The Option Investor Newsletter Tuesday 10-26-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Better Late Than Never Futures Markets: See Note Index Trader Wrap: Insurers breath sigh of relief Market Sentiment: Is the rally here? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-26-2004 High Low Volume Adv/Dcl DJIA 9888.48 +138.50 9888.48 9749.55 1.98 bln 2213/ 879 NASDAQ 1928.79 + 14.80 1928.80 1905.49 1.81 bln 1796/1275 S&P 100 531.69 + 7.69 531.60 524.00 Totals 4109/2154 S&P 500 1111.10 + 16.30 1111.10 1094.81 SOX 396.77 - 1.10 400.27 393.38 RUS 2000 577.61 + 5.94 577.99 567.32 DJ TRANS 3435.61 + 55.40 3437.83 3366.07 VIX 16.40 - 0.18 16.87 15.97 VXO (VIX-O)16.48 - 0.39 17.28 16.12 VXN 22.40 - 0.03 23.14 22.36 Total Volume 4,094M Total UpVol 2,854M Total DnVol 1,183M Total Adv 4498 Total Dcl 2469 52wk Highs 270 52wk Lows 121 TRIN 0.55 NAZTRIN 1.14 PUT/CALL 0.68 ************************************************************ Better Late Than Never by Jim Brown The historical end of October ramp finally appeared but the reasons remain far from clear. The Dow has been the laggard for weeks but today the blue chip index roared higher with a +138 point jump to almost regain the 9900 level. It is amazing we had sunk so far that a +138 point gain does not make it back to 9900 and a level that was support then resistance over the last two weeks. Nasdaq Chart SPX Chart Wilshire Chart The morning started off far different than it finished. The indexes dove at the open in anticipation of the Consumer Confidence number with the Dow retesting 9750 before the numbers hit the wires. The Consumer Confidence came in less than expected at 92.8 with a decline on almost all internal components. The magnitude of the declines were minimal on each internal component but the forward looking views were the most telling. Most consumers are backing away from a potential home or major appliance purchase and feel business conditions and employment will be worse six months from now. Only autos showed an increase in purchase expectations and that was due to the new model year and the very strong incentives now being offered for year end inventory reductions. This was the third consecutive month of declines and this is the lowest level in seven months. The high was 105.7 in July making today's number a -13 point drop in only three months. After the headline number was announced the markets rebounded off the lows on decent volume despite the worse than expected results. Traders claim the whisper number was far worse based on the negative campaign ads, mudslinging and the rise in energy prices. The drop was not as severe as the recent Michigan Sentiment and analysts expect the low interest rates will help buoy confidence once the election is over. Retail prices are still experiencing some deflation from excess inventory and are expected to rise but the elimination of apparel quotas should lower apparel prices after the first of the year. Bottom line is a continued decent environment for consumers as long as the Fed does not get carried away in Nov/Dec. Weekly Chain Store sales posted their second week of declines with a -0.6% loss which indicates the high gas prices are continuing to drag on consumer budgets. The index fell to the second lowest level since the beginning of April and has nearly erased the early October bounce. However the ICSC feels growth will improve for the entire month to something in the +3.5% range compared to only +2.4% in September. Somebody better buy a lot of Halloween candy very soon because October is about over. While the economics probably did not provide a large boost to the market the Marsh Mclennan news did. The extremely quick turnaround by MMC to the Spitzer claims has cooled the Spitzer attack. Spitzer has removed the criminal portion of the claims and said the problem can be handle on a civil basis. This removes the potential death sentence for MMC and by association several other companies. The board of MMC quickly addressed the problem and came up with a huge bundle of changes structured to make buyers, investors and Spitzer happy once again. Investors have moved back into the stock over the last three days based on changes being made and discussed and the calming of the Spitzer attack. MMC gained +2.45 today to $28.81 and well above the $22.75 low from last week. AIG was a major winner with a +4.23 gain. As a Dow component this equates to about +35 points of the Dow rebound. The AIG chairman is Hank Greenberg and the father of Jeffery Greenberg the CEO who resigned from MMC. The Dow also got help from GE after GE backed 4Q and full year estimates citing strength across all divisions. GE rose +0.73. Also helping were CAT +1.07, HD +1.00, BA +0.98, AA +0.98. IBM also rose slightly after authorizing a $4 billion stock buyback. Despite the gains by the major insurers, AET +4.49, ATH +3.84, CB +4.56, CI +3.69, WLP +4.67, there is another lion prowling the woods. Connecticut Atty General Richard Blumenthal confirmed he had issued 35 subpoenas to insurance companies and brokers who operate in his state. Anthem was the headliner for this effort but ATH downplayed the event saying it was not material to their business. Bloomenthal said he was working with his counterparts in other states to sift through not only property and casualty but also health, auto and employee benefits. The wide net approach is sure to trip over some more practices they feel are contrary to the public good. Hopefully the fear has already been seen in the boardrooms and when any problems are found there will be a swift response. Given the cash cow that could be milked by aggressive states currently in financial stress the odds are very good there will be some heated discovery and the insurance companies will eventually pay. The Dow rebound this morning may have pulled it out of danger for making the history books. At the open the Dow had lost -2.3% for the month, more than any October since 1997. The +1.4% one-day jump erased more than half of that drop for the month. The key question is obviously how long will it last? With 9900 resistance looming overhead and 9950 almost as strong there is going to be some potholes in the road. However this is October and this is the week that should see a strong rally. At least in normal years we could expect a rebound from the October lows to set us up for the Nov/Dec year end run. The Dow actually pegged the pattern almost to the point with Monday's drop to 9700. The downtrend since February was looking for a lower low and 9700 was the earliest potential rebound point once the August lows at the 9800 level was broken last week. Dow Chart The Nasdaq was not as lucky. A couple of high profile warnings from FLEX and SLAB and the SOX was knocked for a loss that almost took the Nasdaq down with it. FLEX dropped -$1 after it said profits would be below prior analysts estimates on weaker than expected sales. While that warning hurt the market more than it hurt the FLEX stock price the damage from SLAB was much more drastic. SLAB was slammed to a -6.56 point loss after warning that high inventory levels and cautious customers had turned the outlook "extremely murky" according to one analyst. SLAB said they expected the current inventory excess impacting the entire sector to take time to work itself out. SLAB expects Q4 sales to fall to $95 million from prior estimates of $125 million. That slash in outlook knocked three times that amount at -$370 million off the market cap for SLAB. DBS and FB downgraded the company to inline levels making the last six ratings changes all downgrades on SLAB. It seems the analyst community has turned sour on SLAB. The challenge was not the downgrades to FLEX/SLAB but the impact to the markets. The SOX clung to support at 395 and tried several times to rally to no avail. The SOX closed flat at -1.10 at 396. The lack of SOX support for the Nasdaq kept the Nasdaq from joining the Dow party and held it to only a +7 gain at 1920 until the closing spike. The closing spike was due to a couple buy programs on the S&P and the Russell which pushed the Russell to a three week high at 577.63 and over strong resistance. The result was a Nasdaq that moved right back into the middle of its recent range (1900-1950) at 1927 and a +15 point gain. Last week the chip stocks could do no wrong in the eyes of investors. Of the 20 or so chip stocks reporting earnings one analyst said 19 either missed estimates or guided lower. Yet the SOX rallied off its 375 low to a high of 411 last Thursday. So what changed? The reason for the SLAB warning was exactly the same as the rest but the market timing was different. Last week you could not give away insurance stocks and huge