, and the upside surprise combined with the lack of material news helped gap INTC to a spike high of 28.40 on the news, following which price settled into a range just below 28 as of this writing. The company cited strength in demand for communications products and said that demand for microprocessors, chipsets and motherboards is consistent with previous expectations. For tomorrow, we await the May employment report, including nonfarm payrolls (est. +225K), the unemployment rate (est. 5.6%), hourly earnings (est. .2%) and the average workweek (est. 33.8). I noted in the Futures Wrap that bonds diverged to the upside today, failing to fall despite the strong showing from the US Dollar Index. I would take that divergence to indicate the market's expectation for a downside surprise in tomorrow's 8:30AM report, but we'll find out soon enough. I would expect a terrible report to drop the US Dollar Index and rally bonds, equities and metals, while a strong report should do the reverse. An unexciting report would likely leave the market to its own devices, which here looks like a trend of a strong dollar and weaker equities. Tomorrow will help complete the picture. *************** 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_060304_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 **************** Traders Brace for Jobs Report - J. Brown Thursday proved to be a busy day. Action was volatile in the oil sector with crude rocking back and forth over the $40 level but in the end oil slipped lower. OPEC did approve a production hike but the general consensus was the 2 million barrel hike merely legitimized what cartel members were already pumping. Investors grew exceedingly cautious over Intel's mid-quarter update after the bell with the SOX semiconductor index leading the NASDAQ lower. Fortunately Intel (INTC) offered positive news and guided revenues to the upper end of their previous guidance. This has the tech sector poised for a rebound tomorrow if the jobs number doesn't disappoint. Tomorrow is all about the jobs number. As long as it's not too hot or too cold we should be good. If the number comes in too hot then investors will worry that the Fed may have to hike rates faster than expected and further impact the economic recovery. Overall the market slipped in a broad sell off as traders decided to take some money off the table ahead of Intel's announcement and the jobs report. Every sector slipped lower with the heaviest losses in technology and airlines. It is noteworthy that the Dow Transports may have turned in a technical bearish reversal with today's decline erasing yesterday's strong gain. The hardware sector also took it on the chin with a big drop after several days of sideways action. Declining stocks outnumbered advancers 3-to-1 on the NYSE and almost 3-to-1 on the NASDAQ. Down volume swamped up volume by more than 4-to-1 on the NSYE and more than 3-to-1 on the NASDAQ. Stepping back and looking at the technical picture on many of the major indices it would appear that we're setting up for a roll over under resistance. This just happens to coincide with an upturn in the volatility indices. If the jobs number doesn't excite then next week could be a tough one. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8861 Current : 10195 Moving Averages: (Simple) 10-dma: 10114 50-dma: 10253 200-dma: 10077 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1116 Moving Averages: (Simple) 10-dma: 1111 50-dma: 1117 200-dma: 1087 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1445 Moving Averages: (Simple) 10-dma: 1442 50-dma: 1442 200-dma: 1428 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 17.03 +0.95 CBOE Mkt Volatility old VIX (VXO) = 17.34 +1.10 Nasdaq Volatility Index (VXN) = 23.93 +1.32 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.13 518,239 585,165 Equity Only 1.01 407,717 409,788 OEX 2.60 12,636 32,850 QQQ 2.36 60,151 142,234 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 64.8 + 1 Bear Confirmed NASDAQ-100 38.0 + 0 BULL ALERT Dow Indust. 66.7 + 0 Bear Confirmed S&P 500 61.6 + 1 Bear Confirmed S&P 100 61.0 + 1 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: 1.11 10-dma: 0.94 21-dma: 1.02 55-dma: 1.07 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 725 846 Decliners 2109 2170 New Highs 57 82 New Lows 24 24 Up Volume 283M 337M Down Vol. 1210M 1140M Total Vol. 1504M 1497M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/25/04 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 Not much movement from the commercial traders. It looks like they shifted a handful of money from shorts to longs. Conversely the small traders have rotated some money from longs to shorts. Commercials Long Short Net % Of OI 05/04/04 397,964 417,175 (19,211) (2.4%) 05/11/04 401,365 421,672 (20,307) (2.5%) 05/18/04 394,352 423,258 (28,906) (3.5%) 05/25/04 400,713 420,764 (20,051) (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 05/04/04 137,112 80,201 56,911 21.6% 05/11/04 135,534 76,987 58,547 27.5% 05/18/04 139,647 74,597 65,050 30.4% 05/25/04 136,086 79,060 57,026 26.5% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 There was a big drop in longs by the commercial traders but it was coupled with a significant drop in shorts too. They remain net bullish on the S&P 500. Small traders have grown net bearish after last week's bullish reading. Commercials Long Short Net % Of OI 05/04/04 316,840 370,781 (53,941) ( 7.8%) 05/11/04 378,696 362,887 15,809 2.1% 05/18/04 390,484 357,157 33,327 4.5% 05/25/04 353,722 336,406 17,316 2.5% 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 05/04/04 119,308 74,407 44,901 23.2% 05/11/04 101,199 94,408 6,791 3.5% 05/18/04 62,216 87,269 25,053 16.8% 05/25/04 91,515 100,759 ( 9,244) ( 4.8%) 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 have upped their long positions and remain net bullish on the NDX. Small traders have likewise upped their short positions and remain net bearish. Commercials Long Short Net % of OI 04/27/04 54,196 33,948 20,248 23.0% 05/04/04 56,931 35,209 21,722 23.6% 05/18/04 