The Option Investor Newsletter Thursday 07-01-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Nonetheless Futures Markets: See Note Index Trader Wrap: Semiconductors weigh on tech, oil approaches $39 Market Sentiment: Fear of the Weekend Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-01-2004 High Low Volume Adv/Dcl DJIA 10334.16 -101.30 10448.09 10274.51 1.78 bln 1380/1850 NASDAQ 2015.55 - 32.20 2045.53 2006.67 1.77 bln 938/2124 S&P 100 549.01 - 4.86 554.43 545.85 Totals 2318/3974 S&P 500 1128.94 - 11.90 1140.84 1123.06 W5000 11024.15 -114.80 11140.79 10975.26 SOX 467.03 - 18.10 485.09 462.59 RUS 2000 582.43 - 9.09 591.52 582.43 DJ TRANS 3172.01 - 32.39 3212.45 3160.17 VIX 15.20 + 0.86 15.57 14.41 VXO (VIX-O)15.08 + 1.09 15.99 14.40 VXN 20.06 + 0.69 20.68 19.59 Total Volume 3,883M Total UpVol 726M Total DnVol 3,112M Total Adv 2686 Total Dcl 4466 52wk Highs 261 52wk Lows 86 TRIN 2.75 NAZTRIN 1.91 PUT/CALL 0.93 ************************************************************ Nonetheless by Jim Brown The key word in the Fed announcement was "nonetheless" and not "measured pace" and that difference was felt in the market action on Thursday. Post Fed trading was less than inspiring as a new flurry of earnings warnings produced a cloud over the markets. Adding to that cloud was a weaker than expected ISM and stronger than expected Jobless Claims. Cracks were forming in the bullish sentiment on multiple fronts. Dow Chart - Daily Nasdaq Chart - Daily SPX Chart - Daily SOX Chart - Daily The morning began badly with stronger than expected Jobless Claims which came in at 351,000 with last weeks numbers revised up to 350,000. This makes three of the last four weeks at 350,000 or higher and suggests the employment picture is not as strong as economists would like. The four week moving average rose to 347,000 and the highest level since April 17th. With the June employment data due out tomorrow the markets were not excited about the 350K level being breached so frequently. Offsetting the Jobless Claims was a stronger report from the Monster.com Employment Index which rose to 136 in June from 128 in May. This was a +6.3% increase and the jobs were spread across most geographic sectors. Management and Administration positions were the strongest with the Sales and Production components barely budging. This data is not adjusted for seasonality as are all the other employment surveys and it is difficult to determine if it was a seasonal bounce or a real change in hiring. This index represents the change in jobs advertised and not jobs filled. The key report for the day was the ISM for June and at 61.1 it still represents an expanding economy but it was the lowest level seen since last October's 57.0. The high of 63.6 was posted in January and the number has been moving lower since. There was a small bounce to 62.8 in May but June's -1.7 drop erased all the gains. The problem for June was in the New Orders and Backlog components. New Orders dropped from 62.8 to 60, down from the 73.1 high in December. Order Backlog fell to 58.5 from 63.0 in June and the 66.5 high in April. New Export Orders fell nearly -4 points from 60.6 to 56.7. Employment fell from 61.9 to 59.7. Good news came from a drop in Prices Paid from 86.0 to 81.0 but bad news came from a nearly +2 point jump in inventory levels to 51.1. The conclusions drawn from the ISM are not very exciting. Orders are down, inventory is up with employment dropping again. This appears to be confirmation of the many smaller reports from earlier in the month suggesting the economy is cooling. What this means in English is we are no longer expanding at a red hot pace but more of a lukewarm crawl. The lack of any inflation in the prices could be due to the continued slack in the economy and the inventory buildup. This is good news for the Fed but troubling news for traders. With the market priced to perfection a slowing of growth at the same time the Fed is raising rates is a recipe for disaster. It might sound like the ISM was all negative and that is far from the truth. The ISM has now been over 60 for eight months and that is the first time in over 20 years. The economy is still expanding only that pace of expansion has slowed over the last four months. The odds are good that string will be broken next month. The problem for the markets today came from multiple fronts. The Fed statement was one area of concern. While everyone expected the Fed to raise rates again before year end they would prefer that it occur in an orderly measured pace. The Fed added the clause "Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." While the "measured pace" term was still used in the preceding sentence the "nonetheless" qualification removed it from consideration. The Fed tried to ride the fence and ended up with splinters. They tried to appease the markets but just had to have the last word. That last word worried the markets that there is still a danger of a repeat of the 1994 runaway rate hikes. If the economy was still expanding at a faster rate this statement may not have been a real problem. The ISM confirmation of weakness in prior reports that the expansion is slowing only served to highlight the phrase. Another challenge for the markets was some window undressing before the holiday weekend. Those who bought stocks last week in anticipation of a Fed celebration rally were quick to bail out when that rally did not occur. Remember all the talking heads that predicted a market relief rally if the Fed would just go ahead and raise rates and remove the uncertainty? They were conspicuously absent today as the market imploded. Also impacting the averages was another flurry of earnings warnings and lowered guidance. Many tech companies confessed to lower earnings prospects and the Nasdaq took it on the chin with a -32 point drop. Leading the big cap indexes down was very disappointing auto sales and further evidence of the slowing economy in general. GM reported sales fell -15% and much more than anticipated from their warning last month. Ford said sales fell -8%. Both companies said they were working to increase sales. Translated that means the incentives offered in the showroom was going up once again. The average incentive today is just over $4000 with some vehicles well over $5000. The problem with autos is the lack of demand. They have been giving them away for three years now with zero percent and buy one, get one gimmicks and there is no pent up demand. Used car prices have fallen off the planet and junkyards are crushing newer cars than ever before and on a regular basis. We have discussed the lack of future car buyers for the last two years as each round of incentive increases was implemented. Short of putting car keys in Wheaties boxes the car companies are going to have a tough time moving inventory for the next several months. The new model year will be their best hope. Cardinal Health was the biggest loser of the day and lost -$7 billion in market cap and -$17 off their stock price when they issued a high profile earnings warning. Three funds collectively lost over $1 billion on the news. The Fidelity Dividend Growth Fund and Fidelity Advisor Dividend Growth along with the Vangard Health Care Fund lost big bucks. CAH was a top holding in each. CAH was also 1.3% of the Fidelity Magellan Fund with assets of $67 billion. Tough to wake up to that kind of haircut as a fund manager. All your work for the last six months wiped out in one day by one stock. Other earnings warnings for the day included COLT, WMAR, PSTA, ELX, ESPD, CCUR, AMKR, MERX and SIPX to name a few. The index with the biggest loss was the SOX after Smith Barney downgraded the sector and AMKR warned of sector problems. AMKR cut its estimates to +6 cents from 17-22 cents analysts had expected. They cited weakness in cell