The Option Investor Newsletter Thursday 06-17-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: One to Go Futures Markets: See Note Index Trader Wrap: Semiconductors weigh on tech, oil approaches $39 Market Sentiment: The Waiting Game Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-17-2004 High Low Volume Advance/Decline DJIA 10377.52 - 2.06 10390.01 10338.13 1.57 bln 1670/1108 NASDAQ 1983.67 - 14.56 1993.93 1976.25 1.46 bln 1199/1811 S&P 100 552.60 - 0.83 553.63 550.62 Totals 2869/2919 S&P 500 1132.60 - 1.51 1133.56 1126.88 RUS 2000 569.57 - 0.50 571.16 565.21 DJ TRANS 3059.99 + 0.75 3062.53 6032.32 VIX 15.15 + 0.36 15.58 15.00 VXO 15.06 + 0.40 15.97 14.87 VXN 21.33 + 0.94 21.75 20.77 Total Volume 3,321M Total UpVol 1,345M Total DnVol 1,908M 52wk Highs 214 52wk Lows 131 TRIN 1.38 PUT/CALL 0.79 ************************************************************ One to Go Linda Piazza One day remains in this option-expiration week. Only one more day of boredom remains before markets break out of their recently established consolidation patterns. At least, that's the hope many market watchers express. Muted reactions to economic numbers characterized Thursday's trading, with markets drifting down or up according to the latest release in a day punctuated by scattered releases. Only on the Nasdaq and some other tech-heavy indices did the drifts take the indices far from the flat-line levels. The Dow closed lower by 2.06 points or 0.02 percent, the Nasdaq by 14.56 points or 0.73 percent, the Russell 2000 by 0.50 points or 0.09 percent, and the S&P 500 by 1.53 points or 0.13 percent. Some hints of another boring day on the markets occurred pre- market. Futures showed little reaction to overnight news that might have been market moving only a week or two earlier. The day dawned with news of a car bombing in Iraq, with that bomb killing dozens and wounding more than 100. As the June 30 hand- off date approaches, violence escalates as had been anticipated, but the level of Thursday's carnage proved particularly disturbing. In addition, recent explosions have stopped oil exports from Iraq, requiring repairs of blasted pipelines in both the north and south of Iraq. Crude oil prices rose pre-market, with European and U.K. oil majors rising and crude-sensitive sectors such as airlines sinking. June 30 looms important for another reason, too, of course, with a two-day FOMC meeting concluding that day. Exacerbating the worries of market watchers during the pre-opening hours was a Swiss central bank decision to hike rates and further warnings by central bank members in England and other countries. In the U.K., May's retail sales rose a higher-than-expected 0.8 percent, increasing expectations for yet-another rate hike by the Bank of England. Economic numbers released in the U.S. before the market open fanned worries about the pace of rate hikes in the U.S. Our economic calendar included the release of initial claims and PPI at 8:30, May's leading indicators at 10:00, natural gas inventories at 10:30, and June's Philadelphia Fed number at noon, but it was PPI that garnered the most attention early in the day. PPI came in at a hotter-than-expected 0.8 percent higher due to soaring food and energy costs. Core PPI, excluding those costs, rose more than expected, too, to 0.3 percent against an expectation of a 0.2 percent rise. Crude goods rose 2.8 percent, with core crude goods falling 3.8 percent. May's wholesale prices climbed 5 percent, indicating that producers have been able to increase prices to offset costs. Intermediate goods prices climbed 1.1 percent and 0.9 percent, excluding food and energy. Gasoline prices contributed to the higher PPI. While one article trumpeted the news that "Wholesale Inflation Leaps on Higher Producer Prices," raising the specter of Greenspan and company ratcheting up rates at a faster-than-wanted pace, other commentators calmly noted that PPI tends to be more volatile than CPI. Markets also had to deal with the pre-market release of the jobless claims number, balancing that stronger-than-expected PPI against good news in the employment sector. With last week's claims number rising to a seven-week high and the prior week's revised upward, attention focused on that claims number. The expectation for the four-week average ranged from 330K-346K, depending on the source. The actual number fell somewhere near the middle of that range, at 336,000. Articles mentioned that increased demand encouraged U.S. companies to hold on to workers. First-time claims fell 15,000 from a revised-lower 351,000 (revised from 352,000). The four-week average dropped to 343,250, easing away from that 350,000 level that many consider the benchmark. Some point to the federal holiday last week for President Reagan's funeral as a major reason for the decrease in claims, the second week in a row that has contained a federal holiday. Next week, much attention should focus on the claims number. Before the release of the 8:30 numbers, S&P futures had been holding steady and slightly higher than at Wednesday's close, from about 1132.75 to 1134, but they dipped lower to support near 1132 after the release. The dip wasn't extreme, and it was predictive of the market open, also a dip that wasn't extreme, although the Nasdaq did open almost five points lower. Indices opening near Wednesday's close didn't maintain those near flat- line levels long, however, with markets slipping lower into the 10:00 release of May's leading indicators. Market pundits characterize the leading indicators index as a closely watched number, and it appeared to cheer market watchers, with the SPX, Dow, Russell, and Nasdaq all steadying immediately after the release of that number and then climbing off their lows. After our markets opened, European markets had followed our markets lower after PPI and had steadied immediately after the release of the leading indicators and then drifted up into the European close, following the same pattern the U.S. markets this morning. The FTSE 100 and CAC 40 closed near flat-line levels, up 0.05 percent and 0.10 percent, respectively, but the DAX fell harder after PPI than did the other two, and it closed lower by 0.44 percent. Expectations for May's leading indicators ranged from a rise of 0.3-0.4 percent, with the prior month's release seeing a rise of 0.1 percent. Leading indicators actually rose a higher-than- predicted 0.5 percent, with one headline noting that eight of the ten U.S. leading indicators rose. Consumer confidence and stock prices were the two leading indicators that dropped. An increase in factory hours and a rise in money supply prompted some of the gains. Then began the next set of economic releases. Natural gas inventories rose 94 BCF, according to the Department of Energy, but that number appeared to produce no reaction at all. Expectations for June's Philadelphia Fed Index had ranged from 25.3-28.00, with the market consensus being 26.4, according to one article. The number was actually a higher-than-expected 28.9, rising above May's 23.8. The prices-paid component dropped to 51.9 against May's 59.6. As Jonathan Levinson noted at the time on the Monitor, markets showed little reaction at first to the Philadelphia Fed Index, perhaps still ruminating over the previous releases and their implications. Most markets then drifted slightly lower, wafted along on a gentle, languorous current. They tried to climb again, too, but late-day trading was characterized by a dampening of any moves higher or lower, with most indices finding a preferred level and sticking to that level into the close. Breadth proved mixed, with adv/dec ratios at 19:14 for the NYSE and 12:19 for the Nasdaq. Up volume outnumbered down volume by a healthy margin on the NYSE, too, with down volume more than double up volume on the Nasdaq. Weakness in semi stocks and a Jabil-induced weakness in electronic manufacturers pressured the tech-laden Nasdaq all day. Flextronics (FLEX) and Celestica (CLS) fell along with JBL, although Solectron (SLR) managed a nearly flat close ahead of its after-hours earnings report. Across the markets, other weak sectors included biotechs, networkers, securities broker/dealers, and computer storage companies, but a surprising number of sectors closed in the green. Many stocks closing higher were in the oil-service, utility, and natural-gas sectors, but gainers also included the homebuilders and healthcare stocks. Studying a list of sector decliners and gainers, some might consider the trading to have been mostly defensive. Stocks in the news included Jabil (JBL), of course, closing lower by 3.56 points or 12.69 percent after the warning about Q4. CSCO traded lower by 0.52 points or 2.18 percent after announcing that it would buy the intellectual property, most of the engineering teams and certain assets from Procket Networks, a privately owned company. JDA Software (JDAS) announced its own acquisition, of QRS Corp. (QRSI), a retail-industry software maker. Although JDAS opened lower and traded lower after the opening, it rebounded and closed higher by 0.32 points or 2.61 percent. Other scheduled economic releases included the money