The Option Investor Newsletter Tuesday 07-13-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Earnings Deadlock Market Sentiment: Intel vs. Bastille Day Watch List: Education, Drugs and Heavy Machinery Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-13-2004 High Low Volume Adv/Dcl DJIA 10247.59 + 9.40 10257.10 10230.63 1.49 bln 1596/1635 NASDAQ 1931.66 - 5.30 1945.17 1930.59 1.52 bln 1454/1588 S&P 100 544.00 + 0.30 544.84 543.03 Totals 3050/3223 S&P 500 1115.14 + 0.79 1116.30 1112.99 W5000 10854.69 + 5.67 10869.10 10837.81 SOX 449.42 - 0.80 445.35 436.61 RUS 2000 562.69 + 0.45 564.93 562.24 DJ TRANS 3079.74 - 11.90 3092.07 3079.43 VIX 14.46 - 0.50 16.20 14.28 VXO (VIX-O)15.68 - 0.39 16.20 15.33 VXN 21.42 - 0.31 21.80 20.62 Total Volume 3,233M Total UpVol 1,396M Total DnVol 1,730M Total Adv 3461 Total Dcl 3668 52wk Highs 93 52wk Lows 160 TRIN 0.96 NAZTRIN 2.04 PUT/CALL 0.79 ************************************************************ Earnings Deadlock by Jim Brown Traders fought to a deadlock today as they waited for Intel earnings after the close. All the major indexes added together were still within a dozen points of the flat line with the SPX, OEX, SOX, RUT all failing to gain/lose a full point. It was definitely a day spent waiting instead of trading. Dow Chart - Daily Nasdaq Chart - Daily The day did not start off well with Chain Store Sales flat with the prior week. Year over year growth fell to only +3.4% and the lowest level since last August. We are now entering some tough comparisons from 2003 and we do not have a tax rebate cycle this year to pour extra cash into the system. This coupled with the high gas prices are likely to keep pressure on retailers into the holidays. Further bad news came from the Richmond Fed Manufacturing Survey which fell to 14 from 22. New Orders fell to 1 from 12 and Order Backlog fell to -12 from -1. This was a very negative report and while the headline number was still positive it showed a significant slowing in manufacturing activity in the Richmond area. All components showed declines except in future employment. Confusing analysts was a drop in current employment of -8 points to only one, but the index of expected employment jumped +7 to nine. Orders down, shipments down, backlogs down but future employment expectations spiking to the upside. This definitely confused investors. The report was the exact opposite of the Kansas City Fed Survey reported on Monday where the headline number jumped to 51 from 35. This continuing contradiction in the economic numbers is keeping traders off balance as well as analysts. The big news for the day was not economic. The markets wandered aimlessly in a narrow range while waiting for Intel to announce earnings after the close. Intel did announce inline earnings but that was the only thing in line. They missed slightly on revenues and lowered their gross margin estimates to 60% from 62% with margins for Q2 falling to 59.4%. The margin decline is critical for Intel as this is the yardstick analysts use to gauge its performance. With revenue in the $8 billion per qtr range it is easy to see a huge move in revenue with no corresponding move in earnings. Intel give their margin estimates so analysts can make assumptions on earnings based on the various revenue projections. Essentially it gives them the yardstick to measure the quarter. With gross margins falling and revenue a little light it suggests times are getting slightly leaner for Intel. They said the drop in margins was due to a product mix shifting to lower priced, lower margin items. High dollar processors were said to be soft and this means corporate sales are not growing. Sure the gamers and graphic artists are buying the hottest processors available but the standard retail PC for mom/pop, home and school is turning into the run of the mill setup that can compete with other sticker price on dealers shelves. With 2.4ghz Pentium4 systems selling for $399 on the Internet it is not tough to see why Intel margins are shrinking. Another challenge was a jump in inventory for Q2 by +15.3% after a +11% jump in Q1. Intel is building products that are not jumping off the shelves and that brings up concerns of slowing consumer trends from yet another angle. Any way you look at it an increase in inventory of more than 25% since January means sales are not occurring as planned. This coupled with the lowered margins is what pushed INTC down -1.36 in after hours. Andy Bryant said in an interview they were seeing some pricing pressures in processors and it would take them 1-2 quarters to work off the extra inventory. On the bright side he said they were seeing normal seasonal trends and he expects business to continue to grow. Personally I think Intel is a great company and they will continue to post increasing earnings but there may be a buying opportunity ahead. I remember several times in the past where Intel got ahead of itself and inventory built to levels where it had to write down massive amounts of obsolete chips. Obsolete to Intel can be a very short period due to their rapid development cycle. "Old" processor chips today may be 6-9 months old with multiple newer chips in production and others in the pipeline. Intel does not wait until they are scrap to write them off. They aggressively manage inventory and write off unsold chips quickly while they still have life at some price. I believe this is coming and could show as soon as Q3. Intel could begin an aggressive price cut strategy to dump the chips and that will again lower their margins. This will initially pressure the stock price. Intel is trading at $24.90 in after hours and under $25 is below prior support at $26. I suspect we will see an attempt to trade $24 and that is the last real support level before $20. I think it is a buy at $24 for long term investors but it is a REAL bargain at $20. I would jump on INTC leaps at any price between $20-$24 and average cost into a multi contract position. The next three months may be dead money but then long term is the key here. Juniper also announced earnings after the bell and beat analysts estimates by a mile. Juniper posted +8 cents compared to estimates of +4 cents and raised guidance for the future. Juniper was up +2.02 in after hours at $24.21 and well over the $21.99 close. They also announced a buyback of $250 million in stock. This is the way earnings are supposed to work. Going the other direction was Merrill Lynch which posted earnings that rose +10% but fell short of expectations. Merrill missed estimates due to weak trading results but showed gains in management fees and mutual fund commissions. Merrill said the firm lowered its risk profile from trading in Q2 after low market volume and low volatility made it more risky to trade. Welcome to the club! Merrill said on their call "it was a difficult trading month (June) and we made a conscious decision to reduce trading." With a $1 billion profit for the quarter the decision to reduce risk was probably a good call. They also announced another stock buyback of $2 bil. MER sank to a 52-week low and closed at 49.80. Next support is $45 and then $40 but I would be very surprised to see much more of a drop. A stock that is making $1+ billion per quarter and buying back $2 billion in stock, its second buyback of this size this year, will find buyers pretty quickly. This is another stock that should be in everybody's portfolio once the election is history. Red Hat turned into a dunce cap today after they said they would have to restate financial results for the last three years. RHAT said they do not expect a "material" effect on annual revenue or cash flow but traders immediately took the stock to the woodshed for a -22% whipping. RHAT dropped -$4.62 to close at $15.72. Red Hat was booking a full month of revenue for any