phones and shortages of semi components. Morgan Stanley also tanked the sector saying Intel guidance, due out with earnings on the 13th, could be below analysts expectations. Add in the ELX warning of slow sales and the SOX dropped -18 (-3.72%) for the day. Needless to say the Nasdaq did not have a chance. The Nasdaq gave back -32 points of its gains for the week but managed to close right on the bottom of its current range at 2015. The Nasdaq rallied out of its prior range (1965-2000) on the 23rd and has refused to go back. The drop today was over by 11:30 but no rebound appeared. The Nasdaq closed off its lows but only barely. The key here is still the SOX and with nearly a -4% drop there is no way the Nasdaq could have produced a gain. The SOX fell back below the 470 support level, which had held all week and clung to 465, the last stop before testing 450 again. If the Intel rumor picks up speed we could easily test 450 again next week. I kept thinking all day we would see some chip buying at the close but it never appeared. The Dow took a serious header off the high board and landed face first several points below the bottom of its recent range. The Dow traded down to 10274 and under the 10300 level which has held for nearly four weeks. We did see a recovery at the close back to the prior 10330 resistance level but the rebound ran out of steam. As with every long holiday in recent memory the rumors of terror threats/events were flying. It was so bad at one point that the Homeland Security Dept had to make a statement that they were not raising the threat level and there were no credible threats for the coming weekend. That is almost more scary than a credible threat because it means there is no concentration of force to prevent the event. It is almost as though the cops are going on holiday as well because there is no visible enemy. There were also several commentators suggesting the Democratic Convention was the most likely target for a regime change attack because the attacked party tends to get the most sympathy. With the goal to sink Bush the commentators thought the Boston convention was not only the easiest target in population density but the preferred target as well. You can bet the security will be extreme and it will not be an easy target by the time the convention begins. In the end it was not the rumors that tanked the market but the perception that the Fed was ready to aggressively raise rates just as the economy appeared to slowing even further. It fell on worries that earnings were going to disappoint and on several key downgrades. Yahoo for instance was knocked for a -2 loss on a change in search strategy by Microsoft. Valuation downgrades are beginning to become common place and earnings warnings only accelerate the worry. Still the most likely fear factor impacting the markets today was the Employment Report tomorrow. The current consensus estimate is still +275,000 jobs and traders were beginning to fear a disappointment. We have seen employment drop in almost every report except for the Monster Index. We have seen Jobless Claims rise back to the 350,000 level for three of the last four weeks with the four week average at 347K. These are not positive signs for the Nonfarm Payrolls. I have heard several whisper numbers this afternoon in the 100-110K range. While this would still be a positive gain it would be a sentiment loss. The perception that employment is accelerating would be dashed and cast more suspicion on the strength of the recovery. A major drop in new jobs would weaken the republican stance and give Kerry more ammunition. The race is already a tossup and that could give investors more election indigestion. Should we see a minus sign in front of the number it could be lights out for any July rally. July is typically the best month of the third quarter and we certainly did not get started off on the right foot. The Dow lost -101 points and broke crucial support intraday. The S&P also traded below 1125 support and managed almost no rebound. Oil spiked back over $39 on comments from Saudi Arabia that they thought it was fairly valued in the upper $30s. What happened to the $25-$30 target price we have been using? Inflation in its purest form brought on by supply and demand. The jump in oil and rates and the drop in orders and jobs knocked the hope out of the market and the result was an ugly day. Normally the trend into the July-4th holiday is up with an earnings led rally for the following week. Not looking too good for that rebound tonight. For the market to have any hope of repeating that trend the Nonfarm Payrolls had better be strongly positive and at least 100K or more. With the implied weekend terrorist threat a wimpy number is not going to instill confidence and create an urge to buy. There is good news in the market but it was hidden by the various factors above. Real rates fell to nearly a two month low despite the Fed rate hike. The yield on the ten-year closed at 4.564. The market had priced in the potential for a 50 point hike as well as strong economics. We got neither and bonds continued to climb. This will help home sales and take some of the fear of the Fed out of the market. This fact will surface next week and you can count on it. We will also need some positive earnings news in order to capitalize on the rate drop and that could be a challenge. For Friday I would look for a good Jobs number to start some bargain hunting ahead of the earnings parade that begins next week. However, don't just jump in assuming we will go higher. We did break support intraday on Thursday and that could be a signal of things to come. The market will confound the most people possible and summer trading is very tough. Wait for a real trend to appear. We are also playing in some fast traffic. The NYSE reported that program trading was responsible for 70.5% of all trades on the NYSE for the week ended June 25th. 70.5%!!! This is an all time record and something that should indicate to us all how little retail trading is actually being done. According to the NYSE an average of 1.119B shares were traded each day. Since there was only an average of 1.588B shares traded each day this means less than 470 MILLION shares of retail trading per day. This is a picture of the summer doldrums at its best. Here is the link to the NYSE report: link In the for-what-its-worth category Abby Joseph Cohen gave her carefully scripted market outlook on Wednesday. She said the markets were 12-15% undervalued and we could see a significant rally by year end. Using the S&P as of Wednesday that +12-15% gain would put the S&P at 1275-1311. Definitely a far cry from our 1025 support today. She also said the rally might not occur until late November or December due to the election. I hope she is right but I would not mortgage the kids to bet on it. Interesting that she chose to make her appearance during the post Fed bounce where all the pundits were predicting a celebration rally. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Semiconductors weigh on tech, oil approaches $39 Sound familiar? How about the June 17 Index wrap title. While technology stocks were broadly lower in today's trade, it wasn't entirely due to the Semiconductor Index (SOX.X) 467.03 -3.72% giving back half of a seven session rally. Networkers as depicted by the Networking Index (NWX.X) 250.22 -4.0% didn't exactly carry their weight among technology after a brief 2-day piercing of their rising 200-day SMA. Non-NWX.X component Emulex (NYSE:ELX) $11.46 -19.91%, which has been showing up on the NYSE new low list the past couple of weeks did its part to deflate any winds that had been filling the sector's sails of late. Emulex's earnings warning drew comment from brokers on QLGC $26.22 -1.39%, a NASDAQ new low setter since March, McData (NASDAQ:MCDT) $4.63 -9.39%, another NASDAQ new low setter since March, which broker Baird said it would continue to be a buyer of despite ELX's warning, Brocade Communications (NASAQ:BRCD) $5.52 -7.69%, which set a new 52-week low in May. While the "trickle down" effect from ELX was seen among networkers, so too was its impact on chipmakers that supply hubs and routers. Baird did comment that ELX's slow quarter is most likely being attributed to EMC's (NYSE:EMC) $11.14 -2.28% move during the September quarter to a hub model switch, which is resulting in a temporary inventory workdown at EMC's distribution partners. Not to be silent, Adams Harkness piled on with a downgrade of Brocade (BRCD) to "buy" from "strong buy" and now notes that ELX's announcement indicated weakness at two OEMs, one of which they believe to be Dow component Hewlett Packard (NYSE:HPQ) $20.58 -2.46%, which is one of BRCD's largest customers. While traders were ridding themselves of semiconductors and networkers just below the 200-day SMA's, crude oil was rising sharply on the heels of yesterday's inventory reports that showed draws. Pumping oil's rise was rumors that the Department of Homeland Security planned to raise it terror alert level ahead of the July 4th holiday. A rumor that both Homeland Security and the White House later refuted. Through it all, the energy sensitive Dow Transportation Average (TRAN) 3,172.01 -1.00% wouldn't budge below the 3,160 level (01/04/01 relative high 3,157.44), which the TRAN broke above in recent session. August Crude Oil Futures (cl04q) - 25-cent box A quick glance at Dorsey/Wright and Associates point and figure chart of August Crude Oil Futures (qcharts: cl04q) has oil rebounding sharply from Tuesday's lows of $35.75. However, oil bulls weren't quite able to get a reversing higher PnF buy signal at $39.50 to negate the current bearish vertical count of $32.00. I eyeballed a PINK horizontal level at $39.50, which I think any move in oil above that level, might trigger some profit taking in the Transports back below the 3,160 level. Oil didn't trade $39.50 today, and the Transports didn't trade below 3,160. As close as 3,160.17 is to 3,160. Market Snapshot / Internals - 07/01/04 Close A/D lines were flat at the open, but the ISM Manufacturing Index of 61.1, certainly spooked traders as it was the lowest reading since October, and off of January's high reading of 63.6. An intra-day review of the SPX had the ISM data being released at 10:00 AM EDT with the SPX at 1,139. Just prior to a sell program premium alert being generated, the SPX moved below its WEEKLY Pivot of 1,135, where the sell program premium was then generated, sending the SPX lower to 1,126. A loan buy program premium was found at 03:41 PM EDT, which most likely correlates to Jim Brown's Market Monitor alert at 03:40:29 that there was a mixed to "buy side" bias on initial market on close orders. However, both Jim's alert as well as the buy program premium came well after the SPX had briefly (about 7- minutes) pierced below its WEEKLY S1 (1,123.75) at 01:50 PM EDT. U.S. Market Watch - 07/01/04 Close I always have high ambitions of showing a bunch of charts in each night's wrap, but never have enough time. I wanted to quickly revisit some notes relating to "new high" tests for some of the indices. The CBOE Internet Index (INX.X) 194.68 -3.12% didn't quite get a new 52-week high yesterday, where the internets look like they want to reload for another go. The S&P Retail Index (RLX.X) 399.14 -0.5% did get a new high above 413.22, but not my "round number" of 414.00. I like to place a formidable challenge to things! (grin) The Transports (TRAN) hung tough above 3,160. The Cyclical Index (CYX.X) 690.03 -1.45% haven't really come close to challenging the 714 level, where on June 24, the best trade was 706.41. The Defense Index (DFX.X) 225.46 +0.55%, which was trading new 52-week highs on June 23 (221.35) did so again today. What I want/need to do, which maybe you the trader can do, is just slap some conventional retracement on the above mentioned indices (somewhat stronger) and get a feel for things. I need to do this further, get a feel for how they're staggered, to also try and get a better sense of their impact on the SPX/OEX. Pivot Analysis Matrix - I think there's potential for a pretty good bounce higher into tomorrow's close, and here's what I think I see in the Pivot Matrix. The SPY traded correlative MONTHLY S1 and WEEKLY S1 today, and just a smidge under. Now.... here we are back around SPX 1,125. On June 17, a Thursday, "Semiconductors weigh on tech, oil approaches $39" the SPY closed at its session lows, but just off its WEEKLY S1, and finished the week (Friday) with a nice gain. Tomorrow, the trade I do LIKE is for the QQQ/NDX where I would LIKE TO SEE the NDX make a continued move lower to that correlative WEEKLY S1 and DAILY S2. Now, for some reason, the QQQ correlation shows up at $36.44-$36.42 and MONTHLY S1/WEEKLY S1. For a QQQ bullish trade setup on that much weakness, I would NOT WANT to see the SPY much below its DAILY S1. Why would/might the SPY hold in at or above its DAILY S1? I would think that with Treasury yields falling in recent session, the banks, as depicted by the BIX.X might be set to firm, and bounce after a test of WEEKLY S2 today. I also sense a GREAT deal of bearish complacency. Let's quickly look at the OEX with new MONTHLY Pivot retracement, where we've got some overlapping support at WEEKLY S1 and MONTHLY S1. But I also want to bring back a prior "hindsight" observation of a doji in the OEX's bar chart, where the OEX rejected higher from that level. Tomorrow, the OEX's DAILY S1 is at that 545 open/close doji and me be a level where bears are just waiting to cover some shorts, or with a little volatility spike into the weekend, really pound out some put selling. S&P 100 Index (OEX.X) Chart - Daily Interval I'll take some time later tonight to find out what Index Trader Wrap it was when I finally noted that little "doji" from June 1st when the OEX opened and closed at 545, then broke higher from the current overlapping MONTHLY S1 and WEEKLY S2. Today, the OEX managed to muster back some strength to close on our downward trend. Hey, that makes sense. If I'm a bear that trades trend, sees it broken, then I'm probably not trash talking and might be trying to get squared up if I've been overly bearish for the past two years. While I usually don't find a DAILY S1 by itself as being a level for institutional buying, that little doji and rather notable move higher would suggest that that 545 level was a level of agreement (market agreed on open price and closing price), yet major disagreement, as when the up move came, it had some upmph behind it for four our five sessions. 