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  Jim Brown   7/18/02,  4:46:01 PM
Pivot Trade Wrap
Super Thursday - This could be called super Thursday for tech earnings. Tonight had MSFT, SUNW, EBAY, GTW and NT to name a few.

SUNW posted earnings inline with estimates of $.01 and broke a string of four quarters of losses. The majority of the gains were in cost cutting but they did see some gains in server sales. Revenue was down as expected but the company was positive on the surface about returning to a profitable position.

NT - Announced earnings inline with estimates with a -.09 cent loss and revenue was just slightly under estimates. They see sales flat for the next quarter with ongoing pressure on capital spending well into 2003.

MSFT - announced results of $.43 cents when estimates were for $.42 cents. They said the environment going forward was still very challenging but affirmed estimates for the next quarter. They are trading down at $50 in after hours about -$1 from the closing price.

EBAY - reported results of $.19 cents per share and inline with estimates and issued cautious guidance for the next quarter with revenue slightly less than analyst estimates.

GTW - missed estimates of -.17 cents with a -.19 number. The company expects business conditions to remain challenging for the rest of the year and is pinning its hopes on a yet to be seen seasonal buying bounce for back to school computer.

It is still too early to determine direction for tomorrow but there was no extremely bullish earnings surprise. Most of the outlooks remain flat to negative and that should be the market outlook as well See you at 9:15

 
 
  Jim Brown   7/18/02,  4:04:27 PM
Pivot Trade Signals
Almost a perfect setup for tomorrow. Dow at 8400, OEX 440, SPX just above the 877 support from Monday! With MSFT, SUNW, EBAY, GTW and NT announcing tonight the stage is set for a monster rebound or the next leg down.

 
 
  Leigh Stevens   7/18/02,  4:00:27 PM
Subscriber QUESTION: "RE QQQ, ex-resistance - In general when channel resistance is broken to the upside and then the price slides down the line, now as support, is this a meaningful pattern or simply a new down trend channel? "

RESPONSE: Yes, its somewhat significant - I think what you're talking about is what we're seeing in the Composite - anyway, this type action is MOST significant on first "touch" when there is a fairly immediate rebound from the previously broken up trendline - this is where you can say that resistance "becomes" support.

Otherwise, the situation is a like an envelope line or Bollinger Band, when the index or stock "walks down" the lower envelope line. All that is happened is that the rate of decline has slowed down - however, its still going down, so line has not "signaled" a reversal point or anything.

 
 
  Steven Price   7/18/02,  3:57:03 PM
Lowes (LOW): $37.82 (-0.39) Like the rest of the market, this stock has pulled back. Its rebound efforts still look weak, as does the rest of the sector. Retail Index ($RLX.X): As I stated earlier today the Retail Index has not been able to get back above 290, with heayweights Walmart (WMT) $47.70 (-0.55) and Home Depot (HD) $29.75(-1.13) also looking weak. Note on Walmart: Walmart is approaching its PnF downward price objective of $46.

 
 
  Jeff Bailey   7/18/02,  3:55:17 PM
Celestica (CLS) error... verbage should be "bull trap" not "bear trap".... I'm getting weary...

 
 
  Jim Brown   7/18/02,  3:53:55 PM
Pivot Trade Signals
Like Steve Price said earlier in the day, it might be a good time to take profits in our XL put play. We could see a dead cat bounce tomorrow! -$9.50 today, -$16 since picked.

 
 
  Jeff Bailey   7/18/02,  3:51:58 PM
Celestica (CLS) $21.92 +17.28% ... Jeff Was looking at CLS and wondering if today's bounce changed the fundamentals of the stock. It did exceed the PNF bear count. Thanks for all the help

Yep... stock achieved, then exceeded its bearish count of $22. Today's trade at $21 puts stocks back on a "buy signal" and interesting that another "tech-like" stock giving a "buy signal" off the bottom. Link

Overhead supply is at $25, so need to at least assess risk to there. Potential "reason" to be thinking bearish is that a "bear trap" could be formed right here at the triple-top. Link

I've been watching the stock trade and looks to be rather "determined" seller just below $22. Might be a very aggressive bear's play. "Bear trap" would be confirmed if stock reverses, then gives the sell signal at $18.

 
 
  Leigh Stevens   7/18/02,  3:50:16 PM
Subscriber QUESTION: "If the QQQ's reach your target of 24.3 - 24.6 today, are you still a buyer of Q calls?"

RESPONSE: Am somewhat leary of taking a QQQ position ahead of MSFT earnings tonight - but that's my price area of buying interest on the Q's around 24.5 - with a tight stop, as this area is down at emerging uptrend line.

