The Option Investor Newsletter Thursday 10-07-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Drug Interaction Warning Futures Wrap: See Note Index Wrap: Consumers pay down credit. That's good isn't it? Market Sentiment: Is this the beginning? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-07-2004 High Low Volume Adv/Dcl DJIA 10125.40 -114.50 10240.95 10124.52 1.84 bln 869/2325 NASDAQ 1948.52 - 22.50 1970.26 1948.03 1.74 bln 961/2133 S&P 100 542.28 - 5.61 547.89 542.19 Totals 1830/4458 S&P 500 1130.65 - 11.40 1142.05 1130.46 W5000 11047.92 - 41.88 11164.15 11045.44 SOX 403.36 - 2.80 410.53 402.78 RUS 2000 582.60 - 10.06 592.66 582.37 DJ TRANS 3341.87 - 46.90 3389.20 3340.94 VIX 14.50 + 1.22 14.66 13.32 VXO (VIX-O)14.56 + 1.56 14.59 13.37 VXN 20.59 + 0.82 20.75 19.65 Total Volume 3,863M Total UpVol 1,182M Total DnVol 2,643M Total Adv 2145 Total Dcl 5012 52wk Highs 398 52wk Lows 97 TRIN 1.14 NAZTRIN 0.61 PUT/CALL 0.86 ************************************************************ Drug Interaction Warning by Jim Brown Warning, certain drug stocks may not be tolerated well by bulls. Serious negative reactions may occur. Limit consumption to only those drug stocks that have reached well know support levels. This could have been the label for today's market as the drug induced stupor kept buyers in bed for the day. Dow Chart Nasdaq Chart SPX Chart The excuse gaining maximum credibility today for the drop in the markets was an attack on drug stocks. An article in the New England Journal of Medicine called into question the entire COX-2 class of arthritis drugs. The article suggested that despite any negative evidence to the contrary all drugs in that class are bad. The article came under fire from multiple directions for the generic conclusions and disregard for the facts. Still the three drug stocks in the Dow, PFE, MRK and JNJ all dropped substantially and were responsible for more than half the morning drop in the Dow. Accounting for the other half was disappointing economics, simple profit taking from the last weeks gains and fear of GE earnings tomorrow morning. The economics started with the Monster Employment Index at 151. This was +6 points over the August level at 145 and appeared to be normal seasonal hiring and not specifically a continued increase in the trend. In August we saw a +11 point spike and this month's seasonal gain was only half of that spike. Despite the slowing rate of growth the +6 points was significant. When coupled with the strong employment components in several other reports recently this suggests tomorrow's Jobs report could be strong. Jobless Claims fell back into the range we had seen prior to the hurricanes at 335,000. The prior weeks claims were adjusted higher to 372,000 and were seen to be a direct result of the hurricanes. Continuing claims have continued to decline but the pace is slowing and could suggest we have reached a level where hiring and turnover have reached a point of equilibrium. The Manufacturers Alliance survey dropped to 75 for the third quarter after three quarters of record highs. Nothing moves higher forever and a drop or pause in production was expected eventually. Even at 75 this is a strong indication of current growth. Shipments remained high at 93 and New Orders only backed off -1 point to 92. The weakness came from a drop in Back Orders to 86 from 93 indicating manufacturers are closing the gap. The Inventory component also shot upward to 69 from 61 and the investment index fell to 69 from 75. Companies running at greater than 85% capacity fell to 28% from 45%. Overall this report showed continued expansion but a reduction in the speed of that expansion. Oil continues exert pressure on consumers and that pressure came in the form of a drop in Consumer Credit by -$2.4 billion when an increase of +$5.9 billion was expected. This was the largest drop in Consumer Credit since Q4-1990 and is a clear indication consumers are being hurt by high energy prices and are concerned about the future. We have been seeing a drop in sales at various retail stores and numbers out today confirmed the drop in credit may continue. The headline Retail Sales number rose only +2.4% for September and it was the second weakest gain for the year. While weather and high gas prices combined to knock about -1.0% from the total the calendar impact of Labor Day added +0.5%. Thompson First Call said that taking Wal-Mart out of the equation dropped the headline number to only +1.9% growth. This compares to +6.1% for 2003 and illustrates how the tax rebate helped inflate the economy. In September discounters saw +3.0% growth but department stores lost -0.8%, apparel -0.4% and specialty stores lost -0.4%. Drug stores gained +4.1% due to the rising cost of drugs and the high floor traffic resulting in impulse sales. Tight job markets, falling wages, higher benefit costs, employers pushing more benefit expenses onto employees and rising energy prices are all depressing retail sales. None of these factors are expected to improve in the near future. Tomorrow we will get the September Jobs Report and the outlook is rosy, maybe too rosy. Expectations are calling for a +160,000 increase in jobs but that is not the real attention getter. October is when the Jobs numbers for the year are revised based on the corrections to the monthly estimates as more info becomes available. Based on a leaked internal memo now making the rounds, source unknown, the street is expecting another +288,000 jobs in the form of an upward revision to prior numbers. Obviously if this revision occurs and the September numbers are strong the Democrats will lose a few more debate points for Friday night. They can't complain that the revision was moved to October for political purposes because that date change happened in 2001 to better reflect current conditions. The revisions prior to 2001 had been made in February since 1991. This expected jump in jobs by nearly 500,000 jobs has been raising eyebrows and stock prices on the street for the last week. This suggests that the market may have gotten ahead of itself on the rumor and a sell the news event could be in our future should the expectations not come to pass. This could have been a factor in our afternoon sell off on Thursday. The morning sell off was initiated by the attack on Pfizer in the New England Journal of Medicine. The investment community is fresh off the massive Merck drop from last week and funds were trying to decide what to do with their MRK money now burning a hole in their pocket. Pfizer had been looking like a beneficiary from the VIOXX disaster and had seen a six day gain on the news. Because the article took a swipe at the COX-2 drugs in general there was a knee jerk reaction to drug stocks in general. There is no basis in the attack but investors dumped -84 million shares of Pfizer anyway. Personally I think this is a superb buying opportunity on Pfizer. After the initial morning dip it rebounded right back to its multiyear support level at $30. Pfizer was on TV on nearly every news channel claiming numerous studies, one as large as 1.4 million patients had not shown any indications of cardiac events. In one specific blind study the subjects taking Celebrex long term actually had fewer cardiac incidents than those taking the placebo. Celebrex is the oldest COX-2 drug and as such has had many more studies done and according to the FDA there is no incidence of cardiac events. Several studies currently underway using Celebrex have been running longer than the 18 month threshold where VIOXX failed and at dosages 2-4 times the recommended dose with no indications of complications. Over 31 million patients have taken Celebrex since it was introduced in 1998. Celebrex was on track to do nearly $3 billion in sales in 2004. This is a big drug but only a drop in the bucket to the $53 billion in revenue Pfizer will see this year. VIOXX was on track to hit $2.5 billion in sales before being removed from the market. According to surveys done this week 58% of those VIOXX patients are switching to Celebrex. 