58,376 37,528 20,848 21.8% 05/25/04 59,891 37,630 22,261 22.8% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 22,261 - 05/25/04 Small Traders Long Short Net % of OI 05/04/04 10,247 24,764 (14,517) (41.5%) 05/11/04 9,716 21,072 (11,356) (36.9%) 05/18/04 9,843 18,935 ( 9,092) (31.6%) 05/25/04 10,184 20,653 (10,469) (33.9%) 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 are adding to their short positions while small traders are adding to their longs, which is generally par for the course. Guess who is right more often? Yup, the commercial traders. Commercials Long Short Net % of OI 05/04/04 24,296 22,181 2,115 4.6% 05/11/04 22,614 21,507 1,107 2.5% 05/18/04 22,257 22,444 ( 187) (0.4%) 05/25/04 23,578 24,632 (1,045) (2.2%) 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 05/04/04 6,262 8,155 (1,893) ( 9.2%) 05/11/04 7,009 7,640 ( 631) ( 4.3%) 05/18/04 9,098 6,591 2,507 16.0% 05/25/04 9,623 6,614 3,009 18.5% 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 06-03-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: LXK, SLAB Dropped Puts: CAKE Call Play Updates: AET, BCR, DGX, IMCL, QCOM, ZMH, AIG, BA, ERTS, JNJ New Calls Plays: None Put Play Updates: None New Put Plays: GS **************** 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: ***** Lexmark Intl. - LXK - close: 90.59 change: -1.71 stop: 91.70 We knew we were skating on thin ice with our LXK play when the stock just couldn't man age to pull itself away from the 50-dma. Last week's rebound and rally above $95 should have generated some follow-through if there was any to be had, and this week we've seen the consequences of that lack of follow-through. LXK came down to fractionally break the 50-dma yesterday, but today's breakdown really seals the deal, with the entire day's action below that important average and more importantly, LXK ending the day below our stop. Positions not stopped out today should be exited into any rebound on Friday. Picked on May 13th at $94.03 Change since picked: -3.44 Earnings Date 4/19/04 (confirmed) Average Daily Volume = 1.15 mln Chart = --- Silicon Labs. - SLAB - close: 48.28 change: -1.75 stop: 48.50 Knowing that it was a risky play right from the start with price bumping into the PnF bearish resistance line, we wisely suggested that breakout entries should not be considered. Our desire was to nab an entry on a rebound from the $50 area, which sadly was never delivered. Certainly yesterday's dip to the $50 level may have looked marginally appealing, but not with the lack of an afternoon rebound. Sure enough, the selling frenzy continued today, driving the stock back under the 200-dma and our $48.50 stop. We really never got an opportunity to play on this one, but clearly that is a good thing, as we shift SLAB to the drop list tonight. Picked on May 30th at $52.19 Change since picked: -3.91 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.16 mln Chart = PUTS: ***** Cheesecake Factory - CAKE - cls: 39.82 chng: +1.07 stp: 40.75 We've been more than patient with our CAKE play over the past couple weeks, letting it consolidate ahead of the next downward leg. But we were starting to get concerned with the way the intraday highs and lows were moving higher. That mild trepidation turned to conviction today as the stock gapped lower and then rallied strongly until topping out just over the $40 level. Today's candle engulfed the past 5 sessions, did so on the strongest volume of the past 3 weeks and looks an awful lot like a key reversal day. So while our stop hasn't quite been reached, we're going to advocate an early exit. Any weakness tomorrow should be used as an opportunity for a more favorable exit. Picked on May 13th at $40.09 Change since picked: -0.27 Earnings Date 4/20/04 (confirmed) Average Daily Volume = 639 K 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 ******************** Aetna Inc - AET - close: 84.88 change: +2.52 stop: 80.00*new* A number of healthcare and insurance related issues out performed the market's malaise on Thursday and AET was leading the pack. Shares gapped higher this morning and broke through its 40-dma but remained under technical resistance at its 50-dma and the $85.00 level. We're unsure what really sparked the rally but volume was double the normal on Thursday. The company did announce a new weight management program at the National Summit on Obesity today. AET also declared that it would be presenting at the Goldman Sachs Global Healthcare Conference on June 10th. We are going to raise our stop loss from $78 to $80.00. Picked on May 30 at $ 81.20 Change since picked: + 3.68 Earnings Date 04/29/04 (confirmed) Average Daily Volume: 1.5 million Chart = --- Bard C R - BCR - close: 57.51 chg: +0.36 stop: 54.25 BCR continues to demonstrate its relative strength against the market's general weakness today. There has been no post-split depression that is common among stocks that have strong pre-split ramp up. BCR's technicals remain bullish but its stochastics are looking overbought. The stock might need a breather. If you're considering new positions look for a dip back to the simple 10- dma near $56. Picked on May 20 at $ 55.00 (post split) Change since picked: + 2.51 Earnings Date 04/20/04 (confirmed) Average Daily Volume: 386 thousand Chart = --- Quest Diagnostic - DGX - cls: 88.08 chg: +0.23 stop: 83.75*new* In spite of all the movement the markets have churned sideways the last two sessions and DGX has followed along. Actually, that's not entirely true. DGX has been following its upward trend and volume has been stronger than normal but the gains have been muted. We suspect that DGX is due for a dip and traders might want to look for a pull back toward the $87.00 level as an entry point. Of course the market direction tomorrow depends on how the street interprets the jobs data. We're going to inch up our stop loss from $83.45 to $83.75. Picked on June 01 at $ 87.70 Change since picked: + 0.38 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 603 thousand Chart = --- Imclone Systems - IMCL - close: 72.97 chg: -1.88 