The Option Investor Newsletter Thursday 08-26-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Bulls Applying Pressure Futures Wrap: See Note Index Wrap: Expect the unexpected Market Sentiment: Volume Evaporates Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-26-2004 High Low Volume Adv/Dcl DJIA 10173.41 - 8.30 10193.54 10155.86 1.24 bln 1781/1424 NASDAQ 1852.92 - 7.80 1860.39 1848.88 1.18 bln 1231/1762 S&P 100 539.46 - 0.11 540.45 538.18 Totals 3012/3186 S&P 500 1105.09 + 0.13 1106.78 1102.43 W5000 10721.63 + 83.26 10737.04 10699.87 SOX 380.40 - 3.90 384.28 378.16 RUS 2000 547.25 - 2.89 550.14 546.00 DJ TRANS 3108.84 - 5.20 3130.55 3098.79 VIX 14.91 - 0.07 15.22 14.76 VXO (VIX-O)14.87 + 0.24 15.23 14.56 VXN 21.60 + 0.19 21.77 21.36 Total Volume 2,625M Total UpVol 1,100M Total DnVol 1,466M Total Adv 3467 Total Dcl 3580 52wk Highs 143 52wk Lows 79 TRIN 0.99 NAZTRIN 1.55 PUT/CALL 0.84 ************************************************************ Bulls Applying Pressure by Jim Brown The major indexes may have finished in the red but it was only by a narrow margin. Sellers were unable to capitalize on a slow day and take back some of the gains from the last week. Oil prices, weak earnings, weak economics and potential terror events failed to remove the underlying bid that kept the markets near their highs for the week. Dow Chart – Daily Nasdaq Chart – Daily SPX Chart – Daily Russell Chart – Daily Jobless Claims jumped again to the 340,000 level and well above estimates for another drop to 330,000. The market tried to ignore the news because much of the increase was related to Hurricane Charlie. Despite the thousands of temporary hires in Florida the jump to 343K was the highest level in four weeks. Discounting the impact of Florida to the headline number the trend has been steadily downward. This tells us that layoffs are continuing to slow despite the lack of strong jobs growth. Rising oil prices and geopolitical concerns may be keeping employers from adding to the workforce but they are not cutting workers at the same rate they were earlier in the year. This suggests we could see some additional jobs growth in the Jobs Report next Friday. The estimate for +125,000 new jobs is well below last months optimistic level but still above the +32,000 jobs actually reported. Another employment report released today was the Help Wanted Index and it fell to only 37. This is the lowest level since December and only one point below the low of 36 set in May of 2003. With the move to job ads on the Internet instead of papers this index has been demoted to a footnote but it is still an indication of a lack of hiring. The recent high of 40 in March was inline with the rising job creation at the time. A continued drop is just another confirmation employers are still cost conscious and concerned about the future. For Friday we are scheduled to get the GDP update and the consensus is for another drop to +2.8% from the +3.0% last time around. With anecdotal evidence from several weak sectors there is some concern the number could drop even lower. A low number here could help fuel speculation that the Fed will not raise rates at the Sept-21st meeting. The current consensus is for another hike because the Fed views is as removing accommodation not raising rates. They view the current 1.50% as woefully low and in need of correction. The Fed funds futures after the morning reports are showing a 70% chance of another quarter point increase in Sept. We will also see the final Consumer Sentiment for August and it is not expected to change from the 94 in the earlier release. Greenspan is scheduled to talk at the Jackson Hole conference and that speech will be dissected for further insight on his comments earlier in the week. His Jackson Hole remarks have moved the markets in the past as he tends to be less formal and deviate from the party line at these conferences. His rebuttal letter to the Senate Banking Committee earlier this week suggested home prices were too high in some areas as a result of the recent housing bubble. He also said he thought Japan could be hurt significantly if oil prices continued to climb. Japan has no oil and is dependent on imports. He also said the economic cycle in Asia is slowing and oil prices could accelerate that weakness. He said growth in China had "braked sharply" and there was a risk of a hard landing. The letter was a constant set of good news/bad news comments where he made positive comments about an area of economic concern and then hedged his bet by giving a caution about that same area in the very next paragraph. This fence straddling will hopefully be resolved with any update on those topics tomorrow. Unfortunately I would not bet on it. Today was a bad news bulls type of day. Earnings misses and warnings from several high profile companies gave the bulls a wall of worry to climb and while they did not quite make it to the top they ended on the last step. Starbucks produced some bitter coffee for investors with sales growth that was the weakest since May 2003. SBUX dropped -$2.58 or -5.6% on the news. The slowing growth was undoubtedly due to consumers paying more at the pump and less at the counter over the last three months. $3 coffee may be a casualty of $2 gas. Krispy Kreme donuts failed to satisfy the sweet tooth of investors after turning in a dismal +0.1% growth in revenue. The stock was knocked for a -10% loss after reporting earnings and guidance that was far below estimates. KKD only earned $5.7 million this quarter compared to $13 million in the same quarter last year. This was a -55% drop in earnings. They also posted large increases in costs and big drops in margins from 19.3% to only 10.4% in company owned stores. They said they suffered losses in closing some non performing locations. Wow, have times changed. They also said stores purchased from franchisees had been under performing. If I reworded that sentence it would look something like this. Stores repossessed by KKD and those abandoned by franchisees were doing poorly as one would expect when taking over failed locations. Since boarding up a failed KKD store could produce very negative sentiment for other KKD stores in the area they are sometimes forced to run a location rather than close it. Shades of Boston Chicken all over again. At $13 today they are well off their $50 2003 highs and odds are good they will go lower. KKD blamed their problems on the Atkins diet and with that trend slowing they will have a chance for a sweet rebound in the future. Fred's missed estimates by a penny and blamed the results on slower sales in home furnishings and apparel. No real surprise here after WMT and TGT warned that sales were slowing earlier in the week. The impact of higher gas prices is likely to produce a flood of these type of earnings reports when earnings begin again in October. We are still a couple weeks ahead of the start of earnings warning season in mid September but I think everyone already knows how it is going to turn out. With home heating oil running +30% over last year there will be a lot of coal in the Christmas stockings and some people will be glad to get it. Kirkland's (KIRK) dropped -19% after warning that sales in August were down sharply. You may not have heard of them but they sell home furnishings. They said sales have "slowed considerably" and "customer traffic remains a concern, ESPECIALLY in mall stores" (my capitals) They also said they were "not optimistic they could produce comparable same store sales in the near term". They expect same store sales to drop -10% to -15% in the 3Q. Try telling them