38% to some other form of treatment including Bextra, another Pfizer drug, and the rest going back to Ibuprofen or a similar over the counter drug. The survey found that pharmacies were scrambling to find enough Celebrex to fill the demand and pharmacy suppliers were paying premium prices to acquire large stocks of the drug. Rumors have customers trying to stockpile large quantities of the drug just to make sure they have it on hand if a shortage develops. With the jump in demand from 58% of VIOXX users converting prescriptions, Celebrex is on track to hit $5 billion in sales at little or no extra cost to Pfizer. If their drug trials currently underway prove to prevent Alzheimer's and colorectal cancer then $10 billion would be an easy target. I believe this is a buying opportunity for Pfizer but do your own research. I am an occasional Celebrex user and for me it is a wonder drug and based on the consumer hoarding reports I am not alone in that belief. The real reason we sold off today was not COX-2 drugs $53 oil or weak economics. We sold off because we were due and in those occasions the headline reasons are just sound bites for reporters looking for an excuse. If they wanted a reason there were plenty. Chipmakers are still warning and earnings estimates for the quarter are still falling. Taiwan Semiconductor, the worlds largest chipmaker, said sales fell for the first time in seven months and they warned they could continue to drop as demand falters. They expect oil prices to filter through the global economy and depress demand and earnings in 2005. The current S&P Q3 earnings are projected to be +12.5-13.5% with 4Q estimates now below +15%. This alone is plenty of reason to take cautious profits from the very strong rally. Oil hit $53 today and closed at an all time high of $52.67 on continued supply concerns. Production from the Gulf of Mexico is still down -1.4 billion barrels per day from Ivan damage and will not be back online for weeks. Nigeria is still a concern after a strike put some production on hold. Home heating oil supplies fell yesterday and demand is increasing as homeowners try to beat the rush to fill tanks ahead of any coming shortage. When given the choice of paying high prices for gas and heating oil or not being able to buy it at all, the high price option is quickly chosen with some other retail purchase taking a back seat. Investors are no longer pouring funds into the markets according to TrimTabs.com. In the week ended Wednesday stock funds saw outflows of -$170 million compared to inflows of +$600 million in the prior week. These numbers pale in comparison to the multi billion inflows from early in September. Fear of October may be impacting investor sentiment and seeing the markets back at multi month highs may seem like a good place to be cautious. Another reason for the market weakness may be the growing election risk. Kerry has pulled ahead in some polls and this produces even more risk for drug companies. The CIA report today that Saddam had not produced weapons of mass destruction for more than a decade was a serious blow to the Bush campaign and Kerry wasted no time in turning the news into a media event. Tomorrow night's debate will turn into another Bush bashing event in hopes of trying to leverage Kerry's current lead into a winning margin. With only 26 days left in the campaign the mud slinging will intensify for both sides. With the broader surveys showing a dead heat we could see more caution appear in the markets. Given the heights we have seen this week it was only natural for some profits be taken off the table before the Jobs report and the debate. The Dow took a serious hit for -114 points but 40+ points were due to the three drug stocks in the Dow. Also dragging the Dow lower was a substantial drop in MMM, UTX, HON, CAT and BA in front of the GE earnings before the open tomorrow. Fears that the conglomerate could express weakness in any of their individual areas drove investors to take profits. Each of those stocks represent a subset of some GE business and risk is high. GE never misses earnings numbers but they do talk down future projections. Jeffery Immelt said recently that growth in 2005 could be in the high single digits. Previously he had projected double digit growth in various divisions so it will be very interesting to see what appears as official guidance tomorrow. GE earnings are a proxy for the overall economy and while no negative guidance is expected caution was warranted. The Dow dropped from its opening level of 10240 to close at the low of the day at 10125. Nearly 50 of those points lost came in the last 30 min of trading when investors bailed from those five Dow stocks mentioned above. Even with the -114 point drop today we are still trading above last Friday's support level of 10050 and resting on the 50dma. While today's drop was dramatic it was not material and only classifies as simple cautionary profit taking along with a drug induced headache. The Nasdaq held at support most of the day and it was not until that closing sell cycle that 1955 broke and it accelerated deeper into negative territory. However, even at the 1948 close it only pulled back to yesterday's lows. The Wednesday end of day buy program was erased and we are right back in the range for the week. Again, it was simply cautionary profit taking. The SOX barely even budged after a couple of chip warnings and the comments out of Taiwan Semi. For the week the SOX has been trading between 400-410 and it closed in range at 403 with only a -2.84 drop for the day. If the Nasdaq selling was more widespread or on more substantial fears the SOX would have confirmed. Instead the SOX appears to be confirming a lack of selling pressure in techs. When determining real market performance it sometimes helps to look at the Wilshire-5000. As the broadest measure of the market it is not impacted by weighting of several high profile stocks and as such gives a clearer picture of overall market sentiment. The Wilshire dipped only a tame -41 points today and suggests the negativity was due to Dow imbalances only. Wilshire Chart The worst performer today was the Russell with a -10 point drop. The Russell had been on fire since Sept 28th and rallied more than +30 points as end of quarter contributions pushed it to within 7 points of resistance at 600. October is small cap month and funds typically pour the majority of their cash into the small caps in hope they will turn into big caps in the coming year. It is also the time when those funds that specialize in small caps tend to take profits in those winners who no longer fit the small cap growth model. Essentially those that became big caps are kicked out in favor of the little guys with big prospects. This pruning process tends to make the Russell volatile as the higher cap stocks which are more heavily weighted are sold. We saw some of that volatility today with the -10 point drop breaking initial support and taking back one third of the recent gains. For Friday I have mixed emotions. I know, you should not trade on emotions but you know what I mean. The SPX has pulled back to 1130 and strong support and a likely place for a relief rally to occur should Jobs be strongly positive and GE not spoil the party. I personally have a bullish bias for tomorrow but it all depends on the morning events. I believe the pullback today simply gave us some breathing room for both sides and took the pressure off the bulls. Wednesday's close was just too close to very strong and very critical resistance. Trying to get a running uphill start while on the side of a steep hill is a challenge. The pullback provided a resting point in neutral territory to wait for events to clear. I am not worried about Friday regardless of which direction prevails. Next week's direction is more critical with October one third over and the election only three weeks away. The Friday debate will be cussed and discussed in mini-debates by hundreds of on air reporters and countless surveys will be tabulated. Institutional investors will have to wade through the political morass and decide if the prevailing candidate can be elected and how it will impact their portfolio. With October known as portfolio restructuring month we could see this activity suddenly reach a fevered pitch. Let's just hope it is positive for the markets. 