 
 
  Leigh Stevens   7/18/02,  3:44:41 PM
Subscriber QUESTION: " Hi Leigh, you are doing a great job thanks for your great comments. Looks like YHOO is breaking out, your commnets please. "

RESPONSE: Short-term "breakout" would need to be move above 15.3, especially on a closing basis.

Yahoo (YHOO) is what would be called in technical (analysis) terms a "rectangle" or sideways consolidation, between 10.7 and 20.2 - dating from Nov. The longer this goes on the better upside potential the stock should have at some point - when, is impossible to say - how, is when you get daily and weekly closes above 20, with stock able to find support on corrective pullbacks to 20 area. Conversely, downside risk is still to prior Sept. lows in $8 area if there is any 1-2 days where the stock closed under 10.70 and didn't immediately rebound.

 
 
  Leigh Stevens   7/18/02,  3:33:22 PM
Subscriber QUESTION: "Currently holding the Aug 70 put. In looking at the PF chart there looks to be resistance at the 74 level and support at 67. I'm a rookie at the PF charts and may have this all wrong. Would you suggest holding this position looking for a breakdown from todays high or an exit from here. Some seem to think Blue is headed lower...60 maybe even 50? "

RESPONSE: Weekly close above 74 or intraday move above 75 would suggest that IBM has bottomed already.

Conversely, move below 67.2-66.3 would be bearish - if so, see some possibility of another down "leg" to 58-60 area where I see better prior support in terms of the 5-year weekly chart.

Nothing conclusive yet in technical action as to whether a "final" bottom is in place or time frame it will take to resolve this sideways trade of past few weeks.

 
 
  Jonathan Levinson   7/18/02,  3:31:02 PM
Back online, but without email. I sure wish I had the resources to short MSFT into the stone age, which is where I've just spend the last few hours. It looks like I've missed a slow motion breakdown here, telegraphed by the bond market. The QQV is down .98, and the TRINQ is back off its highs of the day, currently at 1.23 as the selling relaxes for the moment. The COMPX is trading slightly above its low of the day at 1360, as is the US Dollar Index. A short here presents a dubious risk/reward profile, as positive news could provide a bungee snap. I personally am not expecting that to occur, but I'm not willing to risk the week's profits on it.

Wesley, I'm not aware of any symbol for the TRIN and TRINQ other than $TRIN and $TRINQ. A symbol lookup for these, possibly under Arms Index, should do it.

 
 
  Jeff Bailey   7/18/02,  3:27:34 PM
Sungard Data $20.94 -7.54% ... interesting stock here. S&P Index funds will get to buy this one tomorrow and the supply/demand chart looks like the added liquity will be welcomed by those non-indexed funds holding long. Company also resports earnings tonight after the bell.

If SDS were to "stink up the joint" like its point and figure chart hints it will, but the stock bids to $23 on any type of S&P addition buying, I'd be looking short/put on any rally under the above scenario. Link

Point/figure chart is bearish with vertical count of $18 and lower highs (X's) and lower lows (O's) also bearish.

 
 
  Jim Brown   7/18/02,  3:23:27 PM
Pivot Trade Signals
I actually like the setup the market is giving us. By moving to the bottom of the current range it gives us a good support base if MSFT is positive. If MSFT is negative then it could force us below those support numbers and force the next leg down and bring back the huge market swings. I just wish the market would drop to at least 440 before the close to really compress that spring.

 
 
  Leigh Stevens   7/18/02,  3:18:20 PM
Subscriber QUESTION: "Can you give a similar update on Juniper as Qcom please? "

RESPONSE: Juniper Networks (JNPR) is rebounding off a "V" bottom in $5 area, then got above resistance implied by 50-day moving average recently at 8.1 and is still in an uptrend. Next resistance looks like 10.30 area at a "line" of prior highs and lows from Mar-Apr-May. This is key resistance and an upside target.

I don't think the stock is going to get through this area anytime soon. Support looks like 6.6-6.7 area. I anticipate a possible trading range between these levels.

 
 
  Leigh Stevens   7/18/02,  3:08:40 PM
INDEX Update: Support & Resistance -

Nasdaq Composite (COMP) First support > estimated at 1360; then, at 1338, at bottom of minor channel and at lower hourly envelope line - Resistance > 1392, then 1400

Nas 100 (NDX) Estimated support > 970, at lower hourly envelope line; then, prior low at 955 - Resistance > 1025, then 1035

QQQ: Estimated near support > 24.3-23.4, at low end of hourly uptrend channel; then 24.0 - Resistance > 25.5, then 25.8

 
 
  Steven Price   7/18/02,  3:07:46 PM
Reader Comment RE:Cigna (CI) $83.08 (-2.25)

Hi Steven, Do you follow all of the stocks presented in the OIN call and put list and report on them in the Monitor? I have noticed a few lately. However there was almost a perfect setup for CI today and was wondering if you brought it up today? entry on $88 rollover or momentum traders below $85 Thanks, Don

Response: Thanks Don. We profiled this stock in our recent put picks Link . I try to comment on our picks, as well as other plays and strategies during the day. We do follow all of our picks and update readers on these throughout the week. Please check our Updates section for regular commentary on current plays.