and other retailers that gas prices are not a problem for the retail community. I have seen several reports that mall traffic has slowed considerably across the country. Semi stocks took yet another hit today as various analysts continued their cautionary stance for chips. BofA cut their ratings on AMD, INTC, TXN, BRCM and MU. They feel the chip sector has peaked early for this cycle and expect capex spending to decline. They are expecting 2005 to exhibit a cycle trough like those that began in 1995 and 1997. I quickly tracked down a chart for that period and there were some significant declines after the 1995 and 1997 peaks. If they are correct then there are some rough times ahead. SOX Chart - Weekly 1995-1999 SOX Chart - Weekly 2001-2004 Do we have to wait for 2005 to determine what is going to happen in chips? Not if we believe the mid quarter updates currently in progress. NVLS gave their mid quarter update after the bell with mixed results. The stock dropped initially after the bad news but rebounded in later trading. Novellus said customer order patterns were becoming more cautious and the outlook was much different than the upbeat guidance in July. NVLS said they were seeing some push outs of orders, some as far as 1Q of 2005. They were still positive about the outlook but turning cautious as well. Bookings are now expected to be at the low end of the range at $420 million but shipments will be below previous guidance. 3Q revenue was also expected to be lower than previously forecast but only slightly. (they still have time to let investors down slowly) Q3 earnings were lowered to 37 cents compared to the current analyst consensus of 40 cents. On Wednesday CMOS also warned that conditions were deteriorating with order push outs and lower visibility. There is that "visibility" word again. It means we are not getting the orders we want but we are still hoping we can produce a miracle before time to report earnings again. The big dog, Intel, will have their mid quarter update on Thursday Sept 2nd and all eyes will be on how they are handling their inventory problem and how bookings are progressing. The back to school build out season is over and we are moving into the holiday build cycle. Time to get down and dirty on pricing to blow out those excess chips. Expect some killer computer deals this fall. AMR also warned after the bell that conditions were getting worse. With oil still hovering in the mid $40s AMR expects 3Q fuel costs to be $300 million over the same quarter in 2003. AMR said its full year fuel costs would be in the $3.8 billion range. They did say traffic loads were up about +7% but revenue per available seat mile (RASM) would be below last years levels. Obviously a continued rise in oil prices would be very detrimental. Unfortunately that is probably what is going to happen. Crude oil fell again today despite sabotage in Iraq cutting production again. Oil prices rose on the news but fell back again before the close on news of the ceasefire in Iraq. With oil demand continuing to rise on a daily basis this price pullback may only be temporary. I have discussed Hubbert's Peak several times in this commentary over the last several weeks. There is a scenario in the current peak forecast that predicts a push out of that production peak for several years if OPEC allows oil prices to run out of control. I believe we are seeing that today. Because the oil nations can see the future in terms of depletion they are determined to get every last dollar they can before the wells run dry. Does anybody really think this oil "crisis" just happened overnight? Of course not. Oil was $7 a barrel in 1997. What changed? Supply temporarily exceeded demand because OPEC was not managing production correctly. Now they have the price going in the right direction (for them) and there is no end in sight other than a dry hole. Sure prices may fluctuate but the last chapter has already been written. Below is a chart of Hubbert's Peak. The swing point extension is a prediction that very high prices could squelch demand and prolong the pain but the end result is the same. Remember it is not when the last oil well runs dry but when demand exceeds production that all hell will begin to break loose. Currently that is projected for 2007-2008. For a complete description of the projection go here: http://www.hubbertpeak.com/campbell/camfull.htm Hubbert's Peak Chart Not to spend all my space on negative events TIVO beat estimates by 12 cents and Ace Cash Express (AACE) beat by 8 cents. That tells me consumers are short on cash to buy gas and that benefits ACE and they are staying home more and that benefits TIVO. Need I say more? A study I saw last week said a $10 rise in the price of oil subtracted two cents from average corporate earnings and 50% from cash available to spend by consumers. That sounds a little strong to me on the consumer side but we all know almost every blue collar worker is supposedly only two paychecks away from bankruptcy. That may be an over exaggeration but I have heard it many times. Most consumers tend to spend what cash is available and max out their credit cards for the rest. When unexpected events happen there is very little cash available to fill the gap. Using that analogy I guess it is possible for the 50% study to be at least close. Using that same analogy UBS downgraded Capital One today from a buy to a neutral due to credit risks ahead. Capital One supplies credit cards to weaker credits. Considering all the bad news today I think the market performance was nothing short of spectacular. We may not have closed in positive territory but just holding the high ground with nothing positive in the headlines was a major achievement. The Dow closed at 10177 and continued to hold near that strong resistance range of 10200-10250. The Nasdaq was slightly weaker but managed to hold over 1850. Were it not for the SOX losing another -1% the Nasdaq might have made it back to positive territory. There was simply no profit taking from the gains of the last week and not even any sign of real weakness. These performances were even more amazing to me with the Olympics winding down to the closing ceremonies on Sunday and the Republican Convention starting on Monday. Add in the GDP and Greenspan speech on Friday and traders have a mine field of event risk ahead. Personally I am expecting a rally next week once the convention gets underway with no problems and I expect it to continue the week after Labor Day. Maybe the strong underlying bid this week is from institutional investors who are anticipating that rally and trying to sneak into positions ahead of the herd. It makes as much sense to me as any other theory. With only one trading day left before those two big events I would expect some event risk selling on Friday. However what I would expect and what we get may be two different things. With the futures shaking off the NVLS news after the bell and trading back in positive territory only a couple points away from the high for the month there is no evident event fear. One of our readers in the Futures Monitor today probably said it best. If all the bears are already short in anticipation of a drop on Friday are we not in danger of sinking our own boat? I paraphrased but you get the point. With the rebound to SPX 1105 this week every bear in the market was ready to jump on that very strong resistance in anticipation of both profit taking from the rebound and event risk selling into the weekend close. Neither has occurred and there are probably more than a few bears getting very nervous tonight. Should we get