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 ******************** Consumers pay down credit. That's good isn't it? One of the better arguments, of which I don't think you'll ever get agreement on, is if it is a positive, or a negative that consumer credit rises or falls in any particular month. Americans are often criticized for carrying too much debt, especially on those little thin plastic things called credit cards. I still remember my grandfather telling me (at the ripe age of about 8 years old), "Jeff, other than your house, if you can't afford to pay cash for what you want to buy, you probably can't afford it." I think that was the lecture he gave me after I asked him if I could borrow 20-cents for a candy bar at the drug store. It was a bearish day on Wall Street, where stocks extended losses in the last hour of trade after the Fed said consumer, non- mortgage credit fell by $2.4 billion to $2.038 trillion in August, which was a shocker to economists' forecast of a $5.5 billion increase. The decline was led by a $3.4 billion drop in revolving credit (credit card debt) which fell by a sharp $3.3 billion, the largest monthly decline since April's $5.0 billion. Meanwhile, nonrevolving credit (student loans, auto, etc.) rose a fractional $900 million. Hmmmm.... for those of us who have been monitoring Treasury yields, we can probably make the tie that consumers refinanced some mortgages in August as the benchmark 10-year yield ($TNX.X) slipped back from its May-June highs of 4.8%. After all, in March (see April's $5.0 billion decline in consumer credit), the benchmark 10-year Treasury yield ($TNX.X) was just starting to rise from roughly 3.8% (refinance that mortgage) where in April, a prudent consumer probably paid down some of those revolving credit card balances that carry upwards of 9% to 18% annual rates. The negative of paying down those revolving credit balances? You got it! Consumer's could have spent the money and helped fuel economic growth! The good news? Consumer should now have some "available credit" to run up in the months ahead. Roughly $3.4 billion according to the Fed. You see, there will never be agreement on this topic. Aha! So that puts some focus on tomorrow's nonfarm payroll figures (nice transition here) and average hourly earnings, which economists are forecasting to rise 0.2% from August's 0.3% gain. We'll get all these fun figures before the opening bell. The headline number is the September nonfarm, where economists' look for the economy to have added 150,000 new jobs, after adding 144,000 in August. August's figures, as well as prior months figures can be revised, and there have been some good points made that revisions will be higher. The average workweek is expected to decline to 33.7 hours from August's 33.8, where since the beginning of the year, the average workweek has been bound between 33.6 hours and 33.8. CNBC's Kudlow & Cramer had James Cramer looking for an upside surprise with the thought that the energy industry had stepped up hiring in the energy-rich states of Texas and California. During and after hurricanes pummeled parts of Florida, some economists' thought hiring from the construction and utility sectors could see a hefty increase as demand for labor to clean up hurricane-related damage takes place. We may have seen some of that today, when weekly jobless claims fell to 335,000, which was below economists' forecast of 355,000. I'll try and dig through tomorrow morning's nonfarm payroll figures and see if there are any special notes as to "why" the numbers came out as they did. Market Snapshot / Internals - 10/07/04 Close From 12:00 to 03:00, we need a magnifying glass to look for any change, but in the final 45-minutes of trade, buyers vanished and the major indices finished at their lows of the session. Sell side volume doesn't look particularly heavy, as TRIN was little budged. Meanwhile the VIX.X popped above its WEEKLY Pivot for the first time this week to close at a session high. Sniff..... A little option action into next week's expiration? By the close, it was the Nov. 1,175 calls that turn up as the most active at 10,838 contracts and open interest of 13,820, where the average h/l/c price was $4.50 and last trade of $4.10. Looks like a premium seller to me, where the bet is that the SPX isn't going to trade much above 1,175 by next month's expiration. The Oct. 1,100 put (9,747 : 49,470) and Oct. 1,125 calls (8,252 : 19,546) were 2nd and 3rd-most active. Both of these contracts were up more than 125% from yesterday's close. U.S. Market Watch - 10/07/04 Close Today's "top story" was the question of whether or not its the COX-2 inhibitor of many pain relievers that may cause a higher risk of heart attack in some patients, or is it Merck's Vioxx? I read some articles today that date back several months regarding COX-2 inhibitors, and I cannot come up with any conclusive evidence that COX-2 is at the root of concern. However, the uncertainty is present, as Merck's Vioxx has been studied longer than any of the other COX-2 inhibitor drugs (as far as I could tell), and that is what raises some doubt/speculation on just what scientists know for sure about extended use. Bottom line right now, as I see it, is that nobody really knows for certain, and if they do, they aren't talking about the ABSOLUTE known negatives of COX-2 inhibitors. While Genentech (NYSE:DNA) $47.55 -5.37% was weak after yesterday's quarterly earnings report, I have to think the broader weakness in the group may stem from a growing debate on just what the Food and Drug Administration should be doing, or should have been doing when it approved Merck's Vioxx. The FDA has been chastised for taking too long to approve some drugs that could potentially save lives, where the FDA seems to drag its feet in the approval, or expediting process. However, the recent news about Vioxx now has investors, and the general public, wondering what else is out there that we may not know is potentially more harmful to us than what we're trying to cure, or treat. For biotechnology, one concern could be that the approval process takes longer, thus more costly to develop a drug that could eventually win approval. For me, biotech is a difficult "buy" right now, and as one institutional analyst that follows the drug/biotech group said today, even a large drug maker like Merck (MRK) and recent price action shows some of the risks of investing in drug/biotech. A couple of days ago, some analysts were cautiously bullish on Merck (MRK) as the company had a hefty cash position and a nice 4% dividend yield. Now we're seeing some lawsuits being filed against the company and that 4% dividend yield is now 4.9% as the stock has fallen an additional 6% from its September gap down close of $33.00. BIG test for BIG tech? The SOX.X and NWX.X showed some relative strength today, but the MSH.X, while fractionally green during parts of today's session, remains below its 200-day SMA. Keep an eye on these buggers. The NASDAQ's 10-day NH/NL ratio was able to reverse back up into a column of X, and suggests some intermediate-term bullish leadership is still holding tough. Since January, we've been used to seeing the NASDAQ's 10-day NH/NL ratio turn south and keep heading south when it moves lower. Still, I remember taking a few exams in high school, which I spent about 30-minutes studying for, and when I looked at the first question on the BIG test, I wasn't overly confident of my eventual score as that first question was a tuffy. Of the 35 MSH.X components, Intel (INTC) $21.24 +0.52%, Oracle (ORCL) $12.29 +0.42% and Motorola (MOT) $18.80 +0.26% managed to have the bullish answer. Electronic Arts (ERTS) $45.62 -2.81%, Juniper Networks (JNPR) $25.20 -2.66% and EMC Corp. (EMC) $12.35 -2.6% got it wrong in today's session. The Morgan Stanley Health Provider Index (RXH.X) was the only sector to finish green, with Manor Care (HCR) $31.41 +5.36% and LifePoint Hospitals (LPNT) $31.50 +3.82% doing most of a bull's work, on negative breadth of 9 to 4. Community Health (CHY) $27.93 was unchanged. Pivot Matrix - The Dow Industrials (INDU) sits right on its WEEKLY Pivot and trying to curl higher 50-day SMA, but close back below its MONTHLY Pivot, where a continued slide could have other indices gravitating back toward their MONTHLY Pivots. In what could be a volatile session tomorrow, the INDU sits smack dab between DAILY S2 and DAILY R2, as well as correlative WEEKLY S1 and WEEKLY R1. Keep in mind the DIA "Max Pain" Theory of $101 ($1 increments) if you're looking to trade, or hold October expirations. OEX "Max Pain" is 540 (5-point increments), SPX is 1,120 (5-point increments), NDX is 1,400 (25-point increments), QQQ is $35 ($1 increments), and the SOX.X is 380 (5-point increments). We make note of the "Max Pain" levels, and would want to know where they are, especially if we see unusual VIX.X action. Jeff Bailey **************** MARKET