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 **************** Fear of the Weekend - J. Brown If yesterday's post-fed afternoon rally was due to window dressing then funds didn't take long to do a little undressing. The day started with some disappointing economic data in the form of higher than expected initial jobless claims and an ISM index that came in just a tad lower than forecast. There were a number of factors pressuring stocks and investors used them all as an excuse to sell. The last 24 hours has not been positive when it comes to earnings outlooks. Cardinal Health, the nation's largest drug wholesale, dropped a bomb last night with an earnings warning for the June quarter, the year and next year. On top of the earnings news CAH added to its woes by revealing a new government probe into its accounting practices. Shares of CAH dropped like a rock with a $17.00 haircut or 25% decline in market cap. Emulex (ELX) was chasing after CAH with its own earnings warning that left shares of ELX down 20% on the session. You would expect the brokers to downgrade these stocks and they did but analysts were also downgrading some recent winners like Boeing (BA) and Yahoo (YHOO). All in all the effect was damaging to investor confidence regarding the upcoming Q2 earnings season. It was a very bearish day as the SOX semiconductor index led stocks lower with a 3.7% decline. Only the DFI defense index and the XNG natural gas index managed to close in the green. Pressing down on stocks was day two in a huge surge higher for crude oil. Oil has risen more than 8% in the last two sessions and completely erased its losses over the last two weeks. Market internals were obviously negative. Declining stocks outnumbered advancers 17 to 10 on the NYSE and 21 to 9 on the NASDAQ. Down volume was more than four times higher than up volume on both exchanges. Wall Street will be focused on the non-farm payrolls report tomorrow but the real fear may be the Fourth of July weekend. Investors tend to get spooked ahead of any long holiday and the potential for terrorist attacks. I suspect that many traders have already left for the holiday, which will leave us with low volume to exaggerate any moves in the markets today and tomorrow. If we can escape any sort of major terrorist event over the weekend then maybe fund managers can put their new wad of retirement cash from the quarter's end to work and do a little buying next week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8871 Current : 10334 Moving Averages: (Simple) 10-dma: 10392 50-dma: 10253 200-dma: 10152 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 962 Current : 1128 Moving Averages: (Simple) 10-dma: 1135 50-dma: 1119 200-dma: 1099 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1180 Current : 1489 Moving Averages: (Simple) 10-dma: 1487 50-dma: 1451 200-dma: 1442 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 15.20 +0.86 CBOE Mkt Volatility old VIX (VXO) = 15.08 +1.09 Nasdaq Volatility Index (VXN) = 20.06 +0.69 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.93 736,874 686,859 Equity Only 0.74 576,755 429,000 OEX 0.62 38,203 23,733 QQQ 0.78 66,351 51,684 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 67.1 + 0 Bear Confirmed NASDAQ-100 50.0 + 1 BULL ALERT Dow Indust. 70.0 + 3 Bear Confirmed S&P 500 65.4 + 0 Bear CORRECTION S&P 100 66.0 + 2 Bear CORRECTION Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.26 10-dma: 1.08 21-dma: 1.04 55-dma: 1.07 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1059 915 Decliners 1741 2103 New Highs 105 73 New Lows 28 37 Up Volume 358M 325M Down Vol. 1415M 1386M Total Vol. 1796M 1725M 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 Thursday 07-01-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: AHC, CAT, DHR, MERQ, ETN, EBAY, MMM, QCOM New Calls Plays: None Put Play Updates: GCI, OMC, SLAB New Put Plays: NTES **************** 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: ***** None ************************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: 79.89 chng: +0.70 stop: 77.50*new* Tuesday's rebound from the $75 level was just the beginning for our play on AHC, as the stock pushed right up to and through last week's high at $79.10. Then in defiance of the broad market weakness seen today, the stock pushed to new recent highs, even spending a bit of time above $80. Our target in the $82-83 area is looking more and more feasible by the day. With that target now only $3 away, it is time to get more aggressive with our stops. We're raising our coverage stop to $77.50 tonight, which is just under yesterday's intraday low and should be under the supportive 10-dma ($76.96) by tomorrow. While aggressive traders can still consider new entries on either a successful bounce from above $78 or a breakout over today's high. But our focus is now turning to maximizing gains from the play, rather than looking for new entry points. A move into the $82-83 area ahead of the weekend should be used as an opportunity to exit the play with a tidy gain. Picked on June 17th at $74.15 Change since picked: +5.74 Earnings Date 7/28/04 (unconfirmed) Average Daily Volume = 1.13 mln Chart = --- Caterpillar, Inc. - CAT - close 78.18 change: -1.26 stop: 76.00 Reflecting the schizophrenic mood of the broad market, our CAT play has been bouncing between support near the $77 level and resistance in the $79.50 area for over a week now. Neither the bulls or the bears seem able to gain a significant advantage and that keeps the range trade alive. We're still expecting the stock to break to the upside, but probably not until we see one more test of the bottom of the range first. Investors are unlikely to be aggressive buyers of the stock ahead of the long weekend straight in front of us, so dip buyers ought to get one more shot at buying a bounce off the $77 support level. Traders looking to buy a breakout over resistance (now at $79.60) will likely have to wait until next week when hopefully we'll see stronger volume and conviction. Maintain stops at $76, which is under all of the major moving averages. Picked on June 24th at $79.10 Change since picked: -0.92 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 2.36 mln Chart = --- Danaher Corp. - DHR - close 50.98 change: -0.87 stop: 50.00 We've been waiting to see where DHR would pause in its steady ascent for a bit of profit taking and today was the day. After testing yesterday's highs near $52,. The stock headed sharply lower early in the day, falling right to solid intraday support near $50.50 and then beginning a minor rebound into the end of the day. There should be solid support near that level and rebound entries from that vicinity look favorable. We're still looking for the stock to extend its bullish move up into the $53- 54 area, so a pullback near $50.50 would still provide ample upside potential for new positions. On the other hand, a breakout over $52 resistance really doesn't leave much room for profit, so we're not recommending breakout entries at this time. The one potential problem for our play is that the daily oscillators are looking a bit extended up here. Should they roll over into solid Sell signals, then it's a safe bet we'll see our $50 stop tripped before our profit target is reached. Picked on June 20th at $48.74 Change since picked: +2.24 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 1.55 mln Chart = --- Mercury Interactive - MERQ - cls: 49.02 change: -0.81 stop: 48.50 Don't look now, but our MERQ play is in trouble. The broad market weakness today certainly didn't help, and MERQ rolled over right at the $50 level - giving the impression that that level is once again behaving as resistance. MERQ dropped to close at its low of the day and just above the 20-dma ($48.94). If that average fails to offer support, then it’s a safe bet that our $48.50 stop will be hit. On the other hand, a rebound from the 20-dma can be used for new entries for aggressive traders. That would be the mirror image of the rebound scenario that presented itself a couple weeks ago. The problem that must be confronted though, is the fact that the daily oscillators are on Sell signals and selling volume appears to be on the rise. Keep those stops in place and look for the rebound. Picked on June 6th at $47.56 Change since picked: +1.46 Earnings Date 7/21/04 (unconfirmed) Average Daily Volume = 2.03 mln Chart = --- Eaton Corp - ETN - close: 63.68 chg: -1.06 stop: 61.85 Believe it or not but ETN weathered the market sell-off on Thursday better than some of its peers. That may be partly due to its fresh breakout above mild resistance at $64.00 on Wednesday. Without a doubt the stock is looking a little overbought up six weeks in a row but its P&F chart continues to look very bullish with the breakout and $83 target. As long as ETN continues to channel higher we should be okay. Right now the bottom of its narrow