a positive GDP surprise tomorrow morning or Greenspan gets out of bed in a bullish mood then there may be some bearish road kill for lunch. I for one will be going long on any break over SPX 1110 if I have to close my eyes and hold my nose to do it. There is strong resistance at 10200-10250 but there was also strong resistance at 10150 and we blew right past it yesterday and never looked back. If bulls need a wall of worry to climb then this is it. Cinch up those climbing spikes and get ready for a run if the markets open higher tomorrow. It will defy logic but then most rallies normally do. If we do get a dip instead it will just a better buying opportunity for Monday. Enter Passively, Exit Aggressively. Jim Brown Editor ************ FUTURES WRAP ************ 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 ******************** Expect the unexpected The S&P Banks Index (BIX.X) 359.55 +0.12 came within 2.23 points of trading its all-time high and looks extended after trading a May 10th intra-day low of 322.50. One would expect some type of profit taking in the banks after an impressive 10.7% gain in just over 3-months, but with Toronto- based Toronto-Dominion (NYSE:TD) $33.35 -2.39% formally announcing it would take a 51% stake in Banknorth Group (NYSE:BNK) $33.90 -2.8% in what industry analysts see as a way for Toronto-Dominion to gain access to further acquisitions in the U.S., bank bulls seem hard-pressed to relinquish their hold on the group. As the BIX.X looks to challenge its all-time highs, Banc of America Securities threw in the white towel by cutting earnings estimates and lowering price targets on several semiconductor stocks. I'm not sure, but CNBC reported that Banc of America might have been the last broker to make such a call in the last few months. Ahead of this evening's quarterly update from chip-equipment maker Novellus (NASDAQ:NVLS) $24.65 -1.94%, Deutsche Bank unexpectedly upgraded Novellus' rival KLA-Tencor (NASDAQ:KLAC) $37.50 -0.55% saying KLAC should be well positioned for an up- cycle as a recent flux in forecasted orders from chip foundries brings uncertainty, and combined with the lowering of expectations from the semiconductor industry has stock prices in the sector depressed. Perplexing to Deutsche Bank's call on KLAC was the firm expecting stocks to be subject to catalyst driven trading in the near term. U.S. Market Watch - 08/26/04 While Deutsche Bank looks for a catalyst to bring gains to KLA- Tencor (KLAC) and perhaps the semiconductor itself, its the Semiconductor Index (SOX.X) that has been the weak spot the last 5-sessions. The semiconductors are perhaps ripe for a bounce, but from deeply oversold bullish % levels of 6%, one needs only to wait for this sector's bullish % to begin reversing up from these levels to still be way ahead of the eventually known catalyst. Stocks traded in a very narrow range today with the Dow Industrials giving less than a 40-point intra-day move with breadth ending with 16 gainers, 13 decliners and General Electric (NYSE:GE) $32.79 finishing unchanged. How fitting for GE, with the largest market cap weighting in the S&P 100 Index (OEX.X) 539.46 -0.02% to also finish nearly unchanged, down a fractional 0.11 points. Market Snapshot/Internals - 08/26/04 Close If looking for clues to any directional bias, don't look at the TRIN. On a light volume trade, TRIN closed 1.00, a reading interpreted as "neutral" by most TRIN followers. Take the NASDAQ's finishing advance/decline line, flip it around and you get something close to the more bullish NYSE advance decline line. Put both the NYSE Composite ($NYA.X) 6,439.80 +0.12% and NASDAQ Composite ($COMPX) 1,852.92 -0.41%, and we'd most likely get something that looked like the Wilshire 5000 Total Market ($DWC.X) 10,721.63 -0.01% in today's trade. Not unlike the very narrow Dow Industrials (INDU), it too traded in a tight 37-point range. Pivot Analysis Matrix - 08/27/04 Good gravy! Today's tight trade would have the DAILY S2 to DAILY R2 easily in play, and with the preliminary second quarter GDP due out before tomorrow's opening bell, with economists' expecting the initial figures of 3.0% growth to be revised lower to 2.7%, regardless of what we expect, this week's trade, excluding yesterday afternoon's little pop higher, has the MARKET looking like it doesn't necessarily know what to expect. The retailers as depicted by the S&P Retail Index (RLX.X) 392.06 +0.11% have given some indication of strength. It's no easy task to move above a correlative 50-day SMA and 200-day SMA. S&P Banks Index (BIX.X) - Daily Intervals Maybe the economy is growing at such a sluggish pace that market participants have piled into the banks. On the other hand, this meteoric rise in the banks comes from the very level that some analysts felt was the beginning of a Fed-engineered economic and financial crisis. S&P 500 Index Chart - Daily Intervals I've drawn a BROWN horizontal line at tomorrow's DAILY S2, which would roughly market the top of Friday, Monday and Tuesday's highs. Tomorrow's DAILY R2 once again builds a third level of resistance at WEEKLY R1. As the SPX now tried to get back above my "old" downward trend, I'd have to at least view near-term support in front of a relatively important economic report to that trend and the 1,096 level. So far this week, buyers have been steady at the MONTHLY 61.8% retracement of 1,093. Keep and eye on your BIX.X tomorrow, where I would at least tie its MONTHLY R2/DAILY S1 correlation to the SPX's DAILY S2. For those that don't expect the unexpected, look for a BIX.X break above 362 to have the SPX surging above 1,111 should it decide to get back on trend above that rising 200-day SMA. Volumes have been light and there seemed to be little interest. It does seem crazy to even think there wouldn't be some type of computer selling above 1,111, but a break of DAILY R2, and WEEKLY R1 may have computers turning on with upside risk immediately assessed to 1,122. Jeff Bailey **************** MARKET SENTIMENT **************** Volume Evaporates - J. Brown Volume has been very low all week and it is still sinking. A lot of investors have already placed their bets and or moved to the sidelines ahead of the Republican National Convention next week so there isn't a lot to do but sit and wait. "But look at oil!" you say? The sharp decline in oil is great news but with crude down five days in a row I'm surprised that the markets aren't higher. So that brings the question, "Is this just a dip in the bull market for oil?" Or "Are terror concerns about next week's convention really that high and keeping traders out of the markets?" Both questions are valid. Unfortunately, I don't have solid answers for either although I tend to believe a lot of folks are willing to sit out and not do any trading until after Labor Day. Our market wrap column on OptionInvestor.com has been saying that there aren't any strong catalysts to spur any buying until after Labor day for a while now. If you're an optimist then you can feel good that the NASDAQ is back over the 1850 level and the S&P 500 is back above the 1100 mark but that's about it. Yes, there are a number of stocks that appear to have put in a new bottom in August or was that just a new relative low? Until we see some new relative highs the prevailing downtrend is the one we need to be careful with. I might feel better if the Dow Industrials can breakout over 10,200 but the warm fuzzy feeling probably won't last long. Today's market was certainly mixed. Advancing stocks outnumbered decliners 15 to 13 on the NYSE but lost 12 to 18 on the NASDAQ. Likewise up volume outweighed down volume on the NYSE but it was reversed on the tech-heavy NASDAQ. Overall volume was pathetic with less than 2.5 billion shares trading on both exchanges. I will say that the strength in financials has been bullish but the banking indices are now looking over extended and just under resistance. The recent breakout in the Dow Transports is also bullish but the gains have been more muted than I would have expected given the sharp pull back in crude prices. There definitely seem to be a lot of cross-currents in the market right now and none of them are very strong. Everyone seems to be waiting for something. Now whether that's the RNC or the Labor Day weekend is up for debate. Look for tomorrow's trading to be influenced by the GDP revision and the sentiment numbers. Next week's volume is going to be worse than this week with rumors floating around that Wall Street is taking the week off to avoid the traffic delays caused by the RNC security. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9233 Current : 10173 Moving Averages: (Simple) 10-dma: 10051 50-dma: 10149 200-dma: 10251 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 983 Current : 1105 Moving Averages: (Simple) 10-dma: 1091 50-dma: 1104 200-dma: 1110 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1280 Current : 1369 Moving Averages: (Simple) 10-dma: 1356 50-dma: 1406 200-dma: 1441 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.91 –0.07 CBOE Mkt Volatility old VIX (VXO) = 14.87 +0.24 Nasdaq Volatility Index (VXN) = 21.60 +0.19 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.84 563,139 472,778 Equity Only 0.70 441,929 309,162 OEX 0.99 21,186 20,831 QQQ 2.77 18,290 50,526 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 54.9 + 0 Bear Confirmed NASDAQ-100 32.0 + 3 Bear Confirmed Dow Indust. 46.6 + 0 Bear Confirmed S&P 500 50.6 + 1 Bear Confirmed S&P 100 49.0 + 3 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 0.94 10-dma: 0.82 21-dma: 1.20 55-dma: 1.25 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 1485 1212 Decliners 1308 1775 New Highs 91 36 New Lows 18 34 Up Volume 653M 349M Down Vol. 544M 799M Total Vol. 1224M 1173M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 08/17/04 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 There has been very little change in the commercial traders' positions. They remain slightly net short while small traders are net long (bullish). Commercials Long Short Net % Of OI 07/27/04 397,354 422,914 (25,560) (3.1%) 08/03/04 401,619 419,429 (17,810) (2.2%) 08/10/04 397,576 419,734 (22,158) (2.7%) 08/17/04 398,472 416,109 (17,637) (2.2%) 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 07/27/04 135,136 90,433 44,703 19.8% 08/03/04 128,510 88,833 39,677 18.3% 08/10/04 135,689 93,897 41,792 18.2% 08/17/04 138,550 97,792 40,758 17.2% 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 In the e-mini contracts we see commercial traders upping both their long and short positions but they remain net bearish. Small traders have done the same by increasing positions overall and they have increased their bullish sentiment. Commercials Long Short Net % Of OI 07/27/04 337,615 429,477 ( 91,862) (12.0%) 08/03/04 340,053 428,736 ( 88,683) (11.5%) 08/10/04 369,547 441,055 ( 71,508) ( 8.8%) 08/17/04 404,065 457,372 ( 53,307) ( 6.2%) 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 07/27/04 186,211 68,930 117,281 46.0% 08/03/04 195,105 68,717 126,388 47.9% 08/10/04 179,940 89,239 90,701 33.7% 08/17/04 192,939 92,361 100,578 35.3% 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 have increased both their longs and shorts in the NDX but shorts made a stronger comeback. Commercial traders remain net bullish but the strength of their sentiment is decreasing at least as of Aug. 17th. Small traders have turned sharply bullish with a big switch in positions. Commercials Long Short Net % of OI 07/27/04 43,042 35,935 7,107 9.0% 08/03/04 42,771 36,863 5,908 7.4% 08/10/04 43,968 38,351 5,617 6.8% 08/17/04 44,743 41,535 3,208 3.7% 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 07/27/04 14,543 14,518 25 0.0% 08/03/04 8,995 13,901 (4,906) (21.4%) 08/10/04 10,081 10,858 ( 777) ( 3.7%) 08/17/04 12,256 8,352 3,904 18.9% Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders are at a virtual standstill during the latest period and remain net bullish on the Industrials. Naturally small traders are making the opposite bet and have turned more bearish. Commercials Long Short Net % of OI 07/27/04 27,577 21,427 6,150 12.5% 08/03/04 30,118 25,029 5,089 9.2% 08/10/04 30,634 22,994 7,640 14.2% 08/17/04 30,271 22,809 7,462 14.1% 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 07/27/04 5,310 6,099 ( 789) ( 6.9%) 08/03/04 4,325 5,212 ( 887) ( 9.3%) 08/10/04 6,450 8,488 (2,038) (13.6%) 08/17/04 4,388 7,089 (2,701) (23.5%) 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. 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The Option Investor Newsletter Thursday 08-26-2004 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: AET, BOL, FMC, INSP, MHK, POT, RAI, TDS, ZBRA New Calls Plays: PD Put Play Updates: KLAC, SPW New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** 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 ******************** Aetna - AET - close: 92.28 change: +0.18 stop: 89.95 AET is going nowhere fast. We expected some profit taking near $95.00 so we were not surprised with Tuesday's decline. We expected a bounce near $91.50 and we got it. Yet the last day and a half AET has been trading sideways in a 50-cent range. This could be the lack of volume this week. Readers have time to be patient. If AET dips to $90.00 then look for a bounce. If not then look for AET to climb back above the $93.50 level. In the news yesterday was an announcement that AET's chairman and CEO would exercise some stock options and sell 225,000 shares of stock, which equates to 10 percent of his AET holdings. Normally investors (and stocks) don't react well to that kind of news. Picked on August 15th at $90.72 Change since picked: + 1.56 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 1.4 million Chart = --- Bausch Lomb - BOL - close: 65.13 change: -0.47 stop: 62.50 We remain un-triggered in BOL. The stock has been consolidating sideways above the $65.00 level. That's okay with us but the micro-trend of lower highs could be a concern. Right now it doesn't matter since we're still sitting on the sidelines waiting for BOL to trade at $66.51 or above. If BOL trades under $63.50 we may drop the play. Picked on August xxth at $xx.xx <-- see TRIGGER Change since picked: + 0.00 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 397 thousand Chart = --- F M C Corp - FMC - close: 46.38 change: +0.32 stop: 42.00 We can't complain with the action in FMC. Tuesday's breakout over resistance at $45.00 is holding. Shares of FMC are slowly creeping higher, which is good. Unfortunately, volume is dropping and that's not so good. Odds are the volume is a seasonal issue, which is common in late August, and not a sign of weakening in FMC. We remain bullish on FMC and readers may want to initiate positions at current levels or on a dip to $45.00. However, this is a dangerous time for stocks as we approach the Republican convention next week. Be aware of your risk. Picked on August 24 at $45.87 Change since picked: + 0.51 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 265 thousand Chart = --- InfoSpace - INSP - close: 38.52 change: -0.88 stop: 36.50 It may look like INSP is struggling with resistance at the $40.00 level and it is but the stock's trend of higher lows is still