The Option Investor Newsletter Thursday 06-24-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Pause To Reflect Futures Markets: See Note Index Trader Wrap: See Note Market Sentiment: Traders Still Cautious Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-24-2004 High Low Volume Adv/Dcl DJIA 10443.81 - 35.80 10487.46 10433.56 1.72 bln 1662/1566 NASDAQ 2015.57 - 5.40 2032.21 2013.78 1.69 bln 1623/1473 S&P 100 555.71 - 2.09 558.77 555.30 Totals 3285/3039 S&P 500 1140.62 - 3.44 1146.34 1139.94 W5000 11104.21 - 28.10 11159.24 11098.64 SOX 470.73 - 5.60 479.42 469.24 RUS 2000 579.05 - 1.10 583.06 578.92 DJ TRANS 3127.26 - 12.00 3144.88 3124.30 VIX 14.81 + 0.83 14.97 14.16 VXO (VIX-O)14.39 + 0.76 14.64 13.95 VXN 19.36 + 0.38 19.61 19.07 Total Volume 3,681M Total UpVol 1,492M Total DnVol 2,086M Total Adv 3774 Total Dcl 3429 52wk Highs 363 52wk Lows 81 TRIN 1.19 NAZTRIN 1.30 PUT/CALL 0.66 ************************************************************ Pause To Reflect by Jim Brown After a very strong breakout on Wednesday the markets paused to reflect today and managed a very orderly profit taking session. The Dow tried twice to move higher and grab the brass ring at 10500 but fell about a dozen points short on the attempt. Considering the two day rally off the lows it is not surprising traders paused to wonder not only how they reached these levels but why given the current events. Dow Chart Nasdaq Chart Sox Chart The economic reports produced another mixed picture of conflicting signals sending ten year bond yields back down to 4.64%. The Jobless Claims crept up once again to near the 350K level with a notch at 349,000 for last week. There were comments from analysts that Reagan's funeral prevented workers from applying for benefits in the prior week thus shifting more applications into this week. Sounds reasonable to me but we will have to wait for next Thursday's release to see if they were right. The Help Wanted Index for May rose to 39 from 38 in April. Considering the recent gains in employment those same analysts are suggesting that this indicator is no longer valid instead of accepting that new employment may have slowed as we move into summer. Had it soared to 45 or so you can bet they would have been pounding the table to raise the estimates for the June nonfarm payrolls due out next Friday. The tea-leaf readers want the surveys to conform to their economic outlook not change their outlook to match the indicators. Since this indicator is based on newspaper advertising it is probably outdated with the onslaught of online job shops. Outdated yes but not yet insignificant. Another surprise came from a big drop in Durable Goods of -1.6% for May when consensus estimates were for a gain of +1.1%. This marks the second consecutive month that Durable Goods have fallen with the April drop at -2.6%. This two month drop of -4.2% sent the bond market soaring on the outside chance the Fed will see the economy as still too soft to raise rates. While I think that possibility is far too remote to consider the ten-year yields did drop to a five week low and with only four days remaining to the Fed decision. The drop in Durable Goods suggests one of the key points in the economic recovery, business spending, may be slowing once again. This is a very broad indicator and a continued slowdown in most components is troubling to say the least. I think this has a good chance of coming back to bite us very soon if the Jobs report next Friday shows a letup in hiring. The blowout number for the day was New Home Sales which soared to 1,369,000 units and more than 200,000 more than estimates. This is a May number and it was the largest one month increase since April 1993. I am sure readers remember I have written about this before and we expected the late spring numbers to explode. Once the rate increase was more or less guaranteed builders would provide higher incentives to attract buyers and those buyers still on the fence would bite the bullet and take the plunge trying to get in while they could still afford it. We have seen repeated reports that ARM loans have exploded as buyers try to reduce pmts as much as possible to offset rising rates and to leverage the largest amount of house they could buy on current incomes. With housing prices rising +15% or more a year in many areas the window of opportunity for a favorable purchase is closing. I have a son that owns a mortgage loan business and his closings have risen substantially in just the last month. Also, remember that New Home Sales are counted when the contract is signed and deposit made and not when they are closed. The jump in sales is simply a rushed decision to buy and lock in loan rates and it may be well ahead of the actual date of possession. Builders are now racing to build the homes they have already sold. Builders have been offering a capped rate mortgage for closings up to 12 months away in order to lock in buyers. The builder will eat the difference and add it to the cost of sales. Regardless of the current rate of sales you can bet builders will start fewer homes next winter with the prospects of rates being 2% higher in summer 2005. Keep control of the inventory and you control prices. It was not the economic reports that had the most impact on the markets at the open. It was news from Iraq as we draw nearer to the June-30th changeover. Overnight attacks killed 69 and injured over 300 in Iraq as terrorists try to further complicate the change in power. With six days left you can expect this carnage to continue with attacks against the new regime more than likely as the clock ticks down. Where a change in U.S. Presidents normally focuses on accomplishments in the first 100 days of office the major goal for the incoming Iraq regime will be staying alive for 100 days. If today's attacks are any indication the body count over the next week could be huge. Still the markets managed to hold their gains until about 1:PM and the eventual sell off was minimal. The Dow tried very hard to attack the 10500 level but could only manage 10487. Very respectable in my opinion. The closing drop to 10450 is still a level not seen in over two months until yesterday. The resistance explosion on Wednesday came on the back of a very big buy program that triggered massive short covering. Seems there were many traders short in front of the Fed/Iraq events and for good reason. Somebody pulled the buy program trigger at exactly the right time to upset that apple cart with a massive move over the 10430 resistance level. If you recall my comments from Tuesday night this event was not unexpected. We closed just below 10400 on Tuesday and I speculated that a +100 point move would not be unreasonable and I saw a bullish bias building. The 10500 level was my target. "Should we see a Dow move over 10430 we could see an acceleration of buying that just might overcome the resistance areas to the 10500 level." (Tuesday) The 10486 high on Wednesday and 10487 high on Thursday was close enough for me. The Nasdaq rebound far exceeded my expectations and it continued today with a spike to 2032, well over the top of the recent range and over the 2020 resistance. It makes you appreciate how strong the Wednesday short covering really was. The A/D volume was 5:1 in favor of advancers and the new 52-week highs were the strongest since April 12th. The spike came after an upward creep to that prior resistance so the spring was compressed and ready to go. The two-day rebound on the Nasdaq saw very little profit taking with only a -5 point day but we did slip back under the 2020 resistance level. We are poised to go either way. The SOX lead the Nasdaq bounce and it also led the decline today with a -5.61 drop beginning right at 1:PM. The SOX is resting on 470 support and well under strong resistance at 490. There could be another opportunity for a bounce here but odds are better for a sideways move into next week. For Friday we have the final Q1 GDP, which is expected to be +4.4% and inline with the last revision. After the bad Durable Goods today it could move the market if we see a substantial downward revision. Consumer Sentiment is also due Friday at 95.5 and inline with the initial June number at 95.2. This is one indicator that could see a jump. With the Iraq prisoner problem behind us and no material economic challenges in the rate/job market consumers should be happy and enjoying the summer sun. We also see Existing Home Sales where the consensus is for a decline to 6.53M units. After the New Home number today that may be low. For Friday I am not expecting any major upward move. With the potential for an escalation in violence in Iraq as the days tick away there is more potential for profit taking ahead of weekend event risk than for another rally. With the Fed meeting in two days those making bets should have already made them or the cautious ones might wait until Monday. We are watching the countdown on multiple time bombs and as the fuses grow short the potential for gains diminishes. My best target for a resumption of any summer rally is next Thursday. I would look at any dips before the 30th as buying opportunities. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* No time to follow the Market Monitor? 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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_062404_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 Still Cautious -J. Brown "No" was the answer to yesterday's question if there would be any follow through on Wednesday's technical breakout. The long-await rush of money that is supposed to be sitting on the sidelines failed to appear. Investors remain cautious and for good reason. News out of Iraq this morning was deadly. A new series of attacks and car bombs left 100 some people dead and hundreds wounded as we approach the June 30th deadline. Stocks traded mostly sideways through out the session before a last hour sell-off. Yet for the most part stocks held on to the majority of their gains from the previous two sessions. Today's big winners, aside for a surge in gold, were the housing stocks. The May New Home Sales numbers unveiled a 15% jump in sales to a new record. This sparked a fire under the homebuilders but the flames began to cool midday and most builders significantly tempered their gains by the close. This is good news because reaffirms that the economy is strong, consumers are still strong and a wave of new home sales usually means more retail sales as Americans rush out to buy new merchandise for their new homes. Once again market pundits are suggesting that we will continue to trade sideways until the end of next week. I know you're tired of hearing about it but Wall Street remains focused on the June 30th interest rate decision, the Iraq handover and the July 2nd June payrolls report. After that is the long July 4th holiday. If the holiday proves to be uneventful then we can move unhindered into the Q2 earnings season. A couple of noteworthy items to cool any bullish cravings you might have. The volatility indices (VIX, VXO, VXN), while moving higher today, remain near their lows and at bearish levels. Meanwhile, the ARMS index and a few of its key moving averages are also approaching bearish levels. Now we know these can always get more oversold but traders need to be careful when considering new bullish positions. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8871 Current : 10443 Moving Averages: (Simple) 10-dma: 10387 50-dma: 10253 200-dma: 10139 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1140 Moving Averages: (Simple) 10-dma: 1134 50-dma: 1119 200-dma: 1096 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1488 Moving Averages: (Simple) 10-dma: 1473 50-dma: 1447 200-dma: 1438 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.81 +0.83 CBOE Mkt Volatility old VIX (VXO) = 14.39 +0.76 Nasdaq Volatility Index (VXN) = 19.36 +0.38 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.66 861,415 572,208 Equity Only 0.49 698,962 341,775 OEX 1.20 14,827 17,831 QQQ 0.27 137,077 36,783 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 67.0 + 1 Bear Confirmed NASDAQ-100 43.0 + 2 BULL ALERT Dow Indust. 66.7 - 3 Bear Confirmed S&P 500 64.4 + 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: 0.91 10-dma: 0.97 21-dma: 0.93 55-dma: 1.04 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 1357 1585 Decliners 1465 1457 New Highs 161 89 New Lows 30 28 Up Volume 725M 751M Down Vol. 976M 848M Total Vol. 1726M 1674M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/15/04 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 traders remain net bearish but they have added to their long positions. Small traders have also added to their long positions but it's the jump in their shorts that is most noteworthy. Commercials Long Short Net % Of OI 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%) 06/15/04 428,905 444,197 (15,292) (1.8%) 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 05/25/04 136,086 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% 06/15/04 169,595 115,336 54,259 19.0% 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... what are commercial traders trying to tell us. Their short positions have grown steadily over the past four weeks. Likewise the small traders' long positions have grown each week for the last four weeks. Commercials Long Short Net % Of OI 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%) 06/15/04 440,867 522,546 (81,679) (8.5%) 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 05/25/04 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% 06/15/04 216,759 147,247 69,512 19.1% 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 bullish on the NASDAQ but their confidence is waning. Likewise small traders are staying true to their nature and doing the opposite with a decrease in shorts. Commercials Long Short Net % of OI 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% 06/15/04 78,542 54,341 24,201 18.2% 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 05/25/04 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%) 06/15/04 15,794 35,880 (20,086) (38.9%) 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 Hmm.. we have some interesting moves here. Commercial traders have gone from net bearish to net bullish while small traders have oved from net bullish to net bearish on the Dow Jones. You know who normally wins these conflicts - it's the commercials. Commercials Long Short Net % of OI 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%) 06/15/04 30,438 24,766 5,672 10.3% 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 05/25/04 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% 06/15/04 13,942 20,953 (7,011) (20.1%) 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 06-24-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: OSIP Call Play Updates: AHC, DHR, MERQ, EASI, ETN, GDW, PD New Calls Plays: CAT Put Play Updates: CCMP, KSS, INSP, MO, OMC, SLAB New Put Plays: ESRX **************** 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: ***** None PUTS: ***** OSI Pharma - OSIP - close: 68.62 chg: +0.41 stop: 70.01 Ouch! We've been stopped out in OSIP when it pierced the $70.00 mark this morning. On Tuesday we were cautious because OSIP was rising on rumors that DNA was considering OSIP as a takeover play. Then on Wednesday, with the market in breakout mode, the BTK biotech index surged through resistance at its 40-dma and its 200-dma. Today the BTK continued to rally into the morning and that was enough to push OSIP over the edge. The move also produced a new buy signal on OSIP's P&F chart, which actually turned the combined sell signal-to-buy signal into a bear trap pattern (yeah, no kidding). Unfortunately, if you look at the BTK today it appears to be failing under its simple 50-dma. Picked on June 20 at $ 65.63 Change since picked: + 2.99 Earnings Date 05/11/04 (confirmed) Average Daily Volume: 4.4 million 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 ******************** Amerada Hess Corp. - AHC - cls: 77.51 chng: -1.27 stop: 73.85 As we mentioned in our initial writeup on AHC, we expected that a breakout above the $75 level would generate some significant follow through and indeed it did. After clearing that hurdle on Tuesday, the stock soared to next resistance in the $78-79 area yesterday. After such a strong move a bit of profit taking was due and that's precisely what materialized today, with the stock retracing just about a third of this week's bullish move. Traders that missed the breakout entry are now looking for higher support to buy on the pullback and the 50% level near $76.50 looks like a good target. We really shouldn't see a drop all the way back to $75 at this