amounts of money was flowing into sectors not related to insurance. Once the get out of jail free card was played by Spitzer that cash suddenly saw returning value in insurance and weakness in chips for Q4/Q1. As you can tell by the gains in the insurance stocks I reported above the funds were rushing back into the sector and away from techs they loved last week. Why? Insurance stocks were suddenly undervalued repositories for excess cash ahead of the fund year end on Friday. Those funds wondering what to do with cash generated from the portfolio rebalancing over the last three weeks suddenly decided Chubb, AIG, AET, HIG and CI were better investments at their current valuations than chip stocks where 19 of 20 had warned. Another factor sending the indexes higher was the AT&T Wireless sale to Cingular. According to futures traders the close of the deal produced a huge index disparity in the S&P-500. S&P dropped AWE from the S&P-500 and added CIT. AWE had a market cap of $41 billion and CIT only $8 billion. This meant index funds had to buy the index equivalent $33 billion of other S&P stocks to make up for the reduction to the overall market cap loss in the S&P. Rick Santelli said that about 12,000 S&P futures contracts would need to be bought to cover the changes. Obviously the S&P got a much needed shot in the arm and the rebound in insurance stocks definitely did not hurt. I am sure you are thinking the same thing I am. What does that mean for tomorrow? Based on the procrastination factor I would expect more S&P buying tomorrow. I really doubt that every fund that needed to make the change did it today. The Justice Dept did not make the announcement until 3:26 pm on Monday and there were some qualifications. S&P did not announce until 5:46 PM on Monday what changes would be made to the various indexes. This means funds could not make changes until today and just given the enormous amount of money to be shuffled and the number of funds needing to make the change the odds are very good we have not seen the last of it. After setting the stage I suggest we look at it from the bears point of view. Oil closed over $55 again and is moving higher overnight. The S&P closed at 1110 which is just below strong resistance at 1112 where the 50dma and 100dma converge. That resistance won't matter if funds still need to buy billions in S&P stocks. The tech sector did not join the party despite the S&P being better than 25% weighted in tech stocks. That may change tomorrow once fund traders are shocked but the big gains in some non tech stocks. Non-techs may look suddenly over valued and techs may be combed over once again for bargains. The calendar is right for more buying as funds put the finishing touches on their portfolios for year end. The calendar is also wrong for a continued rally based on the current election surveys. With the election still a dead heat according to the surveys there are some other sources predicting a Kerry victory with the University of Minnesota releasing its latest projection on the election saying that Bush has less than a 30% chance of being reelected. The missing 350 tons of explosives made the news all afternoon and the blame is being placed on Bush despite him not even knowing it was there. Late news today suggests a setup by Dr. ElBaradei in an effort to discredit Bush ahead of the election. The IAEA Director General Dr. Mohamed ElBaradei is no friend of the Bush administration and releasing this news the week before the election could be payback. For whatever reason it was released this week it is not doing the Bush campaign any good. This causes even more confusion for investors with only four trading days until the election. The combination of these events suggests more confusion in the markets but a potential upward bias from the S&P changes. The Nasdaq has room to run and the S&P could break 1115 if the fund shuffling continues. The Dow has the biggest challenge at 9900 and 9950 but a textbook support low is in place at 9700. This could be all the bulls need to justify continued buying. Were it not for the election I would bet we close higher on Friday than we did today. However, the election mudslinging on both sides and the closeness of the race will continue to keep the market outcome in doubt. Fortunately October and the election will be history in five trading days and we will be free to trade on fundamentals once again. That may have it's own set of problems but at least it will be different than the ones we are facing this week. Enter Passively, Exit Aggressively. Jim Brown Editor *************** FUTURES MARKETS *************** Futures wrap is not emailed due to the excessive number of charts. It may be read on the website at this address. http://www.OptionInvestor.com/indexes/futureswrap.asp ************************Advertisement************************* Get your FREE weekly charts of the NASDAQ! Hot Stix’ stock market report reveals simple, powerful strategies for profiting from the QQQ - whether down or up! http://www.hotstix.com/public/weekly.asp?aid=755 ************************************************************** ***************** INDEX TRADER WRAP ***************** Insurers breath sigh of relief Despite an intra-day turnaround in oil, with December Crude Oil futures (cl04z) 55.17 +1.15% closing up 63 cents ahead of tomorrow's weekly inventory data, the major indices staged an impressive rebound as one cloud of uncertainty regarding some insurers was put to rest. The S&P Insurance Index ($IUX.X) 290.27 +5.31% as well as the HMO Index ($HMO.X) 921.87 +5.02% were partially reflated, where more than likely, sector bears rushed for cover after New York Attorney General Eliot Spitzer said he would not seek criminal prosecution of Marsh & McLennon (NYSE:MMC) $28.87 +9.27% after the company agreed to name a new CEO. Dow component American International Group (NYSE:AIG) $60.33 +7.54, which Eliot Spitzer's office has subpoenaed, jumped $4.23 on the session, but well off its $67-level of trade found as recently as October 14, when insurers became a greater focus of the New York Attorney General. S&P 100 Index (OEX.X) 531.69 +1.46% components, which also include AIG had health insurer Cigna (NYSE:CI) $63.50 +6.16%, property/casualty insurer Allstate (NYSE:ALL) $47.61 +1.94% and diversified insurer Hartford Financial (NYSE:HIG) $58.74 +6.5% gaining on the session. Allstate (ALL) is not a company that had been reported as a primary focus of the NY AG. NASDAQ-100 Index (NDX.X) 1,422 +0.66% component and health insurer First Health Group (NASDAQ:FHCC) $15.92 +4.05% rose 62 cents. First Health currently in talks to be acquired by Coventry Health (NYSE:CVH) $39.60 +3.01%. The bottom line on many of the insurance stocks that had been under heavy selling pressure in recent weeks saw relief today, where it would appear that as long as company executives show a willingness to cooperate with the NY Attorney General, then there's a good chance criminal prosecution of the COMPANY itself can be avoided. Most investment houses tended to shy away with bullish calls of the large underwriters, as the market doesn't know what the size of fines will be. One could begin to think that if the worst is over, then recent lows for the IUX.X (270) and HMO.X (860) should be the important determiner. U.S. Market Watch - 10/26/04 Close Homebuilders built on Monday's gains, surging back above their rising 50-day SMA (628). Pulte Home (NYSE:PHM) $54.52 +5.86% warned analysts that their 2004 and 2005 profit projections were to low. Earlier this month, Pulte cut its current quarter forecast after its Las Vegas operations tanked when aggressively raised prices scared off potential buyers. That sent the stock's price tumbling from around $62 per share and had the DJUSHB retreating from the 660 level. Market Snapshot / Internals - 10/26/04 Close A reversal for insurers gives the NYSE a greater price lift than the NASDAQ, while the more beaten down INDU/SPX/OEX out gained the RUT.X and QQQ, which had been relative strength performers during the "insurance scandal." I'll make note that the Market Volatility Index (VIX.X) 16.46 was relatively steady all day. Take note of this as I will quickly touch on current VIX.X readings and tie in with SPX.X 30-minute interval bar chart later. TRIN, which sat at its DAILY S2 for the better part of the session, suggests today's trade was all about stocks and volumes were rather brisk. As of last night's close, daily volume was running an average of 1.47 billion shares per day at the NYSE and 1.69 billion per day at the NASDAQ. NH/NL ratios try to stabilize again, but remain in a bearish leadership state. I think tomorrow's "oil trade" lies in the balance. Pivot