 
 
  Jim Brown   7/18/02,  3:03:57 PM
Pivot Trade Signals
Tempting to try and play the breakdown but the risk/reward is minimal. With support at 436-440 it is not worth trying to grab a handful of points. With MSFT in an hour it is too risky to go long. Be patient.

 
 
  Leigh Stevens   7/18/02,  2:45:19 PM
INDEX Update: Support & Resistance - now that we've expanded the price range by this recent weakness on sell/"basket" program

S&P 500 (SPX) Near support > 885, at low end of channel, then prior low at 876 - Resistance > 900-902

S&P 100 (OEX) Support > took out near support at 447, at low end of recent range; next support > 442, then prior 436 low - Resistance > 454-456

DJX: Support > 84.3-84.5, then 84.0 - Resistance > 85.5, then 86.0

 
 
  Jim Brown   7/18/02,  2:43:47 PM
Pivot Trade Signals
Still no compelling reason to trade. The recent sell program drop just pushed the markets closer to the bottom of their recent trading range. With the OEX at 446 it is still over 6 points above where I would consider an entry point. The MSFT earnings tonight are too big a wild card to warrant taking a position without a defined trend. The only trend we have today is boring.

If we get bad news tonight I would hope to get a retest of the 436 low from Monday and a LONG bounce from there. If the news is good then we could get another bounce to the upper resistance but next week could lack the earnings announcement power to continue the run. The high odds favor waiting for the next extreme move and playing the reversal. Patience makes profit! We have a plan and the plan is to wait for the next great entry point.

 
 
  Jim Brown   7/18/02,  2:35:15 PM
There were 2000 contracts traded on the DEC 500 call between spread today. I was the other 5. Would you have any thoughts on this? I think this was one trade. SOK.

Gutsy trade! With the options going at $12.00 it could prove to be very profitable or very expensive. Up until this week most analysts expected a fall rally as the economy picked up. With that possibility shrinking and more accounting problems still undiscovered ahead of us the certainty of that rally is questionable. Can the OEX move up +60 points from here. Absolutely! Can it drop -60 points from here depending on the news to come? Absolutely. I guess the bottom line in taking a position like this is whether you feel the bottom is behind us and how fast you expect the markets to recover if it is behind us. With October typically the low for the year (scary thought) that means OEX 400 could be more like than OEX 500 as the next century mark hit. As far as the 2000 contracts it is impossible to know if somebody was selling calls as part of a hedging strategy or a spread or if it was just a calculated bet on the recovery.

 
 
  Jeff Bailey   7/18/02,  2:29:38 PM
Remember! After the close of trading tomorrow, Standard and Poor's will re-shuffle the S&P 500.

News has been absorbed and most likely factored into stocks. July 9th close may serve as "benchmark" witch was just prior to announcement.

Going out... RD Link , UN Link , NT Link , AL Link , ABXLink , PDG Link , N Link

Coming in ... EBAY Link , ERTS Link , UPS Link , GS Link , PRU Link , PFGLink , SDS Link

Bearish trader thinking... "if I can find a weak stock that's coming into the S&P 500, then short. After all, the stock's been weak (lack of demand) and those looking for the door can sell into liquidity to the index funds.

Bull trader is thinking... "if I can find a strong stock that has discounted the news of deletion that has already been sold, then may get a bounce as committed bulls step up and get some size/liquidity on the pullback."

 
 
  Leigh Stevens   7/18/02,  2:28:46 PM
INDEX Comments: If you like watching paint dry, this market is perfect! Actually there are some important technical aspects to a sideways trend:

1.) - The sideways trend is the second type of basic "consolidation" to a prior price swing. An index or stock can either retrace part of the prior trend or move basically sideways - the first type can be thought of as a "price" consolidation and the second, the sideways move, can be thought of as a "time" consolidation; as in investors/traders have time to do the buying and selling they want to at this new "equilibrium" level - after this new equilibrium is established, usually, the prior trend resumes as it does after any consolidation. This assumes that no prior important support levels are pierced.

2.) - The second thing that a sideways "time" consolidation accomplishes is to "throw off" a near-term overbought condition, especially in the hourly oscillators, by a period of 2-3 days of a sideways, narrow-range movement.