holding up. Readers can look for a dip back to $38.00 tomorrow and if it doesn't bounce then we can worry. Or we can look to see if the simple 10-dma near $37.65 will act as support. More conservative traders, actually most traders, may want to wait for INSPI to trade back over $40.00 before considering new bullish positions. Picked on August 23rd at $40.10 Change since picked: - 1.58 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 1.1 million Chart = -- Mohawk Industries - MHK - close: 77.20 change: +0.20 stop: 73.00 Now that we've seen the bullish breakout and some follow through in MHK now what? We were encouraged to see traders buy the dip to $75.00 yesterday and if MHK dips again we'll watch the $76.00 level to see if it happens again. Bulls with open positions need to be patient and expect some ups and downs. Picked on August 24th at $75.51 Change since picked: + 1.69 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 397 thousand Chart = --- Potash - POT - close: 53.62 change: +1.93 stop: 49.99 *new* Time to adjust your stop loss! POT surged more than 3.7 percent on Thursday for no apparent reason. The breakout above the $52.00 level is very bullish and volume was way above average but that could be skewed by the recent stock split. Shares of POT are now within striking distance of our target at $55.00 and readers need to be ready to exit. We're going to raise our stop loss to $49.99 for now but more conservative traders may want to put theirs under the 21-dma at $50.51. Picked on August 10th at $ 51.08 Change since picked: + 2.54 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 180 thousand Chart = -- Reynolds American - RAI - close: 73.37 change: +0.59 stop: 69.36 Slowly but surely shares of RAI seem to be consolidating higher. The next test will be a breakout over the $74.00 level. The defensive nature of this stock could help us if traders turn cautious next week. There was some bad news out yesterday. Moody's Investors Service lowered their credit rating outlook on RJ Reynolds from "stable" to "negative" over cost concerns with the recent tax rulling and potential damages from litigation. We're encouraged that RAI was able to shake off the news and post a gain today. Picked on August 19 at $72.88 Change since picked: + 0.49 Earnings Date 08/02/04 (confirmed) Average Daily Volume = 1.2 million Chart = -- Telephone & Data Sys - TDS - cls: 77.51 change: -0.47 stop: 74.00 TDS, in spite of the recent breakout over $78.00, is going nowhere. Shares are back under the $78.00 level and have spent the last six sessions in a $1.50 trading range. More aggressive readers can eye a bounce from $77.00 as a potential entry point but we feel more comfortable waiting for a new high over $78.40. Picked on August 24th at $78.05 Change since picked: - 0.54 Earnings Date 07/21/04 (confirmed) Average Daily Volume = 195 thousand Chart = --- Zebra Tech. - ZBRA - close: 56.46 chg: -0.08 stop: 53.25 ZBRA experience a strong, high-volume surge on Wednesday and broke through resistance at $83.50 and the $84.00 level to hit our TRIGGER at $84.35. On a post-split basis this changes our entry point to $56.18 and our stop loss to $53.25. Readers can choose to initiate positions at current levels or look for a dip to $55.00 as an entry point. Our target is $60. Picked on August 25th at $56.18 Change since picked: + 0.28 Earnings Date 07/28/04 (confirmed) Average Daily Volume = 419 thousand Chart = ************** NEW CALL PLAYS ************** Phelps Dodge - PD - close: 82.10 chg: +2.26 stop: 77.00 Company Description: Phelps Dodge Corp. is the world's second-largest producer of copper, a world leader in the production of molybdenum, the largest producer of molybdenum-based chemicals and continuous- cast copper rod, and among the leading producers of magnet wire and carbon black. The company and its two divisions, Phelps Dodge Mining Co. and Phelps Dodge Industries, employ more than 13,500 people in 27 countries. (source: company press release) Why We Like It: If you're a MarketMonitor subscriber then you know we've been following PD as it flirts with the $80.00 level the last couple of weeks. Today Jeff Bailey mentioned the new high and bullish P&F buy signal. Investors bid up shares of PD and other miners due to a rise in copper prices. Copper surged to a new eight- year high ($1.403 a lb.) because of news that workers at two Southern Peru Copper Corp mines have threatened a strike on August 31st if the company doesn't cough up some wage increases. The obvious risk here is that the Southern Peru Copper Corp capitulates pretty quickly and copper prices subside again. We don't know if or when that can happen. All we do know is that global demand for copper is very strong right now and any disruption would be a boon for those companies still producing. Plus, we have the very obvious bullish breakout over $80-82 in shares of PD and the triple-top breakout buy signal on its P&F chart. Actually, if you're counting it's a quintuple-top breakout. The P&F chart's bullish target is $93.00 but we would target the $87.50-90.00 range. We're willing to speculate on a continued rise with an immediate stop under $77.00, which was the recent low on Wednesday. Suggested Options: We're going to suggest the September or October calls. The $80 and $85 strikes should work well. BUY CALL SEP 80 PD-IP OI=7414 current ask $4.00 BUY CALL SEP 85 PD-IQ OI=3119 current ask $1.45 BUY CALL OCT 80 PD-JP OI=3046 current ask $5.65 BUY CALL OCT 85 PD-JQ OI=1932 current ask $3.10 Annotated Chart: Picked on August 26th at $82.10 Change since picked: + 0.00 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 2.1 million Chart = ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* KLA-Tencor - KLAC - close: 37.50 change: -0.21 stop: 38.51 There seem to be a lot of mixed messages here. Chipmaker CMOS fell to a new low after reporting disappointing earnings. CSFB essentially downgraded INTC when they warned investors the company would likely report Q3 sales in the lower half of their guidance range. AMD was downgraded this morning from a "buy" to a "neutral" by BAC. BAC's semiconductor analyst also said they believe the chip cycle has peaked. With all this negativity why isn't KLAC falling lower? On the other hand DB upgraded KLAC to a "buy" this morning yet the stock isn't climbing either. Shares of KLAC seem to be coiling sideways and we do expect a breakout but it could be either way. It may be noteworthy that KLAC is still inside its descending channel. Remember this was a slightly more aggressive play but considering the trend and investor caution betting on a drop may be (should be?) the better bet here. Picked on August 24 at $37.01 Change since picked: + 0.49 Earnings Date 07/29/04 (confirmed) Average Daily Volume = 6.7 million Chart = -- SPX Corp - SPW - close: 36.76 change: -0.17 stop: 38.26 SPW continues to coil against support near $36.00 with a trend of lower highs that should blossom into a downside breakout. Until then we remain un-triggered. Our entry point to buy puts is a drop to $35.75 or lower. Picked on August xxth at $xx.xx <-- see TRIGGER Change since picked: - 0.00 Earnings Date 08/02/04 (confirmed) Average Daily Volume = 814 thousand Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 08-26-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Oil Services to Homebuilders and more Traders Corner: Charting – Trendlines: Part 1; Construction & types Combos: Is Directional Trading A Correctable Personality Flaw? ********** WATCH LIST ********** Oil Services to Homebuilders 