Matrix - Same NSDAQ/QQQ resistance correlations tomorrow, that were present in last night's wrap. The semiconductor's digested some more "bad news" with Silicon Laboratories (NASDAQ:SLAB) $27.88 -19.04% a casualty. I'm going to make the case that last night's Spitzer news and today's trade now has the MARKET fully compensating, or believing there will be no insurance companies going out of business under the scenario of criminal wrongdoing. At least, criminal wrongdoing that can't be settled out of court with a pretty hefty fine. S&P 500 Index (SPX.X) - 30-minute intervals I'm showing a 30-minute chart of the SPX.X, with QCharts' calculated WEEKLY Intervals. As the SPX.X first broke below its MONTHLY Pivot 1,115, it was the stepped up allegations of wrongdoing by Mr. Spitzer that had the SPX falling below MONTHLY Pivot, and staying there for the last two weeks. Today, the SPX started out right at the 21-period SMA (thin pink) and with the help of 3 buy program premium alerts from 10:00 AM EDT to 10:20 AM EDT was able to gain to its WEEKLY Pivot of 1,103. One last buy program premium at 12:10-12:15 had the SPX clearing its WEEKLY Pivot. I went back and reviewed some notes from a Market Monitor Archive on 10/21/04 at 02:21:19 AM, when I was answering a trader's question regarding "what does it mean when you post sell program premium." In that post I made a record 8 different sell program premiums generated during the 10/20/04 and all activity was right around the MONTHLY S1 from 1,096.73-1,101.74. I could make the case, based on this observation, that the "insurance out of business" risk was removed today. Now... today, the VIX.X stayed very steady. See where I point to VIX.X 16.35? Other than yesterday and today, the most recent VIX.X reading at current levels was October 14, which equates to that SPX.X relative low. As I see it, ONE concern exists. That is OIL. With the Dow Transports (TRAN) 3,435.61 +1.64% closing at an all-time high, I have to think the OIL concern remains psychological. One UNCERTAINTY is Tuesday's election. Will the equity MARKETS be nervous into the weekend, ahead of the election? Answer: No, not if the SPX can hold above 1,098. December Crude Oil Futures (cl04z) - 30-minute intervals There are two economic reports due out tomorrow morning, September durable goods at 08:30 AM EDT(consensus +0.5% versus August's -0.3%) and September new home sales at 10:00 AM EDT (1,150K versus August's 1,184K). Then at 10:30 AM EDT is when weekly crude oil, distillate and gasoline inventories will be released. I have not yet found an information resource to give an estimate of what traders are expecting. I usually get that information when the data is released. However, oil was lower at today's open, but with the above technicals, it was going to be hard to find any traders willing to go home short ahead of tomorrow morning's energy report and buyers snapped up oil under its WEEKLY Pivot. In recent weeks, the PATTERN has been that if oil closes above Tuesday's close on Wednesday (tomorrow) then oil tends to trade higher into the Friday close. For me to think equities can make a further move higher, perhaps SPX.X WEEKLY R2, then oil is going to have to see a decline back near the $52.00 level into Friday's close. Based on today's trade, I'd at least need to see a 30-minute close below the WEEKLY Pivot, which is something oil didn't do today. Some of last week's energy statistic headline numbers that can serve as a quick reference tomorrow. For the week ended October 15.... Refinery inputs averaged 14.8 million barrels/day +280K bbls/day Gasoline production rose to 8.7 million barrels/day Distillate production up slightly to 3.7 million bbls/day U.S. crude oil inventories +1.2 million barrels in week. Gasoline inventories -0.7 million barrels in week. Distillate inventories -1.9 million barrels in week. Jeff Bailey **************** MARKET SENTIMENT **************** Is the rally here? - J. Brown There have been a lot of traders waiting and watching for the end of October rally in stocks. You can bet that more than a few of them are hoping that today's 138-point gain in the Dow is the beginning. There are probably a few more hoping or speculating that today could be the beginning of the widely-expected post- election fourth quarter rebound higher. It is certainly a possibility to consider. Most will point the finger at insurance stocks today if you're looking to blame someone for the bounce. The entire insurance sector soared higher after news hit of NY Attorney General Eliott Spitzer's decision to not file criminal charges against Marsh and Mclennan (MMC). The IUX insurance index added 5.3 percent and Dow-component AIG soared more than 7 percent and was the Dow's biggest gainer. The rally spread to the rest of the Big Board and soon almost the entire market was trading higher. Only semiconductors, disk drives, and gold stocks closed lower as evidenced by their respective indices. Bulls produced some big bounces in healthcare (HMO.X +5%), homebuilders (DJUSHB +3.4%), and airlines (XAL.X +4.3%). Overall market internals were very bullish. Advancing stocks outnumbered decliners 20-to-7 on the NYSE and 3- to-2 on the NASDAQ. Up volume was about four times heavier than down volume on the NYSE and only about 25 percent heavier on the NASDAQ. I feel like I should mention crude oil again and its rebound back over the $55 a barrel level but does it really matter? Oil didn't influence stocks today and it certainly didn't impact the transportation sector, which climbed right back toward five-year highs. On a different note there are probably some big-picture pundits out there pondering the implications, if any, of the SEC's vote on hedge funds today. The hedge fund industry is rumored to control upwards of $1 trillion in assets. The agency voted in approval of having hedge funds register as investment advisors. This would allow SEC examinations, force them to have and follow security compliance guidelines and provide more information in general. Tomorrow's economic reports are the durable goods orders and new home sales. Plus, we'll get the latest oil and gas inventory supply data. Wednesday is also another full day of Q3 earnings. Some of the oil/energy stocks reports are AHC, COP EOG, KMG, and POG. A few of the tech stocks reporting are ASKJ, JDSU and SIRI. Plus, we have a handful of other big names like BUD, BDK, NEM, NOC, BA, PG and UL. Tuesday leaves us with just seven days and only five trading days before the Nov. 2nd election. It wouldn't surprise me to see stocks rally into the election on the singular notion that the whole circus is almost behind us. But then that's probably not true. Such a razor-thin race probably guarantees the whole thing will be decided in court and we won't know the "winner" for days. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 9497 Current : 9888 Moving Averages: (Simple) 10-dma: 9883 50-dma: 10110 200-dma: 10264 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 1018 Current : 1111 Moving Averages: (Simple) 10-dma: 1105 50-dma: 1112 200-dma: 1119 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1301 Current : 1442 Moving Averages: (Simple) 10-dma: 1443 50-dma: 1411 200-dma: 1439 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 16.39 -0.19 CBOE Mkt Volatility old VIX (VXO) = 16.48 -0.39 Nasdaq Volatility Index (VXN) = 22.47 -0.23 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.67 841,443 566,655 Equity Only 0.58 705,920 406,927 OEX 0.84 22,756 19,085 QQQ 1.40 14,958 21,023 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 62.9 + 0.2 Bear Correction NASDAQ-100 49.0 + 2 Bull Alert Dow Indust. 