supply figure. Recently, some economists and other market watchers have been scrutinizing the money supply figures, expressing the opinion that money supply has been expanding at an abnormally fast pace. Many concluded that the Fed had taken an unusually accommodative stance. However, you'll notice that you don't find the figures for money supply in this article. That's because I've recently come across articles by Mark Hulbert, with those articles expounding on some of the reasons why we might not be able to trust the money supply numbers. Those reasons include the Fed's tendency to seasonally adjust those numbers even many years after their first release. Recently, the Fed revised the seasonally adjusted data for 1998, for example. Hulbert also mentioned a couple of ways that the errors could affect the money supply number, including the as-yet-unproved possibility, proposed by Madeline Schnapp of TrimTabs, that banks could be erroneously entering figures for risky items into one measure of money supply that has displayed that abnormally high pace of expansion. I don't know about you, but I don't have the experience to sort through data sets that may be in error when first released and then adjusted for the next six years and come to any sound conclusion, so you won't find an erudite discussion on money supply in an article I've written. Another economic release scheduled for after hours was the semi book-to-bill number. Late last week and early this week saw several analysts recommend that clients lighten up on their semi related stocks, with Deutsche Bank and UBS being two of those analysts. Clients have apparently taken that advice to heart, along with a number of their investing friends, because the SOX headed south all week, rolling back down into the descending regression channel that has contained its prices this year. Stochastics rolled down into a full bear roll, and the SOX confirmed a double-top formation, setting up a downside target near 437. Not benefiting Thursday's trading was memory-chip maker SimpleTech's (STEC) lowering of revenue estimates on Wednesday. Semi.org had not yet released the semi book-to-bill number as this article was submitted, so I was not able to include that number in this article, but semi-related stocks throughout the globe could certainly use some help tonight, with our SOX perching on important support. Annotated Daily Chart of the SOX: As James Brown pointed out on the Market Monitor today, MACD created a new sell signal. The histogram is now negative, but that sell signal was created from above the signal line, and the MACD has not completely rolled down through that line. I find this an iffy time when watching MACD, because as it's on the verge of rolling down through that signal line, it sometimes turns right back up again. This might be a particularly important point since the SOX ended the day on possible mid- channel support, just above the March low. A positive or even a buy-the-(negative)-news reaction to the book-to-bill number could see beaten-down semiconductor stocks attempt to rise. If so, the 30-dma has proven particularly important to watch over the last month, with that average now marking the approximate confirmation level of the double-top formation. With that confirmed double top formation, complete with bearish divergence as the second top was formed, the expectation would be that the SOX will again find resistance, perhaps near either the 30- or the 50-dma's. Expectations or not, in-place trend or not, price action should always be the guide. A move above the 200-dma would signal that the SOX might be ready to break out of that descending regression channel. A negative reaction to the book-to-bill number could be followed by a further drop, confirmed by a move below 452.75-453.00. The expectation then would be that the SOX would fall down through its regression channel toward that 437-438 downside target predicted by the double-top formation. Traders should note intervening support before that target could be reached, however. A SOX decline would create more pressure on the Nasdaq, of course. With tomorrow being opex Friday, I would caution against placing large bets on any position, however, as the day could produce false moves that are not particularly amenable to technical analysis. The Nasdaq's chart displays some troubling signs, too. Annotated Daily Chart of the Nasdaq: That potential head-and-shoulders formation just under resistance pinpoints possible weakness, especially when coupled with the rolling-down RSI. Bullish traders prefer to see a measured pullback in the form of a flag formed from a tight pattern of lower highs and lower lows, a bull flag. However, neither stochastics nor MACD has fully committed to the downside, and the Nasdaq has stubbornly maintained levels above the 200-dma, so we can't assume that H&S formation will ever be confirmed. Watch that 200-dma for signs that the Nasdaq might be confirming that H&S, rolling down toward the 1930 support again. A move up through 2000 and then above last week's high would be a sign that the Nasdaq is unexpectedly breaking to the upside out of its bearish right triangle. These formations typically break to the downside, but "typically" is not synonymous with "always." The Russell 2000 chart displays its own possible H&S, with the Russell 2000 not yet ready to roll over into that right shoulder and perhaps never ready to do so. That possible right shoulder forms at the 50 percent retracement of the decline from the April 5 high to the May 17 low, and has a descending neckline that roughly conforms to the 30-dma. Annotated Daily Chart of the Russell 2000: Oscillators do not yet commit to a direction. It's possible to micro-analyze every nuance of each of the oscillators and discover bearish price/RSI divergence as the possible head was formed, but all we can say with certainty is that the Russell 2000 remains trapped between its 200-dma and 100-dma. It's positioned about midway between support and resistance and displays a potentially bearish formation that has yet to be confirmed. A break much above 572 negates the potential H&S, while a break below the 200-dma confirms it. Until either of those events occurs, we can't determine much else. The Dow's chart displays indecision, too, with the daily candle a doji at resistance for the second day in a row. Annotated Daily Chart of the Dow: Although I haven't included the channel on this chart, it's also possible to characterize the Dow as trading lower since February within a descending regression channel, with the top of that channel described by the top red trendline on the chart above. As other writers have noted, the Dow clings to that upper trendline, not able to move above it and not willing to fall below it. Oscillators show inconclusive evidence. Stochastics and RSI poise on the verge of tipping over into bearish rolls or else trending while the Dow begins a directional move higher. Nothing on this chart signals that the Dow will head one direction more strongly than the other, with the obvious exception of an expectation that an index trading in a well- formed descending regression channel might continue to trade lower within that channel. Since the weekly view shows oscillators still trending up but showing the slightest tendency to hook over, the possibility remains that this big regression channel has been nothing more serious than a bull flag on the weekly chart. The SPX can also be characterized as trading lower within a descending regression channel, although its channel formed beginning in early March. Annotated Daily Chart of the SPX: As is also true of the OEX, the SPX's pullback on the daily chart since early June could be variously characterized as a bull flag (if you're a bull) or a broadening formation (if you're not so bullish). This week, that formerly broadening formation has narrowed into a tighter range, however, with a top at about 1136.50 and a bottom at about the board-flat 100-dma, with further support below at the 50-dma. RSI begins to look more bearish here, but stochastics kicked back up again, giving a mixed outlook that goes perfectly with the flattening MACD. Weekly oscillators look similar to the Dow's: RSI and stochastics headed higher, but showing a slight tendency to hook down. After-hours earnings did little to clarify the situation. They included reports by Adobe (ADBE), Red Hat (RHAT) and Solectron (SLR), with ADBE and RHAT both trading lower, and SLR headed higher. RHAT's revenue missed expectations, and the stock had headed lower by 9 percent as this report was prepared. ADBE had dropped more than 2 percent. Economic reports due Friday include only the 8:30 release of the Q1 current account figure, with the previous number at -$127.5 billion, and with expectations firming up for a deficit of -$140.0 billion, but ranging from $139.5-141.3 billion. If markets are going to move, they'll probably be prodded by something other than economic numbers. The often-seen tendency for an option expiration Friday is for markets to clamp down late in the morning and attempt to maintain equilibrium until the market close, a tendency that