SENTIMENT **************** Is this the beginning? - J. Brown Could this be the beginning of a new leg lower in the market's current trading pattern? Bulls had hoped the pattern was broken earlier this week when the S&P 500 index broke above its descending trendline of lower highs. Yet since Monday's rally the SPX has churned mostly sideways between 1130 and 1140. The NASDAQ's strength and new two and half month highs were also encouraging but again the index has spent the week churning sideways mostly under its simple 200-dma. The Industrials fared even worse with an early high on Monday and another lower top Wednesday-Thursday. Given the sentiment and fear indicators like the ARMS index and the VIX/VXO it's not a surprise to see stocks turning lower. The VIX/VXO has been screaming that the markets are at a short-term top for days and the ARMS index or TRIN has seen its short-term moving averages hit bearish reversal levels in the last couple of sessions. Of course if you're an episodic or news-driven trader then today's weakness has more to do with drugs, oil and jobs than technical indicators. Experienced traders try and take a balanced approach and absorb it all. The drug sector has surely been a drag on stocks. Merck's dramatic news last week to pull their Vioxx drug off the shelves hit the group hard. Earlier this week news that Chiron would not deliver any flu vaccines was another surprise. Now new reports are out today suggesting that Pfizer's Celebrex, the rival to Vioxx, may also raise the risks for heart attacks. While PFE should have the studies to prove their product is safe the stock sank anyway on the initial news and pulled the drug sector lower again. Rising oil prices certainly don't help investor confidence. Crude oil has hit its third record high in a row over $50 a barrel. Today oil futures crossed $53 before settling at $52.67. The oil story has been beat to death even though it's still a factor so I won't go into detail on why it's bad for our economic health. Investors are also focused on tomorrow's jobs report. Wall Street estimates for the non-farm payrolls number is 140K to 150K. The problem is that September's number could be skewed downward by the recent rash of hurricanes. Four hurricanes in six weeks can take its toll on the economy. Therefore there will be a lot of eyes watching to see if the July and August numbers are revised upward to support a rising trend of job growth. If the job number is above 150K then the Bush camp is going to use it as fuel. If the number is under 140K then it will be gun powder for the Kerry camp. Meanwhile the Q3 earnings season has begun. Dow-component Alcoa (AA) has already announced and Dow-component General Electric (GE) reports tomorrow. Wall Street is looking for 38 cents a share from GE and analysts are eager to hear positive comments about GE's forecast for 2005. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9230 Current : 10125 Moving Averages: (Simple) 10-dma: 10128 50-dma: 10124 200-dma: 10298 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 990 Current : 1130 Moving Averages: (Simple) 10-dma: 1122 50-dma: 1106 200-dma: 1119 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1455 Moving Averages: (Simple) 10-dma: 1430 50-dma: 1388 200-dma: 1441 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 14.50 +1.22 CBOE Mkt Volatility old VIX (VXO) = 14.56 +1.56 Nasdaq Volatility Index (VXN) = 20.59 +0.82 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.86 804,871 694,062 Equity Only 0.75 624,556 467,848 OEX 0.77 48,226 37,137 QQQ 1.70 54,479 92,781 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 66.3 + 0 Bear Correction NASDAQ-100 47.0 + 0 Bull Alert Dow Indust. 56.6 - 3.3 Bear Correction S&P 500 65.2 + 0.8 Bear Correction S&P 100 62.0 - 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: 0.69 10-dma: 0.93 21-dma: 0.95 55-dma: 1.11 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 680 895 Decliners 2112 2101 New Highs 100 52 New Lows 22 33 Up Volume 470M 697M Down Vol. 1367M 1023M Total Vol. 1849M 1733M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/28/04 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 The most recent data doesn't show a lot of movement. Commercial traders upped their short positions a bit so they remain net bearish. Small traders didn't do much maneuvering and remain net bullish. Commercials Long Short Net % Of OI 09/07/04 415,952 426,342 (10,390) (1.2%) 09/14/04 442,049 469,982 (27,933) (3.0%) 09/21/04 404,746 425,560 (20,814) (2.5%) 09/28/04 404,773 434,441 (29,668) (3.5%) 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 09/07/04 157,732 130,817 26,915 9.3% 09/14/04 167,310 126,513 40,797 13.9% 09/21/04 134,943 108,036 26,907 11.1% 09/28/04 135,317 107,173 28,144 11.6% 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 The e-minis always see a lot of action and this time we see the commercial traders upping both their longs and shorts in almost equal percentage moves so "smart" money remains bearish. Small traders also upped their longs and shorts and remain strongly net bullish. Commercials Long Short Net % Of OI 09/07/04 371,111 600,593 (229,482) (23.6%) 09/14/04 377,643 586,139 (208,496) (21.6%) 09/21/04 213,014 397,844 (184,830) (30.2%) 09/28/04 226,020 420,714 (194,694) (30.1%) 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 09/07/04 286,194 80,075 206,119 56.2% 09/14/04 289,155 81,314 207,841 56.1% 09/21/04 256,315 60,275 196,040 61.9% 09/28/04 262,501 68,255 194,246 58.7% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 The NDX futures aren't seeing much action from the commercials. They did up their short positions a bit after the previous periods significant drop. Yet professional traders remain net bullish on the NDX. In contrast the small trader remains heavily net bearish but not to the extreme they were a week ago. Commercials Long Short Net % of OI 09/07/04 51,814 44,179 7,635 7.9% 09/14/04 64,282 59,808 4,474 3.6% 09/21/04 54,530 30,827 23,703 27.7% 09/28/04 55,045 32,319 22,726 26.0% 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 09/07/04 16,817 12,561 4,256 14.5% 09/14/04 36,372 28,584 7,788 12.0% 09/21/04 7,417 25,821 (18,404) (55.3%) 09/28/04 10,078 22,917 (12,839) (38.9%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Interesting... commercial traders didn't make many adjustments but small traders did. We're seeing small traders hedge their bets as their longs and shorts grow closer together. This has significantly reduced their bearish outlook on the Dow. Commercials Long Short Net % of OI 09/07/04 29,128 24,011 5,117 9.6% 09/14/04 41,951 34,486 7,465 9.7% 09/21/04 30,816 27,200 3,616 6.2% 09/28/04 29,714 26,877 2,837 5.0% 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 09/07/04 5,041 8,656 (3,615) (26.4%) 09/14/04 8,121 14,425 (6,304) (27.9%) 09/21/04 4,467 6,748 (2,281) (20.3%) 09/28/04 5,143 5,988 ( 845) ( 7.6%) 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 10-07-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: MHK Dropped Puts: None Call Play Updates: CMI, GDW, GIVN, IR, KMRT, LMT, OSIP, PH New Calls Plays: None Put Play Updates: LLY, FLIR, SEPR New Put Plays: IVGN, WHR **************** 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: ***** Mohawk Industries - MHK - cls: 76.98 chg: -2.30 stop: 77.99 Yuck! MHK has reversed from Friday's bullish breakout over $80.00 to today's bearish breakdown under support at $78.00. We couldn't find any specific news for today's decline but we suspect it is sympathy pains from the 3.9 percent drop in the housing sector. MHK looks ready to retest the $75.00 level as support. Needless to say we have been stopped out at $77.99. Picked on October 03 at $80.35 Change since picked: - 3.37 Earnings Date 10/21/04 (confirmed) Average Daily Volume = 355 thousand Chart = 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 ******************** Cummins Inc - CMI - close: 73.87 change: -1.20 stop: 69.99 Shares of CMI did not escape the market-wide sell-off on Thursday but they didn't do too bad. The stock slipped about 1.6 percent on volume that was less than half the average, which means it was probably a lack of buyers more than an over abundance of sellers. Keep an eye on the stock. Shares could find support at $72 and $70 but we'd obviously prefer to see CMI bounce from $72. No change in our stop loss. Picked on September 19 at $70.99 Change since picked: + 2.88 Earnings Date 07/23/04 (confirmed) Average