Because of the way an oscillator (RSI, Stochastics, MACD to some extent) works - the formula takes the highest high and lowest low for X periods and measures current "last" against this range - the longer that the price range is a narrows one, the more the oscillator will come down.

On balance, I take the current sideways consolidation bullishly - that is, in and of itself. This is where the old traders saying comes from to "never short a dull market"; i.e., often "dull" relates to a situation where a market is moving laterally or sideways after a first "leg" up.

 
 
  Steven Price   7/18/02,  2:28:00 PM
Bank of America: We discussed going long the Aug 70-65 put spread in BAC a couple of days ago. This stock has reached the first targeted support area below $64. There has been some consolidation here in the past and this looks like a good point to close part of the position for a profit.

 
 
  Jim Brown   7/18/02,  2:25:51 PM
Pivot Trade Signals
It appears traders are more afraid of MSFT earnings than they were of IBM. This is an interesting irony in the markets. They bought the markets in front of the weakest Dow tech and are selling it before the strongest Dow tech announces. Could be setting up for a very interesting Friday.

 
 
  Steven Price   7/18/02,  2:19:46 PM
Reader Question Goldman Sachs (GS): $75.72 (+1.24) Could you give me your opinion on shorting GS here. thanks

Response: GS has recently broken above its 21 and 50 day moving averages. It has also broken above the resistance around $74. I don't see this as a strong short candidate.

 
 
  Jim Brown   7/18/02,  2:17:27 PM
Hey Jim, Tomorrow the S&P changes the 7 stocks to all USA companies. Will that also affect the OEX? I heard on CNBC that many traders seem to want to wait until next week to see how that affects the S&P. What's your take? I'm really thinking of those calls on OEX, but I want to wait. Thanks! Chris

Call buyers should be very careful holding over the weekend. Normally what happens is a drop in the index late in the day that the stocks leave the index as funds dump the shares. Much of this has already happened with the big drops we saw in many of the stocks when the change was announced. What will happen tomorrow is that we will see the stocks being added spike at the close as funds move into the stocks. Depending on how many speculators bought those stocks over the last two weeks in advance of the funds we could see a huge spike in prices if they bought too little or a huge drop in prices if they bought too many. The speculators attempt to capitalize on the need by funds to buy a huge amount of stock in a relatively few hours by taking positions earlier to dump at the close. Much of this speculation has driven prices up already over the last two weeks.

The most likely result will be a drop of the S&P at the close Friday, maybe slight since the stocks leaving were not large capitalization stocks in general. On Monday there could be a larger drop in the S&P since the new stocks will be officially in the index and speculators dumping excess stock will drive it down. Also, the price increase in these stocks over the last two weeks was artificial and that increase will start to bleed as well. Overall I see the change as negative BUT it was only seven stocks! Not 77 or a 177 like the Russell shuffle last month. The Russell has lost 60 points since the artificial spike at the end of June to 460. The S&P will not see this kind of impact. I don't see this as being material but it is something to watch.

 
 
  Jim Brown   7/18/02,  2:04:54 PM
Pivot Trade Signals
The old adage "never short a dull market" could really apply to today. However this dull market has done us a favor by shrinking option premiums to some extent. A reader asked about a QQQ straddle before the MSFT earnings tonight. I checked on the prices and the July-25 straddle is .55 call/.40 put for a net debit of $.95 cents with the QQQ at 25.07.

If anyone thought the QQQ could move more than $1 tomorrow after a MSFT surprise then this would be a profitable strategy. In order to finish in the black the QQQ would have to trade/close above 25 or below 24. A better strategy would be to go farther out in time by a couple months where the losing side will retain value longer. Buyer beware when playing July options on expiration day. Maximum risk = maximum returns or maximum loss!!

 
 
  Jeff Bailey   7/18/02,  2:02:43 PM
AOL/Time Warner (AOL) $12.50 -4.65% ... Jeff: Jeff, I know you are busy but do you have any suggestions as to a bearish target for AOL? I am long call leaps but have hedged them with shorter term puts.

Mid-June's (after red 6) trade at $16.50 had AOL's chart back on a "sell signal" and resulting column of O (from $19.50 to $15.50) has the bearish vertical count at $10.50. Link

Dorsey/Wright classifies the stock as "media" and that group is "bear confirmed" at 22.14%. It would currently take a reading of 28% to have group reversing up to "bull alert" (tie in a trade at $15 with AOL) and 62% to achieve "bull confirmed" status. In December, this group achieved the 68% level, just shy of the "overbought" 70% level. The rest as they say is history. Hmmmm... AOL was trading $35-ish back in December.

 
 
  Steven Price   7/18/02,  1:56:15 PM
Reader Question: Is OIN holding MRK puts over earnings in the morning?

Response: OI will be closing our MRK put position, as we do not hold positions over earnings.

 
 
  Jim Brown   7/18/02,  1:53:15 PM
Pivot Trade Signals
The current bleed on the OEX/SPX is the closest thing to a trend we have seen today. The advance/decline ratio is weakening at a negative .70 and the VIX has started to tick back up. We are stretching to call this a trend but it is surprising to see it trending down before Microsoft earnings, which are expected to be positive. I hope this is not a leading indicator that MSFT may not hit estimates. They have widely been expected to beat estimates by a penny but with all the negative news about slowing PC sales this down tick could be caution setting in.

There is a side opinion that MSFT could be the last big cap to crash and cause the next retest of the recent lows. MSFT has been relatively strong considering the rest of the Nasdaq and the strong stocks crash last. Time will tell but MSFT does have a habit of trending down after the earnings news has passed, even on good news.

 
 
  Steven Price   7/18/02,  1:52:00 PM
Reader Comment: Re: last night's article "Call=Put" Link

Steven: Thanks for this very educational article. I wonder whether your leverage could be increase if selling 1 LEAPS call, instead of selling the 100 stocks. LEAPS are often considered as stock-“ersatz”. Outlay would be less, return may be higher?? I would appreciate if you could allude to that next time. Thanks jean

Response: Thanks for the suggestion Jean. Certainly selling a call is one alternative to shorting stock, with the similar upward implications. However, selling a LEAP call, against a long short term call, essentially leaves you with a short time spread. This has other implications, such as volatility levels, having to pay the bid/ask spread, and liquidity of trading the stock, as opposed to the option. If you short stock against a long call and it drops, you will probably get more bang for your buck by buying it back and then attempting the same transaction if the stock goes back up. A LEAP is generally more expensive, leading to a wider bid/ask spread. As stock goes down, implied volatility levels of the options generally increase, affecting long term options the most, and prop up their prices, which would prevent it from falling as much as the short stock.

 
 
  Steven Price   7/18/02,  1:36:55 PM
XL Capital (XL): $66.97 (-7.57) I remarked in yesterday's Market Monitor that our XL put play had reached a point where OI felt it would be prudent to take some profits. Today XL announced it was increasing reserves by $200 million for losses from the Sept. 11 attacks. It also expects to lose $120 million due to losses in telecom investments. As I mentioned yesterday and at the risk of stating the obvious, this would be a good point to take profits on the put play. Note: XL's post Sept 11 closing low was $62.

 
 
  Steven Price   7/18/02,  1:26:32 PM
Reader Comment:

Hi Steve, I think it is great to have you on the monitor. I have been interested in spread trading for some time. Since this seems to be a slow day and I am sitting at home ,getting things done, I thought I would put 2 cents in on my current strategy which may be of benefit to some of your readers. My situation is: 1. I have a day job (although on vacation today) and don't have the luxury of watching the markets like you pros do. My goal is to eventually quit the day job and trade. 2. I like trading at inflection points (like all of us), but while at work cannot watch the market minute-by-minute. Strategy: Buy a stock, Currently playing TYC then: 1. Buy protective puts (3 months out) 2. Day - Trade the out of the money covered calls (1 month out). I usually set entry points near the top of the day, hope it gets caught and try to make 3-5% per day. Yesterday traded the call and the put and made 13%, although I don't intend on trading the protective put very much due to the risk. 3. This strategy works in that you don't have to be married to your monitor, and hopefully will be able to generate 10% per week. Extrapolating a 100 K portfolio could generate conservatively 20 K per month after paying for the insurance puts. (Enough to quit the day job hopefully - time will tell) Comments, Criticisms, Flaws. Thanks for all your good work. DAS.

Response:Thanks for sharing your strategy. I'm glad to see it working out for you. I'm not sure I would suggest our readers quit their day jobs, since there are a few considerations with this strategy. As long as the stock goes up and allows you to sell the call at a nice premium, and then comes back down every day, you can buy it back for a profit. But you can only sell one call for every 100 shares you own if you don't want to risk an upside breakout, and then you must wait for the opportunity to buy it back if you want to keep re-employing the same strategy. It sounds as though this is working well for you so far. The downside put is also nice to have as protection, but remember the put suffers time decay, and you need to be able to trade the call back and forth enough to cover the decay in the put.

 
 
  Jonathan Levinson   7/18/02,  1:21:07 PM
Steadily dropping bond yields are conflicting with the lower QQV and decreasing TRINQ. Bonds are indicating a defensive posture while the COMPX chops along in a narrow range with compacency in the QQQ option traders. My bet would be to follow the bond market.

