The Option Investor Newsletter Thursday 01-13-2005 Copyright 2005, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Not A Pretty Picture Futures Wrap: See Note Index Wrap: Oil jitters keeps buyers at bay Market Sentiment: Earnings Jitters Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-13-2005 High Low Volume Adv/Dcl DJIA 10505.83 +112.00 10618.15 10486.17 1.87 bln 1481/1737 NASDAQ 2070.56 - 22.00 2094.80 2068.27 2.15 bln 1167/1926 S&P 100 561.56 - 5.75 567.31 560.47 Totals 2648/3663 S&P 500 1177.45 - 10.25 1187.70 1175.80 SOX 396.17 - 5.70 401.79 395.87 RUS 2000 610.13 - 3.06 616.57 609.06 DJ TRANS 3533.57 - 53.60 3591.89 3532.15 VIX 12.84 + 0.28 12.86 12.37 VXO (VIX-O)13.07 + 0.28 13.42 12.59 VXN 19.09 - 0.19 19.45 18.81 Total Volume 4,242M Total UpVol 1,407M Total DnVol 2,713M Total Adv 3058 Total Dcl 4163 52wk Highs 169 52wk Lows 57 TRIN 1.39 NAZTRIN 1.12 PUT/CALL 0.93 ************************************************************ Not A Pretty Picture by Jim Brown After a rebound on Thursday and a positive open thanks to Apple earnings the markets lost momentum early and began to slip. As the day progressed oil prices greased the skids and the closing drop was anything but bullish. Time to take a hard look at the future for January. Economically there are warning clouds on the horizon. The Jobless Claims rose again to 367,000 for the week and the highest level in three months. The Labor Dept was at a loss for the reason and did not try to explain it away as a seasonal adjustment problem. This was +27,000 above the consensus estimate of 340K and it pushed the four week average to 344,000. This was also a new cycle high. This is not a good sign for the economy but it is too soon to tell if this is just post holiday terminations of peak employees or the start of a new trend. Import Prices fell much stronger than expected at -1.3% pulled down mostly by falling oil prices in December. Oil prices fell -11.5% but that drop is rapidly evaporating as oil moves higher in January. Excluding energy, import prices rose only +0.5%. Export prices rose only +0.2%. These numbers will reverse if oil continues its climb. The Retail Sales for December (MARTS) jumped +1.2% led by strong sales in autos. Without those year end specials on cars/trucks that were designed to blowout old models the gains would have only been +0.3%. There are so many different retail sales reports and conflicting numbers it is hard to determine the real truth. Another study out today said holiday sales were up +5.7% for Nov/Dec and the strongest gains since 1999. Autos, furniture and online sales helped ramp up the numbers. Considering the huge support from auto sales are dependent on the very strong year end incentives we can't expect the sales for Q1 to continue to post strong gains. The Manufacturing Alliance Survey headline number fell from 75 to 70 and the second quarterly decline. The index high for this cycle came in 2004-Q2 at 80 and we have seen a drop back to 2003 levels with this report. All components, shipments, new orders, order backlog and margins fell with only inventories showing a gain. The inventory component at 72 is now at the highest level since 1995. This could be bad news if the inventory gain is due to falling sales. Perhaps the report with the most impact on the market was the weekly natural gas storage report that showed a drop of -88 billion cubic feet. Despite warm weather in most of the U.S. there was enough cold climates to overpower the distribution system and cause a significant draw down in inventories. This caused oil prices to spike back over $48 on speculation next weeks expected cold wave would cause an even further drop in supplies. In my oil crisis report I outlined that Chesapeake Energy said 95% of their prior gas wells were between 3-5,000 feet. In 2005 35% will be 13,500 feet or deeper. Gas is becoming harder to find in any quantity and more expensive to produce. The CHK CEO said a nationwide cold snap at the same time would deplete supplies and there would be shortages. He said if all plants were generating at peak capacity there would not be enough gas in the pipeline system to satisfy demand. He said a future shortage was almost guaranteed as more electric generation plants were built because they consume huge amounts of gas. The U.S. is already a net importer of natural gas. As oil sprinted back over $48 and a six week high the markets began to decline. Oil traders said they were afraid supply was going to run short again as demand increases from the coming cold weather but bigger problems ahead were also looming. Over the next two weeks we will see the Presidential Inauguration, Iraq elections and the OPEC meeting on the 30th. They expect increased supply disruptions as the election approaches in Iraq and in the other OPEC countries. There is also a concern building that the inauguration could be a terror target. Those expressing concerns say that we have gone far too long without an event on U.S. soil and this would be a highly visible, hard to defend target. I know we went through this concern period in 2004 for each of the conventions and the Olympics with no problems. This event could be seen as an opportunity to attack the administration directly. Despite all the worry above the real reason for the late afternoon decline was attributed to a Treasury ruling that repatriated cash could not be used for dividends and stock buybacks. In Q4 it was reported that these were allowed uses of the nearly $600 billion in cash that companies were planning on bringing back into the U.S. as a result of the 2004 Repatriation Act. That act allows a bargain basement tax rate on any cash that is brought back into the U.S. and used for a specific number of job creating uses. Companies had hoped to be able to use the money for dividends and stock buybacks. We also saw negativity from a surprise earnings warning from GM. GM announced this morning that profits were going to fall because of lower profits at its financing unit and a $1 billion increase in healthcare costs. GM fell -1.07 on the news but the depression was felt across the entire market. GM is the largest private provider of healthcare in the U.S. and supports hundreds of thousands of retirees, employees and their dependents. The rising cost of health insurance and medical costs is not only impacting GM but all major corporations and continues to spiral out of control. The GM problem is just the latest in a long line of corporate revelations. GM expects earnings to drop to between $4-$5 a share in 2005 compared to an estimated $6.31 for 2004. Another big hit is coming from the financing arm which has had to eat billions in zero percent financing over the last couple years and higher interest rates it has to pay. GM tried to pacify investors by restating its goal of $10 a year in earnings but now says it could be 2007 at the earliest before that goal is met. I am not holding my breath given the continues influx of Asian automakers. Their market share in 2004 was the largest ever and growing rapidly. In 2004 sales by the big three U.S. makers fell to only 58.7% of vehicles sold and its lowest rate ever. Asian U.S. sales grew at a double digit rate in 2004. The higher oil prices accelerated the drop in the Dow Transports with a drop to 3533 at the close. The high for this index was 3823 back on December 30th. This -7.6% drop broke strong November support at 3560 and is very close