point and are expecting the uptrend to continue, possibly as early as next Monday. A rally into the $82-83 area should be used for harvesting gains on the play. We're keeping our stop at $73.85 for now. Picked on June 17th at $74.15 Change since picked: +3.36 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 1.10 mln Chart = --- Danaher Corp. - DHR - close 50.16 change: -0.58 stop: 48.00 Monday's breakout over $49 was just the beginning for our DHR play, as the stock continued its bullish move, rising almost to the $51 level this morning before the inevitable profit taking arrived. The pullback was a bit stronger than we would have liked, but it was encouraging to see the stock find support just above $50 and consolidate in a tight range for the remainder of the session. While aggressive traders can consider buying the current dip, based on the way the stock has traded recently, we're expecting a pullback to test the $49 breakout level as newfound support. That will make for the ideal continuation entry point, as the 10-dma ($49.16) ought to continue to act as support. Traders looking for momentum entries can still consider a move over $51, as that still leaves ample room to our $53-54 target zone for a quick momentum play. Note that our $48 stop should now be protected by the 20-dma at $48.15. Picked on June 20th at $48.74 Change since picked: +1.42 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 1.58 mln Chart = --- Mercury Interact. - MERQ - cls: 50.38 chng: +0.39 stp: 48.50*new* Wednesday's strong rally lifted most stocks higher and MERQ wasn't left out of the bullish party, rising to test the $50 resistance level. Solidifying that move, the stock continued its ascent today, reaching almost to the $51 level before settling back for only a small fractional gain. Despite the afternoon pullback, MERQ still closed at its best level since mid-January and the next objective will be for a move to fill that January gap up in the $52-53 area. While aggressive traders can hold on for a test of the January highs near $54, we're suggesting harvesting profits in the $52-53 area. With the proximity of that exit target, it only makes sense to tighten our stop. Let's raise that stop to $48.50, which will be below the 20-dma ($48.39) by tomorrow. A pullback and rebound from above the 10- dma ($49.00) can still be used for new entries, but we're leaning more towards just managing existing positions here, rather than aggressively chasing new entries. Picked on June 6th at $47.56 Change since picked: +2.82 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.11 mln Chart = --- Engineered Support Sys - EASI - cls: 58.67 chg: -1.03 stop: 55.50 The DFI defense index has hit yet another new all-time high in the last two days. Climbing in its shadow is EASI. The stock tried for the second time to breakout over resistance at $60.00 but with the markets slipping back in profit taking today it couldn't do it. We are expecting an eventual breakout but shares may retest the $57.00 level again. At this time we're not suggesting new bullish positions. Yesterday we raised our stop loss to $55.50. Picked on June 20 at $ 56.22 Change since picked: + 2.45 Earnings Date 05/25/04 (confirmed) Average Daily Volume: 297 thousand Chart = --- Eaton Corp - ETN - close: 62.85 chg: -0.93 stop: 59.95 ETN surged to a new all-time high on Wednesday and confirmed the breakout over key resistance at $62.00. The stock is short-term overbought so today's 1.45% pull back is just mild profit taking. Actually, it wouldn't surprise us to see ETN slip back to test the $62.00 mark again. Traders should be ready to take advantage of the dip or buy the bounce. Remember that our target is the $70 range. No change in our stop loss. Picked on June 18 at $ 62.05 Change since picked: + 0.80 Earnings Date 04/14/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Golden West Fncl - GDW - close: 108.80 chg: -0.10 stop: 107.00 GDW came very close to breaking out over resistance and hitting our trigger to go long at $110.01 this morning. GDW hit $109.89 before slowly slipping back toward unchanged as the market suffered some profit taking on yesterday's gains. We will continue to wait for the breakout for now but our patience won't last too much longer. Keep an eye on the banking indices. The BKX needs to push through resistance near 98.00-98.50 while the BIX index did hit a new three-month high but failed to hold it. 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 = --- Phelps Dodge - PD - close: 76.08 chg: +0.96 stop: 71.75 *new* Hmm... it may be time to consider taking some profits here. The July $70 calls have moved from $3.80 to $7.00 and the July $75s have surged from $1.50 to $3.30 since we added PD to the play list. Shares of PD are up eight days in a row without a break. We're encouraged that PD has broken out above the $75.00 level and its simple 100-dma but nothing moves straight up. PD remains a few points shy of our target in the $80.00 range so patient traders willing to handle a dip or two can hold on. We would expect a pull back into the $74-75 range before mounting another charge toward the $80.00 region. Remember, there's no rule that says you can't sell and jump back in on a dip or just raise your stops (probably higher than ours). In the meantime we're going to raise our stop loss to $71.75. Investors are probably encouraged by news from PD that one of its mines has paid off all outstanding debt. Here's an excerpt from their press release: "[Phelps Dodge] has taken another major step in its stated program of lowering the company's debt, reducing interest expense and managing the maturity profile of its long-term commitments. Effective June 21, 2004, Compania Contractual Minera Candelaria, the company's 80-percent-owned copper mining operation in Chile, completed the full prepayment of its senior debt and executed the termination and release of the existing financing obligations and associated security package with the bank group. Candelaria joins the company's 82-percent-owned Cerro Verde mining operation in Peru as a debt-free source of low-cost, South American copper production." Picked on June 20 at $ 71.68 Change since picked: + 4.40 Earnings Date 04/28/04 (confirmed) Average Daily Volume: 2.6 million Chart = ************** NEW CALL PLAYS ************** Caterpillar, Inc. - CAT - close 79.10 change: +1.21 stop: 76.00 Company Description: Caterpillar Inc. operates in three principal lines of business: Machinery, Engines and Financial Products. The Machinery segment designs, manufactures and markets construction, mining, agricultural and forestry machinery. The Engines segment designs, manufactures and markets engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications, and related parts. The Financial Products segment consists primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a range of financing alternatives for Caterpillar machinery and engines, solar gas turbines, as well as other equipment and marine vessels. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of Caterpillar's equipment. Why we like it: After an impressive run to new all-time highs early in the year, CAT was way overdue for a bout of profit taking and when the broad market began to weaken, it headed south with the rest of the herd, finding support in the $73-74 area. Another run at the highs was turned back just below the $85 resistance level and thus ensued another trip down to the $73-74 support level. Since then, the stock has been market time between $73-76, waiting for the bullish support line on the PnF chart to rise to meet price and either give a strong rebound or signal a major breakdown. Last week saw the stock drop right to the $74 level (the site of the PnF bullish support line and we've seen a very strong rally off of that level this week. The first obstacle to be scaled was resistance at the $78 level, and that breakout generated a fresh PnF Buy signal. With the PnF chart already bullish with an upside target at $86, this latest breakout looks like a nice point of confirmation. Note that this week's breakout through $78 took price through the 50-dma ($76.88), 100-dma ($77.33) and 200-dma ($76.76), all in the same day (yesterday) and it was followed by another strong up day today (+1.55%) in spite of the broad market consolidation action. CAT looks like it wants to run back to test its