 
 
  Steven Price   7/18/02,  1:12:17 PM
Reader Question Lowe's (LOW) I bought PUT when $37.25 price was triggered at $4.20. Now stock is going up. Should I hold my put or Close at this level with $1.00 loss.

Response While LOW has been on an upswing, I am not yet convinced of its renewed strentgh. The stop loss figure on OI's play list is $40.60 Link ,and the recent rise has not been accompanied by significant volume. The rebound in LOW has mirrored that of the Retail Index ($RLX.X), which broke it's 290 support level two days ago and has not yet made it back through that level. The index is currently trading 286.30. I would keep an eye on OI's stop loss as well as the RLX before being convinced of renewed strength in LOW.

 
 
  Steven Price   7/18/02,  12:57:35 PM
Reader Question: I own 3600 shares of QQQ and typically sell covered calls to lower my basis. I've been considering selling, for example, the August29-$30 covered calls and August 19-$20 puts and hold them close to expiration. I may not sell all 36 put contracts as this may affect my margin requirement. Is this a conservative strategy, or is there another approach that does essentially the same thing with less risk?

Response: The position you are talking about is a short strangle, which is selling out of the money calls and out of the money puts. If you are long QQQ shares, then you are essentially long overall. By selling puts, you are only increasing your risk to the downside. If QQQ falls below the short put strike, you are getting even longer by 100 shares times the amount of puts you have sold. I would not consider this a low risk strategy. While the only risk to the upside is having your shares called away at the strike you have sold, you have increased your downside risk to. Another strategy some traders employ to collect premium while limiting risk is selling spreads, in this case a downside put spread, which might be able to collect a credit while limiting your potential loss to the spread between the strikes you've chosen.

 
 
  Jonathan Levinson   7/18/02,  12:56:00 PM
Not much new here as I work on restoring my downed harddrive. Numerous readers have asked if I'm short or long- nope, still on the sidelines. The US Dollar, which is higher now, above 104.80, is tempering my otherwise bearish growl. The TRINQ is coming off the low end of its range at 1.31, and the QQV is now down .75 on the day. So far, nothing doing.

 
 
  Jeff Bailey   7/18/02,  12:34:44 PM
OSI Systems (OSIS) $17.52 -5.2% ... You said to take profits at 17.5, which was right on target so far. I have the Oct puts, but underwater. Are you expecting the stock to still go down per your original p/f price, or should a person do as you suggested and sell puts? Thanks

OK.... some things to think about and so tough with limited info.

If a trader is holding this as ONLY bearish play in his/her account, then I'd want to hold it as a bit of a "hedge."

If holding multiple put positions, then begin looking at those against OSIS.

One "determiner" may be relative strength. If I look at the RS chart of OSIS versus QQQ (as a comparison only). OSIS has held up rather well. However, would currently read as "sell signal, column of X" and looks like RS has rallied right back up to a relative strength level, which combined with regular p/f chart of OSIS, hinted of near-term type of resistance. Thus thoughts of "not closing out here and looking for pullback to price of $17.50.

Here's RS chart of OSIS vs. QQQ. Link

Can do the same with RS chart of OSIS vs. S&P 500 where here too we see some "resistance" on RS chart, but would be read as "buy signal, column of X" and more bullish. However, now firm in stop just above recent OSIS price high. Link

Can "step out" further with RS comparison of OSIS vs. NASDAQ-Comp. and here we see "weaker" RS chart, and would be read "sell signal, column of O". and hints of weaker stock near-term in the broader NASDAQ.

All combined, make similar comparison with other trades you may be holding. Assess various relative strength characteristics and look to hold those that are "relatively" weaker as depicted by OSIS, where technical resistance in the specific stock's chart has overhead supply near by.Link

Right now, I'd rankg OSIS more 50/50. If feeling "too bearish" in account, then look to cut trade with small loss or gain.

I will also note... according to Dorsey/Wright and Assoc., stock is classified as "Protection/Safety Equipment". Sector is "bear confirmed" at 36.67% and would currently take a reading of 44% to reverse into "bear correction" status, or 52% to achieve "bull confirmed" status.

 
 
  Leigh Stevens   7/18/02,  12:03:59 PM
Subscriber QUESTION: "Qcom is doing much better than qqq. Tech analysis please. Thx."

RESPONSE: Well, QCOM has come up to resistance implied by the top of its trend channel on the Daily chart. The stock gapped higher yesterday, above resistance at its 50-day moving average (29.4) - Qualcomm is trading a bit better than the Q's, but still in line. This stock really moves at times - it reverses on a dime too and goes the other way just as fast. A close above 31.00 is needed to suggest that QCOM was possibly breaking out of its long-term down trend.