stop: 72.00 Red alert! IMCL may have topped out at $77.25 during the last few sessions and they have broken its short-term rising trendline of support as well as its simple 10-dma. Contributing to the decline on Thursday was news that a large owner of IMCL stock sold nearly 900K shares between $74-75 a share. The owner's name is Carl Icahn who still own 4.2 million shares of IMCL. Unfortunately for us the SEC filing of his transactions also included notes that he sold calls and bought puts - a strategy that would certainly indicate he expects the price to drop. Investors are probably hitting the "sell" button wondering, "Does Carl know something we don't know?" The recent drop has produced a fresh P&F sell signal. It might be a good idea to exit IMCL promptly but with our stop loss at $72.00 we're going to stick it out one more session and see where it closes on Friday. Should IMCL tread water tomorrow we might get some good news out of the analyst meeting this Sunday. Picked on May 26 at $ 74.05 Change since picked: - 1.08 Earnings Date 04/27/04 (confirmed) Average Daily Volume: 2.9 million Chart = --- QUALCOMM - QCOM - close: 67.64 chg: -0.34 stop: 64.50*new* Hmm... from the looks of it QCOM is starting to tire a bit. The stock continues to drift higher in its narrow rising channel but its stochastics indicator is overbought and hinting at a dip. Don't be surprised to see QCOM dip back toward its 10-dma near $66.65. Such a move might be an entry point for new positions but we'd look for signs of a bounce first. In the meantime we're going to inch up our stop loss a bit from $64.00 to $64.50. Picked on May 24 at $ 66.01 Change since picked: + 1.63 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 9.6 million Chart = --- Zimmer Holdings - ZMH - close: 86.38 chg: -0.73 stop: 83.00 Well so far so good. ZMH finally "woke up" and started moving yesterday with a run toward the $88.00 level before some last minute profit taking. Today's decline was mild and in tune with the general market drift lower today. Should ZMH continue to slip look for a bounce from its 10-dma or the $85.00 level. Such a move might be a good place to consider new entry points. Yesterday we raised our stop loss to $83.00 and we're going to leave it unchanged. Picked on May 27 at $ 85.20 Change since picked: + 1.18 Earnings Date 04/26/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- American Int'l Grp. - AIG - cls: 73.45 chng: -0.41 stp: 70.50*new* Continuing its halting bullish move, AIG pushed over the $74 level yesterday, helped along by the moderate broad market advance. After being unable to hold that level into the close though, the bulls took another run at it this morning, but with the broad market unable to hold its ground, the stock deteriorated throughout the day, ending just above last week's resistance. While price action still looks favorable, we can see daily oscillators tipping over in overbought territory and we should expect another dip to test support before the stock is able to make another strong upward push. Look for new entries on a dip and rebound from the $72 area, which is reinforced by the 10-dma ($72.42), 50-dma ($72.44) and 100-dma ($72.19). Although momentum entries above today's high may work, remember that we have more resistance near $75.50, which is why our preference is for pullback entries. At this point in the play, we really shouldn't see a break below $71, which is supported by the 20-dma ($71.19). Raise stops to $70.50. Picked on May 25th at $72.00 Change since picked: +1.45 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 5.38 mln Chart = --- The Boeing Company - BA - cls: 46.10 chng: -0.65 stop: 44.00*new* What started out as a very bullish session for shares of BA yesterday, ended only moderately positive. After plunging back from the opening gap, the stock found support near $46 and then rallied into the close. But with the overall market acting poorly on Thursday, BA headed back for another test of $46, ending the day just above that level. the bullish trend is still very much intact and we're still looking for a rally up towards the $50 level, but as we've been saying, buying the breakouts does not appear to be the most prudent strategy, as demonstrated by what happened following yesterday's move through resistance. We'll continue to focus on pullback entries, first at $46 and then down at stronger support at $45. Following the breakout above $46, we're cinching our stop up to $44, just under the top of the late-May gap. Picked on May 27th at $46.20 Change since picked: -0.10 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 2.95 mln Chart = --- Electronic Arts - ERTS - cls: 51.34 chng: +0.77 stop: 48.00*new* Continuing its recent pattern, ERTS is having a hard time pushing through the 50-dma. Yesterday's move was simple, with the stock opening near the 50-dma and then heading south until finding support just over $50. Today's action actually looked pretty encouraging with ERTS well above the 50-dma at midday and looking like it was ready for a breakout through $52. But the sellers appeared in the afternoon, pressing the stock down to close just fractionally under the 50-dma again. The good news is that the stock managed a new recent closing high, while the bad news is that resistance is still holding. With today's price action as our evidence, clearly breakout entries are not yet the right strategy. We need to wait for that breakout over the $53 level (and the accompanying PnF Buy signal) before aggressively buying into strength. We'll continue to advocate pullback entries near the $50 level in anticipation of the breakout through resistance. Note that we've tightened our stop to $48 this afternoon, which is just below both the rising trendline ($48.20) and the 200-dma ($48.03). Picked on May 18th at $49.60 Change since picked: +1.74 Earnings Date 4/29/04 (confirmed) Average Daily Volume = 3.93 mln Chart = --- Johnson & Johnson - JNJ - cls: 56.59 chng: +0.39 stop: 54.00 Can we classify that as a breakout? You bet we can! It wasn't clear whether that