may be exacerbated by the upcoming FOMC meeting and transfer of power in Iraq, with both events now two weeks away. While I would not be surprised to see that trend continued tomorrow, be watchful of the crude prices. While lowered gasoline prices this week and building inventories over the last couple of weeks might have reassured markets, crude futures flamed up toward the $39.00/barrel level Thursday. That, coupled with the higher- than-expected PPI, could start a fire that eats through some support levels. The Dow Jones Transportation Index, often a leading indicator for the Dow, created a doji at the top of a rise in Thursday's trading, and Dow bulls don't want to see it turn down Friday, pressured by rising crude prices. However, some possibilities for at least a modest rise exist. Tech traders should watch the SOX's reaction to the semi book-to- bill number. Although several chart attributes suggest that the SOX has room to fall, it's deeply oversold on a 30-minute basis, and it may just see an oversold bounce unless the number disappoints in a big way. If a directional move gets underway, market watchers want to see the various indices make a concerted effort to move the same direction, rather than have the tech- related indices moving in opposition to the others, for example. If markets could all head the right direction, perhaps market watchers won't even have one more day of boring trade but will find something to excite them tomorrow. I'm not counting on that to happen, but just open to the possibility. Be careful, keeping the trend of many opex weeks in mind as you make decisions about entering positions. After the opening volatility, moves that appear to be promising may get damped down almost as soon as they get started, especially if there's no volume behind the move. *************** 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 ******************** Semiconductors weigh on tech, oil approaches $39 The Semiconductor Index (SOX.X) 453.44 -3.37% finished the session down 15.85 points, led lower by Xilinx (XLNX, -6.7%), ALTR (-5.4%), National Semiconductor (NSM -5.4%) and Novellus Systems (NVLS -4.7%) as weakness associated with JBL's guidance forced speculation that overall demand for semiconductors is waning. Weakness among semiconductors weighed heavily on broader technology and many 4-lettered stock symbols with the very broad NASDAQ Composite (COMPX) 1,983.67 -0.72% and its sibling NASDAQ- 100 Index (NDX.X) 1,464.03 -1.07% showing relative session weakness against other major indices. Despite recent weekly data that showed builds in U.S. oil inventories, continued attacks on Iraqi oil pipelines had August Crude Oil futures (cl04q) jumping $1.16, or 3.08% to settle at $38.81. U.S. Market Watch - 06/17/04 Close While many 4-lettered stocks found a lower trade in today's session, those with 1, 2 and 3-lettered stock symbols at either the New York or American Stock Exchange faired better in what could be called an "oil and water" trade. While the NASDAQ Composite struggles with downward trend, the NYSE Composite found early morning support at its recently broken-to-the-upside downward trend to post a 10-points gain. Market Snapshot / Internals - 06/17/04 Close While the NASDAQ's NH/NL 10-day Average Ratio slips lower by an additional 2.2%, we get the feeling that that slippage has a pulling effect on the NYSE NH/NL 10-day Average Ratio, where it would currently take a reading of 74.0% for it to see a 3-box reversal on its point and figure bullish % Chart. I'll try and tie this bullish leadership indicator in with a bar chart of the NYSE Composite ($NYA.X) in a moment. Sectors with good representation on the new high list today include Oil & Gas (BR, BRY, CECX, CHK, COP, CRZO, DVN, GRP, JDO, VPI, WGR, XOM), Steel (LSS, NSS, NUE, OS) and Food/Beverage (CSG, WFMI, UNFI). NYSE Composite Chart - Daily Intervals In last night's Index Wrap we looked at the NASDAQ Composite (COMPX) and I'm showing the NYSE Composite ($NYA.X) with similar use of retracement and trend. While the COMPX struggles with what would be the solid red trend on the above chart, the NYSE is trying to hold this trend as support. Now, as you and I follow the NH/NL ratios over time, we can see that the NYSE holds greater bullish leadership, but lets not also forget how much more "oversold" it was at 12% at its recent low readings. As we see the NASDAQ Composite struggle with downward its solid red downward trend, I've added the dashed red trend on the NYSE Composite chart, where perhaps we begin to make the tie with the recent NYSE NH/NL 10-day Average Ratio high reading of 80% with this dashed red downward trend. Now, I'm limited by time to how many charts I can get doctored up, but one reason I think it important, or worthy of a review on both the NASDAQ Composite (COMPX) in last night's wrap, and now the NYSE Composite (NYA.X) in tonight's wrap is because of this week's Triple With expiration. Understand that it may be easier to "push around" the NDX/QQQ, the S&P 100 (OEX.X), the INDU (30 stocks) and perhaps the S&P 500 Index (SPX.X) in order to get things squared up at an options/futures expiration. It's entirely different, and perhaps a more natural trade to observe/understand both the NASDAQ COMP (3000+ stocks) and NYSE Composite (3000+ stocks). If I were to combine the two, I'd certainly have two indices right at downward trends, some abatement of bullish leadership, and a more defensive picture at this point. Pivot Matrix - Good gravy! I'd go cross-eyed looking at all of these correlations for tomorrow's trade. Why do YOU think we'd see so many correlations? My best guess..... computers are doing a HECK OF A LOT OF THE WORK as they try and get things squared up at the quarterly Triple Witch. The point I would have to make at this point is that unless you're going to trade VERY TIGHT STOPS intra-day, with hopes of getting some type of quick move intra-day, I'd be more tempted to just sit on the sidelines with any type of trade entry at this point. Semiconductor Index (SOX.X) - Daily Intervals The bulk of today's declines for the SOX.X came in the first hour of trade, where today's close comes below the SOX's long-term upward trend from the October 2002 lows. A recent MACD sell signal, that is now present today led to a lower low. A quick check of Dorsey/Wright and Associates' Semiconductor Bullish % (BPSEM) shows a net loss of 1.47% of semiconductor-related stocks to reversing lower point and figure sell signals to 23.53% bullish. While still "bull alert" status having reversed up from 18% to a recent high reading of 26%, a break much below our MONTHLY Pivot would have 435 back in play, if not a good washing out in the weeks to come to the 412 area. Jeff Bailey ************************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 **************** The Waiting Game - J. Brown Welcome to the waiting game. The Producer Price Index (PPI) showed that inflation at the wholesale level ticked higher than expected but stocks really didn't react to the news. That's because the markets feel relatively confident that the FOMC will only raise rates by 1/4 point on June 30th. The only thing left to do now is wait for the June 30th meeting to pass. In the mean time investors will be reacting to what will surely be a string of bad news as we approach the Iraq handover of power. There was news out this morning that terrorists drove a car bomb into a crowd of Iraqis looking for work in the new government military. The explosion killed 35 people and injured more than 100. The real unfortunate thing here is that we're likely to here more of these reports as we approach the deadline. The combination of waiting for the interest rate decision and rising violence in Iraq will likely to keep a lid on the stock market. Not helping matters today was an earnings warning from Jabil Circuit (JBL) last night. JBL slipped more than 12% but it drug the SOX semiconductor index down with it. The SOX fell more than 3.3% breaking minor support at 460. The next test for the SOX is the 450 level. The NASDAQ will have a hard time trying to mount a rally without support from the semiconductor sector. Earnings season is quickly approaching but there is still a threat that we may see more earnings warnings. Plus, the markets may be back to its old tricks of looking for the whisper number. Software maker Adobe Systems (ADBE) reported earnings of 44 cents per share. This was 2 cents above estimates and significantly better than last year's 27 cents yet the stock fell lower in after hours trading in spite of guiding higher for the next quarter. Traders need to keep an eye on crude oil again. Oil futures rallied $1.16 to $38.81 a barrel. Bulls can shop the energy stocks for potential plays. Overall the market internals were mixed. Advancers beat decliners almost 17 to 11 on the NYSE but lost 12 to 18 on the NASDAQ. Volume continues to be light. I continue to watch the volatility indices. The VIX/VXO/VXN all bounced today but they remain near their lows, which could also be a roadblock to any new rally of significance. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8871 Current : 10377 Moving Averages: (Simple) 10-dma: 10351 50-dma: 10261 200-dma: 10121 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1132 Moving Averages: (Simple) 10-dma: 1131 50-dma: 1119 200-dma: 1093 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1464 Moving Averages: (Simple) 10-dma: 1472 50-dma: 1448 200-dma: 1436 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 15.15 +0.36 CBOE Mkt Volatility old VIX (VXO) = 15.06 +0.40 Nasdaq Volatility Index (VXN) = 21.33 +0.94 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.79 818,546 647,093 Equity Only 0.63 604,920 383,811 OEX 1.01 37,221 37,547 QQQ 5.43 14,854 80,593 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 65.4 + 0 Bear Confirmed NASDAQ-100 42.0 + 3 BULL ALERT Dow Indust. 70.0 + 0 Bear Confirmed S&P 500 63.2 + 0 Bear Confirmed S&P 100 63.0 + 0 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: 1.02 10-dma: 0.98 21-dma: 0.92 55-dma: 1.03 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 1670 1199 Decliners 1108 1811 New Highs 135 72 New Lows 57 55 Up Volume 854M 413M Down Vol. 671M 1024M Total Vol. 1572M 1458M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/08/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial trades are turning more bearish with an increase in short positions while pulling a little bit of money out of their longs. Small traders have increased their positions in both longs and shorts but continue to remain net bullish. Commercials Long Short Net % Of OI 05/18/04 394,352 423,258 (28,906) (3.5%) 05/25/04 400,713 420,764 (20,051) (2.4%) 06/01/04 406,665 421,681 (15,016) (1.8%) 06/08/04 397,294 452,904 (55,610) (6.5%) 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 05/18/04 139,647 74,597 65,050 30.4% 05/25/04 136,086 79,060 57,026 26.5% 06/01/04 137,100 79,583 57,517 26.5% 06/08/04 158,373 92,794 65,579 26.1% 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 Hmm... could the commercial traders be trying to tell us something? Both their large S&P futures positions and their S&P e-minis positions have turned net short or bearish. As would be expected the small traders is walking the other way and has significantly beefed up their longs. Commercials Long Short Net % Of OI 05/18/04 390,484 357,157 33,327 4.5% 05/25/04 353,722 336,406 17,316 2.5% 06/01/04 325,865 325,274 591 0.0% 06/08/04 367,191 409,246 (42,055) (5.4%) 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 05/18/04 62,216 87,269 25,053 16.8% 05/25/04 91,515 100,759 ( 9,244) ( 4.8%) 06/01/04 111,484 90,625 20,859 10.3% 06/08/04 140,191 84,649 55,542 24.7% 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 remain net long on the NASDAQ 100. Small traders remain strongly net short. Commercials Long Short Net % of OI 05/18/04 58,376 37,528 20,848 21.8% 05/25/04 59,891 37,630 22,261 22.8% 06/01/04 59,944 34,784 25,160 26.6% 06/08/04 64,747 41,178 23,569 22.3% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 25,160 - 06/01/04 Small Traders Long Short Net % of OI 05/18/04 9,843 18,935 ( 9,092) (31.6%) 05/25/04 10,184 20,653 (10,469) (33.9%) 06/01/04 9,755 30,025 (20,270) (51.0%) 06/08/04 9,716 29,594 (19,878) (50.6%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL There has been very little action from the commercial traders in the Dow Jones futures but they remain net short. Small traders remain net long but their resolve may be weakening a bit. Commercials Long Short Net % of OI 05/18/04 22,257 22,444 ( 187) (0.4%) 05/25/04 23,578 24,632 (1,045) (2.2%) 06/01/04 23,397 24,393 ( 996) (2.0%) 06/08/04 24,636 25,821 (1,185) (2.3%) 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 05/18/04 9,098 6,591 2,507 16.0% 05/25/04 9,623 6,614 3,009 18.5% 06/01/04 9,000 6,021 2,979 19.8% 06/08/04 8,325 6,431 1,894 12.8% 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 06-17-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: DGX, QCOM Dropped Puts: SYMC Call Play Updates: BCR, ETN, GDW, HSY, ZMH, ERTS, MERQ New Calls Plays: AHC Put Play Updates: CCMP, KSS, MO New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Quest Diagnostic - DGX - cls: 87.12 chg: -1.08 stop: 84.95 After two weeks of trying we're going to err on the side of caution and close this play. As of yesterday the stock was looking okay with a rebound back over the $88.00 level. That's what we had been waiting for as an entry point for new positions. Unfortunately, today's decline has undermined our confidence and thrown its technical indicators into conflicting signals. More aggressive traders might want to stick it out and see if support at $86.00 holds up. Picked on June 01 at $ 87.70 Change since picked: - 0.58 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 603 thousand Chart = --- QUALCOMM - QCOM - close: 68.25 chg: -0.50 stop: 67.00 Again, we're choosing to err on the side of caution. After days of consolidating under resistance at $70.00 shares of QCOM have broken down instead of broken out. The close under its simple 10-dma is a technical failure meanwhile its MACD signal is close to producing a new sell signal. We'd rather exit now for a small gain than watch it evaporate. We can always choose to go long again if QCOM eventually breaks out over resistance at $70. Picked on May 24 at $ 66.01 Change since picked: + 2.24 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 9.6 million Chart = PUTS: ***** Symantec Corp. - SYMC - cls: 40.89 chng: +0.12 stop: 43.00 We couldn't have asked for more cooperation from SYMC, as the stock crashed through the $44 support level and just kept on going. Yesterday's dip to a new relative low looked good and then the bears finished the job today, driving the stock to an intraday low of $39.7 before the midday bounce. As you'll recall, we were looking for a drop to the $39-40 area as our cue to harvest gains on the play and today's price action certainly qualifies. Aggressive traders might be able to squeeze a bit more out of the play on another drop on Friday, but we'd expect price to pin fairly close to the $40 level for options expiration. We'll close the play out tonight and consider it a success in what has been a difficult market this week. Picked on May 13th at $44.16 Change since picked: -3.34 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 4.92 mln Chart = ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Bard C R - BCR - close: 57.63 chg: -0.53 stop: 55.95 Wow! BCR continues to churn sideways in a tight $2.00 range. We were thinking it may be time to drop it with this morning's early weakness but shares rebounded higher the rest of the session. BCR's strong finish into the close has given us new hope that the stock might breakout over $58.00 soon. We're going to hold on to it and see how it performs tomorrow. No change in our stop at $55.95. Picked on May 20 at $ 55.00 (post split) Change since picked: + 2.63 Earnings Date 04/20/04 (confirmed) Average Daily Volume: 386 thousand Chart = --- Eaton Corp - ETN - close: 60.95 chg: -0.43 stop: 59.95 We remain un-triggered in our recently added bullish play in ETN. The stock gapped lower this morning but traders jumped in to buy the dip near $60.00 and drove the stock back toward $61. Our strategy is to go long if and when ETN trades at $62.05. Until then we're just spectators. Picked on June xx at $ xx.xx <-- See TRIGGER Change since picked: + 0.00 Earnings Date 04/14/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Golden West Fncl - GDW - close: 107.96 chg: +0.35 stop: 107.00 Thus far we remain un-triggered in this bullish play. Right now our strategy is to open bullish positions if and when GDW trades at or above $110.01. More aggressive traders can choose to try and jump the gun by entering on a breakout of its recent bull flag. The $108.50 or $109.00 levels might work as more aggressive entries. We are somewhat encouraged by the very slow upward drift in GDW over the last three sessions. The company did issue a press release yesterday stating they would announce Q2 earnings on July 20th. Picked on June xx at $xxx.xx <-- See TRIGGER Change since picked: + 0.00 Earnings Date 07/20/04 (confirmed) Average Daily Volume: 694 thousand Chart = --- Hershey Foods - HSY - close: 45.45 chg: -0.29 stop: 44.75 It looks like we are seeing a little post-split depression in HSY after all. Typically if a stock sees a decent ramp up into the split it can experience post-split depression as the momentum traders exit looking for the next play. As of this afternoon we were feeling okay with the bounce from its simple 10-dma. Now we're turning a little cautious since HSY fell sharply in the last hour of trading. We would not suggest new bullish plays unless HSY produces a strong bounce from the $45.25 level. We're going to leave our stop loss at $44.75 but traders should start aiming for the exits if HSY trades under $45.20. Picked on June 08 at $ 46.11 (post split) Change since picked: - 0.66 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 441 thousand Chart = --- Zimmer Holdings - ZMH - close: 86.00 chg: -0.87 stop: 84.95*new* "Please fasten your safety belts and make yourself aware of the nearest exit. In some cases the nearest exit may be behind you." We realize the above lines are commonly