highs from earlier in the year and we want to go along for the ride. Aggressive traders can enter on a continued bullish push above $79.50, while the more conservative approach would be to enter on a pullback near the $77.50-78.00 area. Following the breakout through all those longer-term moving averages yesterday, we should now see strong support building near the $77 level, providing additional protection for our stop, initially placed at $76, which is just under yesterday's intraday low. Suggested Options: Shorter Term: The July $75 Call will offer short-term traders the best return on an immediate move, as it is currently in the money. Longer Term: Aggressive longer-term traders can use the August $85 Call, while the more conservative approach will be to use the August $80 Call. Our preferred option is the August $80 strike, as it is currently near the money and should provide sufficient time for the play to move in our favor. BUY CALL JUL- 75 CAT-GO OI=3320 last traded @ $4.60 BUY CALL JUL- 80 CAT-GP OI=4511 last traded @ $1.15 BUY CALL AUG- 80*CAT-HP OI=8201 last traded @ $2.55 BUY CALL AUG- 85 CAT-HQ OI=9115 last traded @ $0.90 Annotated Chart of CAT: Picked on June 24th at $79.10 Change since picked: +0.00 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.34 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: 28.51 chg: -0.43 stop: 30.00 We have good news to report on CCMP. The stock continues to under perform its peers and resistance at the $29.00 level and the simple 40-dma has held. The next move for CCMP "should" be down. Traders looking for new positions might want to use today's drop from the 40-dma as an entry point. Conservative traders can tighten their stop to $29.51. We're going to leave ours at $30.00 for one more day. Fortunately, the company didn't have anything to say at the growth (company) conferences this week that actually moved the stock. Picked on June 13 at $ 29.46 Change since picked: - 0.95 Earnings Date 04/22/04 (confirmed) Average Daily Volume: 3.7 million Chart = --- Kohl's Corp - KSS - close: 43.60 change: -1.49 stop: 45.50*new* It wouldn't be a bad idea to consider taking some profits in KSS either. The stock is very quickly approaching our target in the $41-42 range. So far the July 50 puts have jumped from $3.50 to $6.60 while the July 45 puts have ballooned from $0.85 to $1.95 since we added KSS to the put list. Honestly we're surprised that KSS hasn't produced much of an oversold bounce yet. It tried on Tuesday-Wednesday but failed at its 5-dma. Today's 3.3% decline is a breakdown back under the psychological $45.00 mark and its simple 50-dma. We're going to lower our stop loss to $45.50 but more conservative traders concerned about protecting profits might want to consider a stop loss near $44.75. Picked on June 06 at $ 47.45 Change since picked: - 3.85 Earnings Date 05/13/04 (confirmed) Average Daily Volume: 3.7 million Chart = --- Infospace, Inc. - INSP - close: 35.17 change: +0.09 stop: 36.00 There's a big reason why we initiated coverage of INSP with a breakdown trigger and that reason is clearly evident on the daily price chart. The stock launched higher from just above our $32 trigger and is now challenging triple resistance at the 20-dma ($35.35), 100-dma ($35.32) and 50-dma ($35.59). If there's any chance for the H&S top formation to play out in the near term, than price must roll over below this strong resistance level. A breakout will more than likely activate our $36 stop, and we'll happily step aside without having been lured into a position. If we do get the rollover, make sure to wait for our trigger to be hit before playing. Picked on June 22nd at $33.83 Change since picked: +1.34 Earnings Date 7/28/04 (unconfirmed) Average Daily Volume = 1.07 mln Chart = --- Altria Group - MO - close: 48.45 change: -0.02 stop: 49.50 After languishing below resistance near $48 for well over a week, MO finally caught a bit of a lift with the broad market advance yesterday and it held that fractional gain throughout today's consolidation session. The stock has now moved slightly above the dual 10-dma/20-dma resistance near $48, but while that was taking place, the daily Stochastics has reached all the way into overbought territory and is hinting at a rollover at the 30-dma ($48.39). This play still looks quite attractive for rollover entries near current levels, targeting an initial drop to the $44-45 area. With our initial stop at $49.50, that presents a solid risk to reward ratio. Picked on June 15th at $47.55 Change since picked: +0.90 Earnings Date 7/20/04 (unconfirmed) Average Daily Volume = 6.67 mln Chart = --- Omnicom Group - OMC - close: 76.14 change: +0.17 stop: 79.75*new* Continuing with its breakdown, OMC confirmed the longer term H&S pattern on Tuesday and then fell right to that $75 support level, where we suspected some support would be found. The weakness of the rebound from that level (so far) is quite encouraging and now we'll be looking for a rollover from the $77 level over the next few days to get the next leg of the downtrend moving. Note that the broken H&S neckline and the 10-dma ($77.42) are converging to bolster that resistance level. As if that wasn't enough, there is very stiff overhead resistance at broken support in the $78.00-78.50 area. With the drop below $76, the bearish PnF chart is now working with a downside target of $69, although it's possible that we'll see significant support start to build in the $70-71 area. Lower stops to $79.75 tonight, which will be above the 50-dma ($79.80) by tomorrow. Picked on June 20th at $77.14 Change since picked: -1.00 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 1.09 mln Chart = --- Silicon Labs. - SLAB - close: 47.17 change: +0.63 stop: 48.50 While the initial breakdown under entry trigger certainly looked favorable earlier this week, the strong rebound has got to be causing even the staunchest of bears a little heartburn. The stock found a low on Tuesday just under $43 and then bounced strongly yesterday, closing just over the 10-dma ($46.52). The real cause for concern arrived today though, with the stock's early rise coming within 2 cents of hitting our $48.50 stop. Fortunately, the Semiconductor bulls lost their nerve near midday and SLAB plunged back near the $47 level, wiping out nearly all the intraday gains by the close. The big question is whether the breakdown was a bear trap or if today's failed rally was a bull trap. Obviously we can't know that right now, but we have a couple metrics to guide us along the right path. Should our stop be triggered, it would be on a break above today's high and that stop should be honored. On the other hand, aggressive traders could look at a break back under the 10-dma as a possible continuation entry into the play, with the $43 level a clear point of support on the way down to our $40 target. Keep one eye on the SOX for indications as to sector strength or weakness. Picked on June 20th at $44.99 Change since picked: +2.18 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.15 mln Chart = ************* NEW PUT PLAYS ************* Express Scripts - ESRX - close: 76.07 chg: -0.33 stop: 77.51 Company Description: Express Scripts, Inc. is one of the largest pharmacy benefit management (PBM) companies in North America. Express Scripts provides integrated PBM services, including network pharmacy claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical and drug data analysis services, and medical information management services. Express Scripts is headquartered in St. Louis, Missouri.