50.0 - 0 Bear Confirmed S&P 500 60.2 + 0.6 Bear Correction S&P 100 59.0 + 1 Bear Correction Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.03 10-dma: 1.04 21-dma: 1.02 55-dma: 1.07 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 2063 1793 Decliners 745 1197 New Highs 135 91 New Lows 25 63 Up Volume 1672M 1047M Down Vol. 397M 728M Total Vol. 2089M 1803M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 10/19/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders continue to hedge their bets in the big S&P contacts and are nearing a dead heat between longs and shorts. Small traders remain mostly net bullish but have pared back their enthusiasm a bit. Commercials Long Short Net % Of OI 09/28/04 404,773 434,441 (29,668) (3.5%) 10/05/04 421,217 435,736 (14,519) (1.7%) 10/12/04 423,472 436,780 (13,308) (1.5%) 10/19/04 432,945 441,041 ( 8,096) (0.1%) 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 09/28/04 135,317 107,173 28,144 11.6% 10/05/04 137,210 114,489 22,721 9.0% 10/12/04 139,175 113,903 25,272 9.9% 10/19/04 147,148 124,827 22,321 8.2% 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 We see a similar picture in the e-minis. Commercial traders aren't making any changes. They remain net bearish and we have the same reading as last week. Meanwhile small traders have slowly grown more net bullish, which of course is a bearish contrarian indicator. Commercials Long Short Net % Of OI 09/28/04 226,020 420,714 (194,694) (30.1%) 10/05/04 248,190 476,608 (228,418) (31.5%) 10/12/04 258,457 517,805 (259,348) (33.4%) 10/19/04 264,860 531,541 (266,681) (33.4%) 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 09/28/04 262,501 68,255 194,246 58.7% 10/05/04 308,021 80,373 227,648 58.6% 10/12/04 309,720 62,502 247,218 66.4% 10/19/04 353,903 66,027 287,876 68.5% 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 trades have not moved much. They remain net bullish on the NASDAQ 100. Small traders upped both their longs and shorts and reduced their bearish posture a tad but remain strongly net bearish. Commercials Long Short Net % of OI 09/28/04 55,045 32,319 22,726 26.0% 10/05/04 55,640 32,872 22,768 25.7% 10/12/04 52,572 32,775 19,797 23.2% 10/19/04 52,630 31,940 20,690 24.4% 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 09/28/04 10,078 22,917 (12,839) (38.9%) 10/05/04 12,254 30,693 (18,439) (42.9%) 10/12/04 8,756 24,400 (15,644) (47.2%) 10/19/04 10,462 25,243 (14,781) (41.3%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders seem content to sit on the sidelines with out any big directional bets on the Industrials. Longs and shorts have remain pretty close to one another for a few weeks now. That's not so with the small traders. The latest data shows a big drop in short positions and the bias has turned bullish for the first time in weeks. Commercials Long Short Net % of OI 09/28/04 29,714 26,877 2,837 5.0% 10/05/04 27,498 25,772 1,726 3.2% 10/12/04 24,150 22,849 1,301 2.7% 10/19/04 25,385 24,213 1,172 2.3% 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 09/28/04 5,143 5,988 ( 845) ( 7.6%) 10/05/04 5,531 5,539 ( 8) ( 0.0%) 10/12/04 8,814 9,167 ( 353) ( 1.9%) 10/19/04 8,327 6,015 2,312 16.1% Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ************************Advertisement************************* Insiders are Buying these 6 Rocket Stocks. In the last few weeks, we have pinpointed insider buying on six stocks that have the potential to deliver stratospheric gains. Click here for our SPECIAL REPORT on these 6 stocks insiders are buying and why you should too. http://www.insidermoves.com/default.asp?aid=618 ************************************************************** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 10-26-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: GCI Call Play Updates: APC, FDX, SBUX New Calls Plays: LEH Put Play Updates: APOL 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: ***** Gannett Co - GCI - close: 82.27 change: +1.62 stop: 82.01 Heads up! GCI added another 2 percent on top of Monday's bounce to breakout over its simple 10-dma and close over the $82 level. The move has turned GCI's technicals strongly bullish again. Fueling the move higher was news that GCI's management had approved an additional $500 million stock buy back program. Combine that news with a sharp rebound in the markets and it's no surprise to see GCI trading higher. Fortunately, GCI never traded low enough to hit our trigger at $79.40. That means we're still spectators and not players. Today we're choosing to close the play unopened and look elsewhere. Picked on October xx at $xx.xx <-- see TRIGGER Change since picked: - 0.00 Earnings Date 10/12/04 (confirmed) Average Daily Volume = 876 thousand Chart = ************************Advertisement************************* Insiders are Buying these 6 Rocket Stocks. In the last few weeks, we have pinpointed insider buying on six stocks that have the potential to deliver stratospheric gains. Click here for our SPECIAL REPORT on these 6 stocks insiders are buying and why you should too. http://www.insidermoves.com/default.asp?aid=618 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Anadarko Petroleum - APC - close: 70.11 chg: +0.44 stop: 67.99*new* Oil and energy stocks were on the move again Tuesday and shares of APC rose 1.5 percent to close at another new all-time high. Technical oscillators remain positive and its MACD is extremely close to another new buy signal albeit at an overbought level. Remember that we do not want to hold this play over APC's earnings report on Friday morning so we are planning to exit just before Thursday's closing bell. We are going to raise our stop loss to $67.99. Picked on October 22 at $70.40 Change since picked: + 0.65 Earnings Date 10/29/04 (confirmed) Average Daily Volume = 1.6 million Chart = --- Fedex Corp - FDX - close: 88.61 change: +1.67 stop: 84.99 The Dow transports turned in a strong session with a 1.64 percent rally ending close to five-year highs on Tuesday. The group has been exceptionally strong with traders stepping in to buy the dip on Monday. FDX is performing its own rebound today with a 1.9 percent gain and a close back over the $88.50 level. Readers can choose to use this bounce as an entry point or wait for FDX to clear resistance at the $90 mark. Picked on October 21 at $89.45 Change since picked: - 0.84 Earnings Date 09/22/04 (confirmed) Average Daily Volume = 1.5 million Chart = --- Starbucks - SBUX - close: 50.51 chg: +0.85 stop: 46.95 The SBUX momentum machine continues. Traders bought the dip $49.50 again with its simple 10-dma acting as technical support. Now that the major indices are starting to bounce we can look for SBUX to resume its leadership role again. No change in strategy or stops at this time. Picked on October 17 at $49.47 Change since picked: + 1.04 Earnings Date 11/10/04 (confirmed) Average Daily Volume = 3.3 million Chart = ************** NEW CALL PLAYS ************** Lehman Brothers - LEH - close: 80.60 chg: +1.69 stop: 77.25 Company Description: Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high-net-worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private equity and wealth and asset management services. The Firm is headquartered in New York, with regional headquarters in London and Tokyo and operates in a network of offices around the world. (source: company press release) Why We Like It: The markets turned in a strong session on Tuesday and the broker- dealers took advantage of the bullish environment. The XBD broker-dealer index added 1.26 percent closed above technical resistance at its simple 200-dma for the first time since early May. The XBD has been consolidating under this resistance level for a while and now that it looks ready to really breakout and start a new leg higher we want to add one of the leaders in the group. LEH is one such leader. The stock's relative strength over the last couple of months compared to most of its peers has been impressive. Currently LEH is rebounding from the sharp dip a week ago with technical support at the simple 50 and 200-dma's below it. Tuesday's 2.14 percent gain places LEH back above the $80 level and poised to hit new relative highs. There is obvious short-term resistance at the $82 level but we don't think it will hold. Our immediate target is the $85 region. If you're really optimistic check out LEH's P&F chart, which points to a triple- digit price target. Suggested Options: Short-term traders can choose from Novembers, Decembers and January strikes. We're going to suggest the Decembers. BUY CALL DEC 75 LES-LO OI= 97 current ask $6.70 BUY CALL DEC 80 LES-LP OI=712 current ask $3.10 BUY CALL DEC 85 LES-LQ OI=481 current ask $1.10 Annotated chart: Picked on October 26 at $80.60 Change since picked: + 0.00 Earnings Date 09/21/04 (confirmed) Average Daily Volume = 2.0 million Chart = ************************Advertisement************************* SEE WARREN BUFFETT'S LATEST DISCLOSED STOCK PORTFOLIO Now you can follow the investment master's actual moves. To get a FREE report that details Warren Buffett's strategy and reveals his most recently disclosed, ACTUAL stock picks, Click HERE! http://www.bigmoneywatch.com/default.asp?aid=626 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Apollo Group - APOL - close: 66.75 chg: -4.20 stop: 72.01*new* All of the APOL bears can send a thank you-note to Piper Jaffray. The firm downgraded shares of APOL to "market perform" this morning and lowered their price target fro $90 to $65. This prompted the stock to gap down and close under recent support near $68. APOL is now trading at new lows for the year with volume twice the norm on today's decline. Now if we can see some follow through we'll be in good shape. Our target is the $60 