was the case yesterday as JNJ fell back from intraday resistance, but with today's move over $56.50, the stock is definitely in breakout territory. The validity of the move is reinforced by the expanding volume, which is in stark contrast to the lackluster action in the broad market. Hopefully you took advantage of the dip near the $54 level to get your entry into the play, because that is probably the best entry point we're going to see. It is possible to consider breakout entries above today's high, but that isn't our choice with next resistance waiting at $58. Look at the last two daily candles and you can see another reason why momentum entries just aren't the right choice with JNJ -- in each of the past two strong sessions, the stock came back substantially from its intraday high by the close. We knew JNJ would be a slow-mover, but this one has been even slower than we expected. Conservative traders might harvest some gains near the $58 level as price begins to stall, while those with a more aggressive style can hold on for a rally all the way to our $60 target. Picked on May 9th at $55.30 Change since picked: +1.29 Earnings Date 4/13/04 (confirmed) Average Daily Volume = 7.35 mln Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* None ************* NEW PUT PLAYS ************* Goldman Sachs Grp. - GS - close: 90.55 change: -1.22 stop: 94.50 Company Description: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net- worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why we like it: After losing more than $17 from its early April highs, GS was due for a rebound or at the very least some healthy consolidation. We've been patiently waiting for that consolidation to run its course and provide us an appealing opportunity to get onboard before the slide begins anew. The failed bounce near $94 over the past week certainly would have worked for aggressive traders, but the key issue is the $90 support level. Looking at the PnF chart helps to show why we've been cautious about adding this bearish play, as price has been consolidating right on top of the bullish support line. But now it looks like price is actually going to break down and that breakdown should afford a solid entry for momentum players. Note also that a break below $90 will issue another PnF Sell signal, reinforcing the current bearish vertical count of $74. For traders that don't want to enter on weakness, they'll need to keep their eyes open for a subsequent rebound and failure near the $92 level, which should be strong resistance in its own right. But it will be that much stronger with the 10-dma ($92.51) and 20-dma ($92.87) bearing down. We'll use an entry trigger at $90 (just under the recent lows) and then suggest taking the breakdown or failed-rebound entries as risk tolerance allows. Initially we can expect decent support to materialize near the $85 level and that should work for conservative exits from the play. But our official target will be for a move to between $82-83, in the vicinity of the lows from last June-July. Initial stops will be placed at $94.50 to allow for some movement before the breakdown. Once GS takes out the $90 level on a closing basis though, we'll be looking to tighten that stop. Suggested Options: Aggressive short-term traders will want to use the June 90 Put. Those with a more conservative approach will want to use the July 90 put, as it will provide greater insulation against time decay. Our preferred option is the July 90 strike, as it is just out of the money and should provide ample time for the play to move in our favor. BUY PUT JUN-90 GS -RR OI=6385 last traded @ $1.60 BUY PUT JUL-90*GS -SR OI=6338 last traded @ $2.85 BUY PUT JUL-85 GS -SQ OI=4115 last traded @ $1.30 Annotated Chart of GS: Picked on June 3rd at $90.55 Change since picked: +0.00 Earnings Date 3/23/04 (confirmed) Average Daily Volume = 3.75 mln 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!! 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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 06-03-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Chocolate, Copper and more Option Spreads: I Guessed Right! Help!!! Traders Corner: Triangle patterns and price objectives Traders Corner: Setting The Stage ********** WATCH LIST ********** Chocolate, Copper and more ___________________________________________________________________ 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. ___________________________________________________________________ Hershey Foods - HSY - close: 89.49 change: -0.13 WHAT TO WATCH: The six-week old consolidation in shares of HSY may be ending soon. The stock made another run at resistance near $90.25-90.50 and failed but its technicals are hinting at a bullish turn higher. We would watch HSY for a breakout over $90.50 and target a run toward $95.00. Chart= --- Phelps Dodge - PD - close: 65.34 change: -1.59 WHAT TO WATCH: Phelps Dodge continues to struggle with technical resistance at its 40-dma and has failed to breakout above this descending pressure for the last week. Today's 2.37% decline happens to be a breakdown below its simple 10 and 200-dma's with volume coming in stronger than average. Its P&F chart is bullish but we might speculate on a bearish position if PD breaks down under $65.00 and target a move toward $60.00. This would coincide with the bearish development in its MACD indicator. Chart= --- AmerisourceBergen - ABC - close: 60.98 change: -0.08 WHAT TO WATCH: ABC has rebounded strongly in the last two weeks and is poised to breakout over resistance at $62.00. Such a breakout would also be a move through P&F chart resistance near $61-62. Currently ABC's P&F chart points to an $80 price target. We would look for a move toward $64-66. If you prefer to buy the dip, look for a bounce from $60.00. Chart= --- Texas Instruments - TXN - close: 24.34 change: -0.84 WHAT TO WATCH: We mentioned TXN in the MarketMonitor this afternoon as shares have fallen strongly the last two sessions. Investors were being cautious ahead of Intel's mid-quarter update after the bell tonight and TXN was move perilously close to support at $24.00 on big volume. Now that Intel has essentially raised its guidance to the high end of previous forecasts we might see TXN rebound strongly in spite its bearish technical picture. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- MRK $47.98 +0.15 - MRK broke out above its simple 200-dma a few days ago but it is still struggling with resistance at $48.50. WMT $56.60 +0.25 - WMT broke out above its 50, 100 and 200-dma's intraday today but couldn't hold it and rolled over into the afternoon. The company's annual shareholder meeting is tomorrow. ************************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 ************************ I Guessed Right! Help!!! By Mike Parnos, Investing With Attitude Every once in a while, when the planets are aligned just right – about as often as an eclipse – a directional trader buys a stock and guesses right on the direction. The problems are only beginning. They’re good problems, but problems none the same. There you sit, with a potential pocketful of cash. You have a pretty good knowledge of options and what they can do. After all, you’ve been a CPTI student for a while. But you find yourself at a crossroads. You know the right thing to do, but you can’t bring yourself to do it. You need some positive reinforcement, or, at the very least, some self-discipline. Options are a marvelous invention. They’re better than penicillin. They can often cure what ails you by providing the flexibility to construct a strategy to accommodate almost every conceivable scenario. So, read on and see how we can conjure a compromise – and possible solution – to a situation that otherwise may not have a solution. ____________________________________________________________ Mike, For almost the first time ever (lol) I actually picked a good stock! EYET is up $10 this week. Can we talk about a good plan to own long-term. You talked about a good directional play in an option recently, how about a stock. Unlike the option, I want to own this long term, but protect the downside. What are your “hypothetical” suggestions in a situation like this? Different than owning the option, because a stock has no expiration. I've been using a trailing stop, but am afraid volatility is going to take me out of the stock. Puts are expensive. I’m actually considering selling the December puts because of their high premium. –Mark Hi Mark, You already have a nice profit (so far, on paper). It’s true. The volatility will likely take you out of the position if you have a reasonable trailing stop. You say the puts are expensive? So you don’t want to pay for the safety that you say you want. You can't have the best of both worlds. Protection comes with a price tag – the price of the protective puts. You can choose the deductible (strike price), but you have to measure the potential pain vs. gain. The Cost Of Insurance If you bought the December $40 puts, it would cost you about $6.50. With about seven months left to December expiration, that would mean the protection would cost about $.93 per month with a $4.32 deductible (the difference between the current $44.32 stock price and the short $40 put strike price). True, it’s a little pricey, but you would be protected for seven months and your upside profit potential would be unlimited. However, when you buy insurance, if you have a pre-existing condition, the rates are adjusted accordingly. Another Option EYET (at this writing) is trading at $44.32 Here’s the PUT option chain for EYET: Month Strike Bid Ask Sept 25 .70 .95 Sept 30 1.60 1.85 Sept 35 2.80 3.20 Sept 40 4.50 4,90 Sept 45 7.20 7.70 Dec. 25 1.15 1.40 Dec. 30 2.10 2.50 Dec. 35 3.60 4.00 Dec. 40 6.00 6.50 Dec. 45 8.30 8.80 Here's an idea -- hypothetical of course. 1. Sell the stock and take your profits. (You knew I was going to say that, didn’t you?) 2. Establish a bull put spread program. Begin by selling the Sept. $45 put and buy the Sept. $25 put for a credit of $6.35 (you may be able to negotiate a slightly higher premium by shaving a little from each bid/ask). What Has This Accomplished? a) you locked in your profits on the stock, and; b) if EYET continues up, you will have pocketed another $5.45 of profit. If it goes down, then the worst that can happen is that you buy shares of EYET for a discount net cost of $38.65. Since you want to own EYET for the long term anyway, this could be viewed as a very attractive entry price. With the proceeds of the sale of the stock, you should easily have funds/securities in your account to handle the maintenance requirement. September or December Options? If you look at the above option chain, you’ll see that the December $45/$25 bull put spread would bring in about $6.90 in premium. The same spread for September brings in $6.35. You would get an extra $.55. But, that’s not much for three months of time. It’s best to stay with the September $45/$25 spread. Then, in September, you can establish a new bull put spread position with the same, or different, strike prices – depending on where EYET is trading at the time. What If . . . What if EYET close at $55 by September expiration? The entire bull put spread will expire worthless and you will have profited by the $6.35 you took in as premium. You may not have profited the full $10.68, but you sacrificed none of your profits (no deductible) when you sold the stock. Note that the result is the same if EYET closes at $45.10. In this case, you still keep the $6.35 although the stock appreciated by less than $1.00. What if EYET closes at $41 at September expiration? If no adjustments are made to the position prior to expiration, you would be assigned the shares of EYET at $45. Your actual cost bases on these new shares is only $38.65. In Summary You want to participate in future upward movement of the stock, but you want to preserve your current profits. By using the bull put spread as described above, you put yourself in a position to profit – even if the stock goes up, stays the same, or even goes down a little. A solution that makes everyone happy -- it’s a beautiful thing . . . NEW JUNE POSITIONS June Position #1 – SPX Iron Condor – 1116.64 We sold 5 SPX June 1150 calls and bought 5 SPX June 1170 calls for a credit of $1.20 (x 5 contracts = $600). Then we sold 7 SPX June 1025 puts and bought 7 SPX June 1010 puts for a credit: $1.00 (x 7 contracts = $700). Our total net credit is $1,300. Maintenance: $10,500. Maximum profit range of 1025 to 1150. Potential profit is $1,300. June Position #2 – BBH Iron Condor - $147.64 We sold 10 BBH $155 calls and bought 10 BBH $165 calls for a credit of $.70 (x 10 contracts = $700). Then we sold 10 BBH $135 puts and bought 10 BBH $125 puts for a credit: $.90 (x 10 contracts = $900). Our total net credit is $1,550. Maintenance: $10,000. Maximum profit range of $135 to $155. Potential profit: $1,550. June Position #3 – RUT – Iron Condor – 562.44 We sold 10 RUT 590 calls and bought 10 RUT 600 calls for a credit of $.80 (x 10 contracts = $800). Then, we sold 10 RUT 490 puts and bought 10 RUT 480 puts for a credit: $1.00 (x 10 contracts = $1,000). Our total net credit is $1,800. Maintenance $10,000. Maximum profit range of 490 to 590. Potential profit: $1,800. June Position #4 – MNX – Iron Condor - $144.52 Sold 10 MNX 147.50 calls and bought 10 MNX 152.50 calls for a credit: $.70 (x 10 contracts = $700). Then sold 10 MNX $132.50 puts and bought 10 MNX $127.50 puts for a credit: $.60 (x 10 contracts = $600). Our total net credit of $1,300. Maintenance: $10,000. Maximum profit range of $132.50 to $147.50. Profit potential: $1,300. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $35.98 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. We rolled out the May $34 calls to the June $34 calls for a credit of $.60 and then the May $37 puts to the June $37 puts for credit of $.15. The total net credit was $.75 ($750). Our new total credit: $9,600. Note: We haven’t included the proceeds from this long term QQQ ITM Strangle in our profit calculations. It’s a bonus! And it’s a great cash flow generating strategy. ZERO-PLUS Strategy. OEX – 543.92 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. Our current position: We own 3 OEX December 2006 540 calls @ $81 (x 300 = $24,300). Our cash position as of May expiration is $4,390 plus unused $1,700 = $6,090. June Zero Plus Positions. A June OEX bull put spread 515/505, taking in a credit of $1.15 x 5 contracts = $575. We also sold the June 560 call taking in a credit of $1.20 x 5 contracts = $600. If all goes well, we’ll be able to add an additional $1,175 to our cash position at June expiration. OSX Calendar Spread Plus - $97.37 Originally bought 10 OSX June $115 calls and sold 10 OSX April $115 calls 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, we were a “plus” $.75 ($750). The May $115 call expired worthless. For June, on Thursday, we sold the June $105 call for $.70 against the June $115 call we still own. We closed our May bull put spread for a loss of $3.25 and rolled it out to the June $95/$85 bull put spread for a credit of $2.25. We had to trade 15 contracts of the bull put spread to cover what we spent to close the May $100/$90 bull put spread. We now have a positive $1.45 ($1450) -- $750 from before and another $700 from selling the $105 June call. We bought ourselves another month for the OSX to behave. We’re scrambling and I’ll be glad to be out of this damn trade with my butt still attached. That’ll teach me to try something directional. Never fear, we shall persevere. 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 ************** Triangle patterns and price objectives By Leigh Stevens lstevens@OptionInvestor.com As some of the indexes appeared to hit bottoms in mid-May and trended higher, there were some "triangle" patterns that formed on hourly charts. As prices broke out above the top of these triangles it could be anticipated not only that there would be a good-sized move higher but also what might be some price objectives for the resulting moves. These patterns accompanied classic signs of an oversold condition in terms of high bearish sentiment and lots of put activity, plus low readings on indicators like RSI and Stochastics. TRIANGLE FORMATIONS - A frequent continuation (the prior trend continues after it completes) pattern is the triangle. A triangle formation is generally bullish in an uptrend and bearish in a downtrend. However, sometimes it is neither and simply shows that buying and selling has gotten in balance, causing a pattern of descending highs and ascending lows, with resulting up and down trendlines making a more or less symmetrical triangle such as is outlined below on the hourly chart of the Dow 30 (INDU) - The triangle forms most often as a pause in an up or down move and when prices start going sideways. A series of minor upswings and minor downswings trace out two trendlines the angles of which form a triangular pattern and these lines come together or converge over time. Each of the two opposing sides of the triangle should consist of at least 2-3 points made by highs and lows, the same as for any valid trendline. The shape of the trendline can vary but common to all types is that after prices get close (within 20-30%) of where the lines would touch, prices make a move or breakout above or below the top most of bottom most line. The third "side" of the triangle is assumed as the vertical distance between the initial high and low after which the sloping trendlines begin to form from the various highs and lows. This 3rd. line, closing the triangle, is imagined but not usually drawn. In the above chart it is the wider vertical line connecting the upper and lower trendlines. There are variations in the SHAPES of the triangles, within the context of all being 3-sided figures of course. The ones that have formed in some of the hourly Index charts are symmetrical patterns as the two opposing angles have approximately the same slope and are the most commonly seen triangle shape. There is a measuring implication for where prices might go after breaking out of the triangle: the height of the vertical line often equals a minimum distance that will be covered as measured from the apex of the triangle - that is, from the point where the two lines converge. Oh yes, there is a better "definition" given for the down-sloping line (more highs to use), if we look back to early-May, when prices started falling, as seen in the hourly Dow chart below that encompasses a full month. We draw the vertical line "A" after the first low is made and that is only known later on as further lows are made. The implication that I am working with here is that this current rally is capable of reaching 10,325 at a minimum based on what often happens when there is breakout move from a triangle like the one shown above. While the rally can go higher of course, or the rally may fail shy of this target, a target based on the triangle it gives an idea of a possible price projection once there was an initial rally above the converging lines. In the Nasdaq Composite (COMP) chart below, a "minimum" price upside has already been met based on a measuring objective that is assumed from the triangle pattern outlined on its hourly chart below - The objective implied by the distance between the two sloping lines added to the point where the lines converge (the apex) is noted by the dashed horizontal line extending out from the top of vertical line "B". As with the case of the Dow chart I started with, distance "B" is equal to distance "A". This is not to assume that the rally won't carry still higher but it may also be the limit of the up swing for now. Some other factors can also be looked at here - the RSI (length: 21) indicator is trending lower while prices go sideways and is a bearish price/oscillator divergence. The 2000 area will tend to be a "natural" area of resistance based on it being an even 1000 increment. In technical analysis I emphasize looking at as many other key factors as possible, besides any given one. NOTE: My down-sloping trendline on the COMP hourly chart above goes through a couple of the hourly bars near the end of that trendline - an example of an "internal" trendline connected through the most number of highs (or lows), rather than only at the extreme ends of bar or candlestick lines. The bars that pop through a trendline are common where prices shoot up (or down) in the first hour or two of trading before settling back to within the dominant trendline. An internal trendline that connects the MOST number of points is also what I sometimes also call a "best fit" trendline. Going to show that trendline construction is a bit of an art, certainly not just science at least in the way that I find most useful. I learned the internal trendline term and technique from technical analyst and author Jack Schwager (Market Wizards) who used to say about trendlines, that he "didn't believe in trendlines, but did use 'internal trendlines' which do 'work' in defining support & resistance". Not surprisingly, the S&P 500 (SPX) has a similar triangle pattern on its hourly chart as the Dow - The upside objective implied by the prior triangle pattern is to 1132 in SPX. Since prices did break out above the line of prior hourly highs I would anticipate some further upside follow through, so take 1132 as a reasonable objective here. The S&P 100 (OEX) - A possible objective here, based on the triangle measuring rule of thumb, is to around 554. Time will tell on that. But, again, given that OEX broke out above a cluster of prior hourly highs, 554 is a reasonable target for an extension of this rally. However, if prices now start trading under those prior hourly highs at 546-547 I might exit OEX call positions if I had them - as an inability of prices to hold above prior highs would not be suggesting that the rally has the staying power to reach the implied 554 objective. Assuming I bought OEX calls when the Index achieved a decisive upside penetration of the down trendline or top of the triangle (e.g., at 538) I would still have a profitable trade. Absent an hourly close under 546, I would take as an objective 554. If this level is reached and the market was still very strong, I might sell half my position at least. I often find that targets implied by triangles achieve much of at least the first move in a new or renewed trend. Good Trading Success! using triangles ************** TRADERS CORNER ************** Setting The Stage by Mark Phillips mphillips@OptionInvestor.com As we've been discussing recently, the Housing sector appears ready for a major fall, but given the incredible resilience of the bulls in this area of the market over the past year, if we're going to try to ride the group down, we need to do so with an abundance of preparation and caution. As we discussed last week, when the tipping point occurs, it is not likely to be accompanied by weakness in the fundamentals of the stocks in the sector due to the fact that they all normally appear cheap by traditional valuation metrics. That means that if we're going to attempt a longer-term bearish play in the Housing sector, we'll have to justify it based on the technical picture. Last week, I laid out my own personal speculation of why and when it will make sense to look for the ripe technical setup, based on the way I expect the sector to perform AFTER the Fed begins the next rate hike cycle. But that is really just informed speculation, where I'm looking for the herd mentality to create a certain flow of capital for the next SEVERAL months after rates begin to rise. That first several months is just the setup that gives us what could be a very profitable move in some of these housing stocks as demand dries up in a hurry. Make no mistake --- The Housing market IS a bubble right now and it has been driven the most strongly by Easy Al's monetary policy, which (in the larger view) has created an immense edifice of debt (which I affectionately call the debt bubble). Rising interest rates are not going to be kind to either the multi-year bullish trend in real-estate (and concomitantly the rise in the price of the Housing stocks) or