monthly subscription started during the month. Under the new revision they will book revenue on a daily basis depending on when the subscription began. They estimate less than 3% of their revenue will be impacted by the change. The portion of the month that was not actually earned although collected will be deferred until the end of the contract. It does not go away it just gets deferred. The problem is not in the restatement but in confidence in the company. The companies outlook has not changed and with a record number of corporations finally looking at moving from the Microsoft dominated operating system market to a significantly cheaper alternative the future is bright. This must be my day for bargains because I view all the stocks above, INTC, MER, JNPR and RHAT as long term holds in any portfolio. The buying opportunities in three of them are gifts to traders looking to buy stocks on the cheap. The real problem here is looming in our future and it is not stock related. It is event related and we have a full calendar ahead. We have the Democratic convention on July 26th, Olympics Aug 13th to 29th, Republican convention on August 30th and finally the election in November. In the middle of that stretch there are the two weakest months of the year in Sept/Oct. The potential for a terrorist attack at one of those events may not be as high as in the past but the potential for thousands of news articles discussing the risk is about 100%. While I would want to recommend to investors to buy those four stocks on weakness today there is always the potential for another dip ahead. These fear factors are keeping investors on the sidelines with no urgency to buy. Volume has dried up faster than summer rain in Arizona. Volatility does not exist and we continue to be range bound but we could see a break in that range any day now. The Dow has been stuck in a range under 10250 since July 6th and that is exactly where we closed today. The market was primed and waiting for an Intel earnings win to send us higher. Futures are down about -4 points in overnight trading and it appears we will open down tomorrow. Our support is 10175 and the 200dma so the minor Intel problem may not attract enough selling interest to break us out of the range but just send us back to the bottom. SOX Chart - Daily The Semiconductor Index is right on the verge of a major crash. It has found support in the 440 range since May and we have tested it several times. The Intel news sent the vast majority of chip stocks down in after hours and this suggests the SOX will break this 440 support at the open. This is not good news for the Nasdaq or the Russell. The Nasdaq has more risk with a close today at 1931. The Nasdaq has initial risk to 1900 but the Juniper win could help offset the Intel weakness. The current Nasdaq pattern has moved from range bound to more of a decline but that could have been in anticipation of the Intel report. How the Nasdaq and the SOX react tomorrow to the Intel guidance will be a key but not the answer to the next few weeks of trading. The next major impact to the market could come from IBM on Thursday. If IBM does not trip then tech investors may start focusing on the positive comments from the blue chip giants and the bargain hunting could begin. I just expect that bargain hunting to be muted for the next month regardless of the earnings news. Even if everybody began beating estimates I doubt we would see a breakout move before Labor day. That keeps me thinking there is the potential for a low volume slide ahead and a better buying opportunity for all those stocks I listed above. Patient money is safe money and I plan on being very patient over the next six weeks. 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 ************************************************************** **************** MARKET SENTIMENT **************** Intel vs. Bastille Day - J. Brown It was another snoozer of a session on Wall Street. Everyone was waiting for Intel's earnings report after the closing bell. Even a sour earnings report from Merrill Lynch, who missed estimates by 3 cents, couldn't spark any volatility - except in the broker- dealer index. Overall investors almost seemed fatigued. We've wait so long for the Q2 earnings season to show up and now earnings, which are expected to come in pretty high, won't really matter as Wall Street focuses on guidance for what could be a lousy third quarter. Of course that's the way it normally works as the market discounts future events. By the closing bell market internals revealed just how slow it was. Advancing issues tied declining issues at 1400 each on the NYSE while decliners slipped past advancers 15 to 14 on the NASDAQ. Overall volume numbers were relatively light at less than 3.0 billion shares trading on both exchanges. Traders chose to rotate out of tech stocks ahead of Intel's earnings tonight and IBM's earnings on Thursday. Money also poured out of airline stocks as the XAL dove more than 4%. Tuesday's biggest winners were in the DJUSHB home construction index and the HMO healthcare index, both up about 2%. Now what's this talk about Bastille Day, France's equivalent to our own July 4th? It's probably just coincidence but the Stock Trader's Almanac has pegged July 14th as the market's best bet for a rally. According to the Almanac, by Hirsh Press, seasonal trends over the past 20 years point to July 14th as having the best odds for a gain in the S&P 500. Currently those odds are about 86.6%. Now the question is who will win tomorrow: Intel or Bastille Day? Intel reported earnings that were inline with estimates but came in light on revenues and issued negative comments about their gross margins slipping. One would normally expect this sort of news to depress stocks tomorrow, especially tech stocks. On the other hand Intel did issue a slightly positive forecast for its Q3 revenues. Plus, Juniper Networks (JNPR) announced earnings after the close and they blew past the estimates! Hmm.. it could be another close tug-of-war tomorrow but you have to admit the NASDAQ looks a little oversold, down 120 points in the month of July and traders seemed to be expecting bad news from Intel anyway. If you're a contrarian Bastille Day could be a winner! ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8996 Current : 10247 Moving Averages: (Simple) 10-dma: 10279 50-dma: 10230 200-dma: 10189 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 960 Current : 1115 Moving Averages: (Simple) 10-dma: 1121 50-dma: 1117 200-dma: 1102 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1204 Current : 1428 Moving Averages: (Simple) 10-dma: 1462 50-dma: 1448 200-dma: 1444 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.46 -0.50 CBOE Mkt Volatility old VIX (VXO) = 15.68 -0.39 Nasdaq Volatility Index (VXN) = 21.42 -0.31 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.79 636,712 505,934 Equity Only 0.63 515,012 326,622 OEX 1.45 25,964 37,641 QQQ 1.03 52,976 54,348 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 65.6 + 0 Bear Confirmed NASDAQ-100 48.0 + 0 Bull Alert Dow Indust. 