channel is near $62.00 so our stop at $61.85 is in a good spot. Traders might actually want to use today's dip as an entry point for new positions. Picked on June 18 at $ 62.05 Change since picked: + 1.63 Earnings Date 07/15/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- eBay Inc - EBAY - close: 90.59 change: -1.36 stop: 87.50 EBAY had been fading back a little bit the last couple of sessions to digest some of its gains from last week. Today's sharp sell-off in technology issues could have been worrisome for EBAY bulls but support at the $90.00 mark held. Traders might actually want to take advantage of the dip and use it as an entry point for new positions although we'd probably confirm the market was headed higher tomorrow morning before making a purchase. Yet even a dip to $88.00-89.00 could be seen as an entry point if EBAY starts to bounce back. We'd expect EBAY to really out perform next week if the Fourth of July holiday is a quiet one. We're going to leave our stop loss at $87.50 for now. Picked on June 27 at $ 90.72 Change since picked: - 0.13 Earnings Date 07/21/04 (confirmed) Average Daily Volume: 8.3 million Chart = --- 3M Co - MMM - close: 88.17 change: -1.84 stop: 87.49 We were triggered in this call play on Wednesday when shares of MMM broke through resistance at $90.00 and hit our trigger at $90.11. The push higher came despite news that the Supreme Court turned down MMM's appeal to review a lower court's decision and $68 million jury award against MMM for anti-competitive practices. In the lawsuit one of MMM's competitors said the company was trying to monopolize the transparent tape business. The $68 million fine is nothing to MMM, who currently has a cash hoard of $1.8 billion. Thus MMM may have weathered some bad legal news yesterday but it couldn't hold on to its breakout when the Dow Industrials plummeted more than 100 points on Thursday. MMM actually broke through its simple 10-dma and pierced minor support at the $88.00 mark intraday before small rebound in the afternoon. This is an ugly turn of events for our play and makes Wednesday's breakout look like a bull trap. We would NOT suggest new bullish positions until MMM traded back above the $90.00 mark. Only aggressive traders should consider buying a bound from $88.00. Picked on June 30 at $ 90.11 Change since picked: - 1.94 Earnings Date 07/19/04 (unconfirmed) Average Daily Volume: 2.5 million Chart = --- QUALCOMM - QCOM - close: 72.02 change: -0.96 stop: 69.00 Shares of QCOM are holding up pretty well. The stock managed to squeeze out another new three-year high this morning before slowly fading backwards with the market's sell-off. Adding to QCOM's strength were positive comments from Merrill Lynch who reiterated their "buy" outlook and raised their target price from $75 to $90. After hours news broke that QCOM's suit against rival chipmaker Texas Instruments (TXN) is not progressing as planned. A judge ruled in favor of TXN regarding part of the patent dispute. Shares of QCOM we not trading lower in after hours so we're unsure how the stock will respond in the morning if at all. We feel that traders should be on the look out for a dip toward the $71.00-71.50 region and any bounce above $70.00 could be viewed as an entry point. No change to our stop loss at $69.00 for now. Picked on June 29 at $ 71.55 Change since picked: + 0.47 Earnings Date 07/21/04 (confirmed) Average Daily Volume: 8.8 million Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Gannett Co - GCI - close: 83.70 change: -1.15 stop: 86.05 Good news! GCI has finally broke through support at the $84.00 mark. We have been triggered now that GCI traded at $83.95 with volume about 50% above average. The move produced a new quadruple-bottom breakdown sell signal on its P&F chart. We're only targeting a quick move to the $80.00 range, which should be support. If GCI bounces traders might be able to enter new positions on a failed rally under 84.50-85.00. Congratulations to any traders who took the roll over on Tuesday as an early entry point. Picked on July 01 at $ 83.95 Change since picked: - 0.15 Earnings Date 07/13/04 (confirmed) Average Daily Volume: 957 thousand Chart = --- Omnicom Group - OMC - close: 74.30 change: -1.59 stop: 77.50*new* The rollover from resistance at the 10-dma (now $76.14) looked pretty good early in the week, as last week's rebound in shares of OMC failed. But it was nothing to compare with the bottom falling out of the stock like it did today. OMC plunged at the open and didn't really slow its descent until after it busted through the March lows. Rather than bouncing from that potential support, OMC broke below it, then used that $74.65 level as resistance for the remainder of the day before tipping over to go out on its intraday low. With today's breakdown, OMC is now looking destined for an express ride to the $71-72 area, with the potential for a continued drop toward the PnF bearish price target (now $67), or even the bearish H&S price target of $65. Rebound entries can be considered on a rollover from the $76 area, which should now be strong resistance. Note that we've lowered our stop to $77.50, just over the intraday peak of last week's rebound attempt. Picked on June 20th at $77.14 Change since picked: -2.84 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 1.09 mln Chart = --- Silicon Labs. - SLAB - close: 45.11 change: -1.24 stop: 48.50 As amazing as it seems, our SLAB play is still alive and looking better and better. After last week's near-miss of the $48.50 stop, the stock tipped over in sympathy with the Semiconductor index (SOX.X) and today's 3.7% plunge in the SOX certainly helped to drive SLAB back towards key support near $44-45. Failed rebounds below the 20-dma (now at $47.09) can still be used as potential re-entry opportunities ahead of the next breakdown below the $42.88 low from a couple weeks ago. While momentum entries below that mark could work, we're not overly enthusiastic about that approach due to the way SLAB tends to bounce so strongly after each apparent breakdown. Shorting the rallies at resistance appears to be the more prudent approach on this stock. For now, we'll maintain our stop at $48.50, which is just over the intraday highs from last week. Picked on June 20th at $44.99 Change since picked: +0.12 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.16 mln Chart = ************* NEW PUT PLAYS ************* Netease.com - NTES - close: 39.38 chg: -1.96 stop: 42.51 Company Description: NetEase.com, Inc. is a leading China-based Internet technology company that pioneered the development of applications, services and other technologies for the Internet in China. Our online communities and personalized premium services have established a large and stable user base for the NetEase Web sites, which are operated by our affiliate. As of March 31, 2004 we had approximately 194 million accumulated registered accounts, and our average daily pageviews for the month ended March 31, 2004 exceeded 341 million. (source: company press release) Why We Like It: Any time we play one of the Chinese Internets we like to add an extra note of caution. They're not for everyone as the group can still be volatile. Now having said that the entire niche has been weak the last couple of sessions and today's breakdown in NTES looks good for bearish plays. On top of the general market weakness today the Chinese Internets were hit extra hard due to a downgrade by one analyst reducing expectations for the group. Concerns over business not building fast enough and some regulatory hurdles were to blame for the reduced outlook. We like the technical picture for NTES. Its daily chart shows the breakdown below round-number psychological support at $40.00 on rising volume that is nearly double the average trading volume. Weekly and daily