region. We're going to lower our stop loss to $72.01. Picked on October 10 at $69.81 Change since picked: - 3.06 Earnings Date 10/05/04 (confirmed) Average Daily Volume = 3.3 million Chart = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* Trade Smarter Using the latest Insider Trades Is the CEO selling off? Has a key insider loaded up on shares before a big price jump? Find out now. Get your free download of Real Time insider trades: http://www.realtimeinsider.com/default.asp?aid=637 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 10-26-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Digital Movies to Mining and more! Spreads & Straddles: Insurance Shares Lead The Rally! Premium Selling Plays: Naked Puts & Calls Traders Corner: A basic look at Elliott Wave principles; part 1 ********** WATCH LIST ********** Digital Movies to Mining 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. ___________________________________________________________________ Pixar - PIXR - close: 76.96 change: -1.66 WHAT TO WATCH: Uh-oh! Three days ago shares of PIXR tried to breakout through the top of its trading range at the $82 level of resistance. That rally failed and PIXR turned lower on the session. Now PIXR has fallen three days in a row and broken through the bottom of its trading range on heavy volume. This looks like bad news and a bearish entry point. Traders need to be careful through as the $75 level could act as round-number support. Bears may want to target the $72 region but be aware that the 50 percent retracement of the August to September rally would be about $73.65. Earnings are expected on or near November 11th. Chart= --- Bear Stearns - BSC - close: 92.48 change: +1.69 WHAT TO WATCH: The XBD broker-dealer index has been consolidating under resistance at the 130 level for weeks. The XBD actually broke out over this level a few days ago but couldn't push through technical resistance at the simple 200-dma. Tuesday's broad market rally changed that. The XBD closed over the 200-dma for the first time since early May. Now BSC is bouncing sharply and looking bullish with another close over the $92 level. This could be a bullish entry point for a run toward $96 and probably the $100 region. Chart= --- Intl Business Mach. - IBM - close: 89.00 change: +0.57 WHAT TO WATCH: IBM announced today that its management had approved an additional $4 billion (with a B) for its stock buy back program. Shares tried to breakout over technical resistance at its simple 200-dma but failed. This was the second failure at the 200-dma in six days, which looks bearish. In contrast its P&F chart is bullish with a $97 target but it is noteworthy that the P&F chart is struggling with resistance at the $90 level as well. We're going to watch IBM for a breakout over $90 and consider any such move a potential bullish entry point. Chart= --- Phelps Dodge - PD - close: 88.10 change: +3.50 WHAT TO WATCH: Shares of copper miner PD soared today with a four percent rally charging toward bottom of the gap resistance near $88.50. While PD didn't actually break into the gap is closed near its highs and could do so tomorrow. Traditionally both the bottom and the top of a gap can act as resistance. That means PD has resistance at both $88.50 and again near $91.75. Technical traders may want to use a move over the top of the gap as an entry point and target the $100 level. More aggressive types can try and jump the gun with a higher-risk entry on a move over $90. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- GD $101.51 +2.05 - Defense giant GD continues to rebound from last week's lows and is now back over minor resistance at $101. This could be an entry point for a quick run toward $105. MTB $99.50 +1.50 - MTB is bouncing again. Short-term technicals are turning positive. Watch for a move over $100 or $102. MIDD $46.80 -1.37 - There are no options on MIDD and volume is very light but the stock continues to look like a bearish candidate. CME $165.70 -3.65 - CME reported earnings today and beat estimates by 5 cents. The stock dipped toward the $160 level before bouncing. We are watching to see if the $160 level will continue to hold as support. AMZN $33.83 -0.14 - Hmm.. it's interesting to see AMZN not participate in today's market rally. ************************Advertisement************************* SEE WARREN BUFFETT'S LATEST DISCLOSED STOCK PORTFOLIO Now you can follow the investment master's actual moves. To get a FREE report that details Warren Buffett's strategy and reveals his most recently disclosed, ACTUAL stock picks, Click HERE! http://www.bigmoneywatch.com/default.asp?aid=626 ************************************************************** ******************* SPREADS & STRADDLES ******************* Insurance Shares Lead The Rally! By Ray Cummins Stocks rebounded Tuesday with companies in the insurance sector among the best performers after New York State Attorney General Eliot Spitzer reported he wouldn't file criminal charges against Marsh & McLennan (NYSE:MMC). The Dow Jones Industrial Average closed up 138 points at 9,888 on strength in American International Group (NYSE:AIG), which surged over 7% and outpaced all blue-chip components during the session. The NASDAQ Composite Index was up 14 points at 1,928, despite losses in networking shares. The S&P 500 Index jumped 16 points amid buying pressure in construction, retail, steel and automobile stocks. In the broader market, winners bested losers nearly 3 to 1 on the New York Stock Exchange, where 1.7 billion shares traded. NASDAQ breadth was 3 to 2 on volume of 1.8 billion. In the U.S. bond market, the benchmark 10-year treasury note slipped 5/32 to 102 1/32, to yield 3.99%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 10/24/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT-CREDIT SPREADS Stock Pick Last Mon L/P S/P Credit CB G/L Status BSC 94.16 91.34 NOV 80.0 85.0 0.65 84.35 0.65 Open PHS 37.23 33.99 NOV 30.0 32.5 0.35 32.15 0.35 Closed BTU 60.07 65.77 NOV 50.0 55.0 0.60 54.40 0.60 Open MRVL 28.84 28.09 NOV 22.5 25.0 0.35 24.65 0.35 Open COST 44.69 45.73 NOV 40.0 42.5 0.30 42.20 0.30 Open NEM 46.25 46.12 NOV 40.0 42.5 0.30 42.20 0.30 Open INSP 47.25 51.89 NOV 35.0 40.0 0.85 39.15 0.85 Open BG 41.96 43.72 NOV 35.0 40.0 0.50 39.50 0.50 Open CELG 62.13 56.12 NOV 50.0 55.0 0.60 54.40 0.60 Closed ADBE 53.57 53.74 NOV 45.0 50.0 0.50 49.50 0.50 Open VRNT 37.73 38.37 NOV 30.0 35.0 0.55 34.45 0.55 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss As noted Tuesday, Pacificare Health Systems (NYSE:PHS) became an "early-exit" candidate after a sharp decline on reports of the New York Attorney General's new probe into the health insurance industry. Celgene (NASDAQ:CELG) is also a candidate for early exit after the recent slump in its share value. CALL-CREDIT SPREADS Stock Pick Last Mon L/C S/C Credit CB G/L Status AMZN 40.47 34.60 NOV 50.0 45.0 0.65 45.65 0.65 Open PDX 55.00 54.38 NOV 65.0 60.0 0.60 60.60 0.60 Open BZH 103.14 101.28 NOV 115.0 110.0 1.10 111.10 1.10 Open? CHIR 37.98 31.31 NOV 45.0 42.5 0.30 42.80 0.30 Open FLIR 54.52 54.61 NOV 65.0 60.0 0.70 60.70 0.70 Open MERQ 37.97 40.18 NOV 45.0 42.5 0.35 42.85 0.35 Open BIIB 59.82 56.78 NOV 70.0 65.0 0.65 65.65 0.65 Open MCHP 27.56 28.80 NOV 35.0 30.0 0.60 30.60 0.60 Open CB 66.75 65.46 NOV 75.0 70.0 0.60 70.60 0.60 Open? HIG 56.30 55.03 NOV 65.0 60.0 0.80 60.80 0.80 Open? AET 87.26 83.26 NOV 100.0 95.0 0.40 95.40 0.40 Open CI 60.65 58.85 NOV 75.0 70.0 0.75 70.75 0.75 Open? L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss Special Tuesday Note: Our positions in the Insurance sector became candidates for early exit after unexpected news from the New York Attorney General sparked a rally in the group. The issues include Hartford Insurance (NYSE:HIG), Cigna (NYSE:CI) and Chubb (NYSE:CB). Beazer Homes (NYSE:BZH) is also an exit candidate with the bullish activity in home construction shares. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status JCOM 29.93 29.78 NOV 30.0 30.0 3.75 3.50 Closed The straddle on j2 Global Communications (NASDAQ:JCOM) has been closed in the interest of capital preservation, as the quarterly earnings report did not produce the expected volatility in the issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MDC - M.D.C. Holdings $76.00 *** Sector Rally! *** M.D.C. Holdings (NYSE:MDC) is principally engaged in owning and managing subsidiary companies that build and sell homes under the name Richmond American Homes. The company also owns and manages HomeAmerican Mortgage Corporation, which originates mortgage loans primarily for MDC's home buyers. In addition, it provides title agency services through American Home Title and Escrow Company to MDC home buyers in Virginia, Maryland and Colorado and also offers third-party insurance products through American Home Insurance Agency, to the company's home buyers in all of its markets. MDC - M.D.C. Holdings $76.00 PLAY (conservative - bullish/credit spread): BUY PUT NOV-65.00 MDC-WM OI=953 ASK=$0.25 SELL PUT NOV-70.00 MDC-WN OI=1584 BID=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$69.50 __________________________________________________________________ SPF - Standard Pacific $53.90 *** Next Leg Up? *** Standard Pacific (NYSE:SPF) is a diversified builder of single family homes. The company constructs homes within a wide range of prices and sizes targeting a variety of homebuyers. Standard Pacific has operations in major metropolitan areas in California, Texas, Arizona, Colorado, Florida and the Carolinas and has built homes for thousands of families during its history. In addition to its core homebuilding operations, the firm provides mortgage financing and title services to its homebuyers through its many subsidiaries and joint ventures: Family Lending Services, SPH Mortgage, WRT Financial, Westfield Home Mortgage, Universal Land Title of South Florida and SPH Title. SPF - Standard Pacific $53.90 PLAY (conservative - bullish/credit spread): BUY PUT NOV-45.00 SPF-WI OI=479 ASK=$0.25 SELL PUT NOV-50.00 SPF-WJ OI=5577 BID=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$49.40 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SPW - SPX Corporation $37.40 *** Earnings Speculation *** SPX Corporation (NYSE:SPW) is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. The firm offers a collection of products, including scalable storage networking solutions, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, compaction equipment, high-tech die castings, dock systems, cooling towers, air filtration products, valves, back-flow prevention and fluid handling equipment and metering and mixing solutions. Its products and services also include specialty service tools, diagnostic systems, service equipment and technical information services. SPX' products are used by customers in various industries, including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications, transportation, power, and financial services. Quarterly earnings are due on 11/1/04. SPW - SPX Corporation $37.40 PLAY (conservative - bearish/credit spread): BUY CALL NOV-42.50 SPW-KV OI=13 ASK=$0.25 SELL CALL NOV-40.00 SPW-KH OI=1237 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$40.30 __________________________________________________________________ QCOM - Qualcomm $39.50 *** Downgrade = Sell-Off! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $39.50 PLAY (conservative - bearish/credit spread): BUY CALL NOV-45.00 AAO-KI OI=15793 ASK=$0.25 SELL CALL NOV-42.50 AAO-KV OI=17514 BID=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$42.80 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. _________________________________________________________________ No straddles or strangles today... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ***************************************** PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS ***************************************** All of these issues have robust option premiums and favorable technical indications. However, current news and events, as well as market sentiment, will have an effect on these stocks so review each position thoroughly and make your own decision about its outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 10/24/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield WRLS NOV 7.50 7.20 9.48 0.30 7.65% 4.17% SIMG NOV 12.50 12.10 12.68 0.40 5.95% 3.31% NCRX NOV 25.00 24.30 25.01 0.70 5.52% 2.88% ANF NOV 32.50 32.10 36.86 0.40 2.78% 1.25% STTX NOV 25.00 24.60 23.59 (1.01) 0.00% 0.00% * SNDA NOV 22.50 21.85 29.80 0.65 7.78% 2.97% PMTI NOV 20.00 19.15 22.57 0.85 9.23% 4.44% IDBE NOV 12.50 12.15 16.16 0.35 6.44% 2.88% BVF NOV 17.50 17.05 19.09 0.45 5.40% 2.64% USG NOV 17.50 16.90 23.06 0.60 6.84% 3.55% SNDA NOV 25.00 24.50 29.80 0.50 5.67% 2.04% WEBX NOV 20.00 19.60 21.28 0.40 5.75% 2.04% * ENER NOV 15.00 14.40 18.90 0.60 8.11% 4.17% DRIV NOV 25.00 24.35 34.62 0.65 6.81% 2.67% PLMD NOV 30.00 29.55 33.17 0.45 3.33% 1.52% CNCT NOV 22.50 22.10 27.60 0.40 4.68% 1.81% CCBI NOV 22.50 21.90 23.25 0.60 5.51% 2.74% EYET NOV 35.00 34.45 41.30 0.55 5.17% 1.60% USG NOV 17.50 17.15 23.06 0.35 6.12% 2.04% RIGL NOV 22.50 21.85 25.35 0.65 8.14% 2.97% MCD NOV 27.50 27.15 28.52 0.35 2.99% 1.29% FARO NOV 20.00 19.60 23.75 0.40 5.67% 2.04% NOVN NOV 20.00 19.60 22.30 0.40 4.88% 2.04% VRSN NOV 20.00 19.65 25.01 0.35 4.40% 1.78% ENER NOV 17.50 17.05 18.90 0.45 6.60% 2.64% SSNC NOV 20.00 19.55 22.37 0.45 5.71% 2.30% CKFR NOV 30.00 29.40 30.30 0.60 4.91% 2.04% OSTK NOV 35.00 34.60 52.63 0.40 4.10% 1.16% GBBK NOV 30.00 29.40 29.71 0.31 2.59% 2.04% KRON NOV 45.00 44.50 50.25 0.50 3.10% 1.12% DITC NOV 20.00 19.70 24.44 0.30 5.29% 1.52% MRVL NOV 23.75 23.35 28.09 0.40 5.59% 1.71% AGIX NOV 20.00 19.70 29.37 0.30 4.50% 1.52% As noted Tuesday, Steel Technologies (NASDAQ:STTX) became an "early-exit" candidate after a steep decline in the stock on news of a CIBC downgrade of the Steel sector. The position in Webex (NASDAQ:WEBX) has been closed due to the (bearish) post-earnings activity in the issue. A number of issues are on the "watch" list after the recent broad decline in stocks. NAKED CALLS Stock Strike Strike Break Current Gain Max Simple Symbol Month Price Even Price (Loss) Yield Yield BRCM NOV 35.00 35.35 26.41 0.35 4.44% 0.99% LLTC NOV 40.00 40.60 36.48 0.60 3.74% 1.48% SINA NOV 35.00 35.35 26.65 0.35 4.56% 0.99% LRCX NOV 25.00 25.40 23.89 0.40 5.37% 1.57% * IVX NOV 20.00 20.75 18.90 0.75 9.51% 3.61% PLMO NOV 40.00 40.45 28.20 0.45 5.62% 1.11% SLXP NOV 20.00 20.65 15.00 0.65 8.83% 3.15% AOC NOV 25.00 25.25 19.80 0.25 3.93% 0.99% CVH NOV 50.00 50.60 39.39 0.60 4.46% 1.19% ACF NOV 20.00 20.70 18.15 0.70 8.31% 3.38% DSPG NOV 22.50 22.85 20.07 0.35 6.23% 1.53% HYSL NOV 40.00 40.85 39.20 0.85 6.24% 2.08% * RNR NOV 50.00 50.65 48.04 0.65 3.51% 1.28% X NOV 40.00 40.25 33.61 0.25 3.49% 0.62% Special Tuesday Note: Our positions in the Insurance sector became candidates for early exit after unexpected news from the New York Attorney General sparked a rally in the group. The issues include RenaissanceRe Holdings (NYSE:RNR) and UCI (NASDAQ:UICI). Positions in Hyperion Solutions (NASDAQ:HYSL) and Lam Research (NASDAQ:LRCX) are on the "watch" list. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW NAKED-PUT CANDIDATES Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield EPIQ 16.73 NOV 15.00 FQU-WC 0.45 19 14.55 25 3.8% 10.1% MANT 20.46 NOV 17.50 UUN-WW 0.45 225 17.05 25 3.2% 9.6% NTMD 23.61 NOV 17.50 QNR-WW 0.25 88 17.25 25 1.8% 6.1% A 24.33 NOV 22.50 A-WX 0.40 5670 22.10 25 2.2% 5.9% SCHN 29.38 NOV 26.60 SNQ-WU 0.45 340 26.15 25 2.1% 5.8% EDS 20.99 NOV 20.00 EDS-WD 0.35 3971 19.65 25 2.2% 5.5% CYTC 26.93 NOV 25.00 YQK-WE 0.40 2177 24.60 25 2.0% 5.3% Abbreviations: LB-Last Bid price, OI-Open Interest, CB-Cost Basis (or break-even point), DE-Days to Expiry, SY-Simple Yield (monthly basis without margin), MY-Maximum Yield (monthly basis with margin), TS-Target Shoot. _________________________________________________________________ EPIQ - EPIQ Systems $16.73 *** Entry Point? *** EPIQ Systems (NASDAQ:EPIC) provides technology-based case management solutions to attorneys, law firms, trustees and debtor companies that administer cases in the federal bankruptcy system. Customers implement its solutions to administer personal and corporate bankruptcy cases of all sizes and configurations. The company's product and service offerings automate various administrative tasks pertaining to bankruptcy claims, assets, financial records and other data associated with liquidations and reorganizations and assist customers in organizing and managing their databases of case information, preparing notices and mailings and in fulfilling their additional responsibilities. EPIQ - EPIQ Systems $16.73 NOV 15.00 FQU-WC LB=0.45 OI=19 CB=14.55 DE=25 TY=3.8% MY=10.1% _________________________________________________________________ MANT - Mantech $20.46 *** Earnings Speculation *** ManTech International (NASDAQ:MANT) is a provider of unique technologies and solutions for mission-critical national security programs for the intelligence community, the DOD, and other United States federal government customers. The company provides software development, enterprise security architecture, information assurance, intelligence operations support, network and critical infrastructure protection, information technology, communications integration and engineering support. It delivers these through three