heard in a commercial jet before you take off but they may be appropriate here. After 2 1/2 weeks of consolidating in a tight range under resistance at $88.00 shares of ZMH have broken downward, not skyward. That usually spells trouble. Its technical picture is gloomy with a new "sell" signal in its MACD. That alone may be good enough reason to consider exiting this play now. We're going to hold on to it for at least one more day to see if shares bounce from the simple 21-dma and or support at $45.00. We will try and reduce our risk by raising the stop loss to $84.95. Interested traders can keep their ears open for any good news next Tuesday as ZMH presents at the William Blair 24th Annual Growth Stock Conference in Chicago. Picked on May 27 at $ 85.20 Change since picked: + 0.80 Earnings Date 04/26/04 (confirmed) Average Daily Volume: 1.2 million Chart = --- Electronic Arts - ERTS - close: 51.65 change: -0.62 stop: 50.00 In what has been a rather lackluster expiration week, we've seen very little in terms of directional action from our ERTS play. fter last week's move over $53, the stock pulled back sharply on Monday, and since then the bulls seem to have their hands full just keeping price above the 50-dma ($51.31). The good news is that the bears haven't been able to gain the upper hand either, and the two sides of battled to a stalemate ahead of option expiration tomorrow. Support is looking firm near the $51 level, with resistance looming overhead in the $53.00-53.50 area. We'll more than likely have to wait until next week for resolution of the current consolidation pattern. That means aggressive entries could work on another test of the $51 level, but be sure to keep those stops in place at $50, just in case support fails. Picked on May 18th at $49.60 Change since picked: +2.05 Earnings Date 4/29/04 (confirmed) Average Daily Volume = 3.85 mln Chart = --- Mercury Interact. - MERQ - cls: 48.09 chng: -0.07 stp: 46.50 After the strong surge to just below $50 resistance a couple weeks ago, MERQ has entered a quiet consolidation phase, with price steadily moving lower within a descending channel that we can view as a bullish flag pattern. Support near the $48 level seems to be holding up and traders looking to buy the dip are getting a decent setup here, with price stabilizing at support, with additional support offered by the 20-dma ($47.48) and then the 200-dma ($47.18). Traders that would prefer to see renewed strength before stepping into new positions will want to look for a move over the $48.50 level, which would constitute a bullish break of the aforementioned bull flag pattern. Traders expecting a strong move before the weekend are likely to be disappointed with options expiration occurring tomorrow. For that reason, waiting until Monday before initiating new positions may be the more prudent choice. Maintain stops at $46.50, which will be protected by the 30-dma ($46.44) by tomorrow. Picked on June 6th at $47.56 Change since picked: +0.53 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.38 mln Chart = ************** NEW CALL PLAYS ************** Amerada Hess Corp. - AHC - close: 74.15 change: +2.80 stop: 69.00 Company Description: Amerada Hess Corporation explores for, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Equatorial Guinea, Gabon, Indonesia, Thailand, Azerbaijan, Algeria, Malaysia, Colombia and other countries. The company also manufactures, purchases, transports, trades and markets refined petroleum and other energy products. It owns 50% of a refinery joint venture in the United States Virgin Islands, as well as another refining facility, terminals and retail gasoline stations located on the east coast of the United States. Why we like it: Carving out an impressive bullish trajectory over the past several months, shares of AHC have completely ignored the weakness recently seen in the broad market and have instead moved in line with the persistent rise in energy prices. With Natural Gas moving to new 3-year highs and Crude Oil rebounding from its recent spate of profit taking, AHC really put in an impressive performance on Thursday, tacking on nearly 4%. The stock has been mired in a broad consolidation pattern between $69-75 for the past 6 weeks as the bulls have digested the gains from the most recent rise. But with price once again nearing the top of that range and on such a large one-day move (supported by strong volume, to boot), we're inclined to think a breakout is coming sooner, rather than later. The PnF chart paints a bullish picture as well, with its bullish price target forecasting a rise to $99. The key appears to be that $75 resistance level, which AHC hasn't been able to hit since August of 2002. Not only would a move above $75 satisfy a breakout of the current consolidation range, but it would create a fresh Triple Top Buy signal on the PnF chart. We'll err on the side of caution here and force AHC to prove itself to us, setting an entry trigger at $75. Entries certainly look favorable on that initial breakout, although more cautious traders may want to wait for a subsequent pullback to test the $73-74 area as new support before jumping in. The first serious resistance comes in around the $78 level, but we're going to play for a rise to test the H&S top from early 2002 in the $82-84 area. If we take the current consolidation pattern as the bull flag pattern that it appears to be, then a breakout should give us an upside projection roughly equal to the move that preceded this consolidation (from $62 to $74) or $12. That translates to an upside target of $87, so our $82-84 target is certainly reasonable. Given our expectations for such a strong rally, we're going to start out with an initial stop at $69, just under the last two reaction lows. We'll look to raise that stop after we get the breakout over $75, but for now, it seems prudent to give the stock some room to move. Suggested Options: Shorter Term: The July $75 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive longer-term traders can use the August $80 Call, while the more conservative approach will be to use the August $75 Call. Our preferred option is the August $75 strike, as it is currently at the money and should provide sufficient time for the play to move in our favor. BUY CALL JUL- 70 AHC-GN OI= 75 last traded @ $5.20 BUY CALL JUL- 75 AHC-GO OI=1298 last traded @ $2.00 BUY CALL AUG- 75*AHC-HO OI=2366 last traded @ $3.20 BUY CALL AUG- 80 AHC-HP OI= 945 last traded @ $1.40 Annotated Chart of AHC: Picked on June 17th at $74.15 Change since picked: +0.00 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 1.07 mln Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Cabot Micro. - CCMP - close: 27.82 chg: +0.94 stop: 30.00 Whoa! We knew CCMP might be due for an oversold bounce after its recent declines but we weren't expecting a 3.5% rebound. The stock had recently been falling perfectly after struggling with resistance at its simple 40-dma and then falling through the $30.00 level. Its technical picture is now a little bit mixed with short-term stochastics edging higher from oversold versus its MACD that recently produced a new sell signal. The good news here is that the bounce failed at the $28.25 level but we suggest caution when considering new plays. More conservative traders might want to lower their stop toward $29.50. We're going to keep our stop just above its 40-dma for now at $30.00. Picked on June 13 at $ 29.46 Change since picked: - 1.64 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 3.7 million Chart = --- Kohl's Corp - KSS - close: 45.53 change: -0.52 stop: 48.05*new* KSS is reading our script wonderfully. The stock is down six days in a row and has broken through minor support levels at $48.00 and $46.00 as well as its simple 10, 21 and 100-dma's. Its MACD is in a new sell signal and volume is slowly rising on the declines. Yes, KSS looks pretty good here and that makes us cautious that it might be time for an oversold bounce. Traders looking for new plays might want to look for a bounce and failed rally under $47 or a move through $45.00. We're going to lower our stop to $48.05. Picked on June 06 at $ 47.45 Change since picked: - 1.92 Earnings Date 05/13/04 (confirmed) Average Daily Volume: 3.7 million Chart = --- Altria Group - MO - close: 47.69 change: -0.12 stop: 49.50 In classic expiration-week fashion, MO has certainly failed to do much since we initiated coverage of the stock on Tuesday. The past 2 days have seen volume continue to dry up, while price has drifted along in an exceptionally narrow range of less than 50- cents. The bearish tone of both the candle chart and the PnF chart obviously remain intact, but we will most likely have to wait until next week for this tight consolidation pattern to break. The 10-dma ($48.12) and 20-dma ($48.18) should continue to act as resistance and that means entries on a rollover from those averages make sense in the near-term. Traders that prefer to enter on renewed weakness most likely will be waiting until next week, when we should see the downtrend reassert itself with a break below $47.25. Maintain stops at $49.50, just over the most recent high. Picked