(source: company press release) Why We Like It: We like ESRX because the stock is starting to fade after a strong run from under $55 to $80.00 between October 2003 and April 2004. Technically everything is turning bearish. ESRX broke its five- month rising channel in early May but managed another rally back to resistance at $80.00. When ESRX failed to breakout over $80 again this turned into a bearish double-top pattern. Then on June 14th Wachovia downgraded the stock from "out perform" to "market perform" and ESRX gapped down under its simple 50-dma to test mild support at $75.00. Shares of ESRX have since rallied back to fill the gap at $78.00 and are now rolling over again. Its daily technicals (MACD, RSI and stochastics) are all bearish while its weekly chart also shows a new MACD sell signal. Its point-and-figure chart is bearish with a $64 price target. The company had a chance to announce positive stock-moving news at the William Blair & Co 24th Annual Growth Stock conference this morning but whatever they presented failed to inspire investors. We're going to suggest using a TRIGGER at $74.95, which would be a breakdown under the round-number psychological $75.00 mark and its simple 100-dma. Once triggered we'll target a move toward the 200-dma currently at $68.50; of course by the time we reach the 200-dma it may be a bit higher. Our initial stop loss will be $77.51. Suggested Options: There are only three weeks left for July options so we're going to suggest the August puts. Our favorite is the August 75s but the 70s look good too. BUY PUT AUG 75 XTQ-TO OI= 1498 Last traded @ $2.60 BUY PUT AUG 70 XTQ-TN OI= 1000 Last traded @ $1.15 Annotated Chart: Picked on June xx at $ xx.xx <-- see Trigger Change since picked: - 0.00 Earnings Date 04/27/04 (confirmed) Average Daily Volume: 733 thousand 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. 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The Option Investor Newsletter Thursday 06-24-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Homes to Technology Option Spreads: A Trilogy - The Covered Call Exposed – Part 1 Traders Corner: One Pattern (WEDGE) – One Indictor (OBV) Traders Corner: Lights, Camera, Action! ********** WATCH LIST ********** Homes to Technology ___________________________________________________________________ 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. ___________________________________________________________________ Meritage Corp - MTH - close: 70.31 change: +1.31 WHAT TO WATCH: Both stock volume and option volume is pretty low on MTH but careful traders might still be able to profit on the stock's strength. MTH mimicked most of the homebuilders by shooting to new relative highs on the surprising New Home Sales report this morning. The breakout over its 100-dma and the $70.00 mark looks great. The pull back from $72.00 doesn't look so hot. Depending on your trading style investors can look for a bounce from $69.00 or a breakout over $72.00 to initiate new bullish positions. Its Point & Figure chart shows a new triple- top breakout buy signal and an $87 price target. We would probably target the $77.50 region. Chart= --- Broadcom Corp - BRCM - close: 45.00 change: -0.56 WHAT TO WATCH: We mentioned BRCM in the MarketMonitor today. The specialty chipmaker has recently broken out above crucial resistance at $44.00 on strong volume. The move also produced a bullish P&F chart breakout with a $62.00 target. We think traders could initiation bullish positions now or on any bounce above the $44.00 mark and target a move to round-number psychological resistance at $50.00. Earnings are a month away on July 20th. Chart= --- Sony Corp - SNE - close: 37.78 change: +0.16 WHAT TO WATCH: SNY has been consolidating under resistance at $37.50 and its simple 200-dma for the last month. Its trend of higher lows finally blossomed into a breakout today above its 50- dma and the 200-dma. Bulls might want to consider buying a bounce from $37.50 or a breakout over $38.00 and target a move to $42, which looks like point-and-figure chart resistance. Chart= --- eBay Inc - EBAY - close: 88.74 change: +0.39 WHAT TO WATCH: Yes, we're still holding EBAY to the watch list. Yesterday the stock not only broke through minor resistance at $88.00 but broke out of its bull flag pattern. The flagpole on the pattern suggest an upside target of $100.00. More aggressive traders could go long at current levels (anything above $88.00) while more conservative traders can wait for a new high and a breakout over $90.00. We are expecting some sort of earnings run ahead of its July 22nd announcement. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- QCOM $68.68 +0.78 - QCOM failed again at resistance but is still within striking distance of breaking out above the $70.00 mark. RIMM $61.03 +0.80 - RIMM is back above the $60 mark but still under resistance at $62.00. Look for a potential pre-earnings ramp up ahead of its June 29th report. ONXX $41.98 +0.78 - The recent rebound in ONXX has produced a technical breakout on its daily chart and P&F chart. We would target a move to its 40 & 50-dma's near $46.50 or the resistance near $49-50. VAR $78.90 -0.80 - Here we go. VAR looks ready to drop toward support at $75.00 and its simple 200-dma. YHOO $34.11 +0.14 - Bulls should be encouraged that YHOO not only held on to all its gains from yesterday but hit new highs. DE $69.24 -0.06 - Rival CAT is breaking out so we expect DE to follow soon with its own breakout over resistance at $70.00. ************************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 Trilogy - The Covered Call Exposed – Part 1 By Mike Parnos , Investing With Attitude When you embark upon your first adventure into options trading, there are those who will tell you that “covered call writing” is the safest strategy. Most brokerage firms allow novice option traders to trade covered calls in their IRA accounts because of it’s “safety.” Little do they know. There are a variety of ways to trade covered calls. This deserves some attention. Not all who read this column are ready for the more advanced strategies that I usually discuss here. The most basic theories of therapy involve going back to one’s childhood -- where impressions and life-long habits are formed. So, let’s get the road on the show . . . Once upon a time there was an investor. All of his life he was taught that if you bought a stock and held onto it forever, the stock would go up, he’d make a lot of money and live happily ever after. It was the American dream. As we’ve come to learn, those dreams and Mother Goose have a lot in common. They’re fairytales. The harsh realities of the market have resulted in a rude awakening from dreamland. The Internet bubble, the recent bear market, and an abundance of corporate improprieties, have systematically demolished hordes of retirement accounts. They “buy-and-holders” are still “holding.” Old habits die hard. Only, what they’re holding isn’t hard anymore. Covered Call: The Stock For our example, we’ll say you currently own 1,000 shares of Juniper (JNPR) currently trading at $21.30. How you came to own this stock is anybody’s guess. Maybe you bought and held, maybe you inherited it, maybe you won the lottery. It’s not really important. The question is – how can you best use this asset to make money? You have a neutral to bullish outlook on JNPR. You project that it will trade flat or possibly up a little in the next few months. If your projection is just wishful thinking and you have nothing to base your opinion on, you have no business owning a stock, let alone trying to trade options. Covered Call: The Option Well, if you’ve read my previous columns, you know that there is a bottomless pit of speculators out there. “Speculators” is the nice word. “Gamblers” is more accurate. There is, and will always be, someone out there who is willing to buy an option – betting that JNPR will rise substantially in the next month. He wants to buy the right to buy JNPR from you at $22.50 anytime between now and June expiration (about 4 weeks). For that right he’s willing to pay you $1.50 per share. That translates into $1,500 worth of dead presidents into your pocket. The speculator is buying the JNPR June $22.50 call option. He’s buying the “right,” but not the “obligation,” to buy the stock from you at $22.50. He’s expecting that JNPR is going to appreciate well beyond $22.50. If he’s buying the stock at $22.50 and the option costs him $1.50, his breakeven is $24.00. The nice part about all this is that the $1,500 he’s paying you is yours to keep – regardless what happens to the stock. It shows up in your brokerage account the very next business day. What you have to be willing to accept is the fact that, if JNPR does happen to move up, you’ve agreed to sell it at $22.50. You will not participate in any gains above and beyond $22.50. More Profit Than You Think Once you’ve accepted the fact that you and your 1,000 shares may soon experience a separation, you can focus on the potential profit in the trade. If JNPR finishes above $22.50, there are two ways you will profit. 1) You took $1,500 when you sold the call. That’s a good start. 