Daily Volume = 724 thousand Chart = --- Golden West Financial - GDW - cls: 113.49 chg: +0.04 stop: 109.95*new* GDW is holding up pretty well. On a day that most of the market turned lower GDW still managed to close in the green. A reader emailed in this morning when GDW was over $114 and asked if we still planned to exit near our suggested target in the $116 region. Right now given the current market environment our answer would be yes. If GDW reaches $115.50 or above we'd probably exit. Keep an eye on the $111 level. If GDW breaks $111 we're going to turn defensive. We are raising our stop loss to $109.95. Picked on September 30 at $110.95 Change since picked: + 2.54 Earnings Date 07/20/04 (confirmed) Average Daily Volume = 512 thousand Chart = --- Given Imaging - GIVN - close: 42.04 change: -0.36 stop: 37.00 There's not much happening in shares of GIVN the last couple of days. Then again that may be a good thing. The stock dipped earlier in the session (Thursday) but pared its gains by the close for a 36-cent loss. Overall the action over the last two sessions has been sideways so we're not complaining, especially today. If the stock dips consider buying a bounce from $40.00. Picked on October 04 at $41.26 Change since picked: + 0.78 Earnings Date 10/27/04 (unconfirmed) Average Daily Volume = 247 thousand Chart = --- Ingersoll-Rand - IR - close: 69.75 change: -0.44 stop: 67.49 Uh-oh! This looks like trouble. IR has not been able to hold on to yesterday's bullish breakout over the $70.00 mark. Granted today's 44-cent drop is relatively minor to the declines in the Dow Industrials it remains a warning sign. Readers can watch for a potential bounce from $68.00 but currently we would not suggest new positions until IR traded back above $70 and then again may be wait for IR to trade over $70.50. Picked on October 06 at $70.19 Change since picked: - 0.44 Earnings Date 10/21/04 (confirmed) Average Daily Volume = 1.2 million Chart = --- Kmart Holdings - KMRT - close: 87.75 chg: +0.53 stop: 84.99 Our aggressive call play in KMRT is holding up. Well, it may not be up but it's maintaining its trend of higher lows. The lackluster same-store sales data from the retail sector today was not very encouraging. We would not consider new bullish positions until KMRT traded back above the $90.00 mark. Picked on October 04 at $90.53 Change since picked: - 2.78 Earnings Date 08/16/04 (confirmed) Average Daily Volume = 2.7 million Chart = --- Lockheed Martin - LMT - close: 56.26 change: -0.05 stop: 53.50 Defense stocks were not able to dodge Thursday's market sell-off and LMT followed the DFI defense index lower. Fortunately, LMT was dragging its feet as shares slipped just 5 cents or 0.08 percent compared to the DFI's 1.25 percent decline. As long as LMT trades above $55.50 we're going to feel okay with bullish positions. If shares crack the simple 10-dma we're going to get cautious. Picked on October 01 at $56.01 Change since picked: + 0.25 Earnings Date 07/27/04 (confirmed) Average Daily Volume = 1.7 million Chart = --- OSI Pharma - OSIP - close: 62.00 change: -1.62 stop: 59.99 Hmmmm... what to do now? The BTK biotech index dropped 3.5 percent as investors did some profit taking in biotech giant Genentech (DNA) after the company announced earnings recently. The DRG drug index fell another 2.7 percent after PFE lead the group lower over concerns that Celebrex may also raise the risks of heart disease. OSIP has been weathering much of the storm with only minor sideways chop. That was until today. Thursday OSIP slipped 2.5 percent to test very minor support at $62.00. We suspect that OSIP could retest the $60.00 region as support. Therefore we would not suggest any new positions until we see OSIP dip toward $60 and begin to bounce. Watch those stops. Ours is immediately under $60.00. Picked on October 03 at $63.45 Change since picked: - 1.45 Earnings Date 08/10/04 (confirmed) Average Daily Volume = 1.6 million Chart = --- Parker Hannifin - PH - close: 62.00 chg: -0.78 stop: 59.49 PH is a recent addition to the play list and shares soared to new highs at $63.90 today before finally succumbing to the market's downward slide. Volume today was very big and that's a concern because it looks like distribution. If this is a short-term top then PH should dip back toward the $60.00 level. We suggest patience. Readers can wait on the sidelines and look for PH to dip to $60 and then consider buying a bounce. Picked on October 06 at $62.78 Change since picked: - 0.78 Earnings Date 10/19/04 (confirmed) Average Daily Volume = 719 thousand Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Eli Lilly & Co - LLY - close: 59.56 chg: -1.91 stop: 62.51 Look out below! LLY slid another 3.1 percent and under performing the DRG drug index's 2.7 percent decline. Drug stocks took it on the chin again today after new reports surfaced that PFE's Celebrex drug may also increase risks of heart disease - the same risks that forced MRK to pull its Vioxx drug off the market. The news about Celebrex may or may not be true and PFE appears to have the studies to prove that Celebrex is safe. Whatever the case LLY joined the drug stock sell-off and fell through and closed under round-number, psychological support at $60.00 on heavy volume. This is the second time we've had an opportunity to take profits at our initial profit target of $60.00. We are suggesting readers do the same again today. However, we're going to keep the play open and target a move to $58.00-56.50. Picked on September 22 at $63.92 Change since picked: - 4.36 Earnings Date 07/22/04 (confirmed) Average Daily Volume = 3.1 million Chart = --- FLIR Systems - FLIR - close: 58.16 chg: -1.26 stop: 62.51 FLIR isn't the fastest moving stock but the downtrend is still intact. The stock spent the last few sessions trying to bounce back above the $60 level but failed. Today's 2.12 percent drop looks like a new entry point. Our one concern is the simple 100- dma just under $57. Our short-term target remains $55. Picked on September 29 at $59.35 Change since picked: - 1.19 Earnings Date 10/20/04 (confirmed) Average Daily Volume = 577 thousand Chart = --- Sepracor Inc - SEPR - close: 47.35 chg: -0.98 stop: 52.01 We would have liked to have seen a bigger and more negative reaction in shares of SEPR as the drug and biotech indices march lower today. Yet we won't complain about the 2 percent drop in shares of SEPR. The stock is back under the cloud of moving averages and is now testing minor support at $47.00. Our target remains the simple and exponential 200-dma's just north of $43. Picked on September 22 at $48.94 Change since picked: - 1.59 Earnings Date 07/13/04 (confirmed) Average Daily Volume = 1.8 million Chart = ************* NEW PUT PLAYS ************* Invitrogen - IVGN - close: 53.83 chg: -1.84 stop: 56.25 Company Description: Invitrogen Corporation provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery, and commercial bio-production. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery including functional genomics, proteomics, bioinformatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen is headquartered in Carlsbad, California and conducts business in more than 70 countries around the world. The company globally employs approximately 4,000 scientists and other professionals. (source: company press release) Why We Like It: Investor expectations are already diminished for IVGN because the company issued an earnings warning back in July when it reported its Q2 numbers. The stock managed to rally back to the bottom of its gap down in September but couldn't break into the gap. Now shares are sinking in a trend of lower highs and lower lows as the BTK biotech index begins to turn lower from overbought levels and the DRG drug index sinks under bad news from heavy weights like MRK and PFE. IVGN's breakdown under the $55 and $54 levels on Thursday looks like a new bearish entry point. Short-term technicals like the RSI and stochastics are negative and its MACD is in a new sell signal. We're going to set an initial target of $50.00 but we suspect that IVGN could trade lower. Suggested Options: We are going to suggest the November puts even though we do not plan on holding over the October earnings report. BUY PUT NOV 55 IUV-WK OI=244 current ask $3.50 BUY PUT NOV 50 IUV-WJ OI=662 current ask $1.45 Annotated Chart: Picked on October 07 at $53.83 Change since picked: - 0.00 Earnings Date 10/21/04 (unconfirmed) Average