technicals like the RSI and stochastics are bearish and its P&F chart is weak and points to a $33 target. We do note that NTES has support near $35.50 and we're going to make that our initial target but the stock appears to be trading in a wide descending channel and a lower target is possible. Earnings are expected in about three weeks but the date is not confirmed. Suggested Options: We're going to suggest the August puts. Our favorites are the 40s but the 45s have relatively low time premium and the 35s are cheap. BUY PUT AUG 45 NQG-TI OI= 117 Current Ask $6.90 BUY PUT AUG 40 NQG-TH OI= 407 Current Ask $3.60 BUY PUT AUG 36 NQG-TG OI= 683 Current Ask $1.50 Annotated Chart: Picked on July 01 at $ 39.38 Change since picked: - 0.00 Earnings Date 07/26/04 (unconfirmed) Average Daily Volume: 1.7 million Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 07-01-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Energy, Electronics, Drugs and more Option Spreads: What Your Mouth Will Get You That Your Fingers Can’t Traders Corner: A New Look At Trendlines Traders Corner: It's That Time Again ********** WATCH LIST ********** Energy, Electronics, Drugs and more ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Valero Energy - VLO - close: 74.81 change: +1.05 WHAT TO WATCH: Energy bulls should take note. The sharp rise in crude oil has helped fuel a nice bounce in VLO from its simple 10-dma. VLO is an oil refinery and everyone knows that business is brisk. The stock is at its all-time highs and looks poised to keep right on climbing. We do suggest relatively tight stops if you play it due to VLO's overbought status. We'd probably target a move to $80.00. Chart= --- Best Buy Co - BBY - close: 49.74 change: -1.00 WHAT TO WATCH: We've had our eye on BBY for a while. The stock has been trading sideways for months with most of that time spent in a $5.00 range between $50-55. Now shares are breaking down under $50.00 so it's a good time to short it, right? Maybe. BBY broke through support at $50.00 last month but it proved to be a head fake. Look for a drop through the $49.00 level and then target a move toward $45.00. Watch out for P&F support near $47. Chart= --- Analog Devices Inc - ADI - close: 44.85 change: -2.23 WHAT TO WATCH: The 3.7% drop in the SOX semiconductor index was very bad news for tech stocks and even worse news for chipmakers. ADI fell 4.7% and broke through support at the $45.00 level. Volume was pretty decent on the move and we suspect that bears might be able to target a drop toward $40.00. Unfortunately, there could be support at $43 and again near $42 with the lows in December and May, respectively. The good news is that its P&F chart is bearish and points to a $37 target. Chart= --- Cardinal Health - CAH - close: 52.86 change: -17.19 WHAT TO WATCH: That's right; CAH dropped more than $17 on 18 times its average volume. Last night the company issued a huge earnings warning for the current quarter, all of fiscal year 2004 and FY2005. On top of the earnings news CAH announce a government probe into its accounting practices. We suspect that CAH could produce a "dead cat bounce" tomorrow and if not tomorrow then we'd look for it in the next few weeks. The way to play an immediate bounce is to look for a move back above $54.00 and then use a tight stop. We'd target the $58-59 levels. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- MUR: $75.45 +1.75 - MUR is another oil stock hitting new highs on the surge in crude. BA $49.90 -1.19 - Very aggressive bears might try and short a break under the $49.00 mark with a target towards $45 but odds are we suspect support in the $47.00-47.50 range. ************************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 ************************ What Your Mouth Will Get You That Your Fingers Can’t By Mike Parnos, Investing With Attitude Everyone who was worried that the market was going up too fast raise your hand. OK, first put down your beer. Now, raise your hand. The topside of a few of our Iron Condor portfolio positions were threatened over the last few days. But, never fear. The resistance level fairy came down today, waved her magic wand, and the market pulled back today. So, we’re safe – for now. Fasten your seatbelts. It’s going to be another fun ride. Oh, you can put your hands down now. ____________________________________________________________ Using Your Mouth Instead Of Your Fingers God gave us opposable thumbs – and they come in handy, especially when it comes to using our computer mouse (and, of course, eating). Modern technology has given us the ability to maneuver our way around a brokerage site to do our trading. These days, most of us do our trading online. We do the research. Check out the option chain, get the option symbol, and type it into the online order page. We click “send” and our precious order disappears into the wild blue yonder only to appear on a market maker’s board somewhere. Face it. It’s magic, but it works. That’s all fine and good, but we know how seldom things go exactly according to plan. It’s inevitable. There will come times when you have to communicate with those nice people at your brokerage firm. Perhaps your order didn’t get filled. Maybe the results weren’t reflected properly in your portfolio. Maybe you have questions about maintenance requirements. Maybe the TV is broken and you’re just lonely. Whatever. Plus, though it’s hard to comprehend why, there are still some traders who actually place their orders on the telephone. Well, let’s devote a few paragraphs to the proper way to place your option order on the telephone. I mentioned earlier that the folks at the brokerage firms that take your calls are nice folks. Basically, they are. Keep in mind that they spend their entire workday answering the phones, fielding a variety of questions and complaints. It’s not an easy job. It requires a substantial knowledge base, almost as much patience and a truckload of tolerance. The least we can do is be prepared to give them all the information they need to do their job as effortlessly as possible. Placing The Order Here is a list of what you need before you pick up the phone to dial. 1. Your account number. 2. The type of order you want to place. 3. Are you buying to open, selling to open, buying to close or selling to close? 4. The number of contracts. 5. The option symbol. (4 or 5 letters – can usually be found on most option chains) 6. The debit or credit amount. 7. Is it a limit or market order? (it should be a “limit” order 90% of the time) 8. The duration of the order. (day order, good till cancel, all or none) This information gives your new phone buddy all the information he/she needs to efficiently process the order in a timely fashion – and I emphasize “timely” fashion. Why? Because, while you’re fumbling around for the pertinent information, the market can move against you. That can change the option prices and render your order obsolete. The less time you spend on the phone, the better chance you have of getting your order filled at the price you want. A Typical Phone Order “This is George Soros, account number 8046-1228. I’d like to put on a bull-put spread trade on the S&P 500 index. I want to sell to open 10 contracts of the SPQTO puts and buy to open 10 contracts of the SPQTJ puts for a credit limit of three dollars. This order is good for the day.” The phone rep will then repeat it back to you, using the actual months, to confirm that is what you meant. Listen carefully. This is your chance to catch any mistakes. The phone call is being recorded to make sure your order was placed as described and to resolve any discrepancies that may arise. ____________________________________________________________ JULY NEW POSITIONS Position #1 – SPX Iron Condor – 1128.94 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 – 582.43 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 – 1128.94 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 – 467.03 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 -- $37.04 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 – 549.01 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 ************** A New Look At Trendlines In my last article on macro support and resistance I talked about a book called "DeMark on Day Trading Options." I have never completely read this book but after the support and resistance article I decided to take another look and see what else I could find. There is a chapter on TD Lines and how to draw trendlines and it looked like something I could really get my teeth into so I forged ahead. The methodology is called TD Lines and is copyrighted by T. DeMark DeMark states that trendlines are one of the most widely used technical analysis tools but thinks they are also the most widely abused tool. Since there are no industry standards for drawing trendlines, two different traders can end up drawing two different trendlines on the same market because they are drawn according to a trader's discretion. Where a trendline is placed is often due to a trader's bias or even at the whim of a traders emotion state. It is for this reason DeMark thinks they are unreliable and difficult to reproduce. DeMark thought it would be nice to have some way of normalizing this tool and take out all the arbitrariness of it and introduce a level of objectivity and consistency to drawing trendlines. In this article I intend to examine his mechanical process that removes the possibility of drawing a trendline according to a bias or drawing a trendline differently from any other trader. I will also discuss how, once those trendlines are drawn you can use a list of criteria to determine if breaks are valid or not. But before we get started lets define a trendline, one of the most basic but one of the most valuable tools in our toolbox, as defined by John Murphy: An Up Trendline is a straight line drawn upward to the right along successive reaction lows A Down Trendline is a straight line drawn downward to the right along successive reaction highs The first thing we must do is find the two most recent swing lows or highs. DeMark calls these TD points. A TD Point Low (swing low) is a low that has a higher low one bar before it and one bar after it. A TD Point High (swing high) is a high that has a lower high one bar before it and one bar after it. DeMark does not call trendlines just plain Jane (only I can say that) trendlines, he calls them TD Demand Lines and TD Supply Lines. TD Demand Line - an upward sloping line between the two most recent TD Point Lows where the most recent low is higher than the previous low. The line is drawn through the lows of TD Point Lows. TD Supply Line - a downward sloping line between the two most recent TD Point Highs where the most recent high is lower than the previous high. The line is drawn through the highs of TD Point Highs. Once a more recent TD Point Low or High has formed a new line is drawn and it becomes the active trendline. Let's take a look at how to draw these trendlines with an example. Here is the SPX since May 26th with the TD Demand Lines drawn. I have numbered the TD Point Lows. The RED trendline connects 1 and 2, the blue connects 2 and 3 and the yellow line connects 4 and 5. The yellow line is the active TD Demand Line now. Here are the TD Supply Lines on the same chart. Red connects 1 and 2 the only TD points that can be connected because the definition is connect TD Point Highs where the most recent high is lower than the previous high. Now that we have our trendlines drawn we can move on and introduce criteria that will tell us if a break of a trendline is a valid break and not. Here is a chart of RIMM with two TD Point Highs (May 5th and 13th) marked and a TD Supply Line in magenta. Any one of the following qualifiers will validate a TD Supply Line breakout. 1. The price bar prior to an upside breakout must be a down close. If there is an upside breakout of a TD Supply Line check to see if the previous day's close was lower than the day before. This is all you need to validate an upside breakout. Using the example above this qualifier was not fulfilled because the bar prior to breakout bar did not have a down close. 2. The upside breakout bar's open must be greater than both the active TD Supply Line and the previous price bar's close. If #1 is not met then check this one. The upside breakout bar's open was 47.12 and its previous bar's close was 46.50 but the open seems to be right at the Supply line. A quick check of intraday chart and indeed the open was right at the line so I will say this qualifier is not fulfilled. 3. The current price bar's open must be greater than both the previous two price bars' closes, and the current price bar's TD Supply Line must be greater than the previous price bar's high. If #1 or #2 are not met then check this one. The upside breakout bar's (May 18th) open is 47.12 and the previous bar's close (May 17th) was 46.50 and the close on day before (May 14th) was 46.30. The TD Supply Line is greater than May 17th's high. This qualifier is fulfilled so the breakout is considered valid and you would go long this market. Here is what happened. Now that you have a valid breakout you can calculate a price objective. Here is how to do make this calculation: 1. Calculate the lowest price below the TD Supply Line. In our RIMM example that is May 10th at 43.70. 2. Calculate the difference between the low from #1 and the TD Supply Line immediately above the lowest price. I calculated this to be 47.75 so the difference is 47.75 - 43.70 = 4.05. 3. This difference is then added to the breakout price, which was 47.32. So the price objective is 47.32 + 4.05 = 51.37. RIMM easily made that level. Let's do a TD Demand Line now. Here is a chart of TASR from April 5th to April 20th. Any one of the following qualifiers will validate a TD Demand Line and will give you a trading opportunity. 1. The price bar prior to a downside breakout must be an up close. If there is a downside breakout of a TD Demand Line check to see if the previous day's close was higher than the day before. This is all you need to validate a downside breakout. In our example above the previous day's close was 59.35 and the day before was 57.05 so this qualifier is fulfilled and you do not need to go further but I will look at #2 and 3 for instruction. 2. The downside breakout bar's open must be less than both the active TD Supply Line and the previous price bar's close. The open on the downside breakout bar was 53 and higher than the TD Demand Line so this qualifier would not have been fulfilled. 3. The downside breakout bar's open must be less than both the previous two price bars' closes, and the current price bar's TD Supply Line must be less than the previous price bar's low. Downside breakout bars open is 53 and previous bars open was 58.84 so far so good. Next we compare downside breakout bar's open to two bars ago and that was 48.84 so this qualifier is not fulfilled either. Now that you have a valid breakout (#1 was fulfilled) you can calculate a price objective. Here is how to do make this calculation: 1. Calculate the highest price above the TD Demand Line. In our TASR example that is April 19th at 64.15. 2. Calculate the difference between the high from #1 and the TD Demand Line immediately below the highest price. I calculated this to be 52.36 so the difference is 64.15 - 52.36 = 11.79 3. This difference is then subtracted from the breakout price, which was 53.56. So the price objective is 53.56 - 11.79= 41.77. TASR made that level the next day. If you trade a breakout of a TD Supply Line here is a list of scenarios where the trade should be cancelled. 