2) If your stock is called away at $22.50, you will have made another $1,200 in profit from the appreciation of the stock price. Remember, this all started with JNPR trading at $21.30. When the stock is sold, you get the $1,200 difference. You took, in $1,500 from the sale of the option plus another $1,200 profit from the sale of the stock – a total of $2,700. That’s a better than 13% return for about a month. If you used margin to purchase the stock, it would be about a 26% return. If JNPR finishes below $22.50, you will still own the stock and may be able to sell another call for July. The Good, The Bad & The Ugly You now know the good. Get ready to learn about the bad and the ugly. The main risk in covered call writing is the fact that you do own the stock. And, contrary to popular optimistic thinking of the masses, the shares of JNPR could go down just as easily as it can go up. The $1.50 taken in from the option purchase provides a little cushion – a damn little cushion. The same principles apply to covered call selling as to all other trading and/or investment strategies. The main principle, and the toughest one to live with, is that you must have an established exit point – and the self-discipline to act on it when necessary. Of course, that means having to admit that you’re wrong when JNPR turns south instead of going up. How do you figure out your exit point? There are a few ways. 1) Use a specific dollar stop. Your account management techniques tell you that you have a maximum limit of a $2,000 loss per position. That would dictate that you have to close out your entire position by selling your stock and buy back your short JNPR $22.50 option when it costs you a total of $18.90 ($18,900). 2) Check for support levels. There may be a support level at $20.50. Maybe there’s a 50-day moving average at $19.55. You can establish an exit point if one, or both, of these support levels are violated. Another Way To Play Covered Calls This strategy alternative is for more aggressive traders. What the hell, as long as you own the shares of stock anyway let’s have some fun. One thing that we know is likely is that JNPR will move up and down 2-3 points a few times during the next month. When JNPR moves down, the value of the $22.50 call decreases. After two weeks, JNPR falls to $19.60. The value of the June $22.50 call may be $.40. You can buy it back and play the bounce back up from the $50 day moving average at $19.55. Then, you wait until JNPR moves back up to about $22.25 and sell the $22.50 again, this time for $1.00. That’s an extra $.60 ($600) taken in during the option cycle. This may happen two or three times during the four weeks if the market gets volatile. That could increase the premium taken in by a total of $1.20. Again, there’s no guarantee that any of this will happen. Some traders, who can’t keep their hands in their pockets, like to trade “within their trade” to try and generate more premium. The Bottom Line Can you guess what I’m going to say? If you buy a stock, you’re exposed for the entire value of the stock, all the way down to zero. If you combine stock ownership with selling a call against the stock, you may be able to generate some monthly cashflow. The likelihood is that, if you guess right about the direction, the stock will be called away. If you guess wrong, the stock will go down and you will take a few hits of that “hopium” drug and sit there “hoping” the stock comes back up. It won’t and you’ll end up still owning the stock at $15. Selling Calls On Tanking Stocks Why can’t you sell a call when the stock is at $15? Well, you can, but there won’t be any premium in the $20 or $22.50 July calls. If you sell a $15 or $17.50 call, you’ll be locking yourself into a loss on the stock– which is a no-no. A Marriage Made In . . . ? Fact: Many brokerage firms only allow covered-call selling in IRAs. Fact: There are still countless buy and holders who are still holding stocks in their IRA. It’s fate. It’s inevitable that the twain will meet. The money or the stocks will eventually disappear and the novice traders will have more bad things to say about options. They will continue to live in denial. It wasn’t their fault. They’ll blame the options -- when they simply don’t know how to use them. When all is said and done, the only way to own a stock is to buy a protective put as insurance to protect against catastrophic events. Check out one of my previous columns in which I discuss the “collar” in great detail. JULY NEW POSITIONS Position #1 – SPX Iron Condor – 1140.65 We sold 10 July SPX 1170 calls and bought 10 July SPX 1180 calls for a credit of about: $1.10 ($1,100). Then we sold 7 July SPX 1075 puts and bought 7 July SPX 1060 puts for a credit of about: $1.20 ($840). The total net credit of was $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 – 579.05 We sold 10 July RUT 600 calls and bought 10 July RUT 610 calls for a credit of about: $1.00 ($1,000). Then we sold 10 July RUT 530 puts and bought 10 July RUT 520 puts for a credit of $1.30 ($1,300). Our total net credit was $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 – 1140.65 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. We sold 3 SPX July 1125 puts and bought 3 SPX July 1100 puts for a total credit of about: $6.30 ($1,800). Our 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 – 470.73 We sold 10 SOX July 490 calls and bought 10 SOX July 500 calls for a credit of about: $1.10 ($1,100). Then we sold 10 SOX July 420 puts and bought 10 SOX July 410 puts for a credit of about: $1.30 ($1,300). Our 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. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $37.05 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 – 555.71 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 was $4,390 plus unused $1,700 = $6,090. From the June option cycle, we are able to officially add $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. ____________________________________________________________ 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 ************** One Pattern (WEDGE) – One Indictor (OBV) By Leigh Stevens lstevens@OptionInvestor.com In my most recent Index Trader column I cited examples of two things in bellwether stock Microsoft (MSFT), one of which – On Balance Volume (OBV) – was a tip off ahead of time, for a rally that was coming. The other thing I mentioned about MSFT - that of an upward sloping wedge pattern and which I cited as a bullish pattern – WRONG!. Not usually or normally!! So, besides my confession of sloppy technical/pattern analysis, I will discuss what bullish and bearish Wedge patterns normally signify. Let's go to the MSFT daily chart, but updated after 4 more days of trading from when I called the rising pie shaped pattern that I outlined below, a "bullish" rising wedge. The chart patterns give conflicting messages here so to speak. The upside penetration of the down trendline was bullish – however, you'll also note that the stock appears to be stalled in the area of the prior highs which should make us alert to a possible top. The upward sloping or bearish wedge, that is normally bearish in its implications for future price action, may be the tip off to what comes next; e.g., a downside reversal, at least back to 27- 27.50 – stay tuned! An advance warning of the good-sized rally that developed in June was the rising On Balance Volume Indicator or OBV line, which is cyan in color. The part outlined in the circle is the key time period – as prices trended mostly sideways, OBV turned up and started trending higher. Let me go to some explanations of each – the wedge pattern and the On Balance Volume Indicator. Wedge patterns have significance for both Stocks AND Indices. On Balance Volume or OBV has significance for all stocks but not for all Indices – actually only for the Nasdaq 100 tracking stock QQQ as it has daily trading volume or a number of shares traded. WEDGE PATTERNS – Wedge patterns are usually "reversal" patterns – meaning the existing trend is susceptible to a trend reversal. One such pattern, while not seen all that often, but which tends to be predictive for a bottom or top is the "wedge". The wedge pattern of a "rising" bearish type is usually seen after an uptrend has been underway for a while which is somewhat the case as an overall uptrend was underway for at least 3 