Daily Volume = 1.5 million Chart = --- Whirlpool - WHR - close: 59.03 change: -1.27 stop: 61.05 Company Description: Whirlpool Corporation is the world's leading manufacturer and marketer of major home appliances, with annual sales of over $12 billion, 68,000 employees, and nearly 50 manufacturing and technology research centers around the globe. The company markets Whirlpool, KitchenAid, Brastemp, Bauknecht, Consul and other major brand names to consumers in more than 170 countries. (source: company press release) Why We Like It: We like WHR as a put candidate for its relative weakness. The stock has been slowly sinking for months and after several weeks of consolidating sideways it looks ready for another leg down. That's especially true with the three-week trend of lower highs and the breakdown under support at $60.00. Investors are worried that the rising cost of steel and raw materials are going to impact earnings from appliance makers like WHR. While WHR has recently settled legal action with its steel supplier Ispat shares of WHR are still sinking. The P&F chart on WHR is bearish with a $53 target. We're only going to target a drop toward $55, where WHR appears to have potential long-term support. Suggested Options: We are going to suggest the November puts even though we do not plan to hold over the October 20th earnings report. BUY PUT NOV 60 WHR-WL OI= 575 current ask $3.00 BUY PUT NOV 55 WHR-WK OI= 182 current ask $1.00 Annotated Chart: Picked on October 07 at $59.03 Change since picked: - 0.00 Earnings Date 10/20/04 (confirmed) Average Daily Volume = thousand Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. 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 10-07-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: A handful of bearish candidates Traders Corner: SUBSCRIBER MAIL + FLAG PATTERNS Combos/Straddles: Make It Your Business To Make It Your Business ********** WATCH LIST ********** A handful of bearish candidates ___________________________________________________________________ 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. ___________________________________________________________________ Zimmer Holdings - ZMH - close: 75.70 change: -2.40 WHAT TO WATCH: We came very close to adding ZMH to the play list tonight as a put candidate. The stock has been struggling under resistance at $80.00 and its simple 100-dma. for more than two weeks before the recent declines. Now ZMH has broken through its simple 200-dma and looks poised to breakdown through the $75.00 level. We decided to wait because the $75 level is underpinned by its simple 50-dma and the exponential 200-dma. Plus, its P&F chart is still bullish. However, in contrast the MACD is bearish with a fresh sell signal. Watch for the breakdown under $75 and target $70. Chart= --- Baush & Lomb - BOL - close: 65.14 change: -1.60 WHAT TO WATCH: It looks like trouble for BOL shareholders. The stock is looking tired and it just broke down through technical support at its simple 50-dma and it looks ready to break down under round-number, psychological support at $65.00. Should this occur look for BOL to retest technical support at its simple 200- dma currently near $61. Chart= --- Coca-Cola - KO - close: 40.12 change: -0.78 WHAT TO WATCH: This may be a bearish entry point on KO again. The stock has been struggling with the $41 level lately and today's decline looks like a failed rally at $41 and a bearish engulfing candlestick. If the Dow Industrials continue to sink then KO may not only follow but help lead the way lower. The P&F chart is bearish with a $26 target. Chart= --- Apollo Group - APOL - close: 71.90 change: -2.05 WHAT TO WATCH: The recent bounce back above the $75 mark is failing and APOL has now broken minor support at the $72 level. We feel that readers can keep APOL on their personal watch list for a drop under round-number, psychological support at $70.00. The P&F chart is currently bullish but a drop under $71 should actually reverse that into a new sell signal. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- MTB $99.25 +0.59 - We're still watching MTB for a breakout over $100. Today's move over $99 produced a new high! GENZ $52.39 -1.74 - GENZ is looking very similar to the BTK biotech index. Both are rolling over from overbought levels. GENZ could test the $50 level soon. ************************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 ************** SUBSCRIBER MAIL + FLAG PATTERNS By Leigh Stevens lstevens@OptionInvestor.com OIN SUBSCRIBER - "How much of Friday's action (10/1/04 strong advance) in the market do you figure was just end of the quarter window dressing? It seems that the end of a month and beginning of another when fund managers put new money to work has had a positive impact on the market, especially with low volume levels. The end of a quarter, the combination of new money going to work and window dressing by fund managers would have a greater impact on the move in the market, at these volume levels. I could also see how this might spook some shorts into covering." RESPONSE – It's difficult to quantify how much of this past Friday's strong rally, in the face of record high oil prices, was due to buying on the first day of the new quarter - "window dressing" of course refers to portfolio managers buying in the last day of the quarter to "dress up" their portfolios. It seems that yes, buying possible most related to the first day of a new quarter, helped set off a scramble to cover shorts, especially as prices took out the prior rally high - but again, it's nearly impossible to quantify these things or entirely understand the rationale sometimes of professional money managers. There were some bullish reports on the chip cycle also. We can look at things like the block trading activity to see if there was greater than average institutional activity to see how much fund influence there was. Institutional fund managers do tend to follow each other into the market. Not wanting to under- perform the market (averages) compels them to put more money to work in equities when there are large surges like this last one. As they take a long view, things like near-term political uncertainty, sharp increases in energy prices and the like may at times take a back seat to more objective things like assessment of earnings growth trends and potential. There could have been a big buy program being worked - "buy program" here meaning, that some monster fund decided to simply up its percentage in stocks (reduce cash) and a broker-dealer was buying blocks of stocks during the day and toward the close to get this done for such a fund or funds. As you say, in a low volume situation, this tends to be magnified. The first day of new quarter could have some favor for timing in carrying out such a buy program(s). With tech underweighted in many portfolios and with the JP Morgan report on their thinking that the semiconductor stocks/business had bottomed out, Nasdaq had the biggest move. In a certain way, I like unexpected action, as I can not only be WRONG! but learn from the times when the market just does some- thing rather unexpected or not easily explained by the "known" fundamentals - this takes me back to see perhaps what I "missed" in technical patterns and indicators if I didn't see it coming. The technical aspects will usually highlight that the market is ready to rally, but won't tell you "why" - this often comes out later so to speak. OIN SUBSCRIBER - "You said in your last Sunday Index summary (10/3/04) that the way it looked to you, both oil and the market would go up I think you said from 50 to 52 next. How did you predict oil to keep going up when 50 seemed so high already? I also thought that if oil kept going it would have to bring stocks down. Oil touched 53 today and which finally seemed to push stocks down." RESPONSE: FLAG PATTERNS - Oil was an easy prediction I guess based on the bullish flag pattern that I was seeing on the November futures chart – actually, it had a projection to around $54 but 52 was an easy and snap answer. This leads me into a discussion about flag patterns, which we see on stock charts a lot and somewhat less on index charts – we also have to loosen up our interpretation of what a flag is. A flag pattern is basically a certain type of minor consolidation of the current trend that, when outlined on a bar or candle chart, traces out a slope that is in the opposite direction of the trend. A