major areas of service solutions, Secure Systems and Infrastructure Solutions, Information Technology Solutions and Systems Engineering Solutions, which are offered separately or in combination to the Company's customers. Earnings are due after the bell on 10/27/04. MANT - Mantech $20.46 NOV 17.50 UUN-WW LB=0.45 OI=225 CB=17.05 DE=25 TY=3.2% MY=9.6% _________________________________________________________________ NTMD - NitroMed $23.61 *** Premium-Selling Only! *** NitroMed (NASDAQ:NTMD) is an emerging pharmaceutical company with substantial expertise and intellectual property in nitric oxide-based drug development. The firm is applying its nitric oxide technology to develop new pharmaceuticals, as well as safer and more effective versions of existing pharmaceuticals to target diseases and commercial markets. Its lead nitric oxide-enhancing medicine, BiDil, which is being developed to reduce mortality and hospitalization and to improve quality of life for African Americans diagnosed with heart failure is the subject of a Phase III confirmatory clinical trial. NTMD - NitroMed $23.61 NOV 17.50 QNR-WW LB=0.25 OI=88 CB=17.25 DE=25 TY=1.8% MY=6.1% _________________________________________________________________ A - Agilent Technologies $24.33 *** Bottom-Fishing! *** Agilent Technologies (NYSE:A) is a global diversified technology company that provides enabling solutions to markets within the communications, electronics, life sciences and chemical analysis industries. The company has four primary businesses. The test and measurement business provides solutions for the operation of electronic equipment and systems and communications networks and services. The automated test business provides system testing solutions for semiconductors and printed circuit systems. The semiconductor products business is a supplier of semiconductor components, modules and assemblies for communications systems. The life sciences and chemical analysis segment offers solutions that help customers identify, quantify and analyze the physical and biological properties of substances and products. A - Agilent Technologies $24.33 NOV 22.50 A-WX LB=0.40 OI=5670 CB=22.10 DE=25 TY=2.2% MY=5.9% _________________________________________________________________ SCHN - Schnitzer Steel $29.38 *** In A Trading Range? *** Schnitzer Steel Industries (NASDAQ:SCHN) collects, processes and recycles metals by operating a metals recycling business in the United States. The company also owns a chain of self-service auto parts stores in the United States, operating under the name of Pick-N-Pull, and is also a maker of finished steel products at its technologically advanced steel mini-mill. As a result of its vertically integrated business, Schnitzer is able to transform obsolete or wrecked auto bodies and other unprocessed metals into finished steel products. In addition, it is a partner in joint ventures that are either in the metals recycling business or are suppliers of unprocessed metals. The company owns interests in five joint ventures that are engaged in buying, processing and selling primarily ferrous metal. Another joint venture is an industrial plant demolition contractor that dismantles industrial plants, performs environmental remediation and sells recovered metals and machinery. SCHN - Schnitzer Steel $29.38 NOV 26.60 SNQ-WU LB=0.45 OI=340 CB=26.15 DE=25 TY=2.1% MY=5.8% _________________________________________________________________ EDS - Electronic Data Systems $20.99 *** Own This One! *** Electronic Data Systems Corporation (NYSE:EDS) is a provider of IT (information technology) and business process outsourcing services. EDS has delivered infrastructure, application and business process outsourcing services to a variety of clients in the manufacturing, financial services, healthcare, consumer, communications, energy, transportation, and retail industries, as well as governments around the world. The company has one subsidiary, A.T. Kearney, a high-value management consultancy. EDS - Electronic Data Systems $20.99 NOV 20.00 EDS-WD LB=0.35 OI=3971 CB=19.65 DE=25 TY=2.2% MY=5.5% _________________________________________________________________ CYTC - Cytyc $26.93 *** Pre-Earnings Rally! *** Cytyc (NASDAQ:CYTC) designs, develops, manufactures and markets sample preparation and imaging systems for medical diagnostic applications. The company's principal products are the ThinPrep System and ThinPrep Imaging System. The ThinPrep System is an automated system for the preparation of cervical specimens and non-gynecological samples on microscope slides. In addition, the company manufactures and markets the FirstCyte Breast Test, a risk assessment tool for women who are at high risk for breast cancer. Earnings are due on 10/28/04. CYTC - Cytyc $26.93 NOV 25.00 YQK-WE LB=0.40 OI=2177 CB=24.60 DE=25 TY=2.0% MY=5.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ARW - Arrow Electronics $23.54 *** Short-Lived Rally? *** Arrow Electronics (NYSE:ARW) is a global provider of products, services and solutions to industrial and commercial users of electronic components and computer products. The firm offers products, services and solutions including materials planning, programming and assembly services, inventory management, online supply chain tools and design services. The company's global customer base consists of original equipment manufacturers, contract manufacturers and commercial customers. ARW - Arrow Electronics $23.54 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 25 ARW-KE 19 0.40 25.40 5.8% 1.6% _________________________________________________________________ TACT - TransAct Technologies $25.35 *** Next Leg Down? *** TransAct Technologies (NASDAQ:TACT) designs, develops, makes and markets transaction-based printers under the Ithaca and Magnetec brand names. In addition, the firm markets related consumables, spare parts and service. Its printers are used worldwide to provide transaction records, such as receipts, tickets, coupons, register journals and other documents. The company focuses on two markets: point-of-sale and banking and gaming and lottery. TransAct offers an array of products utilizing inkjet, thermal and impact printing technology for applications requiring up to 60 character columns. TACT - TransAct Technologies $25.35 "SPECULATIVE" PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 30 TUF-KF 62 0.50 30.50 10.2% 1.6% _________________________________________________________________ USPI - United Surgical $32.24 *** Downtrend Intact! *** United Surgical Partners (NASDAQ:USPI) owns and operates a number of short-stay surgical facilities including surgery centers and private surgical hospitals in the United States, Spain and the United Kingdom. The firm focuses on providing surgical facilities that meet the combined needs of patients, physicians and payors better than hospital-based and other outpatient surgical facilities. USPI acquires and develops its facilities through the formation of relationships with physicians and healthcare systems to better access and serve the communities in its markets. USPI - United Surgical Partners $32.24 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL NOV 35 QPJ-KG 57 0.45 35.45 5.2% 1.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************************Advertisement************************* Get your FREE weekly charts of the NASDAQ! Hot Stix’ stock market report reveals simple, powerful strategies for profiting from the QQQ - whether down or up! http://www.hotstix.com/public/weekly.asp?aid=755 ************************************************************** ************** TRADERS CORNER ************** A basic look at Elliott Wave principles; part 1 By Leigh Stevens lstevens@OptionInvestor.com Since I've noticed a second set of down-up-down price swings in the market of late, in what can also be called "a-b-c" corrections or "waves" (see the last chart below), it has me thinking some about Elliott Wave patterns. Describing this theory of how price moves unfold can be helpful in making trading decisions. This kind of an article tends to also get me some e-mails on the subject, especially given my non-standard, non-orthodox wave "counts". I tend to use trading techniques the way they work for me, which is not always by the book. Describing index, stock or commodity moves by the wave method doesn't get a lot of media time cause its a bit hard to explain in short sound bites. Figuring out the twists and turns of price trends this way is mostly done by "practitioners" of the method I'm going to describe (Elliott Wave) and this language of describing the way price trends unfold is hard to fathom without some study - but it's not all that complicated either, but