on June 15th at $47.55 Change since picked: +0.14 Earnings Date 7/20/04 (unconfirmed) Average Daily Volume = 6.97 mln Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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 06-17-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Printers, Wireless, Healthcare and more Option Spreads: A Peek Into The Future -- July CPTI Positions Traders Corner: Two Weeks And Counting Traders Corner: BOLLINGER BANDS ********** WATCH LIST ********** Printers, Wireless, Healthcare 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. ___________________________________________________________________ Lexmark Intl - LXK - close: 95.39 change: +1.13 WHAT TO WATCH: LXK is making a comeback after spending several weeks basing along support at the $90.00 level. Now shares are breaking out over resistance at $95.00 and look poised to run toward $100. There is some resistance at $97 from early April but its P&F chart points to a bullish price target of $102. Chart= --- Mobile Telesys - MBT - close: 125.50 change: +9.50 WHAT TO WATCH: The market is interpreting some recent comments from Russian President Putin as positive for business and Russian stocks are trading higher. MBT soared more than 8% to breakout over resistance at $120 and $125 on big volume. The road is clear for a run toward its highs near $140. Its bullish P&F chart actually points to a $156 price target. Chart= --- Borg Warner - BWA - close: 44.35 change: +1.44 WHAT TO WATCH: Auto and truck parts maker BWA is on the move Thursday with a 3.3% rally through technical resistance at its 100-dma. Volume was three times the norm indicating strong buying interest. Traders might want to consider bullish plays with a trigger over resistance at $45.00. We would target $48- $50. A move through $46 would produce a new P&F buy signal. Chart= --- Coventry Health Care - CVH - close: 50.00 change: +0.58 WHAT TO WATCH: Healthcare stock CVH recently broke out over major resistance near $47.00 and has now spent the last three weeks trying to breakout over the $50.00 level. The stock looks poised to hit new highs and we would consider new long plays with a trigger over $50.35. Its bullish P&F chart points to a $62 price target. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- MGA $83.23 +1.17 - We're still watching MGA for a bullish breakout over resistance at $84.00. EMMS $20.02 -1.30 - EMMS has broken down from its recent consolidation on big volume. Look for a move through round- number support at $20. TGN $42.57 +0.67 - The relative strength in shares of TGN might make the stock a decent covered call candidate. Shares hit new highs on strong volume today. RIMM $58.40 +0.83 - RIMM is trying to rebound from its recent bout of profit taking. Watch for the breakout over $60.00. IMCL $81.70 +0.00 - IMCL still looks bullish here but traders might look for another dip to $80.00 and buy the bounce. EGN $45.84 +0.40 - EGN is another utility making new highs. DE $68.52 +0.47 - We're still looking for the breakout over $70.00 but more aggressive players might consider bullish positions on a move through $69. TXN $23.25 -0.91 - TXN was recently on the watch list for a breakdown through support at $24. It happened today on big volume. COF $71.98 +0.75 - COF still looking strong with the rebound from $70.00. Bulls might want to target a move to $75 or $77. ************************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 ************************ A Peek Into The Future -- July CPTI Positions By Mike Parnos, Investing With Attitude Do you feel it? You should. Tomorrow’s opening will tell the tale, but I have a good feeling. It’s a familiar feeling for CPTI regulars – the feeling of those freshly printed twenty-dollar bills running through your fingers. It looks like we’re about to record another impressive profit month for the June expiration cycle. Some people think that we’re just lucky. I don’t think so. Directional traders are scrambling (as usual). They guess right (once in awhile). They guess wrong (more often than not). They’re plastered to their computers with a package of Tums and Alka-Seltzer while the value of their long options wither away. Bless them. It’s their money that ends up in our pockets. ____________________________________________________________ Trade Notification: Prior to Thursday’s close, we bought back the short MNX $147.50 call for $.10. Even though MNX closed at $146.40, remember that we’re exposed for the Friday opening on these European style options. $146.40 is dangerously close to $147.50. If they find Bin Laden tonight, I don’t want it to cost us money. It’s worth the $.10 for the peace of mind. ____________________________________________________________ A Sneak Peek Into July So, Sunday’s column will be another fun one to write – if can take the time off from counting the profits. Don’t worry. I’ll manage. However, let’s take a look at the positions we are considering for the July option cycle. There probably aren’t a lot of surprises here. If it ain’t broke, don’t fix it, right? JULY NEW POSITIONS Position #1 – SPX Iron Condor – 1132.05 Sell 10 July SPX 1170 calls Buy 10 July SPX 1180 calls Credit of about: $1.10 ($1,100) Sell 7 July SPX 1075 puts Buy 7 July SPX 1060 puts Credit of about: $1.20 ($840) Total net credit of about: $1,940. Maximum profit range of 1075 to 1170. Breakeven points of 1072.23 to 1171.94. Maintenance: $10,500. Potential profit: $1,940. Position #2 – RUT Iron Condor – 569.57 Sell 10 July RUT 600 calls Buy 10 July RUT 610 calls Credit of about: $1.00 ($1,000) Sell 10 July RUT 530 puts Buy 10 July RUT 520 puts Credit of about: $1.30 ($1,300) Total net credit of about: $2.30 ($2,300). Maximum profit range of 530 to 600. Breakeven points of 527.70 to 602.30. Maintenance: $10,000. Profit potential $2,300. Position #3 – SPX Credit Spread Boogie – 1132.05 We haven’t done this strategy is quite some time. To review, it consists of establishing a 25-point credit spread and taking in $6-7 of premium (as much as possible). If the trend continues, you keep the premium. If the trend reverses, you close the trade for double the premium amount. Then, you open a credit spread in the opposite direction, using enough contracts to replenish what you spent to close the initial spread. Sell 3 SPX July 1125 puts Buy 3 SPX July 1100 puts Total credit of about: $6.30 ($1,800) Profit potential: $1,800. Maintenance: $7,500 (initially). We’ll need to keep a close eye on this one. We have to be alert – plus, we have to have a large enough account size to accommodate trading an increased number of contracts if adjustments become necessary. Position #4 – SOX (Semi-Conductor Index) – Iron Condor – 453.44 Sell 10 SOX July 490 calls Buy 10 SOX July 500 calls Credit of about: $1.10 ($1,100) Sell 10 SOX July 420 puts Buy 10 SOX July 410 puts Credit of about: $1.30 ($1,300) Total net credit of: $2.40 ($2,400). Maximum profit range: 420 to 490. Breakeven points: 417.60 & 492.40. Maintenance: $10,000. Potential profit: $2,400. ____________________________________________________________ JUNE POSITIONS June Position #1 - SPX Iron Condor – 1132.05 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 - $140.95 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 – 569.57 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 - $146.40 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: $5,000. Maximum profit range of $132.50 to $147.50. Profit potential: $1,300. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.39 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). We rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60 credit) on Tuesday and took in another net credit of $.80 ($800). Our new total credit is now $10,400. 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 – 552.60 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. Our June 515/505 bull put spread expired worthless, as did our 560 short call. Therefore, we are able to officially add the $1,175 to our cash position – that now stands at $6,265 ($4,565 plus unused $1,700) New July Zero Plus Positions. July bull put spread 535/525 for credit of $1.30 x 5 contracts = $650. Short 570 call for credit of $1.40 x 5 = $700. If all goes well, we’ll be able to add $1,350 to our cash position as we wait for the market to move up. OSX Calendar Spread Plus - $99.51 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). This has been going on for a few months. As of May expiration, we had a positive $1.45 ($1450) -- $750 from before and another $700 from selling the $105 June call. Results: The $95/85 bull put spread expired worthless. We had bought back our short $105 June call for $.10 early in the week. The June $115 call expired worthless. It’s finally over. Thank goodness. And it all worked out fine. After a couple of months of chaos, we emerged with a profit of $1.35 ($1.45 - $.10). The profit: $1,350. If nothing else, we put a few more CPTI dollars of profit into our coffers. The biggest benefit came, however, if you followed the trade from the beginning and saw the adjustments that were made as the trade progressed. The OSX didn’t move the way we had anticipated and we had to do some tap dancing (adjusting) but it all worked out. 