66.7 - 3 Bear Confirmed S&P 500 61.6 - 1 Bear Correction S&P 100 64.0 - 1 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: 1.22 10-dma: 1.59 21-dma: 1.29 55-dma: 1.15 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 1402 1447 Decliners 1400 1522 New Highs 60 29 New Lows 30 91 Up Volume 819M 482M Down Vol. 633M 976M Total Vol. 1475M 1500M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 07/06/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders continue to sit tight without much change in their bearish sentiment. Retail traders aren't changing their bullish tune much either but they have grown a bit more optimistic Commercials Long Short Net % Of OI 06/15/04 428,905 444,197 (15,292) (1.8%) 06/22/04 407,842 415,462 ( 7,620) (0.9%) 06/29/04 405,273 413,351 ( 8,078) (0.9%) 07/06/04 402,952 416,526 (13,574) (1.7%) 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 06/15/04 169,595 115,336 54,259 19.0% 06/22/04 124,985 89,934 35,051 16.3% 06/29/04 129,978 94,535 35,443 15.7% 07/06/04 132,423 90,748 41,675 18.7% 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 Now we are seeing some money shuffling in the e-minis. Commercial traders have reduced their shorts and raised their long positions but remain overwhelmingly bearish. Small traders have pared back their bullish sentiment. Commercials Long Short Net % Of OI 06/15/04 440,867 522,546 (81,679) (8.5%) 06/22/04 229,290 446,974 (217,684) (32.2%) 06/29/04 258,443 447,505 (189,062) (26.7%) 07/06/04 287,442 423,583 (136,141) (19.1%) 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 06/15/04 216,759 147,247 69,512 19.1% 06/22/04 243,444 58,389 185,055 61.3% 06/29/04 236,492 47,780 188,712 66.3% 07/06/04 219,321 58,567 160,754 27.9% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders remain somewhat bullish on the NASDAQ 100 but only by a small margin. Small traders are much more bearish on technology. Commercials Long Short Net % of OI 06/15/04 78,542 54,341 24,201 18.2% 06/22/04 40,397 37,413 2,984 3.8% 06/29/04 41,078 37,194 3,884 4.9% 07/06/04 42,245 37,343 4,902 6.2% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 25,160 - 06/01/04 Small Traders Long Short Net % of OI 06/15/04 15,794 35,880 (20,086) (38.9%) 06/22/04 9,311 9,950 (639) ( 3.3%) 06/29/04 7,437 11,904 (4,467) (23.1%) 07/06/04 9,345 16,527 (7,182) (27.8%) 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 Commercial traders continue to snooze with little change in their Dow Jones Industrials positions. Small traders have reduced their bearish attitude some but remain negative. Commercials Long Short Net % of OI 06/15/04 30,438 24,766 5,672 10.3% 06/22/04 26,808 19,752 7,056 15.2% 06/29/04 27,278 20,512 6,766 14.1% 07/06/04 27,214 20,775 6,439 13.4% 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 06/15/04 13,942 20,953 (7,011) (20.1%) 06/22/04 5,626 7,798 (2,172) (16.2%) 06/29/04 4,930 7,682 (2,752) (21.8%) 07/06/04 5,969 8,227 (2,258) (15.9%) 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. 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 ************************************************************** ********** WATCH LIST ********** Education, Drugs and Heavy Machinery ___________________________________________________________________ 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. ___________________________________________________________________ Apollo Group - APOL - close: 91.00 change: +0.97 WHAT TO WATCH: We mentioned APOL as a bullish candidate in the MarketMonitor today and we came very close to adding APOL to the call list tonight. The stock has rebounded sharply from its June lows after scandal broke out among some of APOL's rivals regarding falsified records and a government investigation, of which APOL was not involved with. The recent trend of higher lows has blossomed into a new MACD buy signal and its bullish P&F chart has produced a new ascending triple-top breakout buy signal with a $99 price target. We would probably consider new positions on a push through the $91.50 mark. Chart= --- Wyeth - WYE - close: 35.50 change: -0.40 WHAT TO WATCH: Bears may want to give WYE another whiff. The constant stream of lower highs has produced another failed rally at its simple 40-dma. The stock's P&F chart is bearish with descending triple-bottom breakdown sell signal and a $30.00 price target. Traders could probably initiate positions here with a stop loss above the simple 40-dma and target the $30 region were it not for the July 21st earnings report. We would not hold over the report. Chart= --- Countrywide Financial - CFC - close: 71.26 change: +0.01 WHAT TO WATCH: We're impressed by CFC's ability to churn sideways compared to the broader market weakness but then mortgage rates have dropped significantly from the June highs. The question now is which way will CFC breakout from its current trading range? Bulls can watch for a move through $72.50 while bears can wait for a drop through $69.00. Earnings are expected on July 22nd. Chart= --- Caterpillar - CAT - close: 79.26 change: +1.04 WHAT TO WATCH: Dow-component CAT made another attempt at breaking out over resistance at $80.00 today. The stock looks poised for a run higher and bulls will likely target resistance near $85.00. Unfortunately, earnings are too close for us due out on July 22nd. Take a look at its P&F chart and you'll see why we're so interested. Shares tested support on its P&F chart and rallied! Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- JBL $23.34 +0.07 - Intel's earnings and revenue disappointment is likely to weigh on the chip stocks tomorrow. JBL already has a bearish P&F chart pointing to an $18.00 target. ESRX $74.44 +0.87 - ESRX has been trading in a $3.00 range between $72 and $75 for the last several days. Traders could target $80 on a breakout or watch for a test of the $70 mark and 200-dma on a breakdown. FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 07-13-2004 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: ATK, ITT, PD, SUN, WFMI New Calls Plays: AET Put Play Updates: DISH, IRF, SLAB New Put Plays: **************** 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 ******************** Alliant Tech - ATK - close: 66.10 chg: +0.88 stop: 62.99*new* The DFI defense index has begun to bounce off its recent lows near 750 and ATK has stretched its winning streak to six days in a row. Today's move pushed it through the $66 level and bulls can be encouraged by the better than average volume on the previous four sessions. We remain bullish on the stock but new positions may be better considered on a pull back. Meanwhile in the news ATK announced it will "buy privately held PSI Group, the world's largest provider of pressure tanks for satellites and launch vehicles" (Reuters). ATK said the deal will be accretive to earnings. We're going to raise our stop loss a $1.00 to $62.99. Picked on July 11 at $ 65.03 Change since picked: + 1.07 Earnings Date 08/05/04 (confirmed) Average Daily Volume: 335 thousand Chart = -- ITT Industries - ITT - close: 83.06 chg: -0.94 stop: 80.95 ITT experienced some profit taking today after its Friday-Monday rally. In the news ITT announced that its Board of Directors had approved a 17 cent cash dividend payable on October 1st, 2004 to shareholders on record as of August 27th. We would look for a bounce in the $82.50-83.00 range as an entry point for new bullish positions. No change in our stop loss. Picked on July 11 at $ 82.86 Change since picked: + 0.20 Earnings Date 07/23/04 (confirmed) Average Daily Volume: 532 thousand Chart = --- Phelps Dodge - PD - close: 79.47 chg: +0.25 stop: 75.49 The slow drift higher in PD continues. Shares of this copper miner have been trying to breakout over the $80.00 mark but just haven't been able to muster up enough strength to do it yet. Fortunately, we do see a short-term trend of higher lows suggest the breakout could happen soon. Traders can choose to buy dips to $78.00 or wait for the breakout over $80.00. More conservative traders might want to adjust their stop toward the $76 level. Picked on July 07 at $ 78.75 Change since picked: + 0.72 Earnings Date 07/27/04 (confirmed) Average Daily Volume: 2.6 million Chart = --- Sunoco - SUN - close: 66.09 change: +0.04 stop: 62.99 We have good news to report. The recent consolidation in SUN had drifted back toward previous resistance now new support at the $65.00 level. It was an important test and investors stepped in to buy the dip near support. We agree that the rebound back above the $66 level looks like a new entry point for bullish positions. Just remember that SUN is due to report earnings next Thursday on July 22nd and we do not plan to hold over the event. Picked on July 08 at $ 66.67 Change since picked: - 0.58 Earnings Date 07/22/04 (confirmed) Average Daily Volume: 973 thousand Chart = --- Whole Foods - WFMI - close: 90.85 change: -1.07 stop: 90.50 It's not looking good for our momentum-rebound from support play. There has been no follow through on WFMI's hammer-candlestick on Friday. Instead the stock has very slowly withered back toward the $90.00 level. We're honestly surprised that we've not been stopped out yet. We would not suggest new positions until WFMI rebounded back above the $92.25-92.50 level. More aggressive traders can lower their stop to just under the $90.00 mark and look for a bounce from round-number support. However, we would point out that the intraday chart shows stronger support at the $89.00 level, not at $90. We expect to be stopped out tomorrow. Picked on July 11 at $ 92.31 Change since picked: - 1.46 Earnings Date 07/28/04 (confirmed) Average Daily Volume: 801 thousand Chart = ************** NEW CALL PLAYS ************** Aetna - AET - close: 86.43 change: +1.43 stop: 81.99 Company Description: As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 13.3 million medical members, 11.2 million dental members, 8.1 million pharmacy members and 12.4 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost effective health care through a nationwide network of more than 618,000 health care professionals, including over 370,000 primary care and specialist doctors and 3,783 hospitals. (source: company press release) Why We Like It: AET has been out performing many of its peers the last few days and shares look poised to breakout over resistance at $86.50. The company recently announced it would receive a $740 million tax refund and management said it would use some or all of the money to buy back stock. CIBC followed up on the news saying they would be big buyers of the stock here. We like the P&F chart, which is bullish and points to a $105 target. This is somewhat of a relative strength-breakout play and a potential earnings run play with AET expected to announce Q2 earnings on July 29th. We are going to use a TRIGGER at $86.55 to open the play for us. This way we can sit on the sidelines until AET finally breakouts to new two-month highs. The MACD has produced a new buy signal so more aggressive players may want to go long now. The $90.00 level could act as overhead resistance but we're going to target a move toward the $92 area. Suggested Options: We are going to suggest the August 80s, 85s and 90s even though we do not plan to hold over the July 29th earnings report. BUY CALL AUG 80 AET-HP OI=6055 Current Ask $7.70 BUY CALL AUG 85 AET-HQ OI= 530 Current Ask $4.10 BUY CALL AUG 90 AET-HR OI=6533 Current Ask $1.70 Annotated Chart: Picked on July xxth at $xx.xx <-- see TRIGGER Change since picked: + 0.00 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 1.44 mln Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* EchoStar Comm. - DISH - close: 28.92 chg: -0.14 stop: 31.01 We'd like to say so far so good but the drift lower in shares of DISH has been a slow one. We are encouraged that DISH is moving our direction but we expected a faster decline. There hasn't been any stock-moving headlines to report and we're not changing our stop loss at $31.01. Picked on July 09th at $28.99 Change since picked: - 0.07 Earnings Date 08/11/04 (unconfirmed) Average Daily Volume = 2.5 mln Chart = --- Int'l Rectifier - IRF - close: 34.96 chg: +0.56 stop: 37.25 Merrill Lynch's Monday morning downgrade of the semiconductor industry sent IRF gapping lower under round-number support at the $35.00 mark. Today IRF tried to produce an oversold bounce and traded back to $35.59 before slipping lower again. The close below the $35 level today is pretty encouraging. Now that Intel's numbers are out and investors are choosing to sell the news we're seeing some after hours weakness in IRF. Picked on July 6th at $37.00 Change since picked: - 2.04 Earnings Date 07/29/04 (unconfirmed) Average Daily Volume = 1.07 mln Chart = --- Silicon Labs. - SLAB - close: 41.77 chg: +0.31 stop: 44.01 SLAB, like IRF and most of the chip sector, was weaker on Monday after the MER downgrade but SLAB couldn't quite make it to our target of $40.00. Plus, SLAB managed a strong enough intraday rebound to produce a hammer-styled candlestick that could have been a one-day reversal pattern. Fortunately, there was no follow through on the pattern today. We are no longer suggesting new bearish positions this close to our target and we're growing more cautious as the downward momentum seems to slow. It's okay to take profits here and exit if you're so inclined. Picked on June 20th at $44.99 Change since picked: - 2.86 Earnings Date 07/26/04 (confirmed) Average Daily Volume = 1.14 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. 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The Option Investor Newsletter Tuesday 07-13-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Spreads & Straddles: Earnings Season Begins In Earnest! Premium Selling Plays: Naked Puts & Calls Traders Corner: Nested Keltner Channels Made Easy ************************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 ******************* Earnings Season Begins In Earnest! By Ray Cummins The major equity averages traded in a small range Tuesday as investors moved to the sidelines ahead of Intel's quarterly profit report, due for release after the closing bell. The Dow Jones Industrial Average ended up 9 points at 10,247 on strength in pharmaceutical components Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ). The NASDAQ Composite slipped 5 to 1,931 as traders sold chip stocks ahead of Intel's report. The S&P 500 Index finished unchanged at 1,115 as advances in automotive, insurance and retail shares offset losses in gold and airline stocks. Advancers outpaced decliners by 17 to 15 on the New York Stock Exchange, but the trend was reversed on the NASDAQ, where decliners edged past gainers 15 to 14. Big Board volume totaled 1.0 billion shares, while the technology exchange saw 1.2 billion shares change hands. In the treasury market, the benchmark 10-year note fell 1/32, while its yield rose to 4.49%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 07/11/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 48.32 JUL 42 45 0.30 44.70 0.30 Open YHOO 31.87 30.11 JUL 25 27 0.30 27.20 0.30 Open CFC 69.15 69.90 JUL 60 63 0.35 63.03 0.35 Open QCOM 69.86 70.56 JUL 60 65 0.45 64.55 0.45 Open SWIR 33.83 35.85 JUL 25 30 0.90 29.10 0.90 Open CTSH 24.25 24.81 JUL 20 22 0.27 22.23 0.27 Open NUE 69.54 73.48 JUL 60 65 0.75 64.25 0.75 Open SII 53.26 55.94 JUL 47 50 0.30 49.70 0.30 Open RJR 65.90 65.92 JUL 55 60 0.35 59.65 0.35 Open URBN 60.80 58.01 JUL 50 55 0.40 54.60 0.40 Open AMZN 53.71 48.32 JUL 47 50 0.30 49.70 (1.38) Closed PLT 42.39 40.01 JUL 35 40 0.50 39.50 0.50 Open? FRE 63.57 64.06 AUG 55 60 0.55 59.45 0.55 Open GILD 67.42 65.33 AUG 55 60 0.60 59.40 0.60 Open POT 98.08 96.21 AUG 85 90 0.60 89.40 0.60 Open UOPX 89.09 90.72 AUG 75 80 0.60 79.40 0.60 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss The position in Ishares Russell 2000 Index (IWM) was not available at the recommended price. Photon Dynamics (NASDAQ:PHTN) and Maxim Integrated Products (NASDAQ:MXIM) suffered the fate of most chip stocks and the bullish plays on those issues have previously been closed to limit potential losses. Amazon.com (NASDAQ:AMZN); at $50, has also become an "early-exit" victim in the wake of the mediocre profit outlook from Yahoo! (NASDAQ:YHOO) and Plantronics (NYSE:PLT) is definitely on the "watch" list. CALL-CREDIT SPREADS Stock Pick Last Month LC SC Credit CB G/L Status APPX 34.03 25.79 JUL 45 40 0.50 40.50 0.50 Open INSP 34.71 32.46 JUL 45 40 0.65 40.65 0.65 Open WMS 28.75 30.18 JUL 35 30 0.65 30.65 0.47 Open? GS 90.21 90.05 JUL 100 95 0.70 95.70 0.70 Open SYMC 42.42 41.09 JUL 50 45 0.65 45.65 0.65 Open FRX 56.32 51.65 JUL 65 60 0.60 60.60 0.60 Open CTX 47.34 43.77 JUL 52 50 0.30 50.30 0.30 Open SINA 35.60 26.82 JUL 45 40 0.45 40.45 0.45 Open CECO 44.45 44.89 JUL 55 50 0.55 50.55 0.55 Open RYL 75.80 72.60 JUL 85 80 0.60 80.60 0.60 Open LLTC 36.74 37.04 AUG 42 40 0.30 40.30 0.30 Open XLNX 31.53 31.36 AUG 37 35 0.25 35.25 0.25 Open MERQ 46.17 45.08 AUG 55 50 0.65 50.65 0.65 Open SMH 34.58 35.37 AUG 42 40 0.30 40.30 0.30 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss WMS Industries (NYSE:WMS) remains a candidate for early exit and positions in Genzyme (NASDAQ:GENZ), which is currently profitable, and the Oil Service Holdrs (AMEX:OIH), have 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 35.84 JUL 35 30 2.15 2.35 Closed SNDK 22.90 20.93 JUL 22 22 3.40 3.60 Closed GDT 56.02 53.35 JUL 55 55 4.80 4.50 Closed DNA 54.60 51.35 JUL 55 55 4.25 5.10 Open? OVTI 15.50 13.41 JUL 15 15 2.70 4.00 Open? MDC 64.77 60.50 JUL 65 65 4.00 5.00 Open? Positions in Garmin (NASDAQ:GRMN), Sandisk (NASDAQ:SNDK) and Guidant (NYSE:GDT) have been closed in the name of "capital preservation." Genentech (NYSE:DNA), M.D.C. Holdings (NYSE:MDC) and Omnivision (NASDAQ:OVTI) have offered small profits. CREDIT STRANGLES Stock Pick Last Exp. Sold Sold Initial Current Play Symbol Price Price Month Call Put Credit Debit Status NFLX 32.31 33.43 JUL 37 27 0.55 0.50 Open Netflix (NASDAQ:NFLX) appears comfortable in a range near $29-$35, but it is a volatile issue and the position should be monitored daily. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ATH - Anthem $91.31 *** Healthy Sector! *** Anthem (NYSE:ATH) is a health benefits company operating in the United States, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado, Nevada and Virginia, excluding the immediate suburbs of Washington, D.C. The company owns the exclusive right to market its products and services using the Blue Cross and Blue Shield (BCBS) names, and marks in all nine states under license agreements with the Blue Cross Blue Shield Association (BCBSA), an association of independent BCBS plans. Anthem's products include a mix of managed care products, such as preferred provider organizations (PPOs), health maintenance organizations (HMOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company also offers a range of administrative and managed care services and partially insured products for employer self-funded plans. ATH - Anthem $91.31 PLAY (very conservative - bullish/credit spread): BUY PUT AUG-80.00 ATH-TP OI=300 ASK=$0.40 SELL PUT AUG-85.00 ATH-TQ OI=750 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$84.55 __________________________________________________________________ WLP - WellPoint Health $112.90 *** New High Coming? *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare company that offers network-based managed care plans to the large and small employer, individual, Medicaid and senior markets. Its managed care plans include preferred provider and health maintenance organizations, point-of-service plans, other hybrid plans and traditional indemnity plans. In addition, WellPoint offers managed care services, including underwriting, actuarial services, network access, medical management and claims processing, as well as pharmacy benefits management, dental, vision, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health $112.90 PLAY (conservative - bullish/credit spread): BUY PUT AUG-100.00 WLP-TT OI=530 ASK=$0.80 SELL PUT AUG-105.00 WLP-TA OI=519 BID=$1.25 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$104.50 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ KLAC - KLA-Tencor $43.33 *** Chip Sector Slump! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $43.33 PLAY (conservative - bearish/credit spread): BUY CALL AUG-50.00 KCQ-HJ OI=1379 ASK=$0.40 SELL CALL AUG-47.50 KCQ-HT OI=2340 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$47.80 __________________________________________________________________ NVLS - Novellus Systems $29.24 *** Stuck In A Range? *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $29.24 PLAY (conservative - bearish/credit spread): BUY CALL AUG-35.00 NLQ-HG OI=2739 ASK=$0.10 SELL CALL AUG-32.50 NLQ-HZ OI=7263 BID=$0.35 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$32.75 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 07/11/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 15.00 14.60 15.47 0.40 5.63% 2.74% DITC JUL 17.50 16.80 21.45 0.70 8.40% 4.17% SYNA JUL 17.50 16.85 17.18 0.33 3.80% 3.86% PTIE JUL 7.50 7.15 7.79 0.35 9.89% 4.90% BCC JUL 35.00 34.25 34.49 0.24 1.64% 2.19% JILL JUL 20.00 19.45 22.46 0.55 6.72% 2.83% LSS JUL 20.00 19.50 27.18 0.50 6.07% 2.56% OI JUL 15.00 14.65 15.67 0.35 5.64% 2.39% NVTL JUL 15.00 14.65 23.83 0.35 7.34% 2.39% PDII JUL 25.00 24.70 29.57 0.30 3.91% 1.21% RSAS JUL 17.50 17.05 19.17 0.45 6.22% 2.64% STLD JUL 25.00 24.45 28.89 0.55 5.33% 2.25% UPL JUL 30.00 29.55 39.41 0.45 4.14% 1.52% USG JUL 15.00 14.15 18.01 0.85 13.32% 6.01% ATI JUL 12.50 12.20 17.80 0.30 7.44% 2.46% BJS JUL 42.50 41.70 46.57 0.80 4.75% 1.92% LCAV JUL 25.00 24.35 27.21 0.65 6.85% 2.67% NCRX JUL 27.50 26.80 30.14 0.70 7.30% 2.61% NVTL JUL 17.50 17.05 23.83 0.45 8.97% 2.64% SSYS JUL 22.50 22.20 23.13 0.30 4.41% 1.35% SWIR JUL 30.00 28.85 35.85 1.15 10.66% 3.99% SYNA JUL 17.50 16.90 17.18 0.28 4.19% 3.55% YHOO JUL 30.00 29.20 30.11 0.80 6.80% 2.74% AMHC JUL 22.50 21.80 27.03 0.70 9.36% 3.21% CTSH JUL 22.50 22.20 24.81 0.30 4.34% 1.35% CYBX JUL 30.00 29.25 29.31 0.06 0.82% 2.56% ERES JUL 22.50 21.85 26.48 0.65 9.03% 2.97% HLEX JUL 15.00 14.65 15.21 0.35 7.40% 2.39% MINI JUL 20.00 19.65 26.00 0.35 5.89% 1.78% NFI JUL 30.00 29.30 39.56 0.70 9.77% 2.39% PTIE JUL 7.50 7.25 7.79 0.25 11.96% 3.45% RIMM JUL 50.00 49.15 66.74 0.85 6.57% 1.73% SGTL JUL 22.50 22.25 24.53 0.25 4.25% 1.12% BRCM JUL 40.00 39.30 39.31 0.01 0.09% 1.78% CSGP JUL 40.00 39.60 43.85 0.40 3.49% 1.01% DHB JUL 12.50 12.20 14.51 0.30 8.97% 2.46% DY JUL 25.00 24.65 26.34 0.35 4.63% 1.42% ERES JUL 22.50 22.20 26.48 0.30 4.97% 1.35% FWHT JUL 20.00 19.60 19.83 0.23 3.96% 2.04% GVHR JUL 22.50 22.20 23.10 0.30 5.07% 1.35% IMH JUL 20.00 19.75 21.63 0.25 4.41% 1.27% NVTL JUL 17.50 16.90 23.83 0.60 15.07% 3.55% PLMO JUL 25.00 24.55 34.29 0.45 7.28% 1.83% USG JUL 15.00 14.70 18.01 0.30 7.05% 2.04% BCC JUL 35.00 34.55 34.49 (0.06) 0.00% 1.30% CHIC JUL 20.00 19.65 20.11 0.35 7.68% 1.78% CENX JUL 22.50 22.00 24.37 0.50 9.64% 2.27% ENDP JUL 22.50 22.15 21.38 (0.77) 0.00% 1.58% IFIN JUL 37.50 37.05 41.34 0.45 5.93% 1.21% TASR JUL 30.00 29.65 40.61 0.35 6.39% 1.18% USG JUL 15.00 14.70 18.01 0.30 10.67% 2.04% VSAT JUL 22.50 22.20 22.27 0.07 1.32% 1.35% CIMA JUL 30.00 29.60 33.72 0.40 6.65% 1.35% ERES JUL 25.00 24.70 26.48 0.30 6.05% 1.21% ISRG JUL 17.50 17.25 19.48 0.25 7.04% 1.45% MU JUL 15.00 14.70 14.40 (0.30) 0.00% 2.04% NFLX JUL 30.00 29.45 33.43 0.55 9.80% 1.87% NSM JUL 20.00 19.80 19.62 (0.18) 0.00% 1.01% NKTR JUL 17.50 17.15 18.33 0.35 10.49% 2.04% SWIR JUL 30.00 29.75 35.85 0.25 5.32% 0.84% XMSR JUL 25.00 24.65 26.19 0.35 6.82% 1.42% NFI AUG 30.00 29.20 39.56 0.80 5.99% 2.74% NVTL AUG 20.00 19.50 23.83 0.50 5.77% 2.56% CBST AUG 10.00 9.65 11.07 0.35 6.43% 3.63% CACS AUG 12.50 12.00 13.10 0.50 7.03% 4.17% ARXX AUG 12.50 12.10 13.31 0.40 5.71% 3.31% TASR AUG 30.00 29.15 40.61 0.85 5.67% 2.92% PETD AUG 25.00 24.35 27.29 0.65 4.86% 2.67% CRDN JUL 35.00 34.55 38.51 0.45 9.24% 1.30% CRDN JUL 35.00 34.70 38.51 0.30 7.43% 0.86% NFI AUG 30.00 29.40 39.56 0.60 4.68% 2.04% NVTL AUG 20.00 19.50 23.83 0.50 6.11% 2.56% TASR AUG 30.00 29.30 40.61 0.70 4.93% 2.39% EYET AUG 35.00 34.45 45.00 0.55 3.92% 1.60% SCHN AUG 30.00 29.00 31.59 1.00 6.53% 3.45% MGAM AUG 25.00 24.25 26.33 0.75 5.51% 3.09% FRO AUG 30.00 29.30 39.60 0.70 4.97% 2.39% GIVN AUG 30.00 29.45 33.00 0.55 4.21% 1.87% Steel Technologies (NASDAQ:STTX) and Amedisys (NASDAQ:AMED) have been closed to limit potential losses, and only those traders interested in owning Micron (NYSE:MU) should still be in that position. A long list of issues remain on the "watch" list after the recent selling pressure in stocks. NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield ASKJ JUL 45.00 45.55 32.38 0.55 6.50% 1.21% AMLN JUL 25.00 25.35 21.78 0.35 5.29% 1.38% ICOS JUL 30.00 30.45 25.15 0.45 5.26% 1.48% OIIM JUL 17.50 17.80 14.51 0.30 5.50% 1.69% INSP JUL 40.00 40.50 32.46 0.50 6.88% 1.23% RHAT JUL 25.00 25.60 20.49 0.60 9.08% 2.34% XMSR JUL 27.50 27.75 26.19 0.25 4.34% 0.90% CECO JUL 65.00 65.90 44.89 0.90 7.19% 1.37% ESI JUL 45.00 45.50 37.31 0.50 5.47% 1.10% FMT JUL 20.00 20.40 17.19 0.40 8.75% 1.96% NBIX JUL 55.00 56.10 50.18 1.10 8.21% 1.96% SLAB JUL 50.00 50.75 42.13 0.75 6.39% 1.48% AGIX JUL 20.00 20.45 16.02 0.45 9.16% 2.20% LEND JUL 30.00 30.55 26.19 0.50 6.63% 1.64% TSS JUL 22.50 22.90 21.90 0.40 8.67% 1.75% PAYX JUL 35.00 35.40 32.00 0.40 4.97% 1.13% FEIC JUL 25.00 25.35 21.38 0.35 6.89% 1.38% WM JUL 40.00 40.30 38.18 0.30 3.79% 0.74% IPXL JUL 20.00 20.40 16.75 0.40 10.18% 1.96% PSFT JUL 20.00 20.25 17.05 0.25 6.99% 1.23% SLAB AUG 50.00 51.00 42.13 1.00 5.30% 1.96% SINA AUG 40.00 40.85 26.82 0.85 7.85% 2.08% ATRS AUG 30.00 30.85 23.41 0.85 6.52% 2.76% MRVL AUG 27.50 27.85 23.75 0.35 3.98% 1.26% MACR AUG 25.00 25.40 21.84 0.40 4.55% 1.57% ISIL AUG 20.00 20.45 18.00 0.45 5.72% 2.20% Although currently profitable, the position in XM Satellite Radio (NASDAQ:XMSR) has previously been closed to limit potential losses. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 TECH 42.15 AUG 40.00 TGQ TH 1.25 10 38.75 38 2.6% 6.3% GPRO 44.17 AUG 40.00 PSU TH 0.90 71 39.10 38 1.8% 5.0% ATI 18.29 AUG 15.00 ATI TC 0.25 113 14.75 38 1.4% 4.7% CTSH 25.24 AUG 22.50 UPU TX 0.45 304 22.05 38 1.6% 4.6% ERES 27.70 AUG 22.50 UDB TX 0.35 369 22.15 38 1.3% 4.5% ELN 24.54 AUG 20.00 ELN TD 0.30 1613 19.70 38 1.2% 4.3% EYET 44.50 AUG 30.00 QUJ TG 0.45 424 29.55 38 1.2% 3.9% 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 with margin), TS-Target Shoot. __________________________________________________________________ TECH - Techne $42.15 *** Next Leg Up? *** Techne (NASDAQ:TECH) is a holding company that through its two wholly owned operating subsidiaries, Research and Diagnostic Systems, and R&D Systems Europe, makes and sells products for the clinical diagnostics market and the biotechnology research and clinical diagnostics market. R&D Systems is a specialty manufacturer of biological products such as purified cytokines, antibodies and assay kits, as well as whole blood hematology controls and calibrators. TECH - Techne $42.15 AUG 40.00 TGQ TH LB=1.25 OI=10 CB=38.75 DE=38 TY=2.6% MY=6.3% __________________________________________________________________ GPRO - Gen Probe $44.17 *** The Rally Resumes! *** Gen Probe (NASDAQ:GPRO) is engaged in the design, manufacture and marketing of rapid, accurate and cost-effective nucleic acid probe-based products used for the clinical diagnosis of human diseases and for screening donated human blood. The company has received FDA approvals for more than 50 products that detect various infectious microorganisms. In February 2002, the FDA approved the Biologics License Application for the biochemical test used to screen donated blood for human immunodeficiency virus and hepatitis C virus. This assay is utilized to screen approximately 72% of the United States donated blood supply for HIV-1 and HCV. GPRO - Gen Probe $44.17 AUG 40.00 PSU TH LB=0.90 OI=71 CB=39.10 DE=38 TY=1.8% MY=5.0% __________________________________________________________________ ATI - Allegheny Technologies $18.29 *** Made Of Steel! *** Allegheny Technologies (NYSE:ATI) is a diversified producer of specialty materials. The company operates in three business segments: flat-rolled products, high-performance metals and industrial products. The flat-rolled products segment produces, converts and distributes stainless steel, nickel-based alloys and super-alloys and titanium and titanium-based alloys. The high-performance metals segment produces, converts and sells nickel- and cobalt-based alloys and super-alloys, titanium and titanium-based alloys, zirconium, hafnium, niobium, tantalum, their related alloys and other specialty materials. Industrial products' principal business produces tungsten powder, tungsten carbide materials and carbide cutting tools. ATI - Allegheny Technologies $18.29 AUG 15.00 ATI TC LB=0.25 OI=113 CB=14.75 DE=38 TY=1.4% MY=4.7% __________________________________________________________________ CTSH - Cognizant Technology $25.24 ** Consolidation Complete? ** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. CTSH - Cognizant Technology $25.24 AUG 22.50 UPU TX LB=0.45 OI=304 CB=22.05 DE=38 TY=1.6% MY=4.6% __________________________________________________________________ ERES - eResearch Technology $27.70 *** Testing 2004 Highs! *** 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 $27.70 AUG 22.50 UDB TX LB=0.35 OI=369 CB=22.15 DE=38 TY=1.3% MY=4.5% __________________________________________________________________ ELN - Elan Corporation $24.54 *** Strong Sector! *** Elan Corporation (NYSE:ELN) is an integrated biopharmaceutical firm engaged in research and development in Alzheimer's disease, Parkinson's disease, multiple sclerosis, pain management and autoimmune diseases. The company's objective is to discover and develop products that will fulfill the unmet medical needs of patients. Elan conducts its worldwide business, including research and development, manufacturing and marketing, through wholly owned subsidiaries incorporated in Ireland, the United States, the United Kingdom and other countries. ELN - Elan Corporation $24.54 AUG 20.00 ELN TD LB=0.30 OI=1613 CB=19.70 DE=38 TY=1.2% MY=4.3% __________________________________________________________________ EYET - Eyetech Pharmaceuticals $44.50 *** Premium-Selling! *** Eyetech Pharmaceuticals (NASDAQ:EYET) is a biopharmaceutical firm that specializes in the development and commercialization of novel therapeutics to treat diseases of the eye. Its initial focus is on diseases affecting the back of the eye, particularly the retina. The company's most advanced product candidate is Macugen, which it is developing for wet age-related macular degeneration (AMD) and diabetic macular degeneration (DME). EYET - Eyetech Pharmaceuticals $44.50 AUG 30.00 QUJ TG LB=0.45 OI=424 CB=29.55 DE=38 TY=1.2% MY=3.9% "TS" ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ASKJ - Ask Jeeves $31.01 *** New Downtrend Underway? *** Ask Jeeves (NASDAQ:ASKJ) is a provider of Internet-wide search, providing consumers with authoritative and fast ways to find relevant information to their everyday searches. Ask Jeeves deploys its search technologies on Ask Jeeves (Ask.com and Ask.co.uk), Teoma.com, and Ask Jeeves for Kids (AJKids.com). In addition, to its internet sites, Ask Jeeves syndicates its monetized search technology and advertising units to a network of affiliate partners. The company is based in Emeryville, California, with offices in New York, Boston, New Jersey, Los Angeles, London and Dublin. ASKJ - Ask Jeeves $31.01 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 40 AUK HH 2137 0.50 40.50 6.0% 1.2% __________________________________________________________________ DRIV - Digital River $26.96 *** Sector Slump! *** Digital River (NASDAQ:DRIV) is a provider of electronic commerce outsourcing solutions. As an application service provider, the company enables its clients to access its proprietary electronic commerce system over the Internet. The firm's hi-tech platform allows it to provide a suite of electronic commerce services, including Web commerce development and hosting, transaction processing, fraud screening, digital delivery, integration to physical fulfillment and customer service. Digital River also provides analytical marketing and merchandising services to assist clients in increasing Web page view traffic to, and sales through, their Web commerce systems. DRIV - Digital River $26.96 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 30 DQI HF 213 0.85 30.85 7.9% 2.8% __________________________________________________________________ SINA - SINA Corporation $25.82 *** Premium-Selling Only! *** SINA Corporation (NASDAQ:SINA), formerly known as SINA.com, is an online media company and value-added information service provider for China and the global Chinese communities. With a branded network of localized Websites targeting China and overseas Chinese, the company provides an array of services to its users including region-focused online portals, search, directory, interest-based and community-building channels, free and premium e-mail, wireless short messaging, online games, virtual Internet service provider, classified listings, e-commerce, e-learning, and enterprise e-solutions. In turn, SINA generates revenue through advertising, fee-based services, e-commerce and enterprise services. SINA - SINA Corporation $25.82 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 35 NOQ HG 4042 0.45 35.45 6.4% 1.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************** TRADERS CORNER ************** Nested Keltner Channels Made Easy Linda Piazza To those unfamiliar with nested Keltner channels, the channel lines snake across the charts in a confused tangle. Five-Minute Chart of S&P Futures: These channel lines undulate in a manner that reveals crucial information about the markets. A few tips can untangle the information the lines reveal. For the purposes of this article, I'm charting the ES. Traders should note that these charts do not include all sessions, as including the overnight sessions skews the Keltner channels. Using Keltner channels requires no knowledge of the history of Keltner channels or the formulas used to construct them, but that's handy information for those who might want to experiment with the settings. In February, OptionInvestor's Jane Fox wrote an article on Keltner channels, providing a historical perspective as well as basic information on using a single set of Keltner channels. Her article can be found at this link: http://www.OptionInvestor.com/traderscorner/tc_021804_1.asp As Jane explained, Charles Keltner has been credited with formulating these channels as a type of moving-average envelope. Bollinger bands are another type of moving-average envelope familiar to most traders. Keltner built his envelopes around a central moving average, with the envelopes spaced around that moving average by a multiple of the average true range. By tinkering with the settings, one can construct a Keltner channel that contains most movements of the underlying trading vehicle, and then, with the aid of a preferred oscillator, buy support and sell resistance. Annotated Five-Minute Chart of the S&P Futures: As useful as defining likely support and resistance might be to the buy-low/sell-high trader, Keltner designed the charts for a different purpose: to pinpoint breakouts. Annotated Five-Minute Chart of the S&P Futures: While these two uses of Keltner channels prove valuable, other charting tools provide similar information. Bollinger bands can define the likely range for prices. Donchian channels can identify breakouts. Traders might question the need for another type of channeling system. However, Keltner channels excel at providing other information when they're nested one within the other. The concept of stacking different term channels on one chart does not prove unique to Keltner channels. It's been done with Bollinger bands, too. Other traders such as Jerry Wawrzeniak ("The Case for Keltner Channels") applied the technique to Keltner charts, but I've observed some uses of the nested channels that I haven't seen explained elsewhere. Here's how nesting the channels works for Keltner channels. The channel with the shortest-length moving average undulates within the larger channel. As it undulates, it's sometimes stopped at the central Keltner channel basis line, the equilibrium level. I sometimes refer to that basis line as the mid-channel support or resistance. Equilibrium is achieved when the two channels line up together, as if two flexible pipes were lined up one within another, the smaller-bore pipe suspended in the middle of the larger-bore one. Such an equilibrium position can be maintained for some time, but predicts an eventual breakout to come. Annotated Five-Minute Chart of the S&P Futures Why not just use the widest channel and its basis line to identify likely support and resistance? Nested Keltner channels make it possible to confirm important support and resistance other than the levels shown here, pinpoint divergences, and sometimes compose if/then scenarios for likely market action. In these uses, they prove superior to many other channeling systems, including single Keltner channels. When charts include two or more nested Keltner channels, bullish and bearish divergences can be pinpointed without the use of oscillators. These divergences occur as the smallest channel's upper or lower lines are touched. The following chart depicts an example of bearish divergence. Annotated Five-Minute Chart of the S&P Futures: Bullish divergences can be discovered in the same manner by comparing two touches of the smallest channel's bottom line. If the smallest channel has not dipped as close to the larger channel on that second touch, that's bullish divergence. Of course, as with any system that denotes bullish or bearish divergences, these divergences offer a warning only. The bullishness or bearishness they suggest might not be fulfilled or might not be fulfilled quickly. Adding a third Keltner channel increases opportunities to find divergences. In addition, the third channel becomes more important when discussing my preferred methods of using Keltner channels: evaluating whether resistance or support is stronger, and composing if/then scenarios. It should be apparent by now that resistance or support can often be found at Keltner lines, but it's in the convergence of different lines that strongest support or resistance might be found. Annotated Five-Minute Chart of the S&P Futures: The converging resistance lines implied that resistance was stronger than support. More widely separated lines represented the support. The converging resistance lines appeared to fence off the candles while support lines separated, appearing to allow easier access through them. This judgment proved easy to form based on visual clues. Subsequently, the ES did drop to the support offered at the black channel line. Most price action for the ES on the five-minute chart will be contained within this black channel. Some might prefer charting only two nested Keltner channels, simplifying the chart, with the number of nested channels a matter of individual preference. Two appears workable, three possibly ideal, four probably too tangled. Because they're based on moving averages, Keltner lines move, too. They're dynamic. Although this article compares them to pipes, they're flexible pipes. If the candles butt against them, they can be bulged outward. This leads into another characteristic of Keltner channels: the way they allow a construction of if/then statements. For example, about 1:00 EST Wednesday, 7/07, it would have been possible to compose the following if/then statements about the ES: If the ES can maintain values above 1116 and preferably above 1117.40, then it's more likely to test 1119.80 than fall to 1113.30. If the ES maintains values below 1114.70, then it's more likely to fall to 1113.30 than rise to 1119.80. While those statements may seem simplistic, this ability offers an opportunity to assess when a break out of a consolidation pattern might occur or when a play might be in trouble. Longer-term charts offer more widely spaced targets. At the time those if/then statements about 7/07 could have been composed, the ES was settled into a consolidation zone with oscillators flat-lining, with few other clues as to future direction. Annotated Five-Minute Chart of the ES: This ability to compose if/then statements draws from the dynamic nature of the Keltner channels. If prices butt against a Keltner line or breach them, that line and the entire channel turn in the direction prices are traveling. Using the resistance or support levels determined by the Keltner channels, it's then possible to decide what prices will turn channels up or down again. Using the black channel lines that contains most prices as targets, it's then possible to decide on a likely upside or downside target. If prices break out of the black channel, new if/then statements can be composed and targets are based on the wider, purple channel. Depending on the vehicle used for trading and on the time interval of the chart, it might be more likely that prices would regularly travel to the outer, purple channel lines. Since Keltner designed these channels to pinpoint breakouts, such breakouts should usually be considered valid signals, but plans should be made to protect profits in the direction of the trade. Breakouts indicate overbought or oversold conditions, and sometimes prove particularly suspect when they are produced in the first few minutes or last few minutes of the cash market. Once a breakout has occurred, prices become vulnerable to a pullback to the mid-channel level. However, trending markets always produce overbought or oversold signals, so a vulnerability to a pullback does not guarantee that it will occur. Keltner channel breakouts usually signal that it's a time to follow prices with stops, being always prepared for a reversal. It is usually not a time to automatically reverse sides. Although prices prove vulnerable to a pullback to the mid-channel level, that mid-channel level usually moves swiftly in the direction of the price movement. Sometimes a return to mid-channel level does not constitute much of a retracement at all. If, immediately after breaking out, prices hesitate, Keltner lines will snake around them again, providing support or resistance. If this occurs, watch for divergences, both Keltner- style and on oscillators, to warn of an impending reversal. Annotated Five-Minute Chart of the ES: Let's put it all together with a look at a period from 6/23-6/24. On the afternoon of 6/23, a breakout above a channel line at 1138.21 had been preceded by a bullish MACD crossover, with outer channel resistance then at 1140.23. A bullish trade could have been entered, with an 1140 upside target but with hope for more. Annotated Five-Minute S&P Futures Chart for 6/23-6/24: The ES hit the 1140 upside target. Depending on account management style, profit might have been taken as that level was hit, or stops might have trailed the ES's climb since no bearish MACD cross had been produced. Subsequently, the ES broke above the outer Keltner channel line, giving another breakout signal. While MACD had still not produced a bearish cross, participating in this second breakout play was probably safest for those already in a bullish play. Trailing stops would have been necessary, because the pull to reestablish equilibrium suggested vulnerability down to the mid-channel level, then at 1132.63. As mentioned earlier, when candles break out to the upside, the action tilts the channels higher, so that midline average began climbing along with price. Since that midline level was always visible as it climbed, bullish traders could always assess their willingness to risk a return to that midline level. As the regular session drew to a close that Wednesday afternoon, MACD flattened. Prudent short-term traders would likely have exited a bullish play ahead of the close of regular trading, but MACD completed the bearish cross the next morning, opening back inside the mid-length Keltner channel. (Note: The overnight session saw a low of 1141.50, possibly stopping out some bullish traders, depending on their stops.) Not until mid-morning on Thursday did the Keltner resistance lines converge near or just above the then-current ES level. That convergence suggested that resistance was once again growing stronger than support, and hinted at a decline down toward the mid-channel level. That mid- channel level had meanwhile climbed to 1138, near the entry level. Bearish resistance, Keltner style, began to form at that point, too, and MACD turned down again after attempting a bullish cross, the histogram printing negative values. It was time for all straggling, can't-give-up bullish traders to exit their positions. Candles found resistance at the converging channel lines. This suggested a new bearish entry at about 1145, targeting the mid-channel level. Annotated Five-Minute Chart of S&P futures: The converging lines as the mid-channel level was hit suggested that the ES might bounce, while the still-declining MACD suggested that any bounce might be a countertrend bounce doomed to hit a lower high. Depending on trading style, automatic profit might have been taken as that mid-channel level was hit or stops might have followed the candles lower. The automatic profit stop turned out to have been the better choice in this case, but a bullish MACD cross would have suggested an exit at about 1143.50 for those who chose to stay in the trade longer. Keltner channels offer the opportunity to find support and resistance and evaluate which appears stronger, pinpoint tradable breakouts, set profit targets, locate divergences, and construct if/then statements that help plan needed action. They offer some of the benefits of candlesticks in that the clues are visual and easy to spot. For example, if three channel lines converge just below the current ES price, prices will likely find support there. The evidence has been easy to spot. Hopefully, this article has untangled some of the useful information in that snarl of lines on a nested Keltner channel chart. To illustrate the uses of Keltner channels, this article has employed instances when Keltner channels worked as expected, but no tool works all the time. Keltner channels do not appear to work well with overnight futures trading, for example. Before attempting to enter trades based on Keltner channel evidence, watch your chosen vehicle long enough to determine whether Keltner channels prove useful. Tinker with settings. Tinker with the number of channels used. Currently, I'm experimenting with settings that use exponential moving averages as the basis line and also use the AvgHLC setting. Although I used different settings for demonstration purposes on the charts using single Keltner channels, the three channels on the nested Keltner channel charts are based on the following averages with the accompanying multipliers: 10,1.6; 62,3.2 and 127,6.2. The colors used in these channels should depend on personal preference. Choose colors that ensure that the central averages of the shortest- and longest-length channels remain visible, as they often prove important in intraday trading. I've also used slightly different settings in the past, borrowed from fellow traders. I'm still experimenting, and I encourage you to do so, too. ************************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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