 
 
  Jeff Bailey   7/18/02,  12:00:34 PM
Correction to 11:00 intra-day update. The selling of 10 naked put contracts would be equivalent to 1,000 shares, NOT 2,000. Will correct on web site. Having some problems "with math" while typing this morning.

 
 
  Leigh Stevens   7/18/02,  11:51:18 AM
Subscriber QUESTION: "I was wondering if you recall if any of your contributors have ever done a article on fading the gap with regard to the QQQ or DJX, but most especially the QQQ. It seems like a very high odds play, particuarly when the gap is against the trend. Wondering if anyone has ever done a how-to type article on this? "

RESPONSE: I can't say for sure that was not an article or mention some time or other on the OI Site relating to "fading the gap". There is no "technique" relating to this specific terminology, but I think it relates to the tendency for gaps to get "filled in" - in fact, an old trader's saying is that "gaps get filled in".

For example, a stock that closed at 20, opens the next day at 23, creating this 3 point gap between 20 and 23. Some traders would "fade" (trade against) the gap so to speak by selling into this type rally, figuring that at some point the stock will drop back to 20. The reverse might be true on a downside gap - fading this gap would be buying into the decline figuring the stock will come back up to the starting point of the gap.

Just one cautionary note - some gaps are never filled in or get "filled in" only a long time later. When a move is just beginning or a trend is accelerating its momentum in the middle of a move, there is type of gap called a "breakaway" gap that can develop - such gaps may never get filled in or not for a long time. You can go back and look at charts at the start of prolonged bull or bear markets and see many examples of breakaway gaps in both indexes and individual stocks.

Where a gap tends to get filled in is in more "normal" market situation such as when a stock or index is WITHIN a trading range or within an overall trend channel.

 
 
  Jeff Bailey   7/18/02,  11:46:49 AM
The 11:00 AM intraday update has been posted. Link

 
 
  Leigh Stevens   7/18/02,  11:20:11 AM
Subscriber QUESTION: "I checked the S&P futures fair value for today, at 0.95 - with buy programs indicated at 2.35 and sell programs indicated at -1.85.

Is this the premium (difference between cash and futures) or am I reading this wrong?? thanks "

RESPONSE: "Fair value" is what the premium of futures over (above) the actual stock index "should" be so that being long an S&P 500 futures contract is equal to owning the underlying basket of stocks; i.e., the 500 stocks in the S&P (SPX).

Buy programs "at" 2.35 means that IF the premium of Sept. SPX futures ran up to 235 points, futures above or "over" cash, it would become profitable for index arbitrage trading groups to buy stocks and sell futures - this is a "buy program". This works, assuming that the index "arbs" can "lock in" that spread difference of 235 points, because after transactions costs they have the sure knowledge that, by the time of the expiration of Sept. index futures in Sept., the futures price will "converge" or become equal to the actual index. So, worst case for the stock/futures arbitrage is that at the Sept. expiration, the arbs will sell the stocks they own and, at same time, buy the futures contract - liquidating their short futures contracts.

On the other hand, if the premium of the nearby Sept. S&P futures relative to the actual (SPX) index, FELL to minus (-) 185 points under the actual ("cash') index, this "discount" of futures relative to the cash index, would trigger "sell programs" by the same index arbitrage groups that were long stocks/short futures; i.e., the liquidation of these positions by selling the stocks owned and buying back and closing out, the short futures positions.

Such a "negative" premium comes about when traders turn bearish and sell the stock index futures down below the cash index price, due to expectations that the index is going lower and will "catch up" with the futures price later. This situation then allows the index arbitrage traders to "unwind" their cash/futures arbitrage AHEAD of the futures contracts expiration date. The arbitrage players prefer to take the FIRST opportunity to execute such "sell programs" and unwind or liquidate their arbitrage (long stocks/short futures) as this allows them to realize the profit that they had "locked" in earlier by being long the (cheap) stocks versus short the (overpriced) futures.

This may be a bit complicated at first read, but not so complicated that an individual investor/trader cannot understand the concept by analogy. It is like having a cheap equity credit line on your house. If you can borrow at 9% and lend out the same money at 18% percent, this "spread" is attractive and you may want to "lock in" the 9% difference, which becomes your profit.

I will be doing my Trader's Corner article tonight on the subject of "fair value" and how futures premiums well above or below this theoretical "fair" (futures) value allows index arbitrage to go on - with a basic explanation of how this works in practice. At some point most of us that trade index options will be affected by the sharp moves that are sometimes brought about, at least partially, by such Index arbitrage related buy/sell programs. And at some point we may wonder what is going on and why. This knowledge can help you keep a balanced perspective.

For example - you hear that a "buy program" is going on and you see that the futures premiums are "normal". You know that this "program" is simply an institution buying a basket of stocks simultaneously and not the result of overly bullish trader "sentiment" bidding up futures.