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 "Spreads & Combos." 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 ************** Two Weeks And Counting by Mark Phillips mphillips@OptionInvestor.com The Fed's decision on interest rates is now just under 2 weeks away and with continued strong economic data, the market is factoring in the near-certainty of a rise in the Fed Funds rate. The only unknown is whether it will be 25 or 50 basis points. I continue to believe that the Fed will take a gradual approach, preferring to make only a token move unless there are strong signs of an overheating economy. With the recent comments from various Fed officials, it is clear to me that they don't see any signs that would make them want to take a more aggressive approach with respect to interest rate policy. So that means we continue with our analysis under the premise that in two weeks we'll see a 25 basis point interest rate increase. As we've discussed in recent weeks, that move will be akin to the starter's pistol, getting the process of a deflation of the overheated Housing market moving for real. If you're just tuning in to our discussion or want a refresher on this long, rambling discussion, the prior installments can be found at the links below. Look Before You LEAP http://www.OptionInvestor.com/traderscorner/tc_052704_1.asp Setting The Stage http://www.OptionInvestor.com/traderscorner/tc_060304_2.asp The Action Point Draws Near http://www.OptionInvestor.com/traderscorner/tc_060904_1.asp While we have continued to see weakness in the Housing sector ($DJUSHB), we have not seen anything that could be construed as a break in the longer-term bullish trend. The quickest way to confirm that is to pull up the relative strength chart of the $DJUSHB vs. S&P 500 as we've done already. I haven't duplicated that chart here today for the sake of expediency and moving on to new territory. Those of you that use Qcharts can bring up the RS chart on your own by typing in "$DJUSHB /index:spx.x". Make sure to put it on the weekly timeframe and then draw that multi-year rising channel, and we can see that price is drifting along right at the bottom of that channel. That, plus the fact that we don't yet have a Sell signal on our modified-scale PnF chart of the $DJUSHB index, preserves our premise that the tipping point for the sector is still likely to occur after the FOMC meeting in two weeks. Recall from last week's discussion that we've finished with the sector analysis and are ready to proceed with looking at some individual equity analysis. Going back to our initial list of LEAP-able Housing stocks (since we're looking at a nice long-term option play in this arena), we have several targets of opportunity to consider: CTX, LEN, RYL, HOV and DHI. Our first step in the equity-specific analysis is to determine which of those stocks are showing the most weakness relative to the $DJUSHB. Repeating the process we went through in comparing the sector to the SPX, we now go back to Qcharts and start putting in each symbol relative to the $DJUSHB. That's a lot of charts to go through, so let's get cracking! Weekly RS Chart of CTX vs. $DJUSHB Relative to its sector, CTX put in a pretty convincing double top formation and has been in decline for most of this year. In spite of that near-term weakness in the trend, we need to be cautious about this one, with horizontal support still intact. Weekly RS Chart of LEN vs. $DJUSHB I actually like the looks of this chart, as we have a very clear consolidation wedge in process, with "price" holding near the bottom of the wedge. The hint that perhaps the neutral pattern will break to the downside is the fact that the longer-term rising trendline (red) has already been broken. Weekly RS Chart of RYL vs. $DJUSHB Unfortunately, we couldn't show the entire chart here, as the view shown above gives a rather unclear impression as to what to expect going forward. But that red trendline actually begins in early 2001, which tells us that we should view the trendline break as a significant event. Of course, horizontal support is still intact near the 0.125 level and then we will have the relative low from late-2002 near the 0.110 level to contend with. But my read of RYL's RS chart is that this one is just starting to turn to the downside. Weekly RS Chart of DHI vs. $DJUSHB Ouch! That is not what we want to see as eager bears! Sure, the break of the rising channel is encouraging, but that must be put in the proper context of the fact that DHI has clearly been significantly stronger than the overall sector for the past year. There's nothing in this chart to suggest that position of dominance has been abdicated just yet. Weekly RS Chart of HOV vs. $DJUSHB The overall picture presented by HOV is very similar to what we saw in the DHI chart above. HOV has been in a position of dominance relative to the sector for more than a year, and we're just seeing that being equalized now. With the chart still holding above horizontal support, I'm not seeing a flashing sign of relative weakness here. Clearly, these last two charts are the strongest of the bunch, with the strong uptrends of the past year broken, but horizontal support still holding up fairly well. That tells me that our efforts will be best spent by focusing on the first three stocks on our list -- CTX, LEN and RYL. Alright, so we've looked at each of the Relative Strength charts and while the first 3 certainly provide a cleaner picture for a bearish play, it's certainly difficult to make a conclusive case for any one of the three over the others. Additionally, while in the big picture DHI and HOV have been much stronger over the past 18 months than RYL, CTX and LEN, we mustn't ignore the possibility that these stocks may have had a stronger run and thus be susceptible to a bigger fall. Frustrating as it may seem, I don't think we have any hard answers yet. But don't despair, because we still have lots of tools in our arsenal. The next step is to look at relative strength charts of each of these stocks relative to one another. The reason we didn't go here first is that we were hoping that the RS studies against the sector would week out some of the candidates for us. My gut reaction after having gone through that process would be that our principal candidates should be LEN, CTX and RYL, but the evidence isn't quite strong enough to make that an unequivocal statement. Since we have an initial perception that HOV and DHI are the strongest stocks of our group, let's first determine which of these two appear to be the strongest. As you can see from the chart below, I think we can make a clear case that DHI was the weaker of the two through early 2003, but since then it has been gaining strength. We can make a solid case of this RS chart having put in a bottom, with a likelihood of an upside breakout coming in the weeks ahead. Weekly RS Chart of DHI vs. HOV Not only do we have a perception that DHI appears to be strengthening against HOV, we have a clear level defined on the chart above that will confirm that increasing strength. Either a lack of weakness from DHI or excessive weakness from HOV can satisfy that breakout criteria. Now that we've defined DHI as the strong horse, we can use it as our baseline, against which to compare RYL, CTX and LEN. Weekly RS Chart of CTX vs. DHI As you can see, we have a nice little bearish wedge in the CTX relative strength chart, and it has been building for quite a while. The next test of key support near 1.50 will tell us a great deal about what to expect in the months ahead, but based on probabilities, I would venture that we have a major breakdown coming. I like what I see here for a downside play on CTX. Weekly RS Chart of LEN vs. DHI The picture on the LEN chart isn't quite so clean, but we do have a major break of support that has taken place this year. The break of that rising 6 1/2-year rising trendline should not be taken lightly and I view it as a major sea change event. Combined with the steady trend of lower highs over the past 18 months, LEN definitely makes my short list of first string candidates. Weekly RS Chart of RYL vs. DHI Based on those last three charts, I'd have to say that we have a pretty close horse race between CTX and LEN, but that RYL has dropped back a good distance. Yes, RYL is weak compared to DHI, but not nearly to the same degree as our other two prospects. I know this has been a real brain exercise, looking at so many different RS charts in such a brief span of time, and I would certainly understand if your eyes have started to glaze over. So let's briefly recap what we've determined today. DHI is the strongest of our group of 5, and it appears that we have a close race between CTX and LEN as to which one is going to be our favored bearish play following the start of the interest rate hike cycle. All of this analysis was simply the preamble to determine at what point we might consider a bearish long-term play in the sector. That's what all the preliminary sector analysis accomplished. Then we took our list of candidates and narrowed it