flag, sometimes also called a pennant when the flag gets triangular, can be bullish OR bearish; Bull Flags, Bear Flags. Bull flags are when the trend is up or has just started up, followed by a pullback when prices fall some. Such a counter- trend decline when outlined has the appearance of a flag that slopes downward; i.e., a "bull flag". When the trend is down, a consolidation will tend to rebound a bit, forming an upward sloping flag; i.e., a "bear flag". This question started about my prediction of $52 oil when it was at 50, so here's that chart below, which has a bull flag outlined. A flag pattern is usually (not always) considered to have started if there is first a spurt, a bigger than usual move – this makes the so-called "flagpole". Next comes a pullback of a few days; or any trading intervals depending on the type chart; e.g. hourly, weekly, etc. Drawing two parallel lines through the highs and lows tends to outline the shape of a DOWN-ward sloping flag. To complete this bull flag, a next rally comes along that pierces the upper line of the flag – the next advance will often then be equal to the distance of the flagpole (first short spurt), added to where the rally penetrated the top line of the flag. This gives the chart objective (above) of $54 on November Crude Oil. Flag patterns, are pretty common in the commodities markets and have a lot of predictability. That is, they signal reliably that the trend is continuing. Valuable to see the next price swing coming! A Bear Flag example – Several consolidations that looked like flag type patterns are shown below on the S&P 500 (SPX) chart in late-99/early 2001 – You'll notice that two of these flag patterns have the initial spurt that looked a lot like a flagpole. However, flag patterns that followed, did not look quite like the others. These OTHERS, while lacking an initial spurt, fit the definition of a flag as – which is the MAIN thing – the outline of the highs and lows form a pattern that slopes AGAINST the direction of the trend that preceded the flag formation. Again, its handy to see when rallies are counter-trend rallies only and the next move of size and strength is likely to be DOWN. And, to see when declines are counter-trend declines and that the next move of size and strength is likely to be UP. This is what flag patterns show us often enough to trade off them and several flags, both bull and bear variety, are outlined on two bellwether Dow stocks below; General Electric (GE) and Citigroup (C) – I haven't any commentary about specific flag patterns except to just outline some them, and they can be common patterns that give a sense of seeing how the trend is unfolding and to trust the trend. Not for nothing the saying the "trend is your friend". Note, in the GE chart below that the flag that formed after the first decline had the UP-ward sloping bear flag pattern and note the big fall that came after this bear flag consolidation. INTRADAY CHARTS - You can see flag patterns forming all the time on intraday charts. The one below is of the last 30 days of so of hourly trading in Citigroup (C) - The last thing to say in this small talk on flag patterns here, is about pattern failures - in plain English this is about when patterns DON'T WORK – when the thing zigged instead of zagged. The OEX chart below, which is up to date as of the 10/7/04 close, shows a possible pattern failure setting up. By pattern "failure" is meant that the breakout move doesn't occur in the expected or anticipated direction and the rally "fails" – The thing about direction is important. The next good-sized move out of or after a flag pattern forms, is that the move should be in the SAME direction as the dominant or recent trend. When prices start breaking lower, like the OEX last day shown on the above chart, a definite possibility now is looking like another downswing. OR – If the rally resumes within a short time (e.g., 1-2 days) and prices go on to penetrate and rise above prior highs at the top end of the flag, there's of course no rally failure. I doubt it! It looks to me like this Index is headed lower. The combination of the break below the flag pattern that was forming and the possible double top looks bearish - stay tuned however! **************** Combos/Straddles **************** Make It Your Business To Make It Your Business By Mike Parnos Buy Low – Sell High. Sell High – Buy Low. Couch Potato Trading Institute words to live by. Sounds easy, doesn’t it? Well, there’s a little more to it than that. Buy what? Sell when? Who’s high? What’s low? A few years ago, thousands of people left high paying jobs in the hopes of making a living by trading in the stock market. Little did they know . . . And that “little” is why they’re now working their way back up the corporate ladder one cheeseburger at a time. Can you make a living trading? Of course you can, but you have to treat it like a business. Before you can properly invest – whether you’re trading options, stocks, baseball cards or Barbie Dolls – you need to invest in yourself. You need to prepare yourself mentally, physically, and financially. It takes commitment! What Do You Need To Succeed? 1. EDUCATION: Jethro Bodine’s dream was to be a brain surgeon or a fry cook. We’ll never know if he succeeded, because the show was cancelled. Well, each endeavor takes its own form of expertise. Trading is no different. The fact that you're reading my column is a giant step towards that end. I have discussed everything, from aggressive trading strategies to conservative trading strategies (our favorite) to technical analysis to fundamentals -- and I've shared my opinions with you (I'm not shy). But, it takes more than just reading the information. You have to be able to implement it. 2. INFORMATION: You need to have access to the Internet for a variety of reasons. You need a computer with sufficient speed and RAM. A DSL or cable modem is best, but you can get by with a dialup modem. The Internet (not CNBC or your barber) is your primary source of information. Without information from Yahoo Finance (or any number of similar sites) information, you’re flying blind. It’s not healthy. Just ask Ricky Nelson and John Denver. a) Ideally you should have streaming stock and index quotes available. Most decent brokerages now offer that at no charge to their clients. Some Internet sites offer 15-minute delayed quotes, but that’s not good enough. The markets move much too fast. b) Often, the streaming real time quotes also include daily and real time intraday charting. If not, there are a number of free Internet sites that will give you 15-minute delayed daily and intraday charts. They are interactive charts that can, upon request, show you different time frames, chart sizes, various indicators, moving averages, volumes, etc. For a small monthly fee, you can upgrade to their real-time charts. There are many quote and charting services available. ESignal is my personal favorite -- and it's reasonably priced. Check out www.eSignal.com for more information. For the most sophisticated stock traders, NASDAQ Level II quotes and tick-by-tick charting can help with entering and exiting trades. Some brokerages even offer free Level II quotes and charting services to very active traders 3. BROKERAGE ACCOUNT: You will need to have an online margin brokerage account. Accounts where you have to talk to a human (?) to place your order will invariably cost you money. Why? Because by the time you dial the phone, get connected to a broker (or customer service representative), explain what you want to do, get a quote, have him repeat it back to you, and place the order, the underlying could have moved a point in either direction. In that extra minute or two, the information you just received on the phone may now be obsolete and useless. Since we trade credit spread strategies, it's important that you find out the maintenance policies of the brokers you are considering. On Iron Condor positions, the broker should hold maintenance on ONLY ONE SIDE -- which allows for a more efficient use of your trading dollars. Ideally, an on-line account will have software that will show you the bid and ask prices of an option on ALL exchanges on which the option trades. As you know, the prices for an option can vary from one exchange to another. By seeing the different exchange, it enables you, with a simple mouse-click, to send your order directly to the exchange offering the best price – instantly. If you send your limit order at the bid or the ask, it will likely be filled in a matter of seconds. No phones, no fouls. When you open your account, you’ll need to get approval to trade options. The levels of approval go from novice to professional. The more experience you have, the higher approval level you’ll get. The brokerages do this to cover themselves. If you lose the family jewels trading options, you won’t be able to sue the brokerage firm to get them back. If you’re relatively new to options, you’ll probably get approval to sell covered calls and the straight purchase of puts and calls. If you have more experience, you’ll be able to trade spreads. The highest approval level will allow you to sell uncovered options. 