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. ___________________________________________________________________ Schlumberger - SLB - close: 62.16 change: +0.98 WHAT TO WATCH: Here's a paradox - oil and oil service stocks were some of Thursday's best performers even though crude oil slipped for its fifth day in a row. Maybe it's not a paradox. Maybe investors are betting that this dip in oil is only temporary and they're done with the profit taking cycle in energy stocks. SLB is certainly tempting. The stock is rebounding from a test of long-term support near its simple 200-dma. The MACD indicator has produced a new "buy" signal. The P&F chart shows the same line of support. This could be an entry point for a run toward the highs near $66.00. Chart= --- Bard C R - BCR - close: 54.94 change: +0.33 WHAT TO WATCH: This medical device maker has rebounded sharply in the past two weeks and has broken through technical resistance at its simple 10, 21, 40, 50 and 100-dma's. Now BCR is challenging resistance at the $55.00 mark. The P&F chart is bearish and looks very overbought but the drop is already showing a "low-pole reversal". That's a warning sign for the bears. This could be a stock to watch for a bullish breakout. Chart= --- Cardinal Health - CAH - close: 45.80 change: +0.77 WHAT TO WATCH: Do you like "fill in the gap" type plays? Then CAH may be one to watch for you. The stock appears to have put in a bottom between $42 and $44. Now shares have broken to new five-week highs and round-number resistance at $45.00. CAH has also broken into the gap and has a chance to fill it. Optimistic bulls can target a run to $50.00 but we'd watch out for potential resistance at $47.50. Chart= --- Standard Pacific - SPF - close: 50.85 change: +0.82 WHAT TO WATCH: Construction company and homebuilder SPF looks like a tempting bullish candidate. The recent breakout over its 100 and 200-dma's combined with the push through round-number resistance at $50.00 is certainly positive. The homebuilders did not see any follow through on yesterday's declines caused by the lousy home sales numbers. We'd be watching SPF for a breakout over $51.50 and target a run to $55 or higher. The P&F chart shows a strong rebound from its rising support and a bullish target at $64.00. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- BA $52.07 -0.43 - We're still bullish on BA and the dip on Thursday may be an entry point but we're willing to wait and see if it retests the $51.00 level first. EBAY $86.41 +0.75 - EBAY has been climbing, almost daily, for three weeks in a row. The stock is very short-term overbought but it seems bent on reaching the $90.00 level first. AXP $50.12 +0.17 - AXP has been trading in a very tight $1.25 range for the last four weeks. The technicals are mixed and the stock could breakout either way but today's move over the 50 and 100-dma's might be hinting at an upside breakout. Bears can watch for a drop under $49.00. ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Charting – Trendlines: Part 1; Construction & types By Leigh Stevens lstevens@OptionInvestor.com I use trendlines a lot but have learned from past experience that not everyone knows the theory related to how and why these lines work to show a trend or the break of a trend in the market. Many, if not most traders, assume that the markets are somewhat random or that only news and events matter, not some lines that only take a straight edge to draw – how simple is that! For that matter how could something so simple mean too much anyway. However, trendlines are one of the most basic and useful tools in assessing trends and trend reversals in stocks, stock indexes and other financial instruments; e.g., bonds, currencies, etc. If you look at my last Trader's Corner article that had one bit that analyzed the Oil futures charts, you'll notice that oil prices stopped right AT those trendlines and reversed – imagine that! And, we thought that the reversal was just a function of events and what an interesting coincidence that there was no further news that caused prices to keep going up and news that drove prices down. Well, I used to believe in those things too. The fundamentals. Not to discount market influences but there is more to markets than meets the eye – that I know for sure! That prior Trader's Corner article is found at – http://www.OptionInvestor.com/traderscorner/tc_081904_1.asp and, I'll update that chart here – DEFINITION and BASICS – A trendline is, as the name implies, a line that attempts to measure and define a price trend in any market that involves prices set by the free actions of buyers and sellers. "Free" market as defined by what is not - for example, the fed funds rate is not something set by the free action of buyers and sellers. Gold used to be a fixed price, set by government action. A trendline is also by definition a line that either slopes up or down to some degree in keeping with the primary definition of a trend as meaning a predominant up or down price direction. Lines drawn across the highs and lows of a sideways trend or across the tops/bottoms of a defined trading range, are referred to simply as horizontal or level lines. A (I’m tempted to say “the”) basic technique of charting is the use of trendlines. However, not all trendlines are drawn the same or rather, there is not ONE correct way to construct trendlines. I tend to be a bit creative in the construction of trendlines in that I will use a type of construction that could be called “best fit” analysis or use of “internal” trendlines. A conventional trendline, what we learn in charting 101, is to draw an initial trendline through the 2 or more (preferably a minimum of 3 points) highest highs or lowest lows on a bar, candlestick or line (close-only) chart. An "internal" trendline draws a line through the MOST number of highs or lows - more on this later but one example here before we leave the subject of oil. After this span of time on the chart below, the way I've finalized the topmost and bottom-most trendlines is that they cut through one or more intraday highs or lows, per the circles on the chart of the Oil Stock Index (OIX)- The downward pointing red arrow marking the 4th "touch" to upper resistance trendline was followed by a decline after that. This occurred well before (e.g. weeks) the peak in oil prices per the first chart above. Here, we could say that this trendline in a related market (the oil stock index) suggested that the oil price rise might not last much longer, given the tendency for oil stocks to trend higher as long as knowledgeable investors could foresee rising oil prices. There are points that I'll come back to also that are in evidence in the chart above, such as the tendency seen at the lower down (red) arrow, for a trendline that was "acting" as support to define an area of resistance once the up trendline was penetrated (to the downside). Hence, the idea that support "becomes" resistance and vice versa. A rising up trendline is usually drawn by connecting 2 or more lines – 3 if available. You can start with 2 points, such as two of the lowest lows. The resulting line is then below the level of the other periodic price drops that occur in a rising market. What really defines a rising up trendline is not the advancing price moves or price swings, but the low point of the downswings, dips or pullbacks on the way up. You hear the saying "buy dips" or to buy weakness, referring to buying the corrections in a rising trend or buying pullbacks to the up trendline. Downside reactions in an uptrend will usually stop above, at or near the rising up trendline. A past chart here illustrates a simple up