months in the example of Microsoft above. [Sometimes, not as often, a wedge formation will suggest a potential trend reversal even before the emerging trend has gone on very long; e.g., only a month.] BULLISH FALLING WEDGES AND BEARISH RISING WEDGES - In a rising wedge, prices move gradually higher but form converging trendlines and a "narrowing in" pattern of higher highs and lower lows, such as seen in the rising wedge pattern in the chart above and below. The chart below is from 2002 and shows the daily chart of the Dow Index (DJX) chart leading up to late-August '02. Subsequent to the period shown above – by October – the Dow dropped to as low as 7,200 - to 72 in terms of DJX. There is a "measuring" rule of thumb for a downside objective also - prices should decline to the start of the formation, or the lowest prior low as a "minimum" downside objective. To create a wedge, there should be at least 2-3 upswing highs and downswing lows that comprise the points through which the trendlines are drawn – the more points than this minimum number the better, in terms of drawing two well-defined converging lines. A wedge pattern can also form over a very lengthily period such as I showed in my (Essential Technical Analysis) book and as recreated below – What is being suggested in the rising, bearish wedge is that buying is being met with stronger and stronger selling as prices edge higher. When prices fall below the lower up trendline that of a rising wedge pattern, a trend reversal is suggested – prices may rebound to the trendline again, but will typically not get back above it. Place a liquidating buy stop just above the broken trendline, if a short position is established on the downside break. A declining or falling wedge is typically a bullish pattern as it suggests that selling is being met with increasing buying. Eventually, this sets the stage for an upside reversal as can be seen in our next chart. The first recent example (left) in the QQQ chart is the most obvious wedge in the shape of the pattern – one with good "definition". The related tip off for a possible upside reversal was also seen in the decline to the 200-day moving average and not penetrated on a closing basis (suggesting support) - The objectives implied by the wedge - prices should advance to at least the start of the formation, or back to highest prior peak as a "minimum" upside objective, has been met in both examples above. An example of a bullish falling wedge that I used in my book – THE ON BALANCE VOLUME (OBV) INDICATOR – I started this Trader's Corner with an example (first chart – top) with using a recent volume and price trend in QQQ. A past example of what you can sometimes pick up using On Balance Volume Indicator versus the Volume Indicator is seen in the following charts, showing a period in 2002 - QQQ in this first chart was in a strong up trend that was not being "confirmed" with a rising daily volume trend - The normal way of displaying volume is by selecting "Volume" as an Indicator on charting applications - volume is displayed as a histogram or as vertical bars that show the volume total for that day (as read from the right hand numerical volume scale). On Balance Volume or OBV is also a type of volume indicator or volume-RELATED technical study or formula; an indicator being any mathematical calculation that is applied to a financial instrument’s price and/or volume information. To next see what OBV looks like, take a look of this Indicator as overlaid on the QQQ daily chart volume bars below – On Balance Volume keeps a cumulative running volume figure that adds ALL the volume on an up day and subtracts ALL the trading volume on down days. If there is more trading volume on up days then there is on down days, OBV rises, as can be seen in the lower portion of the daily chart on the QQQ chart above. OBV provided an early and ongoing indication that the buying interest in the Nasdaq 100, as reflected in QQQ, was stronger than the selling activity. For this reason OBV can alert us to "accumulation" or steady buying of a stock; i.e., there is buying "on balance" in the stock. It may not be the case that daily volume spikes dramatically, but is typical of institutional/fund buying and their gradual accumulation. A big fund can move prices more than is desirable if it does all its buying (or selling) at once. OBV CONSTRUCTION - To construct the OBV indicator, a running total of volume is kept. Assume that we start with a stock that traded a million shares on day 1 and is a neutral starting point - we have to start somewhere. If the stock closes higher the next day and trades 750,000 shares, day 2’s volume figure is added to the first day and assigned a positive number because our running total is a positive number; OBV is now a +1,750,000. [NOTE: OBV would be a negative number if our example stock closed lower on day 2, on 1,500,000 shares: OBV would be –500,000.] Going back to the example - on day 3 the stock closed lower on 500,000 shares and we subtract that day’s volume from our cumulative OBV total: on day 3, OBV is +1,250,000. When the stock is unchanged in price on day 4, we leave OBV unchanged at +1,250,000. This calculation process continues on into the future. If we graph the points, the resulting line will start moving upward or downward following the direction of the price trend of the stock for which OBV is being calculated. We are primarily concerned with the DIRECTION of OBV - is the (OBV) line moving UP or DOWN? If the direction is up, the OBV line is bullish, as there is more volume on up days than on days when the stock price is down. A falling on-balance volume line is bearish, as more stock is being traded on down days than on up days. If both price and OBV are moving up together, it is a bullish sign portending higher prices. If both price and OBV are moving down together, this is a bearish indication for still lower prices ahead. However, if prices move higher during a period of time when OBV lags or moves lower, this is a bearish divergence indicating diminishing buying activity and warns of a possible top or trend reversal. Conversely, of course, if prices are moving lower but OBV is trending higher, this is bullish divergence. This is not unlike other divergences such as when prices are trending lower, but with rising RSI lows; and, vice versa for a bearish divergence with prices moving higher without a corresponding new high in the RSI oscillator. Good Trading Success! using Wedges and OBV ************** TRADERS CORNER ************** Lights, Camera, Action! by Mark Phillips mphillips@OptionInvestor.com The moment the entire investing community is apparently waiting for will finally arrive next week, with the FOMC delivering their verdict on interest rates. It is widely expected that they'll kick the Fed Funds rate up by 25 basis points and then market participants will react to the news in typical volatile fashion. Once the dust settles, we'll be able to better gauge which way the wind is blowing, but as we've been discussing these past several weeks, that first rise in interest rates will be the starter's gun we've been waiting for. We've spent a lot of time analyzing the Housing sector and several of the more prominent stocks in the sector in excruciating detail over the past few weeks and as of last week's article, we finally settled on CTX and LEN as our two most likely candidates to provide a long-term bearish play in the sector. Recall that we're looking for trades that are going to last months and our preference is to use LEAP Puts as our trading vehicle. I don't want to repeat any of what we've already covered, as there's plenty of new data to consider this week. For those of you looking for a refresher or just joining our discussion, I invite you to peruse the portion of the discussion that has already taken place at the following links. 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 Two Weeks And Counting http://www.OptionInvestor.com/traderscorner/tc_061704_1.asp As noted above, our relative strength studies of our initial five candidates showed us that CTX and LEN were the two weakest of the LEAPable stocks in the sector. Today, we'll focus our attention on these two stocks, looking at both their PnF and candle charts, trying to determine what the most favorable action points will be. Keep in mind though, we are employing a top down strategy and before initiating a trade on either of these two stocks, we need to see the bearish confirmation signs in the $DJUSHB that we've already outlined. Remember, from all of our studies, the sector is still bullish -- we're looking for a solid trade to materialize once that bullish trend is broken. Alright, first up, let's look at CTX and see what it has to offer. Let's start out with the easy stuff. CTX Daily Candle Chart As we might expect from the fact that the sector is still looking bullish, CTX appears to be putting in a near-term bottom. This simply bolsters one of our initial assumptions, that we don't want to take a position as soon as the interest rates start to rise. We'll need to exercise patience and wait for everything to line up in our favor. Keeping in mind that this is a longer-term play we're trying to define, let's slide over to the weekly chart and see if it provides any greater clarity. CTX Weekly Candle Chart Indeed it does! I think the most telling aspect of this chart is the dashed line depicting the longer-term trend. Now that it's been broken, I would expect it to offer firm resistance on the next test. That may take a few weeks to set up. Wouldn't it be interesting if we saw a rollover from the underside of that trendline about the time price reaches the $55 area? It could really get exciting if price then proceeded to break below the neckline of that potential H&S pattern, which would give us a downside target near $26! That's not a prediction, just a speculation on a chart setup that might or might not come to pass. Alright, let's put some of the subjectivity aside and take a look at the ultimate arbiter of supply and demand, the PnF chart. CTX Point & Figure Chart - Standard Scale This standard scale chart shows just about what we might expect, with two failed bearish signals, one in January and the next one in May. Both of those Sell signals were reversed and bears that tried to play the downside in the stock prematurely likely got burned. Take note of the fact that price bottomed near $44 both times, which coincides nicely with horizontal support on our weekly chart. But as we've been discussing, we want to filter out these spurious PnF Sell signals by picking the right scale. We've done this for our sector analysis, so we ought to be able to do it for our stock analysis as well, right? I'll spare you the iterative process and just present the "correct" solution I came up with. CTX Point & Figure Chart - 1.6-point Box Scale After a few false starts, I found that the 1.6-point box size was the right scale to choose for CTX. Note how it eliminates all the spurious Sell signals, but still gives us the same threshold for a confirmed bearish signal? We haven't had a Sell signal in this stock since 2001, so if we see a trade below $43.20, that should be the real deal. So there we have it. CTX needs to trade below the $43.20 level for a confirmed bearish signal. Ideally, we'd have that occur after another credible bounce to put in the right shoulder of the potential H&S topping formation, but we can deal with that possibility later on. I'm not one to quibble over 20 cents, so for our purposes, I'll call $43 our downside trigger for a play on CTX, keeping in mind that we need cooperation from the $DJUSHB as well, giving us its own PnF Sell signal and in the process a breakdown in its RS chart as compared to the $SPX. Now let's turn our attention to LEN, and we'll start right out with the daily chart there as well. LEN Daily Candle Chart After taking another quick look at the chart of the $DJUSHB and seeing that it is still in a bullish configuration, specifically in a relative strength standpoint, we weren't surprised to see the bullish tone on the CTX chart and we see a very similar situation here with LEN. The stock is breaking over the 3-month descending trendline and a trade at $47 will bring us a solid breakout over horizontal resistance. In order to see a pattern of weakness developing, we've obviously got to use a different viewpoint -- how about that weekly chart? LEN Weekly Candle Chart I expected to see a chart transitioning from bullish to bearish, but the similarities between CTX and LEN are really a bit stunning to me. They have both broken below the long-term rising trendline and the first serious test of that trendline (if we can get it) will more than likely have a large H&S topping pattern in play. Should the H&S pattern confirm on LEN, then we're likely looking at a downside target $26, which lines up nicely with that congestion zone at the far left of the chart above. I wonder what the PnF chart has to say? Anybody want to place any bets on whether we have any false Sell signals that need to be filtered out? GRIN LEN Point & Figure Chart - Standard Scale I don't know about you, but that's about what I expected to see. Note the series of Sell signals since the first of the year, each of which was a bear trap? That's definitely not the type of pattern that is going to inspire confidence in playing the downside in this stock, now is it? One thing I'll make note of though is that LEN is actually on a PnF Sell signal right now (until it trades $47) and has a downside target of $27. That's pretty close to the potential $26 H&S target, don't you think? But let's see if we can get a cleaner view by eliminating some of these spurious Sell signals. LEN Point & Figure Chart - 1.7-point Box Scale I had to play with the scaling a bit more on LEN to get things to look right and remove that pattern of successive failed Sell signals. In the end, a scale of a 1.7-point box size did the trick, leaving us with only the current Sell signal. Isn't it interesting that the current bearish price objective is $27.20, which is very close to the $27 target on the standard scale chart? Note that we would have to see a monster rally to above $56 to turn this PnF chart bullish, so I think we have a chart scale we can put some stock in. Do you remember my comment from last week's article that I thought CTX and LEN looked roughly equivalent in terms of bearishness, but that I favored LEN as a better downside candidate due to the RS chart patterns we were looking at? I think our analysis here bears that out, as the stock is already on a PnF Sell signal on its modified scale chart. The congruence of price targets in the $26-27 area for the various scales of PnF charts and the as-yet unproven H&S topping formation is another positive factor. So where do we go from here? We've essentially finished our analysis and are ready to take action, when the price action confirms our bearish thesis. For those aggressive traders that want to get in on the action ahead of a breakdown in the $DJUSHB, I think it should be clear that LEN is the better target of opportunity, due to the fact that it is bearish in almost every way in which we can look at it. For CTX, we've defined a price trigger for playing the downside, but there, I'd want to definitely see the sector having turned bearish before playing. Keep in mind that all of the different chart views we've talked about over the past several weeks should be revisited periodically in the weeks ahead to make sure that nothing fundamental has changed in either the sector RS, the RS of CTX and LEN relative to the sector and their peers and the actual price/PnF charts of our two chosen stocks. For those of you that care to follow along from this point forward, we'll be tracking both of these stocks as LEAPS Put plays in the LEAPS column beginning this weekend. We'll regularly look at the technicals and define/modify entry strategies in the weeks ahead and then we'll monitor price action as the plays progress, looking for any problems along the way to (hoped for) profits. One final note. I know this has been a long and convoluted process for many of you to follow. But at the same time, I hope you (especially those of you that are new to our service) understand that this is the sort of analysis that should be employed on every trade candidate. While it took several weeks to go through the discussion together, note that this process would take about 20 minutes once we know what to do and in what order to do it. I hope you've found the process both educational and helpful! Best Trading Wishes! 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. 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