to the 38% retracement of the gains since August at 3493. This index confirmed the Dow rally in Q4 and is now confirming the Dow drop in 2005. For many weeks in 2004 the TRAN rose while the Dow floundered. It was far stronger and rose despite the record high oil prices. It was very influential in pulling the Dow out of its doldrums in October. The implosion over the last two weeks could be continued profit taking from the strong run with oil prices giving it an added push. Adding to the negativity was the warning from UPS. The -$7 drop in UPS over the last two days has been a major factor in the drop in the TRAN for this week. The drop in UPS on "less than expected volume growth" should not be an indictment of the entire sector. FDX said business could not have been better and affirmed estimates saying they had a strong Q4 and favorable economic conditions ahead. Could it be that UPS is simply losing the ground war and the "FDX 35% cheaper than UPS" ads are winning converts? I believe investors will find this to be the case but they are currently throwing them all out until the outlook clears. Chipmaker CREE announced earnings after the bell and was quickly slaughtered by investors. CREE lost -$7 to $27 after warning that earnings for the current quarter will be well below estimates. This should tank the SOX again on Friday and makes 380 a viable target for the next big drop. The Intel news was unable to provide more than a few minutes of bounce before the weakness appeared again. The SOX closed today at 396 and just a couple points over the pre Intel low at 394. The SOX is proving to be the Achilles heel for the Nasdaq and the CREE news is not going to help. Sun Micro also announced earnings after the bell and while it met earnings the revenue for the quarter was lighter than estimates. It seems a new range of products has failed to excite buyers and shares dropped -5% in after hours. Bears are coming out of the forest in droves. Investors Business Daily ran a headline today saying the "Bull Market Rally is Over" and many believe it. The markets have been unable to find any traction despite hundreds of analysts making public statements that 2005 is going to be a great year in the markets. Considering they were saying we would only see gains of +5% to +8% just a month ago that should make you pause to ponder. TrimTabs said investors withdrew -$3.7B from U.S. stock funds last week and inflows this week have only amounted to $500 mil. International funds saw an inflow of $3.1B the prior week but saw withdrawals of -$685 million for the week ended on Wednesday. Considering TrimTabs had forecasted inflows of $31 billion for all of January this is a huge estimate miss. The markets were counting on that cash inflow to provide a cushion for new year profit taking and it simply did not appear. Analysts are scratching their heads for the reason and suggesting investors want to get past the January events before putting money back into the market. Those events I mentioned before, Inauguration, Iraq elections and OPEC are in addition to earnings. The earnings calendar for 2005 has so far been extremely light and there has been some very mixed results. There is currently no consensus for Q4 as not enough companies have announced to provide a trend of beats, hits and misses. Next week should be a defining week for the markets. Nearly 500 companies will report and we should have a clear picture of guidance by this time next week. The trouble with that view is we have to struggle another week to try and hold the markets above critical support or risk a technical breakdown in addition to the current sentiment breakdown. The sell off this afternoon was ugly. It was ugly because there was not any specific negative stock news and it followed good news from Intel and Apple. The Dow rebound from 10500 on Wednesday was seen as putting a bottom in place for January and today's break back to below 10500 could be seen as negating that bottom. It clearly targets the 38% retracement level of 10425 which is also just above the December low of 10418. Make no mistake. This is the line in the sand that we must not cross. A move below 10425 will negate the bullish uptrend from October and put us right back in the congestion zone from all of 2004. We do NOT want to go there as investors chopped to pieces last year by the range bound trading will tire of the process and move to the sidelines. Dow Chart – Daily Dow Chart – Weekly The Nasdaq is on the verge of a nasty decline as well. The Nasdaq has one more level of weak support at 2050 and the 38% retracement level at 2022. I believe if 2050 breaks we could retrace all the way to 1900. It is too soon to predict that breakage but it will be a critical test. Over the last two days the Nasdaq has broken the uptrend support from August and the 25% retracement level at 2080. Given the good news from Intel and Apple this is not an inspiring performance. Friday will be a pivotal day with the CREE earnings and the potential continuation of today's downdraft. The 2080 support level was also the resistance dating back to Jan-2002. Now that we are back below this resistance it should grow in strength again. Nasdaq Chart – Daily Nasdaq Chart – Weekly The S&P is clinging to support at 1178 and right at the 1175 level I am using as a market sentiment indicator. 1175 was the low back in December and has been tested twice this week. This is a very critical test for market sentiment and the outlook tonight is not good. We could have been the victim of a large sell program at the close but I believe the problem is deeper than that. I mentioned above that money flows have been almost zero and in extreme contradiction to recent norms and predictions. This could be a change in sentiment that will develop into a new leg down. SPX Chart – Daily The SOX could be our leading indicator for the health of the tech sector. Analysts are telling us that the rebound in chip demand has ended for this cycle and 2005 will be a year of rebuilding, retooling and waiting for the next wave of demand to develop from new applications. The SOX has broken 400 and is just above the uptrend support from the 2002 bottom. If the SOX can hold this support around 380 then techs have a chance for a rebound from a higher low. If this support breaks along with the 2004 support low at 360 then techs are in for a very bearish year. SOX Chart – Daily SOX Chart – Weekly For Friday I don't have a very positive outlook. We are right on the edge of switching from a bull market to a bear market in my bias and SPX 1175 must hold along with Dow 10425. Should either break slightly we could still see an end of January rally but I believe the window of opportunity has passed. Funds are faced now with an outlook of protecting prior profits rather than expecting new profits in 2005. Those that held on while others took profits last week are facing a new leg down that could be steep and they could be worrying about protecting their remaining holdings from the bears. A break of 1175/10425 could be the trigger that sends everyone to the opposite side of the boat and begins a sharper downdraft as the boat capsizes. I hope this does not happen but we can't build our future on bullish hopes if there is nothing bullish in the market. So far the January market has been anything but normal and this has to be sending shivers through many money managers as they watched today's drop. Remember my recommendation from Tuesday. I am not a buyer under 1175, I would either be flat or short. Tomorrow is a critical day. There are many possible scenarios and we could still go either way but I would be very cautious of any bounce unless it contains high volume and a very strong advance/decline line. Enter Passively, Exit Aggressively! Jim Brown Editor "The trouble with stretching the truth is that it is liable to snap back." ******************************************** Year Renewal Special - ONLY TWO DAYS LEFT ******************************************** Lock in Your Subscription Rate Now! If you have not signed up yet for the 2004 end of year special then your time is running out. Lock in your subscription price for all of 2005 now and protect yourself from any coming rate hikes. https://secure.sungrp.com/05renewal/ ************ 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************************* 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 ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Oil jitters keeps buyers at bay The major averages finished near their lows of the session where upbeat earnings from Apple Computer (NASDAQ:AAPL) $69.80 +6.63% couldn't offset the recent rise in crude oil prices, as traders' nerves were tested by short-term production snags in the North Sea, expectations of colder U.S. weather and concerns about further OPEC production cuts and the coming election in Iraq. February Crude Oil futures (cl05g) settled higher by $1.67, or 3.60% at $48.04, it highest settlement since November 30. Safe haven buying had today's yield curve flattening. Treasuries found a strong round of buying among the major maturities with the benchmark 10-year yield ($TNX.X) falling 4.9 basis points to 4.187% The U.S. Dollar Index (dx00y) 82.44 +0.36% had the dollar recouping some of yesterday's steep declines after wider-than- expected trade gap figures sent the dollar tumbling on Wednesday. February Crude Oil Futures (cl05g) Chart - Daily Intervals February Crude looks destined for the $49.29-$50.27 area, and for that to take place, traders would be well advised to set a near- term upside alert at this contract's WEEKLY R1 of $48.55. It is still a bit perplexing to this analyst as to why the Oil Index (OIX.X) 399.61 +0.50% lags the commodity, and why some of the producers have been cutting their cap-ex budgets with oil prices still above $40.00. One explanation may be the thoughts of Andrew Lebow, a senior vice-president at Man Financial Inc., who recently told the Canadian Press that he thought there is still somewhere between $10 and $15 a barrel worth of "fear premium" in the oil commodity market, which should be removed by the end of the month, following the Iraq election and the next meeting of OPEC. The OIX.X remains an index I feel traders and investors should bee keeping an eye on, where similar lag in this equity index to the commodity itself, is as suspicious as the Gold Bugs Index ($HUI.X) showed versus gold prices in November. When gold stocks tumbled, gold followed not long after. With this exercise, I'm looking for the OIX.X to "tell us" if the rise in oil prices is going to be sustainable (Mr. Lebow might be doing this too), or is oil's rise simply being caused by trader's looking to hedge some risk into Iraq's elections. Earlier this month I showed a chart of the OIX.X with just one retracement, where we discussed the possibility that a head and shoulder top could be forming with a neckline at 385.50. Tonight, I'm going to show that same chart, but I'm also adding a BLUE retracement, which is anchored at an inflection low found in August (to tie into above futures) and then an inflection high found in October (to tie into above futures), which the OIX.X then exceeded in early December. I am also showing a downward trend on the OIX, from its October relative high (to tie to above futures) and a December relative high (to tie to above futures). Oil Index (OIX.X) Chart - Daily Intervals The OIX.X appears to be lagging the commodity itself, and this is a point of suspicion to me (Jeff Bailey) after the OIX.X exceeded the October highs for oil futures in late November, when the OIX.X went on to trade 417. Since January 1, there has been what I would consider to be a "general distaste for equities" and that by itself may explain why the OIX.X appears to be lagging oil futures (the commodity). However, the OIX.X's "lag" could also be sign that broader MARKET participants think oil's recent rise is only temporary, and is a defensive play into the Iraq elections. My thoughts are this. If the OIX.X get above 405, then not only could we see a short-squeeze in some oil-related stocks as upside risk is immediately assessed to at least 411, but could also be a beginning to confirm thought that oil itself, did NOT trade all- time highs in October of last year. U.S. Market Watch - 01/13/05 Close Outside of the Dow Industrials (INDU) 10,506 -1.05%, which never did see green today (for reasons possibly revealed last night) things didn't look as bearish at 03:00 PM as they do by the close. Bids (buyers) simply evaporated, and I mean evaporated at 03:00 PM EST when the bond market closed. Look at the Russell 2000 Index ($RUT.X) 610.13 -0.49%. It traded its session high at 02:30 PM EST, had "eased back" to 614.00 at 03:00 PM EST, then simply fell apart. Any encouragement for a bull would be that the RUT.X didn't violate yesterday's low of 604.64. I will note here that 606.41, which was traded to the downside yesterday, was April's high. Market Snapshot / Internals - I didn't like the flattening curve today. Fellow analyst Jane Fox had noted earlier in the day that while stocks were trying to hold near unchanged, the rising TRIN indications had her thinking something was up, or eventually down as the case would be. Filed away in my memory bank today is that the 5-day NH/NL ratios for both the NYSE and NASDAQ show improvement. For the NYSE, today is the second day. For the NASDAQ, it is the first. No reason for a bull to act on this, just file it away, there's probably plenty of time to initiate a new bullish trade. Think of these VERY EARLY SIGNS of some type of resumption of short-term bullish leadership in relation to the prior discussion above regarding OIL. I don't know if you may have caught an interview late this afternoon on CNBC, but Maria Bartiromo was interviewing Commerce Bancorp's Vernon Hill. The banks/financials were lagging again today and when asked about higher rates of interest, Mr. Hill quickly brought in the yield curve. While still steep, Mr. Hill immediately noted that he would prefer the yield curve to not be as flat as it has become lately, as that can squeeze margins. While Mr. Hill said strong business trends can offset the flattening of the yield curve, the best of both worlds is strong business trends and steepening of the curve. Pivot Matrix - I'll note tomorrow's DAILY S2 for the DIA as being $104.00, then remember that suspicious option trade noted in last night's wrap. To get there, I'm thinking correlative SPX S1 and DAILY S1 would need to be violated to the downside. To do that, then perhaps further flattening of the curve, with the 10-year yield ($TNX.X) falling below its correlative DAILY S1 and WEEKLY Pivot. For strength? How about the QQQQ/NDX? The QQQQ gets a "tweezer bottom" with today's low matching that of yesterday. The "sucker move" a bear need to be careful of is a break