trendline and connects 3 or more intraday lows – you never have to search very far for examples of trendlines. A down trendline slopes down as it measures a declining price trend and is typically drawn by connecting 2 or more, usually 3 if available, of the highest highs of the periodic upswings or rallies that occur in a downtrend. The points that establish the down trendline are the high points or peaks of the upswings, or minor rallies that run counter to the general downward direction. The advice to "sell rallies" is usually in reference to a declining trend and a rally to the area of the down trendline would be a good way to do it - there are always some countertrend movements. In a decline, trendlines that slope down in a very steep manner are more common than those that have a radically steep upward slope. Rallies in a downtrend will usually stop below, at or near a falling down trendline. The chart below is an example on a line chart, showing closing prices only - The downtrend above gets its best definition so to speak, after a line can be drawn through a 3rd high and that becomes the "defining" point of a down trendline - note the steep decline in fact after that. A downtrend is then assumed to be in effect until around May on the above chart when there was a rally to above the down trendline. Note that the rebound from the resistance trendline on the lower right of the chart illustrates the principal that support and resistance trendlines can assume also opposite roles at a later stage – here, the resistance trendline, once broken, later defines a support area. This brings us an obvious question of which chart TYPE to use and does it make a difference? Generally it does not make a difference whether you use a bar, candlestick or line chart, assuming you have enough points to construct a trendline – one is not better than the another. With a candlestick chart you can play with drawing trendlines only at the lower/upper "bodies" or through the "shadows" (lowest lows and highest highs for the candlestick period; e.g., hourly, daily, etc.). Line chart trendlines mean that you are mostly looking for the close to tell you whether a trendline is intact or penetrated. I tend to use all the above types of charts and they may show me slightly different things. A pullback in an uptrend may dip under the trendline that uses the lows, but not be apparent on a close- only line chart. I tend to use bar charts most often. For weekly and monthly charts, I generally draw a line first with a bar chart, than switch to a line chart for comparison. If the line chart gives me a clearer trendline "definition" I save and use that one. You can also draw trendlines of course on Point & Figure charts, which makes another possible type of chart to use, as can be seen in the chart below of the S&P 500 (SPX) Index. The upside penetration of the down or resistance trendline at the extreme right suggests a trend reversal from down to up. This breakout was the start of the bull market up trend that has continued into at least early this year (2004) - Because the use of trendlines is often an art rather than a science, traders can get frustrated when what they understand as trendline "rules" do not seem to work. Also, there is the fact that it takes some months and years to see how trendlines work in a variety of stocks/indices and market conditions. Conventional or traditional trendlines are straight lines drawn through at least two lows or highs, preferably three, and such a trendline doesn’t bisect or "cut through" any part (price range) of a bar chart or candlestick – or, any close on a line chart. However, if we look at trendlines as angular measures of price momentum and that momentum is often only loosely defined or measured, we make a case for trendlines that sometimes cut through some part of some bars. These are called "internal" or, as I also say, "best fit" trendlines that touch the greatest number of highs and lows. And, I always remember that I am trying to visually depict the DOMINANT momentum of the trend. Although there is more than one way to draw a trendline – the guidelines for best USE of trendlines are the same as seen in the concluding charts drawn from my book (Essential Technical Analysis). This is an unnamed stock in an undefined time span – this is not name that stock and time, just a focus on the trendline concept - The guidelines for using trendlines regardless of how they are precisely constructed, is to buy on declines to or near a support (up) trendline and sell rallies that touch or approach a resistance (down) trendline. A decline that goes through (breaks) an up trendline is an indication that the trend has reversed and a shorting/put buy strategy is suggested – At the end of this period shown above, the rally that penetrated or broke out above its down trendline, was an indication that the trend had probably reversed and was a buy – stock or the calls. Use of trendlines in the chart below showed another place to sell the stock later on when prices rebounded to the previously broken up trendline. Come to think of it, given history as hindsight, wish I had shorted YHOO at 90 bucks, into at least '01 and $10! In a next Trader’s Corner article on trendlines, I’ll discuss what trendlines can and can’t do to help you spot trends and trend reversals – sometimes trendlines don’t work in providing a good definition of a trend, such as in choppy markets or sideways trends. Nevertheless, there are ways to minimize losses in such situations. **************** Combos/Straddles **************** Is Directional Trading A Correctable Personality Flaw? By Mike Parnos Can you wash the spots off a leopard? I certainly hope so. If not, we’re wasting out time here. Can people change? Can you turn a poor trader into a good trader? Well, we may never be able to turn pigs- in-a-blanket into caviar, but we can make progress. Therapy can help, but only to a degree. All I can do is try to create a sense of awareness and present facts. If you are aware, then you can at least make an informed decision. The problem is that most traders are at the mercy of their emotions. I can only attempt to place a few logical speed bumps in the path and hope you will pause, and think, before placing directional trades. Zig Ziglar has said, “Confidence is going after Moby Dick in a rowboat, and taking the tarter sauce with you.” Unfortunately, that’s also the definition of “stupidity.” When people place directional trades, they are pretty confident, don’t you think? Hmmm . . . ___________________________________________________________ Dear Mike, The Iron Condors you talk about in your articles require that the stock remains within a range above the bull put spread and below the bear call spread. Are all non-directional trades like this where the price of the stock or index must not move up or down out of a range? If there are non-directional trades that do not require this would you please give me an example? At the end of your article you try to be funny by saying you have a waiting room full of directional traders that just can't understand why they lose money. But it seems that in last week’s article you were dealing with a non-directional trader that lost money! Could it be that the markets were being directional? – Roger ____________________________________________________________ Hi Roger, There are a few types of non-directional trades. My favorite is the Iron Condor -- preferably on a liquidly traded index. As you wrote in your letter, the idea is to create as wide a trading range as possible while still taking in a reasonable amount of