does involve a particular way of seeing how trends develop. I tend to use anything that works in predicting an unfolding market trend, even if that indicator, pattern or theory can't be shown to "work" all the all the time or at least obviously so. Stochastics don’t work all the time (i.e., they lack predictive value), nor does seeing an apparent double top always signal a downside trend reversal – however, such tools and ideas work very well enough often enough as an aid to trading the trend that they are part of my checklist in trading and trend analysis; for example, what, if anything is the chart pattern, indicators or wave analysis, in this case, suggesting about the strength of the current trend or the likelihood that it will reverse? I’ve been struck over the years by the tendency to make market analysis more complex than is necessary, perhaps due to the tendency to make some specialized analysis techniques an ideology out of methodology. This is especially true of Elliott wave theory and analysis. The Elliott Wave market theory - As explained in my book (Essential Technical Analysis), Ralph Nelson Elliott - referred to as R.N. Elliott (1871-1948) - was not quite a contemporary of Charles Dow, who was born 1851 and died 1902, but Dow's ideas on market behavior were well-known in Elliott's day. R.N. Elliott was not well known during his lifetime as a major league stock investor and speculator. His Elliott wave principles are better known today than during Elliott's lifetime, which is not to say that he didn’t attract significant notice among some important market advisors and professional money managers at the time he wrote on the market. R.N. Elliott had an accounting background and worked with the railroads, including in Central America where he contracted a severe illness in the late-20s. Due to this he spent his next several years bed-ridden and which gave his active mind much time for an in-depth study of the stock market. The build up and crash of the U.S. market over the 1920’s was something that Elliott knew well as he was an avid amateur follower of the stock market. By 1934 and after, Elliott’s own comprehensive theory of market behavior got defined and his predictions at times began to amaze certain market professionals in terms of their forecasting accuracy. By 1945 Elliott was operating an investment advisory and forecasting service from a Wall Street office – "The Wave Principle", a book based on his ideas and still very much in print, was also written. Distilling the basics of Elliott wave analysis is the idea (as with Dow) of there being three components to a trend. You will hear about FIVE waves, but that is because a bull market is said to consist of 3 UP waves or movements, interspaced by 2 corrective downswings. The waves up Elliott called the 3 "impulse" waves - the three big rallies that are typical of a bull trend. In a bear market, according to Elliott, there are 3 parts to a bear market trend: an initial decline, a rally back retracing some of the first decline, and a final downswing; the bear market pattern is composed of down-up-down price swings. An important thing to remember is that frequently, but not all the time, the wave pattern is clearly and easily seen – when it IS clearly and easily seen, it allows a better forecast of how the trend may unfold. The first impulse wave (wave 1) in a bull market trend tends to be the weakest, but after a corrective decline following this upswing ("wave 2"), the next impulse wave ("wave 3") is a strong move. After up wave 3, follows again a decline (corrective "wave 4), followed by the final or third rally (wave 5). In Elliott's way of thinking, a bull market is composed of 3 rally phases, interspaced by 2 declines/pullbacks. As to trading advice, it's very useful for example to know that the middle or SECOND rally in a bull trend/market is often the most powerful. This insight can suggest going in more heavily into index calls on this second rally phase. An example of a strong “3-wave” is the 1998-1999 Nasdaq advance which was the strongest part of the 1990’s tech stock bull market – this of course is also an example of a mega-bull market, but within even a moderate bull market there will tend to be one stronger/longer advance carrying farther than the other rallies. The duration and intensity of this second advance (wave 3) will often be the period of the biggest gains, in the most compressed time frame, of the entire bull market. In a downtrend also, it is the second downswing that tends to carry the farthest. Accurate depiction of where one is in an unfolding price pattern that is cyclical in nature – having distinct components that comprise a beginning, middle and END – is extremely valuable as you can see more accurately what phase we’re in. Robert Prechter is the best-known of the market advisors and analysts that have made wave analysis popular from the 1980’s until now. As Bob has pointed out about the wave theory, like the other principles of technical analysis, it is not always necessary to understand WHY a technique works, as long as you can employ the technique to a profitable end. Hey, it works for me! In a major bull trend, 3 up waves and 2 corrective down waves (for a total of 5 waves) are often apparent. Waves 1, 3 and 5 will be advances (the "impulse" waves), with waves 2 and 4 being counter-trend moves or "corrective waves". The totality of the component moves of a bull market can be referred to as 5 waves up. From my book, a good example - After the 5 waves of a major bull trend, a major bear trend will typically follow and consist of a 3-part "down" structure or 3 component waves – not ALL of these price swings or waves are down, only that they are part of the overall down or bear cycle. The 3 component waves of this bear market trend "corrects" and are counter to the up trend of the bull market that preceded it. These waves are given the letters A, B and C (sometimes small a-b-c), to distinguish between the advancing waves 1-5 that came before. The "A" and "C" waves are the declines, with the intervening "B" wave being a corrective (countertrend) upswing. Note that the number or letter designation is put at the end or completion of that wave; i.e., at the top for an upswing, at the bottom for a decline, as in the chart above. My first example is a stock, but it could as easily be an index and the whole market. The entire bull market/bear market sequence is a 5-wave advance, followed by an A-B-C decline. Elliott talked about alternation in wave duration and strength. Wave three is typically longer and stronger than wave 1. If waves 1 and 3 are about equal length, wave 5 will tend to be the more prolonged advance. Conversely, major bear market down wave A is usually of shorter duration and wave C the longest. However, if wave A is prolonged, look for the down move C to be relatively shorter. As with other technical analysis techniques, a surge in average volume will help identify the strongest part of an overall move. Longer-term charts, such as weekly are favored over daily charts in terms of seeing and defining the MAJOR wave pattern - The above charts are examples of MAJOR bull and bear market trends that unfold with the "classic" (Elliott) wave structure of a 5 up-wave bull market and a 3 down-wave bear trend. There are countertrend moves always. By the way, in the example above, it's not typical for the down move 4 to exceed the low end of the downswing 2 but it does fit the alternation rule. I will get into a discussion of countertrend price moves, but since it adds another layer of complexity, I will save this for another article. In a further article, I'll discuss Elliott Wave patterns in shorter-term price swings, such as would be seen in recent hourly and daily charts. These shorter time frames show how unfolding wave pattern are useful for option traders. In the past few months (March - October, 2004), there have a couple of down-up-down, a-b-c type corrections, making for a great trading market on both the call and put sides - What I have described so far should be viewed as an introduction only, quite likely to something you haven't run into before or don't think of using in analyzing what's happening with stocks. More on tips to making effective use of wave analysis - meaning, help in spotting trend reversals and making trading decisions (i.e., making money) - will follow next week. For now, the Mediterranean waves are lapping on the shore outside. There’ll be a quiz later (kidding!) on this, but not now/yet - for now, just enjoy the idea of waves lapping outside. ********** 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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc