The Option Investor Newsletter Tuesday 06-29-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Watch Your Language! Index Trader Wrap: Gold below $400 + Oil at $36 = Fed raising 25 bp Market Sentiment: One Down, Two to Go Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-29-2004 High Low Volume Adv/Dcl DJIA 10413.43 + 56.30 10429.13 10341.68 1.68 bln 1667/1592 NASDAQ 2034.93 + 15.10 2037.60 2017.35 1.60 bln 1826/1281 S&P 100 552.51 + 2.03 553.58 549.78 Totals 3493/2873 S&P 500 1136.20 + 2.85 1138.26 1131.81 W5000 11084.47 + 28.80 11099.92 11045.09 SOX 480.45 + 10.00 480.80 469.64 RUS 2000 587.83 + 3.73 590.07 583.72 DJ TRANS 3184.71 + 6.70 3189.05 3172.15 VIX 15.47 - 0.60 16.28 15.22 VXO (VIX-O)15.37 - 0.23 16.45 15.37 VXN 20.15 - 0.44 20.52 19.90 Total Volume 3,512M Total UpVol 2,247M Total DnVol 1,217M Total Adv 3923 Total Dcl 3293 52wk Highs 223 52wk Lows 96 TRIN 0.82 NAZTRIN 0.56 PUT/CALL 0.87 ************************************************************ Watch Your Language! by Jim Brown That is what the investor community is saying to Greenspan tonight. While the actual rate decision may be anticlimactic tomorrow the language of the announcement is the key to the reaction. The market rallied on Tuesday on the hopes the "measured pace" clause is retained but the rally was muted on fears hikes could be accelerated. The fears kept us from testing the 10480+ level for the second consecutive day. Dow Chart - Daily Nasdaq Chart - Daily SOX Chart - Daily The morning started out with a minor dip but it was quickly erased as anticipation about the Consumer Confidence filtered through the markets. The Russell spiked substantially before the announcement and then led again after the release. Consumer Confidence rose to 101.9 in June from 93.1 in May. This was well over the consensus estimates at 95.0 and was attributed to falling gas prices and a rise in employment. This was the highest level for the index in two years. The present conditions component soared from 90.5 to 104.8 and the expectations component rose to 100.0 from 94.8. Those thinking jobs are plentiful rose to 18.0 from 16.6, not necessarily a rousing rebound. Those planning to buy homes FELL to 3.6% from 4.1% and those planning to buy a car fell slightly. These surveys are impacted greatly by employment surveys and we have a new Jobs report due out on Friday. As long as we continue to see jobs added to the economy these confidence surveys will improve. We have seen the result of this expanding confidence in the home sales numbers over the last week. Both new homes and existing sales set records. The only other economic report for the day was Chain Store Sales and at -1.2% it echoed the data we have been seeing from the big retailers. Rising consumer confidence has not translated into higher retail sales. Wal-Mart and Target have both warned this week that sales would be weak and that has been reflected in this report. Analysts have attributed the slow sales to cooler than normal weather and heavy rains in many areas. This was the biggest drop in sales in three months and I have a hard time blaming that big a drop on the weather. I suspect it is more of a combination hit from weather, high gas prices and the end of buying fueled by tax refunds. We are right in the middle of the summer doldrums and consumer debt is at record levels. Confidence may be rising but consumer cash is still stretched to the breaking point. I mentioned on Sunday that earnings warnings have been very quiet and traders were left to trade on their own optimistic assumptions. Well the dam broke this week. In just the first two days we have had warnings of weak sales or earnings from TGT, GM, WMT, T, WM and HAL to name a few. I have not heard any news about raised guidance from anyone. If this is the beginning of a new trend we could be in trouble. July is typically the best month of the 3Q and it is not shaping up as a barn burner if this is a clue to the future. The markets were less than inspiring today despite being positive for the day. The Dow battled 10400 for most of the morning and then used 10400 as support for most of the afternoon. The Dow traded in a 25-point range after 12:00 and closed right in the middle at 10413. Overhead resistance is still 10450-10500 and we are still stuck in the broader three week range from 10300-10490. Last week the Dow made a concerted effort to break out of that range to no avail. The Nasdaq did manage to move back to near its recent highs at 2040 on strength in the semis and the small caps. The SOX gained nearly +10 points to move back to interim resistance at 480. With much stronger resistance at 490 we could see one more day of help from the SOX before the Nasdaq has to make it on its own. That would translate to about 2050 on the Nasdaq and it would be a new high for the week. What is going to skew all the support/resistance levels is the Fed decision due out at 2:15 on Wednesday. The widely expected rate hike will be met strong buy/sell activity regardless of what they say. It is a program trade event on both sides. This should easily violate the current resistance levels and I am actually counting on it. After all the cussing and discussing over the last two months we are finally down to the last tick on the event clock and that occurs at 2:15 on Wednesday. Iraq has passed with no material news events and the end of the quarter buying has failed to materialize. The Russell shuffle is behind us and we are left with only the Fed decision before June expires. That decision is not really in doubt but the language will be hotly debated. Most feel they will keep the "measured pace" descriptor for future rate hikes but there is a growing group of analysts that expect that terminology to disappear by August. The real fear has always been that we would see a 1994 rate hike scenario where the Fed ran out of control with an unprecedented series of hikes. The Fed has tried to express that calm will prevail and the recent economic reports suggest the Fed is right in that claim. We have seen numerous weaker than expected reports over the last month suggesting the economy is growing slower than hoped and the Fed is not behind the curve as many have claimed. In fact the Fed has claimed that it will be patient in removing the economic stimulus of low rates until they actually see a substantial increase of inflation. So far they continue to claim that the excess capacity in the economy will keep inflation at reasonable levels for the rest of the year. Just in case they are wrong the Fed has said they will not hesitate to act aggressively if the pace of inflation increases. This is the key language traders will be looking for tomorrow. If the Fed retains the "measured pace" comment then we should rally despite the size of the rate hike. If they change the language to make it conditional to the inflation rate then we could see a strong negative reaction. The majority of traders claim that any Fed rate hike has already been factored in and most feel the language will be neutral. Currently there is only about a 40% chance of more than a 25 point hike. Regardless of the decision and the language we should have some strong moves and everyone should remember the first move is not normally the one that sticks. This leaves us with a vast number of trading possibilities for Wednesday. Add in the multiple earnings warnings and lowered guidance and suddenly the outcome does not look so exciting. I still have a positive bias but I am not as convinced as I was last week. I think the gains in the Nasdaq are the key. As long as techs are finding buyers the rest of the market will probably muddle ahead. We are still seeing some positive movement in the Russell despite some dumping by speculators of stock nobody wanted last Friday. There was a strong program bounce at the open and the close indicating not all funds have filled their rebalance needs. I studied a lot today trying to decipher the various reactions we could see tomorrow and more importantly for Thursday and Friday. It is not a simple problem. We will have four of the five major issues resolved by tomorrows close but there is still a major roadblock in our future. This roadblock is the Friday Jobs Report. The estimate of +275,000 jobs is very high in my opinion based on the weak employment components we have seen in various surveys over the last month. This may be borne out by the almost complete lack of any high profile analysts making higher estimates or even talking about Jobs so far this week. I am sure we are seeing the focus on the Fed decision take precedence over the Jobs number but you can bet that focus will change in a heartbeat once the Fed decision has passed. We have to assume the Fed will know the Jobs number in advance and that will be part of their decision. How they word their statement should be based in part on how strong Jobs were in June. This looming report could keep a cloud over the market after the Fed decision. Assuming a positive statement I think the cloud will be minimal but still a cloud. The worst-case scenario would be a runaway rally on Thursday with a complete collapse on a Job implosion on Friday. This fear should keep the big buyers from making any sizeable commitments prior to Friday. The keyword is "should" and we all know how that tends to cause trouble. Since it is widely assumed that the market will rally after the Fed decision, uncertainty will have vanished, there is always the possibility we could see some portfolio allocation programs hit that tape in hopes post Fed volume will dilute the impact of their selling. In short, there is simply no way to deduce the eventual outcome once the smoke clears. As I said before July is normally the best month in the 3Q and this is an election year which normally increases the odds of a better than average month. However, with the election now a dead heat it could be a hindrance to progress rather than a positive. I am going on the assumption that the flurry of earnings warnings was a fluke and we will still see a positive pre/post holiday bounce. Once we exit next week all bets are off and our direction will be related to real earnings. Until those earnings begin to appear buyers will be hesitant to increase their positions. If you are in the market after the Fed decision keep Dow 10500 resistance firmly in mind because that is the next key level to be broken. I would be very surprised to see that happen on Wednesday. Fed decision days are normally best used to take your spouse shopping. It is cheaper than trying to second and third guess the extreme post decision volatility. Don't forget there are other economic reports tomorrow, NAPM-NY, Chicago Fed NAI and PMI. Any strength/weakness there will only increase the post Fed volatility. Keep your focus on the language and not on the hike. Enter Passively, Exit Aggressively. Jim Brown Editor ************************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 ******************** Gold below $400 + Oil at $36 = Fed raising 25 bp The major indices recouped yesterday's losses and looked rather content to trade either side of their MONTHLY R1s, where an $8.60 shellacking in December Gold futures (gc04z) $395.40 -2.12% and August Crude oil futures (cl04q) $35.62 -1.71% should have the Fed content to raise its target for Fed funds by 25 basis points to 1.25%. December Gold Futures (gc04z) - Daily Intervals If gold says anything back below $400, its that the market feels the Fed is doing a good job with its monetary policy as a recent look above $400 sees a rather sharp reversal in today's session, where more than likely, dollar strength ahead of tomorrow's conclusion to the two-day FOMC meeting comes in anticipation of a long-awaited rate hike. If the Fed holds true to its more recent FOMC meetings, where a gradual increasing of rates has been eluded to, then a 25-basis point rate hike looks in order. I'm showing the December Gold futures tonight, as it gives us an interest rate sensitive commodity, away from equities to keep and eye on. In my opinion, a more "disappointing" reaction from gold, which could spill into equities would be a further and sharp decline in gold below the 388 level, where the gold market may then be saying.... "no, no, no.... too tight too soon!" It wasn't until the FOMC started changing its tune toward potential Fed tightening, when nonfarm payrolls began ramping, that gold fell sharply from the $431 level, to recent lows of $378. AMEX Gold Bugs Index ($HUI.X) - Daily Intervals In today's Market Monitor, I posted this chart of the AMEX Gold Bugs Index ($HUI.X) 185.36 -2.49%. In March, when gold (the commodity) was challenging its December highs, the $HUI.X was well below its December highs and trading the 240 level. It has been my observation for sometime that gold stocks tend to be a "leading indicator" for the commodity itself, and while I'd keep a close eye on GOLD $388, more importantly may be $HUI.X 183. Now I want to take a quick look at a chart, which for a couple of weeks now has been looking somewhat similar to the Gold Bugs ($HUI.X). Strong, but similar. It's bullish % indications have also bee similar, and Dorsey/Wright and Associates sector bullish % also rather similar. Semiconductor Index (SOX.X) - Daily Intervals I'm showing the same chart of the SOX.X we put together back in the February 29 Ask the Analyst column "It's head and shoulders above them all." I've also overlaid the June MONTHLY S1, and this week's WEEKLY R1. I tell you what, if the MARKET is trading this chart, then SOX.X looks set to trade WEEKLY R1 soon. I think we know that the $HUI.X is the weakest of sectors, and it certainly looks like it wants to test upward trend, similar to the SOX.X recent test and successful holding of its MONTHLY S1 and upward trend. Note the SOX.X WEEKLY Pivot of 469.53 being very similar to the head/shoulder top 61.8% retracement. To me, this gives the SOX.X a BULLISH look above 468. Things may get "wild" and a bit confusing with the Fed about to raise rates for the first time in 3-years, and I want us to have a couple "definitive" levels of support to monitor. WEEKLY/MONTHLY SOX.X notes: I would currently show a "zone of resistance" in the SOX.X WEEKLY/MONTHLY from 487 (weekly 19.1%) to 489 (weekly R1) and a "zone of support" from 469 (weekly pivot) to 471 (monthly pivot). In this weekend's Ask the Analyst" column, we looked at Dorsey/Wright and Associate's equity sector bell curve. I noted that the $HUI.X had eased up from the 0-14% level. The Semiconductor Bullish % (BPESEMI) had turned up from the 16%-20%, and today it saw a net gain of 1.47%, getting another "X" on its bullish % chart to 30%, with a current reading of 30.88%. Analysis: Based on the SOX.X pattern of higher lows, I would have to think SOX.X finds gains to WEEKLY R1 pretty soon. This would then begin a pattern of higher lows and equal highs. From a supply/demand perspective, this leans toward the bullish side of things. Market Snapshot / Internals - 06/29/04 Close Speaking of some bullish improvement in bullish % indications, today's trade and prior 10-day's trade has the NASDAQ NH/NL 10- day average ratio reversing up, as a needed reading of 64% has been achieved. While the NASDAQ NH/NL breadth looks to play catch up with the NYSE, the NYSE now looks to be taking a breather with daily percentage changes leveling out. Pivot Analysis Matrix - The S&P 100 Index (OEX.X) 552.51 +0.36% is the only major index below its WEEKLY Pivot, and tomorrow, a test for early strength comes at correlative WEEKLY Pivot/DAILY R1. The INDU, DIA, SPX were sloppy at either side of their WEEKLY Pivots, which are very correlative with tomorrow's DAILY Pivots. Almost acting as a center line, or point of equilibrium into tomorrow's FOMC meeting. Since we were "sloppy" at these levels today, a shorter-term trader might want to watch and see if they find significance in tomorrow's intra-day session as support or resistance, to see if they can sense any type of "determination" from institutional computers into tomorrow afternoon's FOMC announcement. S&P 500 Index Chart - 60-minute intervals I overlaid Keene Little's upward trend as well as labeled points "A" and "C" from Thursday evening's Index Trader wrap, where that trend taken from the early June lows would tie in with our Pivot Matrix WEEKLY 61.8% retracement level, but also tomorrow's DAILY S2. OK... significant support. Let's also associate that with SOX.X 468. How about some resistance? I count 1, 2, 3, 4 overlapping levels tomorrow at SPX 1,040. Overlapping WEEKLY/MONTLY retracement (1 and 2) throw in the MONTHLY R1 (that's 3) and for good measure, the DAILY R2. What I'd look for as it relates to STRENGTH tomorrow. Understand perhaps that GOLD the COMMODITY got a little ahead of itself (relative to the HUI.X), so AFTER the FOMC announcement, I'd keep an eye on GOLD the COMMODITY. For BROADER MARKET EQUITY STRENGTH, watch for the $HUI.X (equity gold) to bid, watch for BROADER EQUITIES to bid, but for GOLD COMMODITY to stay relatively unchanged! 