1. The bar immediately following the breakout opens below the breakout price. 2. The bar immediately following the breakout opens below the close of the breakout bar AND closes below the breakout price. 3. The bar immediately following the breakout fails to exceed the high of the breakout bar. If you trade a breakout of a TD Demand Line here is a list of scenarios where the trade should be cancelled. 1. The bar immediately following the breakout opens above the breakout price. 2. The bar immediately following the breakout opens above the close of the breakout bar AND closes above the breakout price. 3. The bar immediately following the breakout fails to exceed the low of the breakout bar. Demark suggests disqualified breakouts (none of the qualifiers are fulfilled) can be traded also but in the opposite direction. A disqualified breakout of a TD Supply Line could be shorted and a disqualified breakout of a TD Demand Line could be bought. Of course these trades will not have price projections. The DeMark TD Lines and qualifiers can definitely make trend following much more objective if you can follow all the rules. I found this all confusing until I actually wrote about it and followed a couple of examples. There is nothing easy about DeMark's books. Remember trade your plan and plan your trade. Jane Fox ************** TRADERS CORNER ************** It's That Time Again By Mark Phillips mphillips@OptionInvestor.com It's just about this time every year that I start getting a steady stream of reader email asking various questions about LEAPS, but all centered around one key issue. When will the next cycle of LEAPS (2007 in this case) be issued and what is the process. Nobody asks this question about regular short-term options, because the process is fairly straightforward and happens the same way each and every month. But with LEAPS, we only get new strikes once a year, and the process is a bit more convoluted. Now to be entirely honest, I started getting these questions several weeks ago and normally I do this article (it's become an annual affair now) right after May expiration. As regular readers know, I've been rather involved over the past several weeks though, getting that tome on the Housing sector completed. So in my typical "better late than never" manner, I wanted to cover this issue before all of the 2007 LEAPS have been released. May expiration ushers in the process of changing the front year LEAPS (in this case 2005) to regular option symbols, and this is quickly followed by the issuance of the new out year LEAPS (in this case 2007). Since the process whereby this happens is less than straightforward, I think it is worth taking the time for a little review. Old-timers will recall that I cover this topic about this time every year, as we can all use a refresher due to the fact that we really don't think about it during the course of the year. There always seems to be a fair amount of confusion surrounding this process, both why it is necessary and how the process works. Since I've actually been through it a few times, let me see if I can clear things up. In the past, all of the changes took place at once, but a few years ago, the CBOE had to stagger their approach due to the huge volume of options that are now traded. Now the process takes place over a period of just over 2 months, beginning the week before May expiration and ending about a week after July expiration, with roughly a third of the Leap-able stocks receiving their 2007 LEAPS shortly after each expiration event. If you are like me the first time I encountered this process, you are scratching your head and asking what this conversion’ is and what it means to a LEAP trader. Fortunately the answer is fairly simple. Since the CBOE only carries LEAPS for 2 years at a time, before the 2007 LEAPS can be issued, the 2005 LEAPS must be converted to regular cycle Call (or Put) options expiring in January of 2005. This conversion refers to the simple process of changing the symbol from a LEAP symbol to a regular option symbol. In the case of AIG, the 2005 $80 LEAP Call changed to a January 2005 $80 Call (AIG-AP) on June 14th. There is no change in the way the option trades when it is converted, except that it is now referred to as a Call (with a different symbol), rather than a LEAP. There is no change to the 2006 LEAPS at this time except that they now become the front-year LEAPS. Next year at this time, the 2006 LEAPS will undergo a similar conversion process as the 2008 LEAPS become available. The LEAPS expiration (conversion to regular Call Options) occurs in 3 cycles. The cycle 1 2005 LEAPS are converted to regular options on the Monday prior to May expiration (in this case, May 17th) and then the Cycle 1 2007 LEAPS are issued on or near the same day. Extending that process out to the Cycle 2 LEAPS, the 2005's converted to regular options on Monday, June 14th and the 2007's were issued forthright. Finally, the Cycle 3 2005 LEAPS will convert to regular options on Monday, July 12th, with the 2007 LEAPS making their appearance on or about the same day. I know you are all champing at the bit, wondering how do you find out if a given stock is on Cycle 1, 2 or 3. I'm way ahead of you, and after speaking with a very helpful gentleman at the CBOE, I found that there is a quick shortcut we can use to make the determination. Pull up an option chain on the stock in question. It will have option chains listed for July and August, as these are the 2 front months at the current time. The next month that is listed gives us the clue as to which Cycle the stock belongs to. If the next month is October, then it is on Cycle 1. Note that this is the case with MSFT, which already finished its conversion process. If the next month listed in an option chain (after July and August) is November, then the stock is Cycle 2 (conversion process in June). Finally, if September options are the third month listed in the option chain, then the stock resides in Cycle 3. Wasn't that easy? No scrolling through endless lists of equities and LEAP symbols looking for the one in question to find out what cycle it belongs to. All we do is bring up the option chain and the months listed tell us which Cycle it belongs to. And with the dates provided above, you should be able to determine precisely when any stock you are interested in will begin and complete its conversion process. One note I should make is that this trick only works like this AFTER May expiration. If we had been looking at this prior to May expiration (before all the July contracts had been issued), then the month/cycle relationship would be a little different, and perhaps make a bit more sense. Prior to May expiration, stocks with July contracts would have been Cycle 1, those with August contracts would be Cycle 2 and those with September contracts would be Cycle 3. Hopefully I haven't made that too confusing! Should you want to determine if a stock has LEAPS available, the CBOE provides a comprehensive list of all optionable stocks at http://www.cboe.com/TradTool/Symbols/SymbolDirectory.asp. Then selecting the link for LEAPS near the top of the page will give you a list of all equities with LEAPS available. So if you ever question whether a stock has LEAPS available, this is the central repository for that information. Of course, you can always just pull up an option chain and see if there are options listed out to 2005 and 2006 (and now 2007), and that will give you the answer. I know this has been a rather dry article, but hopefully it gives you a roadmap for determining when to expect the issuance of the new 2007 LEAPS for any stock in which you happen to be interested. Happy Exploring! Mark ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. 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