4. MONEY: If you’re planning to treat trading, whether it’s stocks or options, as a business, your money and your positions represent your inventory. They say, “It takes money to make money.” It wouldn’t be a cliché if it weren’t true. How much money is necessary to start your business? It depends on what strategies you want to use. Do your strategies involve stock purchases? If so, then you’ll need enough to subsidize the purchase (or half the purchase on margin) of the stocks. If you’re going to simply buy calls and puts, you need enough to cover the purchases of the puts and calls. For spread trades or trading naked (uncovered) options, the brokerage will likely require an account minimum. When spread and uncovered option trading, if you’re going to do it properly, you’ll need to have cash or other marginable securities (stocks, mutual funds, bonds, CDs, etc.) in your account to enable you to make the trades and adjustments in your positions. Brokerages have different policies in determining what securities they accept as marginable. 5. TIME: You’ve got it. Now, you just have to prioritize it. If trading is your business, you’ll have to do research on what to buy, when to buy it and what’s the right price. That takes time. 6. EMOTION: You can’t afford it. It has no place in the business of trading. Cry at sad movies, not over spilled milk or lost money. If you properly followed your trading rules, a loss is just a cost of doing business. Nothing more. Keep your emotions, along with your ego, on a short leash. You’ll have good streaks and bad, but, if you use common sense, and know every aspect of your business, you can do just fine. 7. DESIRE: You have to want it badly enough. You'll be amazed, if you want something bad enough, by the number of sacrifices you’re willing to make in order to achieve it. You’ll be surprised how far desire will take you. Knowledge is Power If you want to trade for a living, you’ll spend the time to learn the strategies. You’ll find the strategies that are most comfortable and learn them inside and out. You’ll know what to do when the strategy works or if it goes against you. You’ll know the adjustments you can make and when to make them. You’ll know how to research and recognize opportunities and what strategies to use to take advantage of them. Those are the things we try to teach in my columns and at my seminars. It’s there for the learning. The Secret of Survival It comes down to survival. If you want to stay in business, you must concentrate on making good trades. You have to protect your inventory. How? Self-discipline. It’s a rare commodity (not like pork bellies). You can’t buy it at Office Depot or Victoria’s Secret or Dairy Queen. Either you have it, or you don’t. It’s like your money. Either you’ll have it, or you won’t. ___________________________________________________________ Position Adjustment In our QQQ ITM Strangle, we rolled out our Oct. $34 call to the November $34 call for a $.25 credit. We also rolled out the Oct. $37 puts to the November $37 puts for a $.45 credit. Total credit of $.70 ($700). Also, it should be noted that, I did not do a great job of rolling out a few times during the life of this trade. Consequently, for a long time, we have found ourselves with our short positions deeper in the money than we would like. As a matter of fact, we prefer to be much closer to where the QQQs are trading -- and even a bit out of the money if possible -- even if we have to sacrifice some premium along the way for the sake of a more advantageous position for future rollouts. ___________________________________________________________________ OCTOBER CPTI HYPOTHETICAL POSITIONS October Position #1 - SPX Iron Condor - 1130.65 We sold 10 SPX October 1160 calls and bought 10 SPX October 1175 calls for a net credit of about $1.75 ($1,750). Then we sold 10 SPX October 1075 puts and bought 10 SPX October 1060 puts for a credit of about $1.30 ($1,300). Total net credit of appx. $3.05 ($3,050). Maximum profit range is 1075 to 1160. Maintenance is $15,000. Position #2 -- RUT Iron Condor - 582.60 We sold 10 RUT Oct. 610 calls and bought 10 RUT Oct. 620 calls for a credit of about $.65 ($650). Then we sold 10 RUT Oct 530 puts and bought 10 RUT Oct 520 puts for a credit of about $.55 ($550). Total net credit of about $1.20 ($1,200). Maximum profit range is 530 to 610. Maintenance is $10,000. Position #3 - OEX Iron Condor - 542.28 We sold 10 OEX October 520 puts and bought 10 OEX October 510 puts for a credit of about $.70 ($700). Then we sold 10 OEX October 565 calls and bought 10 OEX October 575 calls for a credit of about $.50 ($500). Total net credit of about $1.20 ($1,200). Maximum profit range is 520 to 565. Maintenance is $10,000. Position #4 - BBH Iron Condor - $138.85 We sold 10 BBH October $150 calls and bought 10 BBH October $160 calls for a credit of about $.95 ($950). Then we sold 10 BBH October $135 puts and bought 10 BBH October $125 puts for a credit of about $.55 ($550). Total net credit of about $1.50 ($1,500). Maximum profit range is $135 to $150. Maintenance is $10,000. Be careful. Position #5 -- SPX "Sure Thing" Strategy - 1130.65 Formerly called the "Credit Spread Boogie." The market seems to be in an uptrend since mid-August. Let's go with the flow until the market tells us otherwise. We sold 3 SPX 1120 October puts and bought 3 SPX 1095 October puts for a net credit of about $6.50 ($1,950). The initial maintenance is $7,500. When the SPX traded in the low 1100s, it was time for an adjustment. We closed out the original bull put spread for $13.20 ($3,960). We then opened a seven-contract position of a 1115/1140 bear call spread, taking in $6.35 ($4,445). That means we've taken in some extra premium. Our new profit potential is $2,435 -- if SPX closes below 1115. This one's going to be exciting. ANOTHER POSITION ADJUSTMENT: Well, I said it was going to be exciting. This is one of those times where we are "tested" -- at least our brokerage account is going to be tested as we are in the midst of getting whipsawed. The market did an about face and took off. What did it take off? It disrobed -- shedding its bearish persona and looking up. So we unwound our 1115/1140 7-contract bear call position at $13.80 ($9,660). We then put on a November 14-contract 1120/1095 bull put spread (coincidentally, right back where we started) at $7.00 ($9,800). The maintenance is getting pricey at $35,000. That's why this strategy is not for everyone. Our potential profit is still $2,435. ____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle – Ongoing Long Term -- $36.24 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. We rolled to the Sept. $34 calls and $37 puts, yielding $.45 or $450 for the cycle. For October we were again limited to a $.45 ($450) rollout. We rolled to the Sept. $34 calls and $37 puts for a total of $.70 ($700). Our new total credit is now $12,900. (See "Position Adjustment" description in column text) 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 – 542.28 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 August expiration was $8,390. In September we added another $975 for a new total of $9,365. New Zero Plus Positions For October Not a lot of credit available this month. October bull put spread 520/510 for credit of $.65 x 5 contracts = $325. October bear call spread 565/575 for another credit of $.65 x 5 contracts = $325. If all goes well, we'll be able to add $650 to our cash position. __________________________________________________________ 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, Options Therapist and 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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