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 **************** One Down, Two to Go - J. Brown The first of this week's three big events was Monday's surprise handover of power in Iraq. Tomorrow will bring about the second big event, the FOMC's decision on interest rates. Of course the actual announcement is likely to be anti-climatic since the whole world expects the Fed to only raise rates by 1/4 of a point. Cautious investors are likely still on the sidelines for fear of a surprise 1/2-point hike or a "sell the news" reaction by traders. Quite honestly, I'm not sure which direction the market is headed. The obvious direction is sideways. The Iraq news failed to inspire any big moves and we remain stuck in the market's trading range. Thus news of a 1/4-point hike isn't likely to spark any big moves either. No, the true event tomorrow is not the bump in rates but the FOMC's comments and bias toward future hikes. Right now stocks are unlikely to rally because it is believed the Fed needs to offer more aggressive comments to give them room to raise rates more quickly should inflation continue to rise. Additional factors contributing to a sideways market is Friday's non-farm payroll report and the upcoming Fourth of July holiday here in the States. If the jobs report comes in strong and we escape the weekend without any major "event" then I believe stocks are set up for a rally higher into the Q2 earnings season. At least most stocks look poised to trade higher into earnings. Retail stocks have been taking a beat, especially today. Retail giant Target (TGT) warned that June's same-store sales would likely come in at the low end of their range. This is an echo of Monday's comments from retail titan WMT about June same-store sales. The whole group took a dive today. An earnings warning from Washington Mutual (WM) last night undermined strength in financials and mortgage lenders. However, offsetting the bad news was a stronger than expected consumer confidence report and a continued drop in oil prices. Overall the market was generally bullish with advancers beating decliners 15 to 13 on the NYSE but failing 11 to 12 on the NASDAQ. Up volume outweighed down volume on both exchanges. In addition to the conclusion of the two-day FOMC meeting we'll also get the Chicago PMI report after the opening bell. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8871 Current : 10413 Moving Averages: (Simple) 10-dma: 10388 50-dma: 10253 200-dma: 10147 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1136 Moving Averages: (Simple) 10-dma: 1135 50-dma: 1119 200-dma: 1097 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1505 Moving Averages: (Simple) 10-dma: 1481 50-dma: 1449 200-dma: 1441 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 15.47 -0.60 CBOE Mkt Volatility old VIX (VXO) = 15.47 -0.13 Nasdaq Volatility Index (VXN) = 20.15 -0.44 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.87 589,137 511,491 Equity Only 0.77 500,659 386,514 OEX 1.23 12,133 14,895 QQQ 1.26 30,867 38,776 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 67.4 + 0 Bear Confirmed NASDAQ-100 49.0 + 4 BULL ALERT Dow Indust. 66.7 + 0 Bear Confirmed S&P 500 65.8 + 1 Bear CORRECTION S&P 100 64.0 + 1 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 0.95 10-dma: 1.00 21-dma: 0.98 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 1503 1121 Decliners 1339 1232 New Highs 92 58 New Lows 25 21 Up Volume 947M 1121M Down Vol. 716M 435M Total Vol. 1677M 1567M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/22/04 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 It looks like commercial traders are hedging all their bets by bringing them close to parity. If the "smart money" doesn't know what direction the S&P is going to go after June 30th how are the "little folk" supposed to know? *grin* Evidently, the retail trader isn't listening. They reduced their shorts to leave them strongly bullish on stocks. Commercials Long Short Net % Of OI 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%) 06/22/04 407,842 415,462 ( 7,620) (0.9%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 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% 06/22/04 124,985 89,934 35,051 16.3% 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 Wow! Maybe commercial traders are just ignoring the large S&P contracts and focusing on the e-minis. They reduced their positions in both longs and shorts but they almost cut their longs in half. That's VERY bearish for the market. Likewise small traders are lockstep in unison going the opposite direction. Commercials Long Short Net % Of OI 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%) 06/22/04 229,290 446,974 (217,684) (32.2%) 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 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% 06/22/04 243,444 58,389 185,055 61.3% 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 are reducing their positions in both longs and shorts for the NDX and bringing them closer to break even. Small traders are following suit bring their shorts and longs close to even. Looks like no one knows what direction the NASDAQ is going. Commercials Long Short Net % of OI 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% 06/22/04 40,397 37,413 2,984 3.8% 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 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%) 06/22/04 9,311 9,950 (639) ( 3.3%) 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... oddly enough commercial traders are turning more bullish on the Dow Industrials. Looks like they like the upside breakout. Small traders are more pessimistic here. Commercials Long Short Net % of OI 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% 06/22/04 26,808 19,752 7,056 15.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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%) 06/22/04 5,626 7,798 (2,172) (16.2%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. 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The Option Investor Newsletter Tuesday 06-29-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: ESRX, KSS Call Play Updates: AHC, CAT, DHR, MERQ, ETN, EBAY New Calls Plays: MMM, QCOM Put Play Updates: GCI, OMC, SLAB 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: ***** None PUTS: ***** Express Scripts - ESRX - close: 78.16 chg: +1.92 stop: 77.51 It looks like ESRX doesn't want to play with us. We've been waiting for the stock, currently in a bearish P&F signal, to breakdown under support at $75.00 and its simple 100-dma. Instead shares of ESRX have rallied through the top of its two- week trading range and broke through technical resistance at all of its short-term moving averages. ESRX still has overhead resistance at $80.00 but we're going to drop this play from the put list. 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 = --- Kohl's Corp - KSS - close: 42.29 change: -1.46 stop: 44.35 Target achieved! We've been waiting for KSS to hit the $42.00- 41.00 region and mentioned on Sunday that if the stock hit $42 we'd consider closing the play. Yesterday KSS ticked higher after Barron's issued some positive comments on the company over the weekend but it wasn't enough to push KSS through the top of its three-week descending channel. Today's 3.33% decline on strong volume was fueled by an earnings warning from retail giant Target (TGT). KSS dropped to $41.80 intraday and spent most of the session consolidating just above the $42.00 level. We're going to call it quits here. The downtrend is still very much intact but the suggested options have ballooned in value and we don't want to be too greedy. Those traders not willing to call it quits can keep the play open and monitor their stops tightly. We would look for a bounce back to the top of the channel near $43.50 before KSS rolls over again. Picked on June 06 at $ 47.45 Change since picked: - 5.16 Earnings Date 05/13/04 (confirmed) Average Daily Volume: 3.7 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: 77.23 chng: +1.77 stop: 75.00*new* Our expectations for AHC to find support near the $76 level proved to be a bit too optimistic, as Monday's drop saw the stock slice through that level and fall right to the 10-dma (currently $75.57) by the end of the session. But that proved to be a great entry point for traders brave enough to take it, as the stock launched higher this morning, erasing almost all of yesterday's losses by the close. Today's rebound came on much stronger volume than the recent bout of profit taking, so yesterday's low should represent a local low and we should be looking for a fresh breakout in the near future. Traders looking for breakout entries need to wait for a blast through last week's $79.10 high before playing, and momentum entries will necessarily be shorter- term, as we're looking to exit on a test of next resistance in the $82-83 area. Raise stops to $75, just under both the 10-dma and yesterday's low. Picked on June 17th at $74.15 Change since picked: +3.08 Earnings Date 4/28/04 (confirmed) Average Daily Volume = 1.11 mln Chart = --- Caterpillar, Inc. - CAT - close 78.82 change: +1.34 stop: 76.00 We were hoping for a pullback near $77 to provide a solid entry point into our CAT play and the market obliged yesterday with the stock dropping all the way to $77.15 by the end of the day. Traders that waited until today before entering got another shot at the dip, as CAT fell just slightly to $77.05 before rebounding strongly from the 10-dma ($77.21). We expected a solid rebound from that area due to the solid support represented by not only the 10-dma, but also the 50-dma ($76.70) and the 200-dma ($76.84). The next likely entry point will come on a breakout over last week's highs as the stock pushes above $79.40. Of course, with the volatility that is likely to surround tomorrow's FOMC decision on interest rates, it is possible that another opportunity at buying a dip near $77 may present itself. We'll maintain our stop at $76, which is now below almost all of the major moving averages. Picked on June 24th at $79.10 Change since picked: -0.28 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.37 mln Chart = --- Danaher Corp. - DHR - close 51.40 change: +1.00 stop: 49.75*new* Like the Energizer Bunny, shares of DHR haven't missed a beat. After a few days of consolidation near its recent all-time highs (just under $51), the stock broke out strongly today, ending well above the $51 level and easily in new high territory again. While there could be some volatility surrounding tomorrow's decision on interest rates, the stock appears destined for higher levels in the very near future. To protect against a large (and unexpected) downdraft, we've raised our stop to $49.75 tonight, which is right on the 10-dma ($49.75). A dip back into the $50.50-51.00 area can be used for new entries tomorrow, but only once the stock shows signs of rebounding from that support. Momentum traders can consider breakout entries over today's high, but should aggressively seek a profitable exit from the play as price approaches our $53-54 target. Picked on June 20th at $48.74 Change since picked: +2.66 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 1.55 mln Chart = --- Mercury Interactive - MERQ - cls: 49.85 change: +0.08 stop: 48.50 After last week's bullish move through the $50 level, we were expecting shares of MERQ to see a bit of profit taking ahead of tomorrow's announcement on interest rates and we haven't been disappointed. Both of the past two days have seen the stock unable to hold onto the north side of $50, but showing very little inclination to drop much below there as investors hold their breath ahead of the FOMC. Note that the increasing volume that accompanied the stock's rise last week has dried up considerably this week, indicating that this is just normal consolidation. Ideally we'd like to see a dip back near the $49 level to provide for new entries before the next breakout attempt. Note that the last dip consolidated just above the 20- dma (currently $48.75) before last week's bullish move. We'd like to see a repeat performance, with the 10-dma ($49.26) and 20-dma offering key support. Aggressive traders can consider adding new positions above $51, but only if targeting a rally to our more aggressive target near $54. More conservative traders will be looking to exit the play near $52. Maintain stops at $48.50, which is just under the 20-dma. Picked on June 6th at $47.56 Change since picked: +2.29 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.04 mln Chart = --- Eaton Corp - ETN - close: 63.45 chg: +0.58 stop: 59.95 Shares of ETN continue to consolidate above broken resistance, now new support at $62.00 while the stock tries to breakout above the $64.00 level. News remains relatively quiet and our strategy is unchanged. Traders can buy bounces above $62.00 with a target at $70.00, just under the H&S pattern target of $71. However, keep in mind that ETN is expected to report earnings on July 15th. That only gives us two weeks for ETN to make another run higher because we don't plan on holding over the announcement. We're thinking about raising our stop loss to $61.95 but we'll keep it at $59.95 for now. Picked on June 18 at $ 62.05 Change since picked: + 1.40 Earnings Date 07/15/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- eBay Inc - EBAY - close: 91.82 change: -0.99 stop: 87.50 *new* EBAY started the week off with a bang as the stock soared to $94.13 on Monday after Prudential reiterated their "over weight" outlook. EBAY's management was also quoted as saying they see no more acquisitions in the near future as they continue to consolidate their PayPal merger and focus on growth in Asia. EBAY's chart looks strong with the breakout over $90.00 and the new MACD buy signal. The 1% pullback on Tuesday might be an entry point but there's a chance we could see EBAY dip a little closer to $90.00. Any pull back and bounce above $90.00 looks like a bullish entry point to us. We're going to raise our stop loss to $87.50. We now have three weeks left before EBAY's next earnings report. Picked on June 27 at $ 90.72 Change since picked: + 1.10 Earnings Date 07/21/04 (confirmed) Average Daily Volume: 8.3 million Chart = ************** NEW CALL PLAYS ************** 3M Co - MMM - close: 89.80 change: +1.11 stop: 87.49 Company Description: Every day, 3M people find new ways to make amazing things happen. Wherever they are, whatever they do, the company's customers know they can rely on 3M to help make their lives better. 3M's brands include icons such as Scotch, Post-it, Scotchgard, Thinsulate, Scotch-Brite, Filtrete, Command and Vikuiti. Serving customers in more than 200 countries around the world, the company's 67,000 people use their expertise, technologies and global strength to lead in major markets including consumer and office; display and graphics; electronics and telecommunications; safety, security and protection services; health care; industrial and transportation. (source: company press release) Why We Like It: The Dow Jones Industrials may be stuck in a sideways trading range but that's not hampering the bullish march higher for MMM. This Dow-component recently broke through resistance at $88.00 and now after a week of consolidation looks ready to breakout above stronger, round-number psychological resistance at $90.00. We're not the only ones who are bullish on MMM. This morning Deutsche Bank (DB) issued some positive comments on MMM saying the conglomerate was heading into the second half of 2003 with very strong momentum. DB also raised their 2004 and 2005 earnings outlook for MMM as well as raising their 12-month price target to $105. MMM's P&F chart is even more bullish with a $115 price target. We like MMM's relative strength and we're willing to bet that the stock can breakout over $90 and make a run toward $100 (although we may have to settle for a move to $95) before its July 19th earning date (currently unconfirmed). However, we are going to use a TRIGGER above resistance at $90.11 to open the play for us. Until MMM trades at or above $90.11 we'll wait on the sidelines. If triggered we'll start the play with a stop loss at $87.49. Suggested Options: More aggressive players can try and trade the July options that expire on July 16th because we do not plan to hold over MMM's Monday, July 19th earnings report. However, for the rest of us we're suggesting the August calls. The August 90s look good. BUY CALL AUG 85 MNZ-HQ OI= 109 Current Ask $5.90 BUY CALL AUG 90 MNZ-HR OI=1846 Current Ask $2.35 BUY CALL AUG 95 MNZ-HS OI=2753 Current Ask $0.55 Annotated Chart: Picked on June xx at $ xx.xx <-- see TRIGGER Change since picked: + 0.00 Earnings Date 07/19/04 (unconfirmed) Average Daily Volume: 2.5 million Chart = --- QUALCOMM - QCOM - close: 71.55 change: +2.88 stop: 67.75 Company Description: QUALCOMM Incorporated (www.qualcomm.com) is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. Headquartered in San Diego, Calif., QUALCOMM is included in the S&P 500 Index and is a 2003 FORTUNE 500. company. (source: company press release) Why We Like It: QCOM has been consolidating under resistance at the $70.00 mark for three months. Today shares finally broke out above this crucial resistance level. The move is being attributed to positive comments coming from a Bank of America analyst Tim Long. Long believes that phone companies are going to be turning to QCOM's chips as they upgrade to faster, high-speed Internet and other third-generation services (source: Reuters). His comments produced a 4% rally on more than twice the average volume. We've been highlighting QCOM in the MarketMonitor and on recent watch lists because a move through $70.00 is a bullish quadruple-top breakout buy signal on its P&F chart. Its P&F price target is now $84.00. We want to target a move to the $77.50-80.00 range but QCOM needs to do it before its July 21st earnings report, which we do not plan to hold over. Suggested Options: We're going to suggest the August calls even though we plan to close the play before QCOM's July 21st earnings report. Our favorites are the August 70s. BUY CALL AUG 70 AAO-HN OI= 3083 Current Ask $4.10 BUY CALL AUG 75 AAO-HO OI= 2428 Current Ask $1.75 Annotated Chart: Chart = Picked on June 29 at $ 71.55 Change since picked: + 0.00 Earnings Date 07/21/04 (confirmed) Average Daily Volume: 8.8 million 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 ******************* Gannett Co - GCI - close: 85.22 change: -0.18 stop: 86.05 Wow! Shares of GCI have been pretty volatile in the last couple of sessions. Monday morning the stock rocketed higher and pierced the $87.00 mark and its simple 40-dma before falling back to close with a small gain. The move on Monday looked like a very sharp failed rally. Today's bounce higher was a little less extreme. GCI rallied toward the 86.00 region and its simple 200- dma before failing. Looks like traders are selling each show of strength. This is good news for the bears. Currently OI is still UNTRIGGERED while we wait for GCI to trade at $83.95 or lower. More aggressive traders might want to use today's rollover under its simple 200-dma as an aggressive entry point. Picked on June xx at $ xx.xx <-- See TRIGGER Change since picked: - 0.00 Earnings Date 07/13/04 (confirmed) Average Daily Volume: 957 thousand Chart = --- Omnicom Group - OMC - close: 76.10 change: -0.50 stop: 79.00*new* In light of the price action so far this week, last week's oversold rebound in shares of OMC is looking pretty anemic. After popping up to test the 10-dma (currently $76.80) on Friday, the stock rolled over below that average and appears to be making a beeline back towards that $75 support level. If (as we expect) that support level gives way, then it should be a quick trip down towards the $70-71 area. We had actually expected a bit of continuation to last week's rebound attempt to give us a better rollover entry near the $78.00-78.50 level, and the fact that the stock couldn't manage it simply points out how weak it is. Another failed bounce below the 10-dma looks like a viable entry opportunity, while momentum traders will want to focus on a break below the March low at $74.65. Note that we've slightly lowered our stop to $79, which is just above the $78.00-78.50 resistance zone, as well as the 20-dma ($78.63) and 30-dma ($78.90). Picked on June 20th at $77.14 Change since picked: -1.04 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 1.09 mln Chart = --- Silicon Labs. - SLAB - close: 46.23 change: +0.72 stop: 48.50 On two occasions late last week, our SLAB play narrowly avoided tripping our stop and as it plunged back towards support yesterday afternoon, we were feeling pretty good about the play. Of course, with SLAB rebounding from the site of yesterday's lows this morning, we were having second thoughts. That's the kind of thought process that normally arises with a stock that is behaving in such a volatile manner, as each day presents a different technical picture. For now, the downtrend is still intact, but the stock appears to be trying to build a new base near $45 in anticipation of a real direction emerging after tomorrow's decision on interest rates. That decision should have a direct impact on the Semiconductor sector (SOX.X) -- we just don't know which way it will be, with the sector vacillating between support and resistance. Aggressive traders could look to enter on another failed rebound below the 20-dma (currently $47.61) or on a fresh break under the $45 level, but in either case, watch out for support again near the $43 level. Maintain stops at $48.50. Picked on June 20th at $44.99 Change since picked: +1.24 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.15 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 Tuesday 06-29-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Technology stocks head the list Spreads & Straddles: Stocks Trudge Higher As Fed Meeting Begins! Premium Selling Plays: Naked Puts & Calls Traders Corner: Dow Theory & Technical Analysis: Uno ********** WATCH LIST ********** Technology stocks head the list ___________________________________________________________________ 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: 95.69 change: +1.64 WHAT TO WATCH: We've been following the consolidation in LXK under resistance at $96.00 for several days now. The short-term trend of higher lows appears to be coiling for a bullish breakout. We'd consider new bullish positions on a move above $96.00-96.25. More conservative traders looking for more momentum might want to wait for a move through $96.50-97.00. Keep in mind that its P&F chart target is only at $102, but then again P&F vertical counts aren't stop signs either. Earnings are expected on July 19th. Chart= --- United Technology - UTX - close: 90.53 change: +1.39 WHAT TO WATCH: Dow-component UTX has been flirting with the $90.00 level for several days now. The stock finally broke through and confidently closed above resistance at $90 today. The move looks like an entry point for new bullish positions. Considering the cyclical nature of the company UTX should be doing big business with the economy on the rebound. The stock could produce an earnings run with the announcement still three weeks away. Our only complaint would be the lack of volume on today's rally and potential resistance in the $91.00-91.50 range. Chart= --- Intl Business Machines - IBM - close: 88.29 change: -0.42 WHAT TO WATCH: IBM is significantly under performing its peers in the technology group. The stock has been suffering under resistance at $91.00 for the last couple of weeks and is now beginning to fail. IBM's P&F chart is bearish and points to a $77.00 price target. Its daily chart looks bearish too with the recent drop through the $89-90 levels and its 40 and 50-dma's. Technically IBM's MACD indicator has produced a new sell signal. We'd consider bearish plays on IBM but the company only has two weeks left before it announces earnings and we would not hold over the announcement. Chart= --- Research In Motion - RIMM - close: 59.38 change: +1.61 WHAT TO WATCH: Look out for some volatility tomorrow in RIMM. The company reported earnings after the closing bell and beat expectations. We've been following RIMM in the MarketMonitor and mentioned a few days ago and today that a straddle play might be a way to play the expected post-earnings volatility. Unfortunately, a straddle at the $60 strike was rather expensive at close to $7.00. This afternoon we suggested buying a $65 call and a $55 put for about $3.50, that way RIMM only had to move more than $3.50 to make the trade profitable. So far RIMM is up more than $5.00 and trading above the $65.00 mark in after hours trading. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- GS: $94.00 +0.74 - GS is looking bullish with the strong rebound from last week's lows but it's struggling with the simple 50-dma. BLL: $71.55 +0.61 - BLL is near its all-time highs and has held support above $70.00. Shares continue to look strong albeit overbought. CFC: $69.32 -2.18 - An earnings warning from rival WM has sent CFC under short-term support at $70.00 and its simple 10-dma. The failure to close over $70.00 and its overbought status and new MACD sell signal all add up to what could be an extended pull back. BRCM: $46.49 +1.54 - BRCM continues to rally after its recent breakout above $44.00. We still like the stock for bullish plays. GD: $100.54 +1.10 - GD has been flirting on either side of $100 for days now but the trend is up. KMRT: $68.22 -3.41 - After an incredible 7-week rally KMRT is finally seeing some profit taking. Next stop $62-60?? ************************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 ************************************************************** ******************* SPREADS & STRADDLES ******************* Stocks Trudge Higher As Fed Meeting Begins! By Ray Cummins U.S. equity values increased Tuesday ahead of the FOMC's much-anticipated decision on interest rates. The open market committee meeting is likely to produce the first interest rate increase