down to two that looked the most likely from a relative strength (or weakness, in this case) standpoint, was most likely to give us an attractive setup for a downside play. Next week, we can finally get to the meat of the matter, diving into the actual price charts of CTX and LEN, looking at their PnF charts as we did in the sector analysis portion of our discussion and we can actually determine the most favorable action points. It's been a long road, but for those of you that stuck with me, we should be able to finish this discussion off in fine fashion next week. I hope you've found this to be a beneficial and educational exercise so far and we should be able to tie everything up in a nice pretty package next week. See you then! Mark ************** TRADERS CORNER ************** BOLLINGER BANDS By Leigh Stevens lstevens@OptionInvestor.com I don’t use this variation so much myself to gauge or establish upper and lower trading range parameters or bands, but this is not to say that they are not of value and that some good traders don't make excellent use of them. This indicator does provide some unique information. Fellow market "technician" John Bollinger invented the Bollinger band envelope variation. My reservations about their use is that it is hard to pinpoint a specific buying or selling area, as these bands expand or contract according to market volatility. This is both, I think, the technique’s strength and it's weakness. Bollinger Bands (Boli Bands) combine a centered moving average, which is part of the indicator but is usually NOT shown. BB basically combine the moving average envelope technique with a measurement of current and recent price volatility to determine the optimal placement of the upper and lower lines. The purpose of this Indicator is basically the same as moving average envelopes: are prices high or low on a relative basis? Just as with (moving average) envelopes, two bands – the convention is to call these lines "bands" to distinguish from the fixed percentage envelope technique – are placed above and below a centered moving average, which is often set or "defaults" (by the charting software) to 20-days. However, unlike lines that are a fixed percent above or below the moving average, Bollinger bands are plotted two standard deviations above and below the average. The charts below offer examples for a period when the Nasdaq Composite Index (COMP) was in a stable (down) trend. Disregard the top date as that is today's date when I looked at this chart, but the period shown is from Feb '02 until the end of 2002 – The following chart was during a period of 2000, when COMP was having a more volatile period of wide-ranging price swings when it was forming a top. In the former chart (above), the bands are of a relatively narrow width and in the chart below significantly wider apart at least during the initial top-building process. [NOTE: In the period below the price range was 1800 points, a 36% swing; the upper chart range was 800 pts, a 42% range and close enough percentage wise to compare.]- We can next look at very different periods for the same item, a stock here used in a prior Trader's Column, to illustrate the widening and narrowing of Bollinger Bands in a more wide-ranging (volatile) trend – Standard deviation describes how prices are arrayed around an average value. One standard deviation is a set of values that contains close to 70% of the price fluctuations that occur above and below the moving average used in the Bollinger band calculation. 95% of the fluctuations will occur within two standard deviations of the moving average in question. Since each Bollinger bands is placed at a fluctuating line that is equal to two standard deviations, 95% of all price action will theoretically occur within the upper and lower lines. Each band represents therefore, implied support or resistance. Price swings are unlikely to be sustained above or below these lines for long. Because of how they are constructed, Bollinger bands expand or contract in order to reflect market volatility or the degree of movement in the price swings occurring at any given time. If the bands are relatively narrow, the market is experiencing lower price volatility or narrower price swings and the lines will intersect at upper and lower points that will tend to mark the extremes (highs and lows) for these quieter market conditions. If prices are experiencing wide-ranging price movement, the bands expand to reflect the higher volatility that exists. If the bands are wide and you can usually quickly see this visually in the pattern of price activity, the market is experiencing higher volatility – the lines then suggest where an extreme will be reached based on a more volatile and stronger recent price trend. As with envelope lines, they can be used on everything from intraday to daily to weekly charts, although I find that the most common use seems to be with daily charts. MORE IDEAS: FROM A TALK WITH JOHN BOLLINGER - John spoke at the Market Technicians Association (MTA), which we both belonged to, back in February 2002 - a major theme of this talk related to the "diversity" of people's use of his indicator. For example: WHAT MARKETS - Boli bands are being used in all markets, ranging from stocks, index options, index futures, commodities, currencies, etc. TIME FRAMES - Ranging from years, quarters, months, weeks, days, hours, minutes and with "tick" charts. DIVERSITY - This BB indicator is being used to detect the beginning and end of trends, to highlight the potential for reversals, to assess "continuation" patterns, to identify overbought/oversold conditions and to place stops. CHART PATTERN IDENTIFICATION - John cited an increasing use of his indicator in helping spot or clarify chart patterns. For example, a Head & Shoulder's (H&S) top or bottom has a typical Bollinger Band "signature", or a pattern for the Bands that is Similar, but slightly different than the actual H&S pattern. Using again the chart from above – The use of Bollinger bands in defining a pattern can be seen in the above chart of QCOM where the Bands made a good outline or "definition" of something that looked like and a Head and two peaks that looked even more like "shoulders" – although the right one has a bit of a "spike" to it. There was especially good definition of the Head. BOLLINGER BANDS CAN SUGGEST MANY THINGS – They are a "tool", not a "system". Tools, as is well known, can be employed in different ways and the ability to use them skillfully varies quite a bit - my use of woodworking tools will NOT produce finished cabinets, but my carpenter brother can do that with the same tools. Bollinger bands are highly adaptive as it is volatility that drives the width of the bands. This means that they can be deployed successfully in many different types or phases of markets. As an interest in volatility has grown, using Boli bands is an easy way to include volatility in the trading decision process. NOT SO WELL KNOWN - John's defaults were derived from studies of the U.S. stock market using daily data over a period of many years. The default length for the moving average is 20 periods or 20 "bars". The default for the bandwidth is two standard deviations. John makes greatest use of the Bands on daily or weekly charts. Sometimes he uses them on hourly charts for trade execution, or on monthly charts to gain a long-term perspective. BEST USE - By definition, prices are "high" (on a relative basis) at the upper band and "low" at the lower band. Armed with this information, you can compare price action to the action of the BB indicator to help you arrive at trading decisions. If prices are high and the indicator confirms this, you have a "confirmed" high. If prices are high and the indicator fails to confirm this, you have an "unconfirmed" high, which is suggesting that the stock or index has more "room" on the upside. John indicated that this use or purpose was the goal he had in mind when he developed his trading tool. RULES OF THE ROAD - 1. As with moving average envelops, prices can and do "walk" up or down the Bollinger Bands. 2. The average used was designed to best detect the "intermediate" trend; e.g., 2-3 weeks or longer. 3. Unlike moving average envelopes, at least the way I use them, closes above or below the Bollinger Bands can suggest "continuation" signals for the trend rather than "reversal" type indications. 4. If the (centered) moving average is lengthened, the number of standard deviations needs to be increased; e.g., from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened, the number of standard deviations should be reduced; e.g., from 2 at 20 periods to 1.9 at 10 periods. 5. The moving average used is a "simple" moving average because a simple moving average is used in the standard deviation process, so the same type of average is logically consistent. 6. A "touch" to the upper or lower line is just that - a tag or touch. These are not, in and of themselves, a buy or sell "signal" Good Trading Success! using Bollinger bands ************************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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