premium. Recently, I've been able to use the SPX with a trading range of over 100 points. What we're trying to do is to simply put the percentages in our favor as much as possible. If you have a 100-point range, the SPX can make substantial moves, both up and down, and still close safely within the trading range – and that translates into PROFIT. We have a very high percentage of success. Is it infallible? Of course not. Remember that we’re dealing with a market that we have absolutely no control over. At times, it can be a very helpless feeling. If the market begins to trend, it can threaten and/or violate one of the spread’s short strike prices. The important thing is to have a plan of what you will do if you find yourself in a potentially threatening situation. Those without contingency plans are doomed to fail and destined to end up working under those golden arches during their retirement years. There are a number of ways to adjust your condor positions – many of which have been discussed in previous Option Therapy columns. Place Your Bets and Kiss Your Money Goodbye Directional traders are buying options and essentially placing bets – just like gamblers do in Las Vegas. They're betting that the stock/index will go in a particular direction -- and they can only make money IF it goes in that direction. They will be right sometimes, but, in the long run, they will likely lose money because they’re going be wrong more often than they are right. They may use dozens of complicated indicators, expensive sophisticated software and have a direct line to the Psychic Friends Network. But that doesn't affect the fact that they can profit only one way -- IF they guess right. If you were to flip a coin three times and it turned up "heads" three times, what are the chances it will be "heads" on the fourth flip? The reality is that you still only have a 50-50 chance of it being “heads.” It may seem that the coin is “due” to come up “tails,” but logic tells us different. Hopefully, you do want to use logic in selecting your trades. The same concept holds true for picking direction on stocks or indexes. No matter what the “indicators” say, you have a limited probability of success. In Las Vegas, you can stand at the roulette wheel and bet on red or black. What are your chances of winning? They’re less than 50-50. Why? Because the house builds in their profit percentage by having “0” and “00” on the wheel. When “0” or “00” is hit, everybody loses – except the house. Believe me, all those magnificent hotels in Las Vegas weren’t built with money the house lost. The bottom line is that the directional trader is putting himself at a disadvantage. Now, add to all of this the fact that it's rare that a typical option trader will have the money management skills to bet in the appropriate increments or the self-discipline to control their losses. Other Non-Directional Strategies In previous sessions, I have written about two other non-directional strategies – the “Siamese” Condor and the Low Risk Straddle. The “Siamese” Condor is a short-term trade that benefits by the lack of movement of the underlying. On the other hand, the Low Risk Straddle is a short-term strategy that benefits from a large movement – in either direction. ____________________________________________________________ SEPTEMBER CPTI POSITIONS September Position #1 – SPX Iron Condor – 1105.09 The SPX has become our favorite index. The premiums are respectable. The spreads are wide enough to do a little shaving, and we can create some huge trading ranges for safety purposes. We sold 10 Sept. SPX 1015 puts and bought 10 September SPX 995 puts for a credit of about: $1.10 ($1,100). Then we sold 10 September SPX 1140 calls and bought 10 September SPX 1160 calls for a credit of about $1.40 ($1,400). Total credit and potential profit of $2,500. Maximum profit range: 1015 to 1040. That’s a 125-point range. It is going to require $20,000 in maintenance. The return on risk will be about 14.3%. September Position #2 – RUT Iron Condor – 547.25 The RUT gave us a big scare in August. A lot of traders rolled out their 520 short puts when the price was violated a week ago. It was the prudent thing to do. The huge bounce could not have been predicted. Those that held had a 50/50 chance of success. They rolled the dice and they won. We sold 10 RUT September 500 puts and bought 10 RUT September 490 puts for a credit of about: $1.00 ($1,000). Then we sold 10 RUT September 580 calls and bought 10 RUT September 590 puts Credit of about $1.00 ($1,150). Total credit and profit potential of $2,000. It’s a nice size maximum profit range of 500 to 580. The maintenance requirement is only $10,000. The return on risk will depend on what premium you take in. If you take in $2,000, the return on risk will be 25%. September Position #3 – SPX Credit Spread Boogie – 1105.09 In this August cycle, our Credit Spread Boogie play is going to be 100% profitable. It may have taken two months to make this money, but it was well worth it. So, let’s do it again. We sold 3 September SPX 1105 calls and bought 3 September SPX 1130 calls for a credit of about $7.00 ($2,100). This is based on the feeling that, despite the recent bounce, the downtrend will continue. We’ve taken in $2,100. We’re going to remain in this position until it costs $14.00 to unwind it. That will be an indication that the trend has likely changed and we will then reposition ourselves in the opposite direction – playing enough contracts to replenish what we spent to close out the original spread. The initial maintenance requirement is $7,500. However, keep some of your powder dry. If we have to shift positions, we will need additional maintenance dollars for the additional contracts. September Position #4 – OEX Iron Condor – 539.46 This position is in response to some requests for an OEX play. We sold 10 September OEX 505 puts and bought 10 September OEX 495 puts for a credit of about: $.65 ($650). Then we sold 10 September OEX 555 calls and bought 10 September OEX 565 calls for a credit of about $.75 ($750). Total net credit of about $1.40 ($1,400). Maximum profit range: 505 to 555. Potential return on risk of about 16%. It’s been a long time since I’ve traded the OEX in a condor. I don’t remember how generous they are in shaving the bid/ask spreads. Good luck. ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $34.40 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. June $34 calls and $37 puts -- total net credit of $750. We rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60 credit) and took in a credit of $.80 ($800). We rolled to the August $34 calls and $37 puts, taking in a credit of $900. For the September cycle, we rolled to the Sept. $34 calls and $37 puts, only yielding $.45 or $450 for the cycle. Our new total credit is now $11,750. 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 – 539.46 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 As of July expiration we had a total of $7,440. We now add the $950 for the August expiration for a new total of $8,390. New Zero Plus Positions For September September bull put spread 505/495 for credit of $.75 x 5 contracts = $375. Short 555 call for credit of $1.20 x 5 = $600. If all goes well, we’ll be able to add $975 to our cash position as we wait for the market to move up – hopefully in this lifetime. _______________________________________________________________ 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. Mike Parnos, CPTI Master Strategist 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. 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