in four years on Wednesday, and a 25 basis-point hike is the consensus expectation of analysts. The Dow Jones Industrial Average advanced 56 points to 10,413, with cyclical, drug, and tobacco stocks performing well. The NASDAQ Composite Index tacked on 15 points to end at 2,034 as computer hardware shares continued to enjoy buying pressure. The S&P 500 Index rose 2 points to close at to 1,136, despite broad weakness in retail shares. Trading volume reached 1.37 billion on the New York Stock Exchange and 1.54 billion on the NASDAQ. Breadth was barely positive on the Big Board, however winners outpaced losers 6 to 5 on the technology exchange. In the bond market, the 10-year note was up 11/32 while its yield fell to 4.69%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 06/27/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT-CREDIT SPREADS Stock Pick Last Month L/P S/P Credit CB G/L Status AMZN 50.95 51.80 JUL 42 45 0.30 44.70 0.30 Open YHOO 31.87 34.91 JUL 25 27 0.30 27.20 0.30 Open CFC 69.15 71.09 JUL 60 63 0.35 63.03 0.35 Open QCOM 69.86 69.08 JUL 60 65 0.45 64.55 0.45 Open SWIR 33.83 34.31 JUL 25 30 0.90 29.10 0.90 Open CTSH 24.25 25.93 JUL 20 22 0.27 22.23 0.27 Open NUE 69.54 75.85 JUL 60 65 0.75 64.25 0.75 Open SII 53.26 55.99 JUL 47 50 0.30 49.70 0.30 Open MXIM 51.62 52.03 JUL 45 50 0.70 49.30 0.70 Open RJR 65.90 66.84 JUL 55 60 0.35 59.65 0.35 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss CALL-CREDIT SPREADS Stock Pick Last Month LC SC Credit CB G/L Status APPX 34.03 30.26 JUL 45 40 0.50 40.50 0.50 Open GENZ 41.93 47.06 JUL 47 45 0.30 45.30 (1.76) Closed INSP 34.71 35.96 JUL 45 40 0.65 40.65 0.65 Open WMS 28.75 28.52 JUL 35 30 0.65 30.65 0.65 Open GS 90.21 94.55 JUL 100 95 0.70 95.70 0.70 Open SYMC 42.42 42.14 JUL 50 45 0.65 45.65 0.65 Open FRX 56.32 58.46 JUL 65 60 0.60 60.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss The position in Genzyme (NASDAQ:GENZ) should have been closed last Wednesday, when the issue moved through the sold (call) strike, for a smaller than published loss. Goldman Sachs (NYSE:GS) is on the "early-exit" list and Forest Labs (NYSE:FRX) is one to "watch" closely in the coming sessions. The Oil Service Holdrs (AMEX:OIH) position has previously been closed to limit potential losses. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status GRMN 32.60 34.66 JUL 35 30 2.15 2.35 Open? SNDK 22.90 21.93 JUL 22 22 3.40 3.60 Open GDT 56.02 56.40 JUL 55 55 4.80 4.50 Open DNA 54.60 54.50 JUL 55 55 4.25 4.10 Open OVTI 15.50 17.03 JUL 15 15 2.70 2.75 Open Omnivision (NASDAQ:OVTI) and Sandisk (NASDAQ:SNDK) have achieved small profits, and there may be hope for Garmin (NASDAQ:GRMN) as it has once again become active in recent sessions. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AMZN - Amazon.com $53.71 *** Approaching 2004 Highs! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN - Amazon.com $53.71 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-47.50 ZQN-SW OI=13720 ASK=$0.30 SELL PUT JUL-50.00 ZQN-SJ OI=21371 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$49.70 __________________________________________________________________ PLT - Plantronics $42.39 *** Rally Mode! *** Plantronics (NYSE:PLT) is a worldwide designer, manufacturer and marketer of lightweight communications headsets for phones and cellphones, telephone headset systems, accessories and related services for business and personal use. In addition, the firm manufactures and markets specialty products, such as telephones for the hearing-impaired and other related products for people with special communications needs and headset solutions for the aviation market. PLT - Plantronics $42.39 PLAY (less conservative - bullish/credit spread): BUY PUT JUL-35.00 PLT-SG OI=2 ASK=$0.20 SELL PUT JUL-40.00 PLT-SH OI=35 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$39.50 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CECO - Career Education $44.45 *** SEC Probe Continues! *** Career Education Corporation (NASDAQ:CECO) is a provider of private, for-profit, postsecondary education, with 78 campuses throughout the United States, Canada, France, the United Kingdom and the United Arab Emirates. The company also offers online education programs through its Online Education Group, which includes American InterContinental University Online and also Colorado Technical University Online. CECO - Career Education $44.45 PLAY (less conservative - bearish/credit spread): BUY CALL JUL-55.00 CUY-GK OI=4398 ASK=$0.20 SELL CALL JUL-50.00 CUY-GJ OI=4754 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$50.55 __________________________________________________________________ RYL - The Ryland Group $75.80 *** Sector Slump! *** The Ryland Group (NYSE:RYL) is a homebuilder and mortgage-finance company. The company has built more than 200,000 homes during its 35-year history. Ryland homes are available in more than 275 new communities in many markets across the United States. In addition, the Ryland Mortgage company has provided mortgage financing and related services for thousands of homebuyers. The company's major operations span all the significant aspects of the home-buying process, from design, construction and sale to mortgage financing, title insurance, settlement, escrow and homeowners insurance. RYL - The Ryland Group $75.80 PLAY (conservative - bearish/credit spread): BUY CALL JUL-85.00 RYL-GQ OI=1310 ASK=$0.15 SELL CALL JUL-80.00 RYL-GP OI=1687 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$80.60 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. __________________________________________________________________ No straddles or strangles today... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ***************************************** PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS ***************************************** All of these issues have robust option premiums and favorable technical indications. However, current news and events as well as market sentiment, will have an effect on these stocks so review each position thoroughly and make your own decision about its outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 06/27/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CVTX JUL 15 14.60 16.73 0.40 5.63% 2.74% DITC JUL 17 16.80 24.61 0.70 8.40% 4.17% SYNA JUL 17 16.85 19.96 0.65 7.48% 3.86% PTIE JUL 7 7.15 9.18 0.35 9.89% 4.90% BCC JUL 35 34.25 37.36 0.75 5.12% 2.19% JILL JUL 20 19.45 24.44 0.55 6.72% 2.83% LSS JUL 20 19.50 27.30 0.50 6.07% 2.56% OI JUL 15 14.65 16.78 0.35 5.64% 2.39% NVTL JUL 15 14.65 25.13 0.35 7.34% 2.39% PDII JUL 25 24.70 30.30 0.30 3.91% 1.21% RSAS JUL 17 17.05 20.92 0.45 6.22% 2.64% STLD JUL 25 24.45 28.49 0.55 5.33% 2.25% UPL JUL 30 29.55 37.77 0.45 4.14% 1.52% USG JUL 15 14.15 18.00 0.85 13.32% 6.01% ATI JUL 12 12.20 15.62 0.30 7.44% 2.46% BJS JUL 42 41.70 46.02 0.80 4.75% 1.92% LCAV JUL 25 24.35 28.98 0.65 6.85% 2.67% NCRX JUL 27 26.80 32.02 0.70 7.30% 2.61% NVTL JUL 17 17.05 25.13 0.45 8.97% 2.64% SSYS JUL 23 22.20 28.40 0.30 4.41% 1.35% SWIR JUL 30 28.85 34.31 1.15 10.66% 3.99% SYNA JUL 17 16.90 19.96 0.60 8.98% 3.55% YHOO JUL 30 29.20 34.91 0.80 6.80% 2.74% AMHC JUL 22 21.80 26.60 0.70 9.36% 3.21% CTSH JUL 22 22.20 25.93 0.30 4.34% 1.35% CYBX JUL 30 29.25 35.65 0.75 10.31% 2.56% ERES JUL 22 21.85 26.88 0.65 9.03% 2.97% HLEX JUL 15 14.65 16.78 0.35 7.40% 2.39% NINI JUL 20 19.65 26.29 0.35 5.89% 1.78% NFI JUL 30 29.30 37.95 0.70 9.77% 2.39% PTIE JUL 7 7.25 9.18 0.25 11.96% 3.45% RIMM JUL 50 49.15 60.69 0.85 6.57% 1.73% SGTL JUL 22 22.25 29.13 0.25 4.25% 1.12% BRCM JUL 40 39.30 45.41 0.70 6.43% 1.78% CSGP JUL 40 39.60 45.41 0.40 3.49% 1.01% DHB JUL 12 12.20 14.94 0.30 8.97% 2.46% DY JUL 25 24.65 27.53 0.35 4.63% 1.42% ERES JUL 22 22.20 26.88 0.30 4.97% 1.35% FWHT JUL 20 19.60 22.83 0.40 6.89% 2.04% GVHR JUL 22 22.20 26.48 0.30 5.07% 1.35% IMH JUL 20 19.75 22.50 0.25 4.41% 1.27% NVTL JUL 17 16.90 25.13 0.60 15.07% 3.55% PLMO JUL 25 24.55 33.08 0.45 7.28% 1.83% USG JUL 15 14.70 18.00 0.30 7.05% 2.04% NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ASKJ JUL 45 45.55 37.97 0.55 6.50% 1.21% AMLN JUL 25 25.35 22.32 0.35 5.29% 1.38% ICOS JUL 30 30.45 28.81 0.45 5.26% 1.48% OIIM JUL 17 17.80 15.98 0.30 5.50% 1.69% INSP JUL 40 40.50 35.96 0.50 6.88% 1.23% RHAT JUL 25 25.60 22.23 0.60 9.08% 2.34% XMSR JUL 27 27.75 25.50 0.25 4.34% 0.90% CECO JUL 65 65.90 44.97 0.90 7.19% 1.37% ESI JUL 45 45.50 37.54 0.50 5.47% 1.10% FMT JUL 20 20.40 18.02 0.40 8.75% 1.96% NBIX JUL 55 56.10 51.94 1.10 8.21% 1.96% SLAB JUL 50 50.75 47.62 0.75 6.39% 1.48% AGIX JUL 20 20.45 19.29 0.45 9.16% 2.20% LEND JUL 30 30.55 29.63 0.50 6.63% 1.64% Special (Tuesday) Note: A new stock on the "early-exit" list is XM Satellite Radio (NASDAQ:XMSR), which has reversed course during the last few sessions and appears to be "bullish" in the near-term. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW NAKED-PUT CANDIDATES Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield AMED 32.51 JUL 22.50 CQW SF 0.50 24 22.00 17 4.1% 12.8% NKTR 19.80 JUL 17.50 QNX SW 0.35 1107 17.15 17 3.7% 10.5% NFLX 34.18 JUL 30.00 QNQ SF 0.55 5515 29.45 17 3.3% 9.8% MU 15.24 JUL 15.00 MU SC 0.30 7102 14.70 17 3.7% 8.7% ISRG 18.99 JUL 17.50 AXQ SW 0.25 134 17.25 17 2.6% 7.0% XMSR 26.95 JUL 25.00 QSY SE 0.35 5158 24.65 17 2.5% 6.8% CIMA 32.73 JUL 30.00 UVK SF 0.40 2566 29.60 17 2.4% 6.7% ERES 27.37 JUL 25.00 UDB SE 0.30 499 24.70 17 2.2% 6.0% SWIR 36.41 JUL 30.00 IYQ SF 0.25 1290 29.75 17 1.5% 5.3% NSM 21.53 JUL 20.00 NSM SD 0.20 36006 19.80 17 1.8% 4.9% __________________________________________________________________ Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). __________________________________________________________________ AMED - Amedisys $32.51 *** New All-Time High! *** Amedisys (NASDAQ:AMED) is a multi-state provider of home health and nursing services. The company operates home care nursing offices and has corporate offices in the southern and southeastern United States. The firm's wholly owned subsidiaries are Amedisys Arkansas, Cypress Health Services and Amedisys LA Acquisitions. The services provided in home healthcare include four primary categories: home health nursing services, infusion therapy, respiratory therapy and home medical equipment. AMED - Amedisys $32.51 JUL 22.50 CQW SF LB=0.50 OI=24 CB=22.00 DE=17 TY=4.1% MY=12.8% __________________________________________________________________ NKTR - Nektar $19.80 *** Consolidation Complete? *** Nektar Therapeutics (NASDAQ:NKTR) makes drug delivery products based on its portfolio of technologies and expertise designed to improve drug performance throughout the drug development process. The company has developed three distinct technology platforms: Nektar Molecule Engineering, which uses advanced PEG (polyethylene glycol)ylation and PEG-based delivery systems to enable drug performance, Nektar Particle Engineering, which uses the company's expertise in pulmonary particle technology and supercritical fluids technology to design and manufacture optimal drug particles and Nektar Delivery Solutions, which uses advanced systems for pulmonary drug administration to improve therapeutic outcomes. NKTR - Nektar $19.80 JUL 17.50 QNX SW LB=0.35 OI=1107 CB=17.15 DE=17 TY=3.7% MY=10.5% __________________________________________________________________ NFLX - Netflix $34.18 *** Pure Premium-Selling! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. NFLX - Netflix $34.18 JUL 30.00 QNQ SF LB=0.55 OI=5515 CB=29.45 DE=17 TY=3.3% MY=9.8% __________________________________________________________________ MU - Micron $15.24 *** Entry Point Only! *** Micron Technology (NYSE:MU) manufactures and sells semiconductor products with a variety of packaging and configuration options, architectures and performance characteristics to meet customer needs. Micron's principal products are dynamic random access memory products (DRAMs), Flash memory products and complementary metal-oxide semiconductor (CMOS) image sensors. MU - Micron $15.24 JUL 15.00 MU SC LB=0.30 OI=7102 CB=14.70 DE=17 TY=3.7% MY=8.7% __________________________________________________________________ ISRG - Intuitive Surgical $18.99 *** Testing 2004 Highs! *** Intuitive Surgical (NASDAQ:ISRG) designs, manufactures and sells the da Vinci Surgical System. In addition, the company designs, manufactures and markets a variety of smart disposable EndoWrist instruments. The company's principal products are the da Vinci Surgical System, EndoWrist Instruments and products offered by Computer Motion. Intuitive Surgical's da Vinci Surgical System consists of a surgeon's console, a patient-side cart, a high performance vision system and proprietary wristed instruments. ISRG - Intuitive Surgical $18.99 JUL 17.50 AXQ SW LB=0.25 OI=134 CB=17.25 DE=17 TY=2.6% MY=7.0% __________________________________________________________________ XMSR - XM Satellite Radio $26.95 *** Trend Reversal! *** XM Satellite Radio (NASDAQ:XMSR) is America's #1 satellite radio service with over 1 million subscribers. Broadcasting live daily from Washington, DC, New York City and Nashville, Tennessee at the Country Music Hall of Fame, XM provides its loyal listeners with over 100 digital channels of choice: 70 music channels, more than 35 of them commercial-free, from hip hop to opera, classical to country, bluegrass to blues; and 31 channels of premiere sports, talk, comedy, kid's and entertainment programming. Compact and stylish XM satellite radio receivers for the home, the car, the computer and even a "boom-box" for on the go are available from retailers nationwide. XMSR - XM Satellite Radio $26.95 JUL 25.00 QSY SE LB=0.35 OI=5158 CB=24.65 DE=17 TY=2.5% MY=6.8% __________________________________________________________________ CIMA - Cima Labs $32.73 *** Cephalon Merger: A "Done" Deal? *** Cima Labs (NASDAQ:CIMA) develops and manufactures fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, the firm's proprietary technologies, are oral dosage forms that dissolve in the mouth without chewing or the need for water. The company manufactures six pharmaceutical brands using its DuraSolv and OraSolv fast-dissolve technologies: three major prescription brands and three over-the counter brands. CIMA - Cima Labs $32.73 JUL 30.00 UVK SF LB=0.40 OI=2566 CB=29.60 DE=17 TY=2.4% MY=6.7% __________________________________________________________________ ERES - eResearch Technology $27.37 *** Another 2004 High! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $27.37 JUL 25.00 UDB SE LB=0.30 OI=499 CB=24.70 DE=17 TY=2.2% MY=6.0% __________________________________________________________________ SWIR - Sierra Wireless $36.41 *** The Recovery Continues! *** Sierra Wireless (NASDAQ:SWIR) is a leader in delivering highly differentiated wireless solutions that enable our customers to improve their productivity and lifestyle. Sierra Wireless develops and markets AirCard, the industry-leading wireless PC card line for portable computers; embedded modules for OEM wireless applications; the MP line of rugged vehicle-mounted connectivity solutions and Voq, a line of professional phones with secure, easy-to-use, products for mobile professionals. SWIR - Sierra Wireless $36.41 JUL 30.00 IYQ SF LB=0.25 OI=1290 CB=29.75 DE=17 TY=1.5% MY=5.3% __________________________________________________________________ NSM - National Semi $21.53 *** Chip Sector Speculation! *** National Semiconductor (NYSE:NSM) designs, develops, manufactures and markets a wide array of semiconductor products, including a broad line of analog, mixed-signal and other integrated circuits. Its unique analog and mixed-signal devices include amplifiers and regulators, image sensors, power monitors and line drivers, radio frequency, audio amplifiers, display drivers and signal processors. NSM's other products with digital-to-analog or analog-to-digital capability include products for local area and wireless networking and wireless communications, as well as products for personal systems and communications. NSM - National Semi $21.53 JUL 20.00 NSM SD LB=0.20 OI=36006 CB=19.80 DE=17 TY=1.8% MY=4.9% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ IPXL - IMPAX Laboratories $19.02 *** Downtrend Resumes? *** IMPAX (NASDAQ:IPXL)) is a unique, technology-based pharmaceutical firm focused on the development and commercialization of generic and brand name pharmaceuticals, utilizing its controlled-release and other in-house development and formulation expertise. In the generic pharmaceuticals market, IMPAX is primarily focusing its efforts on selected controlled-release generic versions of brand name pharmaceuticals. The firm is also developing other generic pharmaceuticals that present one or more competitive barriers to entry, such as difficulty in raw materials sourcing, complex formulation or development characteristics, or special handling requirements. In the brand-name pharmaceuticals market, IMPAX is developing products for the treatment of central nervous system disorders. IPXL - IMPAX Laboratories $19.02 "SPECULATIVE" PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 20 UPR GD 1523 0.40 20.40 10.2% 2.0% __________________________________________________________________ PSFT - PeopleSoft $18.68 *** Oracle Merger Drags On... *** PeopleSoft (NASDAQ:PSFT) designs, develops, markets