below $38.00, steepening curve, and TRIN moving LOWER, with first sign of the "sucker move" being a sudden snap back above the tentative (dashed red) MONTHLY S2/DAILY Pivot correlations. Jeff Bailey **************** MARKET SENTIMENT **************** Earnings Jitters - J. Brown Another round of high-profile earnings warnings from the likes of Verizon Communications (VZ) and General Motors (GM), both Dow- components, was enough to sink the markets yet again. Homebuilders may be doing well and Apple Computer is knocking the ball out of the park but overall the market remains defensive. Or if you believe some of the market pundits out there this is just a partial retracement of the super strong fourth quarter. Whatever the case investors aren't finding many reasons to be bullish. The headline earnings news has been disappointing and there remains an under current of worry about interest rates, oil and to a lesser extent the Iraqi elections coming up. Market internals continue to favor the bears as well. The real deluge of earnings news doesn't hit until next week so it's possible that money continues to sit on the sidelines as we wait for the first big week of corporate announcements. One thing is for sure - this is one January where the "effect" on the smallcaps has been nonexistent. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10868 52-week Low : 9708 Current : 10505 Moving Averages: (Simple) 10-dma: 10626 50-dma: 10577 200-dma: 10278 S&P 500 ($SPX) 52-week High: 1217 52-week Low : 1060 Current : 1177 Moving Averages: (Simple) 10-dma: 1189 50-dma: 1187 200-dma: 1132 Nasdaq-100 ($NDX) 52-week High: 1635 52-week Low : 1301 Current : 1545 Moving Averages: (Simple) 10-dma: 1571 50-dma: 1580 200-dma: 1466 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 12.84 +0.28 CBOE Mkt Volatility old VIX (VXO) = 13.07 +0.28 Nasdaq Volatility Index (VXN) = 19.09 -0.19 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.90 893,271 799,634 Equity Only 0.68 711,982 484,745 OEX 0.68 43,216 29,649 QQQQ 2.44 20,168 49,245 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.1 - 0.6 Bear Correction NASDAQ-100 73.0 - 1 Bull Correction*** Dow Indust. 73.3 + 0 Bull Confirmed S&P 500 74.4 - 0.4 Bull Confirmed S&P 100 76.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-dma: 1.27 10-dma: 1.34 21-dma: 1.11 55-dma: 1.02 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 1244 1079 Decliners 1563 1925 New Highs 69 52 New Lows 19 39 Up Volume 651M 670M Down Vol. 1179M 1342M Total Vol. 1852M 2100M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 01/04/05 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 Not much change in the large S&P futures contracts. Professionals remain net bearish and small traders remain net bullish. Commercials Long Short Net % Of OI 12/07/04 450,072 498,057 (47,985) (5.0%) 12/14/04 502,471 540,494 (38,023) (3.6%) 12/21/04 455,238 502,538 (47,300) (4.9%) 01/04/05 456,255 505,042 (48,787) (5.0%) 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 12/07/04 187,707 135,776 51,931 16.0% 12/14/04 201,428 164,111 37,371 10.2% 12/21/04 157,015 106,205 50,810 19.2% 01/04/05 159,197 111,900 47,297 17.4% 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 Commercial traders have increased their bearish bias just as small traders have increased their bullish bias. Commercials Long Short Net % Of OI 12/07/04 470,553 805,234 (334,681) (26.2%) 12/14/04 556,980 899,616 (342,636) (23.5%) 12/21/04 279,694 554,818 (275,124) (32.9%) 01/04/05 302,339 620,759 (318,420) (34.5%) Most bearish reading of the year: (436,367) - 11/23/04 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 12/07/04 311,838 66,496 245,342 64.8% 12/14/04 398,915 137,598 261,317 48.7% 12/21/04 227,047 66,140 160,907 54.8% 01/04/05 279,274 71,151 208,123 59.4% Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders have turned significantly more bearish on the NDX just as the small traders has turned sharply more bullish. Commercials Long Short Net % of OI 12/07/04 57,621 34,313 23,308 25.4% 12/14/04 73,554 50,286 23,268 18.7% 12/21/04 30,614 45,158 (14,544) (19.1%) 01/04/05 27,226 44,600 (17,374) (24.1%) Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 26,058 - 11/30/04 Small Traders Long Short Net % of OI 12/07/04 15,489 49,064 (33,575) (52.0%) 12/14/04 26,781 58,159 (31,378) (36.9%) 12/21/04 20,840 9,109 11,731 39.1% 01/04/05 22,227 8,293 13,934 45.6% Most bearish reading of the year: (34,877) - 11/30/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercial traders are increasing their bearish bias on the Dow Industrials but small traders have jumped ahead in their bearish attitude for the index. Commercials Long Short Net % of OI 12/07/04 25,523 27,351 (1,828) (3.4%) 12/14/04 36,960 38,566 (1,606) (2.1%) 12/21/04 24,850 31,920 (7,070) (12.4%) 01/04/05 24,704 32,916 (8,212) (14.2%) Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 12/07/04 5,274 9,507 (4,233) (28.6%) 12/14/04 13,445 19,089 (5,644) (17.3%) 12/21/04 5,637 6,961 (1,324) (10.5%) 01/04/05 5,166 7,596 (2,430) (19.0%) 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. 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The Option Investor Newsletter Thursday 01-13-2005 Copyright 2005, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: AET, ARLP, AMGN, BBOX, COF, FRE, FRO, PD, RAI, TXI New Calls Plays: KBH Put Play Updates: ADBE, CAI, FDX, NTES New Put Plays: ZMH **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** None ************************Advertisement************************* 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 - CALLS ******************** Aetna Inc - AET - close: 128.17 change: +1.88 stop: 119.99 Trigger alert! We did not have to wait long for AET to breakout over resistance at $127.50 and hit our trigger to go long/buy calls at $127.61. Shares started the session with a pop and closed at a new all-time high. Technicals still look good and its MACD is closer to a new buy signal. We would consider longs at current levels. Picked on January 13 at $127.61 Change since picked: + 0.56 Earnings Date 02/10/05 (confirmed) Average Daily Volume = 2.2 million Chart = --- Alliance Resource - ARLP - close: 71.13 chg: +0.53 stop: 66.49 The rebound in ARLP has paused a bit the last couple of sessions but the stock continues to look poised to trend higher. There was some steady selling at the $71.00 mark recently but it appears that the stock has worked through that overhead supply. Readers can go long at current levels or look for another dip toward $70 as an entry point. Picked on January 10 at $ 69.80 Change since picked: + 1.33 Earnings Date 10/28/04 (confirmed) Average Daily Volume = 115 thousand Chart = --- Amgen Inc - AMGN - close: 63.89 change: -0.98 stop: 62.00 Trigger alert! We have been triggered in our short-term aggressive AMGN play. Shares darted to $65.24 this morning, which was more than enough to hit our trigger to go long at $65.05 over resistance at the $65.00 mark. Unfortunately, AMGN could not hold these gains and the whole move looks like a short- term failed rally. We would be cautious here. Readers looking for new bullish positions can wait for AMGN to trade over $65.25. Picked on January 13 at $ 65.05 Change since picked: - 1.16 Earnings Date 01/26/05 (confirmed) Average Daily Volume = 7.3 million Chart = --- Black Box - BBOX - close: 45.48 change: -0.87 stop: 44.99 Once again we're faced with the prospect of BBOX breaking down under support at the $45.00 level. On Tuesday we suggested that conservative traders exit to minimize any losses and we're going to make the same suggestion today. The NWX networking index doesn't look healthy and BBOX produced a bearish engulfing candlestick today. Together we would expect BBOX to continue to decline but we're going to hold out for one more day to see if BBOX can show some strength and rebound. Picked on December 22 at $ 46.15 Change since picked: - 0.67 Earnings Date 02/01/05 (confirmed) Average Daily Volume = 128 thousand Chart = --- Capital One Financial - COF - cls: 82.04 chg: -0.43 stop: 79.95 Banking stocks got spanked today with one-percent declines in both the BIX and BKX indices. We're encouraged to see that COF out performed its peers but the sector looks to be in trouble. Furthermore we need to keep an eye on COF's upcoming Jan. 19th earnings report. We are not suggesting new bullish positions at this time especially with COF still stuck in this $81-83 trading range. Picked on December 12 at $ 81.12 Change since picked: + 0.92 Earnings Date 01/19/05 (confirmed) Average Daily Volume = 1.4 million Chart = --- Freddie Mac - FRE - close: 70.11 chg: -0.51 close: 69.49 No surprises here. We expected FRE to pull back to the $70 level and that's exactly what it did. Now we just need to see shares bounce from what should be round-number, psychological support. Fortunately, the $70 level is also underpinned by the 40-dma and the 50-dma near $69.60. We are not suggesting new bullish plays at this time although more aggressive traders may want to consider a bounce back over the $71 mark. Picked on December 21 at $ 71.80 Change since picked: - 1.69 Earnings Date 00/00/05 (unconfirmed) Average Daily Volume = 2.8 million Chart = --- Frontline Ltd - FRO - close: 47.69 chg: +1.63 stop: 42.49 Right on target. Shares of FRO added 3.5 percent on above average volume just as crude oil prices surge to new relative highs. Readers can choose to go long at current levels in FRO or hope for a pull back toward $45.50 as a potential entry point. Picked on January 12 at $ 46.06 Change since picked: + 1.63 Earnings Date 02/00/05 (unconfirmed) Average Daily Volume = 1.1 million Chart = --- Phelps Dodge - PD - close: 100.65 change: +2.54 stop: 92.00 Traders must have been turning defensive as copper-producer PD out performed the markets as the major indices turned lower. The 2.5 percent rally on above average volume produced a new MACD buy signal and shares look poised to breakout over the $102 mark. Readers can go long at current levels or choose a dip towards $98 or a breakout over $102 as an entry point. Picked on January 09 at $ 97.65 Change since picked: + 3.00 Earnings Date 01/27/05 (unconfirmed) Average Daily Volume = 2.2 million Chart = --- Reynolds American - RAI - close: 78.92 change: +0.68 stop: 75.99 RAI turned in a strong session adding +0.8 percent versus the market's widespread decline. We remain bullish on the stock but readers looking for an entry point may want to wait for a move over $80.00. Don't forget to keep an eye out for RAI's earnings report, currently expected on or around Jan. 24th. We do not want to hold over the announcement. Picked on December 22 at $ 80.11 Change since picked: - 1.19 Earnings Date 01/24/05 (unconfirmed) Average Daily Volume = 1.0 million Chart = --- Texas Industries - TXI - close: 61.90 change: +0.50 stop: 58.00 The up trend continues for TXI and we're encouraged by the stock's relative strength during Thursday's market pull back. Don't forget that our short-term target is only the $65 level so readers may want to watch for another dip towards $60-61 as a new entry point. More aggressive players may want to hold on and see if shares of TXI can breakout over $65. Picked on January 09 at $ 60.18 Change since picked: + 1.72 Earnings Date 12/16/04 (confirmed) Average Daily Volume = 238 thousand Chart = ************** NEW CALL PLAYS ************** KB Home - KBH - close: 106.00 change: +2.51 stop: 99.50 Company Description: Building homes for nearly half a century, KB Home is one of America's premier homebuilders with domestic operating divisions in some of the fastest-growing regions and states: West Coast- California; Southwest-Arizona, Nevada and New Mexico; Central- Colorado, Illinois, Indiana and Texas; and Southeast-Florida, Georgia, North Carolina and South Carolina. Kaufman & Broad S.A., the Company's majority-owned subsidiary, is one of the largest homebuilders in France. In fiscal 2004, the Company delivered homes to 31,646 families in the United States and France. It also operates a full-service mortgage company for the convenience of its buyers. Founded in 1957, and winner of the 2004 American Business Award for Best Overall Company (source: company press release) Why We Like It: We have had our eye on the homebuilders again recently and KBH has made it to our nightly watch list as a potential candidate multiple times. Fundamentally business is great and KBH reporting record profits. The company was recently added to the Forbes 2005 list of "Supercharged" companies. Technically the stock is turning bullish again as well. Granted the stock price looks a little extended from its Q4 run up shares have actually been consolidating in a bull-flag pattern the last few weeks. We've been looking for a breakout above the $105 level and its short-term trend of lower highs and that breakout occurred today with volume about double the norm. The bull-flag pattern suggests a $125-130 price target but it's worth noting that the P&F chart, while bullish, only points to a $107 target. Fortunately the DJUSHB sector index is also in break out mode hitting a new all-time high today. We're going to suggest an aggressive bullish entry point at current levels with a $115-120 target over the next four to six weeks. Suggested Options: We are going to suggest the April calls. BUY CALL APR 100 KBH-DT OI= 958 current ask $11.40 BUY CALL APR 110 KBH-DU OI= 441 current ask $ 6.00 BUY CALL APR 115 KBH-DC OI= 418 current ask $ 4.10 Annotated Chart: Picked on January 13 at $106.00 Change since picked: + 0.00 Earnings Date 03/17/05 (unconfirmed) Average Daily Volume = 1.1 million Chart = ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Adobe Systems - ADBE - close: 58.22 change: -0.76 stop: 61.01*new* The battle between ADBE's bulls and the bears is taking place between $57.70 and the $59.50 region. Fortunately, the short- term trend is still one of lower highs, which is bearish. Our short-term target remains the $55 region so a failed rally under $60 (like today) could be a new entry point. We are going to lower our stop loss to $61.01. Picked on January 06 at $ 58.99 Change since picked: - 0.77 Earnings Date 03/17/05 (unconfirmed) Average Daily Volume = 2.3 million Chart = --- CACI Intl - CAI - close: 59.30 change: -0.64 stop: 63.01*new* Good news for CAI bears. A.G.Edwards upgraded the stock to a "buy" this morning but the resulting rally in CAI's stock price failed at the simple 10-dma. Shares consolidated lower through most of the session and then crashed lower in the last couple of hours. The close under the $60 mark makes this failed rally look like a new bearish entry point. We are lowering our stop loss to $63.01. Picked on January 05 at $ 61.95 Change since picked: - 1.34 Earnings Date 01/19/05 (unconfirmed) Average Daily Volume = 348 thousand Chart = --- Fedex Corp - FDX - close: 93.76 change: -0.71 stop: 96.01 We're seeing lots of movement in the transportation sector. The Dow Transports index fell again for the second day in a row and has closed under the 3600 and 3550 levels, both potential levels of support. The TRAN's next stop could be the 100-dma. Meanwhile FDX produced a small failed rally of its own at $95.34. We've been targeting FDX's 100-dma so we need to adjust our exit to $91.15-91.25. If FDX trades into that range we'll close the play. Be sure to keep an eye on UPS, which slipped to its 200- dma and could produce an oversold bounce. Picked on January 07 at $ 94.95 Change since picked: + 0.46 Earnings Date 03/17/05 (unconfirmed) Average Daily Volume = 1.6 million Chart = --- Netease.com - NTES - close: 50.85 chg: +0.85 stop: 52.65 Hmm... we're not sure how to interpret the recent action in NTES. The 1.7 percent rally versus a 1.6 percent sell-off in the INX Internet index is not the sort of relative strength we want to see in a put candidate. Shares of NTES did fail at the $51.66 level near its 50-dma but the close over the $50 mark is discouraging. We would be somewhat cautious here. The INX index and HHH holders continue to look vulnerable to we expect that NTES will likely fall in line soon enough. A move back under $50.00 could be used as a new entry point. Picked on January 11 at $ 49.97 Change since picked: + 0.88 Earnings Date 02/15/05 (unconfirmed) Average Daily Volume = 1.0 million Chart = ************* NEW PUT PLAYS ************* Zimmer Holdings - ZMH - close: 77.16 chg: -2.53 stop: 80.26 Company Description: Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer is the worldwide #1 pure-play orthopaedic leader in the design, development, manufacture and marketing of reconstructive and spinal implants, trauma and related orthopaedic surgical products. In October 2003, the Company finalized its acquisition of Centerpulse AG, a Switzerland-based orthopaedics company and the leader in the European reconstructive market. The new Zimmer has operations in more than 24 countries around the world and sells products in more than 80 countries. (source: company press release) Why We Like It: We like ZMH for its technical breakdown on multiple levels. The stock has been suffering under a trend of lower highs for the last four weeks. That consolidation gave way today with a three- percent decline on volume that was more than twice the average. The breakdown under $79 and its 200-dma and 100-dma's looks like a bearish entry point. Not helping matters is the new MACD sell signal on its weekly chart and the new sell signal on its P&F chart. The daily chart suggests we could target a drop towards the $70 region but the P&F chart shows support near $72. We're going to follow the P&F chart and plan to exit near $72 for a quick $5 decline. The challenge here is that ZMH is due to report earnings at the end of January and we do not want to hold over the event. Suggested Options: This is a short-term play so we're only suggesting the February puts. BUY PUT FEB 80 ZMH-NP OI= 154 current ask $4.60 BUY PUT FEB 75 ZMH-NO OI=1550 current ask $2.15 Annotated Chart: Picked on January 13 at $ 77.16 Change since picked: - 0.00 Earnings Date 01/31/05 (unconfirmed) Average Daily Volume = 1.6 million Chart = ************************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 ************************************************************** ********** 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 01-13-2005 Copyright 2005, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: A few big board stocks Traders Corner: Telling a Top: "Key" and other short-term reversals Combos/Straddles: A Little Late Day Action, But Why? ********** WATCH LIST ********** A few big board stocks ___________________________________________________________________ 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. ___________________________________________________________________ Illinois Tool Works - ITW - close: 90.25 change: -0.77 WHAT TO WATCH: The slow, painful drift lower in shares of ITW has finally hit round-number, psychological support at the $90.00 mark. Coincidentally it also happens to be the rising trendline of long-term support dating back to early 2003. A breakdown here would be very bad indeed. We would consider bearish positions under $89.50 and maybe bullish positions on a bounce over $92. Chart= --- Amerada Hess - AHC - close: 82.60 change: +1.18 WHAT TO WATCH: The rally in oil prices today helped fuel a decent 1.75 percent jump in the OSX oil services index. AHC did almost as well with a 1.44 percent gain. We like how AHC is bouncing from a test of support near $78 and its 200-dma. Technicals are improving and its MACD just produced a new buy signal today. We might consider aggressive bullish plays on a move over $84 with a $90 target. Chart= --- General Motors - GM - close: 37.32 change: -1.07 WHAT TO WATCH: GM was the source of the market's weakness this afternoon when the car giant issued an earnings warning. Shares plummeted into the close on very heavy volume. This breakdown under support at the $38 mark puts GM right back in its long-term downtrend. The bottom of this channel is somewhere in the $30 region. Patient traders might consider bearish positions and see how far GM can sink but take note that the P&F chart only points to a $35 target. Chart= ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- EBAY $103.21 -4.04 - Ouch! EBAY announced price hikes for some of its services but traders still sold the news. Watch to see if shares break or bounce at $100. ************************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 ************** Telling a Top: "Key" and other short-term reversals By Leigh Stevens lstevens@OptionInvestor.com SUBSCRIBER QUESTION: Besides the indicators you use like the options (call/put) one, RSI etc and which don't always pin down within a day when a top or bottom is made, what can you tell just from the chart and from trading action? A top was just made that was good for puts . Just using the chart what was the tip off? RESPONSE: You could have used JUST the chart to spot this one – it would have been VERY helpful to know ahead of this point, that that the indices were overbought and that the RSI (Relative Strength Index) was trending lower while prices were still going up, that volume was also trending lower and that sentiment was overly- bullish. But, the reversal pattern on the chart was pretty clear to and the pattern was a "key reversal" type. The OEX daily chart will be used below to discuss this kind of reversal. Some reversal patterns are formed in only 1-2 sessions of whatever time duration (e.g., hourly, daily, weekly) is being watched and you may hear the term "key" upside or downside reversals used for these situations. Key reversals and some other types of short-term reversals are seen by using bar or candle charts - a chart that shows at least the High, Low and Close (HLC). Most such charts are set to show the Open as well (OHLC charts)– A "strong" short-term trend reversal pattern and which is sometimes the start of a significant turnaround in the dominant trend, is contained in the formation of 1 and 2-day key reversals. So, what has to happen to qualify? – by the way, the definitions of a key reversal is often or typically only loosely defined in technical analysis. The following is the definition for what is usually called a reversal up day or reversal down day and also sometimes called a "key" reversal up or key reversal down day: 1. Reversal down day – a day where there is higher high than the prior day, followed by close that is below the prior day’s close. Adding the term "key" downside reversal is too much as the "common" reversal day is pretty, well, common. 2. Reversal up day – a day where there is a lower intraday low than the prior day, followed by a close above the prior day’s CLOSE. What I consider to be a more significant event is where the reversal conditions are less common - what makes a reversal a KEY reversal event, either up or down, is: 1. Downside "key" reversal day (or week, if the weekly range is used) – a day where there is a higher intraday high than the prior day OR prior 2-days AND the close is below the prior day’s LOW (a 1-day "key reversal" down), or of the prior 2-days (a "2- day key reversal" down). 2. Upside key reversal day is a day where there is a lower intraday low than the prior day or past 2 days AND the close is above the HIGH of the prior day (1-day key reversal up) or, of the prior 2-days (a "2-day key reversal" up). The preceding descriptions would also apply to intraday periods where each bar was 15, 30 or 60 minutes, etc. only we would not of course call it a 1 or 2-DAY key reversal; on a 60-min chart, such a reversal would be a key hourly reversal for example. The key reversal term does tend to be applied most often to a daily time frame or daily chart however. It's often a significant turning point where the trend changes for 2-3 weeks or more. The S&P 100 (OEX) daily chart from above is shown again – Note that there were several days where the intraday highs were in the same area per the level dashed line. This is different then the prior multi-day consolidations occurring before this period in late-December. When a pattern is different than what came before, look out for a (trend) CHANGE. The high was noticeably above this line, but prices soon began sinking. The low and the close pierced the lows of the entire prior week and then some. The above is a classic key 1, also a 2-day, reversal. If you checked prices near the close, say the final hour, you could be pretty well assured that this day was going to constitute a strong (key) reversal. You could have even waited until the next day and bought puts on any minor rally - in this recent OEX chart there was a slight rebound back to the 574 area. Rallies after a key reversal are usually weak. Remember, the overly-bullish sentiment? There will be investors and traders who view such weakness as seen during the reversal highlighted in the above chart, as a buying opportunity – especially those who trade off from momentum or on a bullish fundamental outlook only. Those who do not have the benefit and advantage of using technical analysis in spotting a change or reversal in the trend. My more restrictive definition for a "key" downside reversal involves not only a move to new high, followed by a reversal that is below the prior 1-2 bar’s LOW, not to just below the prior bar’s close. This is for the simple reason that this pattern is a more definite sign of a trend reversal. [Key upside reversals are the reverse of the key reversal down – a "key" upside reversal involves not only a move to new low, followed by a reversal above the prior 1-2 bar’s HIGH - not just to above the prior bar’s close. Use of the term "bar" designates the prior trading PERIOD (e.g., hours, days, weeks, etc), so as to not just imply a key reversal is only something seen on a day chart – 1 or 2-DAY reversals are frequently the topic however.] A "2-day key reversal" tends to be a stronger "signal" than a 1- day key reversal or a simple 1-day reversal up. The same is true for a 2-week, versus a 1-week, key reversal. There was a chart of Microsoft (MSFT) I used from a prior year as an example of interest - The example in the above chart of a key 2-day reversal (in MSFT) was also a double bottom low. The more bullish patterns that come into the play the stronger the "signal", so to speak. This is seen also in the recent example of the Nasdaq 100 (NDX) that also made a key downside reversal and where the day's high, a subsequent retreat, ALSO formed a double top – Stevens ranking universe for a the highest probability – notice I said probability, not "certainty" - HIGHEST PROBABILITY FOR A REVERSAL (#1): DOWNSIDE – A key reversal where prices go to a new high that is SUBSTANTIALLY above the prior bar’s high and this high is either an ALL-TIME new high or a new high for the secondary trend, followed by a close that is BELOW the prior 1 or 2-bars’ low. A similar jump in volume would be a good secondary confirmation. UPSIDE - A pattern where there was a new low substantially below the prior bar’s low where this low was also an ALL-TIME new low or a new low for the secondary trend, but which is then followed by a close that was above the prior 1 or 2-bars’ high. A jump in volume helps confirm the turning point. Key daily downside and UPside reversals were illustrated in my book (Essential Technical Analysis) that may also be of interest, so the idea of reversals is shown in some different situations - AND ......... There are some other short-term reversal patterns also, but none as topical or quite as potent as the key reversal – more on these other patterns another time perhaps. The key reversal gives a flavor and feeling for patterns that signal trend reversals. Getting in early in a trend is where you want to be – as opposed to STEVENS rule of thumb for dumb option trading – buy and sell ONLY clear cut breakouts that everyone else also sees, especially the floor or market makers, in time to inflate or jack the premiums way up if you are trying to buy puts or buy calls on said "breakout"! Where you want to be is IN (the trade) before every Tom, Dick, Harry and Jane is also perceiving the trend change - timing is, as they say, EVERYTHING! Good Trading Success!! **************** Combos/Straddles **************** A Little Late Day Action, But Why? By Mike Parnos Did you ever wonder why, after a relatively quite market day, in the last hour it makes a large move in one direction or the other? Here, basically, is how it was explained to me. We know that brokers are often given huge orders by institutions. They are doing their best to get these orders filled. But, it’s not always that easy to do. They often find, that, with the end of the trading day approaching, they still have some sizeable trading to do. For example, the big brokerage firm is sitting with an order to sell 2 million shares of a high tech stock. All day the broker sells each rally in the stock. Only 700,000 of the 2,000,000 have been sold because prices have been weak all day. With an hour left till the close the broker must get the rest of the order filled – regardless of price. Selling that large amount of stock can put tremendous pressure on the stock as buyers sense there is a big seller out there. He is hitting the downtick bid side. The public selling long positions can only keep hitting these downticks. The same thing can happen, just in reverse, when stocks are moving up. That broker may have been buying the stock all-day on dips and only bought 700,000 of his 2,000,000 order. Now with an hour left in the day, he must continue to buy the remaining 1,300,000 at the ask prices thereby pushing prices higher. Other market participants sense an urgency to buy and lift their offers forcing the stock to even rise faster until new sellers will sell stocks at higher prices. The question is – how can we take advantage of these scenarios? You can treat it like a lottery ticket and buy a QQQQ out of the money call or put. If it costs you $.20, a quick dip of $50 might net you $.10 – not a bad return for a short term trade. If you’re more aggressive, you can buy an at-the-money put or call and perhaps participate a little more in the movement of the QQQQs. Remember, the further in the money strike price you buy, the more delta you have working for you – if the stock goes in your direction. By the same token, that’s essentially the same amount of delta working against you if it goes the wrong way. Remember, it’s a directional trade. The dollars you risk, may be your own. ___________________________________________________________ The Road More or Less Traveled I’m writing this from the island of Roatan in Honduras. I got off the ship in the hope of finding an Internet café. Instead, I found a world of poverty. There is no “quality” in their quality of life. Last year’s hurricanes caused tremendous damage and they’re still trying to recover they – and they weren’t in very good shape to begin with. It certainly puts life into perspective. My friends, appreciate what you have. We may trade options. They have very few options. Speaking Of “Quality” Of Life . . . When you sign up for a vacation on a cruise ship, you have to make a few sacrifices. For instance, I just paid $28.75 for all the diet coke I can drink on a seven-day cruise. Now, this couch potato is used to paying $.99 for a two-liter bottle. In the real world, seven two-liter bottles at $1.00 each would total about $7.00. Having to pay $28.75 for a $7.00 value, is like putting in a market order on an option and letting market makers have their way with you. It’s the loss of control that’s most disconcerting. ___________________________________________________________ February Position #1 - SPX Iron Condor - 1186.19 We sold 10 SPX Feb. 1255 calls and bought 10 SPX Feb. 1265 calls for a credit of about: $.50 ($500). Then we sold 10 SPX Feb. 1140 puts and bought 10 SPX Feb. 1130 puts for a credit of about: $1.00 ($1,000). Our total net credit was $1.50 ($1,500). Maintenance of $10,000. We've created a maximum profit range of 1140 to 1255 -- that's 115 points. If everything works out as planned, our return on risk will be 17.6%. We're still conservative and defensive minded. That's why we're limiting our spread size to 10 points or less. _________________________________________________________ February Position #2 - OEX Bull Put Spread We sold 15 OEX Feb 530 puts and bought 15 OEX Feb 520 puts for a credit of about $.50 ($750). Our net credit and potential profit is $750. Maintenance of $15,000. We're going to be content to put on the bull put spread for now. If/when the time is right, we'll put on the bear call spread to complete the Iron Condor. ___________________________________________________________ JANUARY CPTI POSITIONS: January CPTI Position #1 - SPX Iron Condor Bull Put Spread We sold 20 January SPX 1125 puts and bought 20 January SPX 1110 puts for a credit of about $.50 ($1,000). Profit potential $1,000. Maintenance: $30,000. I know I said I prefer not to use anything larger than five or ten-point spreads, but this is almost 80 points out of the money that I'm going to make an exception. This seems incredibly safe, but then we thought that before, didn't we? January CPTI Position #2 - SPX Sure Thing Credit Spread We're still in an up-trend and we might as well try to take advantage of it. Our "sure thing" spread worked to perfection for the December cycle. So, until the market tells us otherwise, we're going to continue with the strategy. Again, remember that this strategy is for only those who have a lot of maintenance dollars available, because you may need them. Eventually, we'll be right, but you may need that staying power (money, financial Viagra). You have to be able to withstand being whipsawed back and forth. In last Thursday's column I suggested initiating the "hypothetical" position by placing the January 1195/1170 bull put spread for a credit of $6.30. However, on Friday, the SPX headed down in the morning. When it leveled out, we put on a two contract SPX 1190/1165 bull put spread instead and we were able to take in $$6.80 ($1,360). We are still mildly bullish for the next month, but we couldn't pass up an opportunity to lower our short strike to 1090 -- plus get a little more premium. Maintenance (initially): $5,000. January CPTI Position #3 - MSH Bull Put Spread This is the Morgan Stanley High Tech Index. We haven't traded it before, so now is as good a time as any. Maybe it will turn out to be a usable replacement for the RUT. We're going to continue to be conservative. We sold 15 MSH January 450 puts and bought 15 MSH January 440 puts for a credit and potential profit of about $.55 ($825). Maintenance: $15,000. January CPTI Position #4 -- SPX Bull Put Spread Put on two weeks ago -- and a wise choice it was (so far). I've become very conservative -- even more so after our unpleasant experience in the November cycle. I saw an opportunity to put some serious distance between a bull put spread and where the SPX was trading. With the SPX at 1179, I noticed the January 1100/1090 bull put spread would yield about $.70. Being still somewhat bullish for the next few months, I was willing to go out to January. I like that almost 80-point (now over 100 points) cushion and I'm willing to wait the eight weeks. When the opportunity presents itself, we can always add the other side of the condor. We sold 15 SPX January 1100 puts and bought 15 SPX January 1090 puts for a credit of about $.70 ($1,050). Maintenance: $15,000 ____________________________________________________________ ONGOING POSITIONS QQQ ITM Strangle - Ongoing Long Term 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 took in $.45 ($450) rollout. We rolled to the November. $34 calls and $37 puts for $.70 ($700). Last week we rolled in the December $34 calls and $37 puts for a total of $.50 ($500). New total: $13,400. We rolled out the Dec. $34 calls at break even and then sold the January $40 puts for $.80 ($800). Our new total premium is about $14,200. _________________________________________________________ ZERO-PLUS Strategy. OEX 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 about 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. 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 total of $9,365. In October we added $650 for a new total of $10,675. Zero-Plus Position Adjustment Prior to expiration, we bought back our Nov. 555 calls and rolled it to six contracts of the January 580 calls for a credit of about $100. We also put on five contracts of a December 540/530 bull-put spread for an $.80 credit ($400). New cash total: $11,175. The December bull put spread expired worthless. We put on a five contract OEX 545/535 bull put spread for a credit of $.70. If all goes well, we can, at January expiration, add another $350 to our cash total. 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, Your 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 (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, it ain't the fault of the strategies. ************************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. 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