the holders of all that debt. The problem will be compounded if they've been foolish enough to listen to Mr. Greenspan and take on variable rate loans that have nowhere to go but up. Alright, enough of the background. Let's start going through the process of analysis, so we all know what to look for and what filters to apply when it is time to act. We should all be familiar with the framework of the technical setup that will precede actually taking a position in the sector, looking to capture that major move. First off, we'll want to see the overall Housing sector weakening relative to the broad market and then we'll look to pick off one or two of the weakest stocks in the sector. The typical tools we'll be using are relative strength charts between the Dow Jones Home Builders index ($DJUSHB) and the S&P 500 ($SPX), both on candle charts, as well as Point & Figure (PnF) charts. Then once we've identified the desired relative weakness, we'll turn our attention to some of the stocks in the sector, cherry-picking the weaklings, using the same relative strength studies. Finally, once we've identified the most favorable targets, we'll start looking for favorable entry points that also afford us desirable risk-reward ratios on the order of 1:2, 1:3 or even greater. So let's get started! First off, we'll start with a Relative Strength (RS) chart of the $DJUSHB index relative to the $SPX, from which it should be crystal clear that we're still early to the game. Weekly RS Chart of $DJUSHB vs. $SPX The 2-1/2 year rising channel shown on the chart above is a clear demonstration of the way Housing has been outperforming the broad market for quite some time. That channel actually began back in mid-2000, making it a 4-year bullish trend. Obviously, we'll need to be very careful about stepping in front of that behemoth! You'll note that I've shown the potential for bearish Stochastics divergence on the RS chart above (blue). I believe this is a case of looking too hard to see it. More importantly, even when it does set up with clean bearish divergence in the midst of a bullish trend, note that price doesn't react very much. I've highlighted two prior instances (red) where there was clear bearish divergence on the weekly RS chart, yet price action didn't go very far and certainly not far enough to violate the dominant bullish trend. The next step is to look at the same RS chart, but in a PnF format. The standard 1-point box size has offered several Sell signals over the past couple years, none of which has gone very far. So in order to filter out those spurious signals, I modified the scale to a 1.5-point box size, shown below. Note that there hasn't been a single Sell signal since the bullish romp commenced in early 2001. Point & Figure RS Chart of $DJUSHB vs. $SPX Now before you accuse me of just picking the scale that fits the point I want to make, let me admit that is true, up to a point. You see, we are going to be monitoring the PnF RS chart for a Sell signal as one of the necessary triggers to start looking for a trade entry. If we've got a scale that has provided several false Sell signals in the past, then how will we know when we get a new Sell signal that we can believe it? What I've done here is set the threshold of our box size just large enough to filter out those false signals, while still maintaining enough sensitivity to make sure we get a timely Sell signal. Make sense? One quick comment about scaling. You'll note that the correlation between the scale in our first chart and the scale in the PnF RS chart is a multiple of 100. Stockcharts.com conveniently turns the RS chart into a percentage scale. More importantly, what's the significance of the actual numbers? There is no significance, at least as it pertains to our study here. We can for all intents and purposes ignore the numbers except to use them as place holders or reference points. Now that we can see in the above charts that both views demonstrate a strongly bullish trend of the $DJUSHB relative to the broad market ($SPX), we should be looking for the point at which we would have the first indication of the trend weakening and then perhaps turning bearish. The most obvious would be a breakdown out of the channel shown on the candle chart, with resistance then manifesting itself at the bottom of the channel, which has for the past several years served as support. Ideally, that would mean a break below roughly the 0.4700 horizontal support shown below. Weekly RS Chart of $DJUSHB vs. $SPX - Sign of Weakness Now take a look up at the PnF chart again. I'm sorry, but I didn't have time to annotate it with the key points. But notice that it would take a print at the 46.50 box in order to generate a Sell signal, the first one in at least 3 years. To me, that lines up very nicely with the requisite break of the 0.4700 level on the candle chart just above. What we've done here is defined certain things that must happen before we can ever set the wheels in motion to play the downside in the Housing sector with a longer-term view. Of course, we must understand that these charts will not stand still in the months immediately before us. The trigger points may change, but the basic theme is still the same, we need the charts to tell us unequivocally that the $DJUSHB is losing strength relative to the $SPX. Obviously, there's a lot more work to be done, but I'm going to force you to think it through a bit and leave things hanging right here. What do YOU think is the next step? Do we have more research/analysis to do on the sector? Or is it time to start stacking up the individual Housing stocks against one another? It's not a trick question -- it's just a challenge for those of you with the inclination to try and figure it out for yourself. If you'd rather have me spell it out, I'm more than willing to do so, but we'll have to save that part of the discussion until next week. Have a great weekend! Mark ************************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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