and supports enterprise application software products for use throughout large and medium-sized organizations worldwide. These organizations include corporations, educational institutions and national, state, provincial and local government agencies. The company provides enterprise application software for customer relationship management, human capital management, financial management and supply chain management, each with a range of industry-specific features and functions. PSFT - PeopleSoft $18.68 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 20 PQO GD 44737 0.25 20.25 7.0% 1.2% __________________________________________________________________ WM - Washington Mutual $38.47 *** Earnings Warning! *** Washington Mutual (NYSE:WM) is a financial services firm serving small and mid-sized businesses. The company accepts deposits from the general public, originates, purchases, services and sells home loans, makes consumer loans and commercial real estate loans (primarily loans secured by multi-family properties) and is engaged in other commercial banking activities, such as providing credit facilities and cash management and deposit services. The company also originates, purchases from correspondents, sells and services loans to higher-risk borrowers through its specialty mortgage finance program. WM - Washington Mutual $38.47 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 40 WM GH 17511 0.30 40.30 3.8% 0.7% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************** TRADERS CORNER ************** Dow Theory & Technical Analysis: Uno By Leigh Stevens lstevens@OptionInvestor.com Well, what does Dow Theory have to say to option traders or do with option trading? Answer: not a lot, but maybe one thing coming up. I say this because it (Charles Dow's theory) concerns itself only with the very long-term trend in the Market – one that is more of investment concern as in 'should I be invested in the market?' However, there may be time coming when Dow Theory will suggest that the current market advance goes into a "confirmed" status for a bull market or not. This is because of something that happened recently, when the Dow Transportation Average went to a new closing high – Now, contrast this with what has been happening with the currently mis-named Dow "Industrial" average, which is no longer composed of mostly industrial type stocks; call em the Dow 30 – Not only is the recent close in the Dow 30 (INDU) far below its prior closing high (Dow theory considers the close only) in February, but this average appears to be struggling even to get back up to re-test the cluster of prior highs from March-April. A LITTLE BACKGROUND PLEASE - Charles Dow didn't consider his ideas on the market as a "theory", he just thought he was making some observations on how the market behaved or would behave in terms of the averages he invented. What came to be known as "Dow Theory" is not a system of market timing really but more of a forecaster of the major or “primary” trend (over many months and often years)and a predictor recessions. Back in the 1880’s and 1890’s, Charles Dow (who, along with Edward Jones formed Dow Jones & Co.) came up with the first stock market averages, which became, over time, the Dow Jones Industrials (now 30 stocks) and the Transportation average (Symbol: TRAN and now 20 stocks) – as well as a Utility stock average (now 15 stocks). As I noted, the Dow Industrials might be better called the "Dow 30" as these stocks have become more technological, communication, manufacturing and service oriented and less "industrial", unlike the case of the heavy industry stocks like U.S. Steel that were part of the early Dow. BY THE WAY – This average of 30 stocks is not capitalization weighted, as is the case of the Standard and Poor 500 or Nasdaq Composite index. Dow stocks of companies that have become price laggards, even if they’re much smaller companies than say General Electric or Microsoft, can have more of a dragging effect in the PRICE weighted Dow 30 average than indexes that give more weight to the biggest companies with far more shares outstanding as in the S&P 500(SPX). Only the Dow Industrials and Dow Transportation (then a group of railroad stocks) averages are used in what became known as “Dow theory”. In a second part to this next week I can cover the main tenets of Dow’s observations on market behavior, which is a lot more than just how these two averages behave. One of Dow's most important contributions was the idea that "confirmation" of the primary trend occurs by the actions of BOTH the Industrial and Transportation averages. A related aspect to this, really the flip side of it - is the concept of "divergence". Dow spoke mostly about confirmation – divergences between averages and between prices and volume or between price action and indicators is mostly what came in this century by various technical analysts. Dow said that if the Industrials moved to a new closing high or low, without the Transportation average following suit at some point (within a few months usually) and fail to "confirm" the new high or low – or, if the Transportation Average (TRAN) goes to a new peak or new low, without the same action in the Industrials – we should be on alert for a possible change or reversal of the primary trend. The reasons for this are simple but was a very astute observation on Dow’s part. Take the example where industrial/manufacturing activity is strong and the Dow 30 average continues to move higher because of it. But, at the same time, orders for those goods are slowing. This situation results in a build up of inventories. Where such a slowdown would show up however, is in transportation activity as there is less shipping business for these companies. Slowing orders in the transportation sector will tend to result in a fall off of company earnings. Astute followers of these stocks would notice this and selling would start to show up in these stocks, either keeping a lid on stock prices or actually driving them lower. Conversely, manufacturing could start picking up but might not be at first reflected in a pick up in those stocks as earnings tend to lag orders – however, an increase in shipping might be noticed more readily and cause transportation stocks to begin rising. During this period the Dow Industrials might fall to a new low, but not the Dow Transportation average. Therefore, a new high or low in the Industrial average, not confirmed by the Transportation average is suspect. In the case of a new high not confirmed by the Transportation stocks it may indicate that the same slowing of earnings and hence stock prices, will show up later on in the Dow Industrials. I think it was in my book (Essential Technical Analysis) that I used an example of a major blockbuster type Dow signal that could have put anyone on the right track in terms of getting into stocks big time as a new low in the Transports was not confirmed by a new low in the Industrials - We can assume that manufacturing was holding relatively steady – perhaps there was not a big build up of inventories - but transportation stocks were suffering more relative to the heavy volume and good earnings that they were experiencing in the prior year(s). A MORE RECENT AND SIMILAR EXAMPLE – What was happening in terms of Dow Theory that would have gotten us into the market again as investors at the 2003 bottom? PLENTY! I rest my case and the picture tells the story here - Ok, I'll say something about this but the signal in terms of Dow Theory should be pretty clear – opps, that is if I've done my job of explaining this theory property. The fall to a new low in the Transportation average was not confirmed by a similar new low in the Dow 30 average. The lower relative high made by INDU was the initial indication to get into stocks. A confirmation of this initial action would have then been when both averages took out their prior weekly closing highs in the second quarter of last year. Notice that the Dow Transportation average went to a new relative high earlier than the Industrials – this is what we would expect in terms of Dow's observations; e.g., that shipping at some point could be picking up even faster than the manufacturing. Shipping tends to be pay as you go and manufacturing is a longer cycle before earnings reflect earlier manufacturing. Once a recovery gets going, a pickup in orders can flow faster to transportation companies' earnings and the rise in their stock prices can be faster because of it. ************************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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