Conversely, you hear that there is a "sell program(s") going on AND you also hear or see that futures premiums are at a substantial DISCOUNT to the actual/cash index, its likely that the sell program(s) "results" from traders, some with excellent market knowledge, turning bearish on the market trend AND being willing to sell futures at less than "fair value" and even less than the actual index value at the time.

 
 
  Steven Price   7/18/02,  11:08:14 AM
Reader Question With higher volatility resulting in higher priced options would it be a good time to be looking at credit spreads?

Response Very good question. The answer to this question is a wishy washy "it depends." Usually the spreads that have the most inflated premiums are downside put spreads. This provides a good opportunity to collect premium as long as a trader is comfortable with the maximum loss on the spread should it go against him. The other thing to note is that in a down market, upside call spreads will also become more expensive simply because market makers don't want to sell any option for nothing. Below a certain price level, certain options hold their premiums due to psychological barriers from knowing there is still time left and the risk reward of selling any option cheap and having to wait a long time for the premium to go to zero simply doesn't seem worth it. I call this the theory of compression. If the volatility and price level of a stock says an option should only be worth $0.75, but it still has 3 months left to expiration, I'd rather not sell it and have to wait three months to collect my $75.00, while assuming the risk of a large upside move. This is one reason upside call volatility holds up so well in a down market.

 
 
  Jonathan Levinson   7/18/02,  10:57:19 AM
Reader writes:

A number of people have mentioned how well MSFT has been behaving. I’m not one of them. It’s widely known that they will match or exceed estimates and yet the stock is toward the low end of its 45 day trading channel, not including the panic drop to 48 the other day. It has made a series of lower highs and lower lows during this period. My feeling is the stock should be doing better, especially today. I’ve always felt that outside of an terrorist event MSFT could be the catalyst that propels the VIX into the 50s and gives us a tradable bottom. Today is such an important day, one that most definitely could determine the short term course of the market. If they disappoint, it could be “fire in the hole”. If, on the other hand, they provide the one thing the bulls need: a positive outlook for the balance of the year and ’03, we should see fireworks instead.

Thanks, Lowell.

 
 
  Steven Price   7/18/02,  10:56:29 AM
Fast Market Conditions Informational note on "Fast Market" conditions after noting Jeff's earlier response. Once a market recieves fast market designation, bids and offers are no longer firm and market makers do not have to honor the posted bids and offers. A fast market can be declared for many reasons, either extreme volatile conditions, bid/ask spread in an individual stock widening out (which obviously does not apply to OEX), or just plain technical difficulties in posting properly disseminated quotes. The CBOE and other exchanges rely on many automated electronic systems for updating quotes automatically as stocks move, and there are often problems that arise which lead to "fast markets"

 
 
  Steven Price   7/18/02,  10:50:41 AM
Amgen (AMGN) $35.40 (-1.70) I've had several questions about Amgen, specifically the Aug 37.5-32.5 put spread. I see it trading at about $2.25. This stock rose significantly in yesterday's trading on news that its aquisition of Immunex received final approval. It now appears at the upper end of a recent descending channel from the end of May. It also has had a tough time trying to cross its 21 dma. A bearish trader may want to look at the Aug 35-30 put spread, which is trading at $1.70, as an alternative to the 37.50-32.50, although either looks reasonably priced for a downside move. If the stock breaks back below 35 the next support level looks to be around 31.

 
 
  Jonathan Levinson   7/18/02,  10:43:00 AM
The US Dollar Index is still doing its slow fade off the morning's highs. The TRINQ is staying persistently in sell territory, and I just saw a 2.27 reading for a few moments there. With price staying in its current range, after unconvincing news from Intel and IBM, I'd be quite bearish today, except for the MSFT and op-ex uncertainty. This week has, for me, taken a big bite out of the Q2 recovery scenario, and we could throw Q3 into the same chute. Still, I won't gamble on what MSFT does tonight.

 
 
  Jeff Bailey   7/18/02,  10:41:33 AM
Jeff, I placed a trade to sell some cboe calls yesterday at a limit and got nothing done because the executing broker told me it took 7 minutes to get the order to the floor, is this possible and legal? They were bid higher than my limit and they attribute it to a fast market.

I don't think it is "illegal" just poor execution. Sounds like you might need to start looking for a broker that caters to your option needs. True, there may have been some "fast market" conditions yesterday, but the OEX is very, very liquid and I'm not sure 7-minutes was needed to get an order done.

 
 
  Jeff Bailey   7/18/02,  10:36:21 AM
Intl. Game Tech $55.40 +0.21% ... bearish trader that hold the Jan 03 $55's from March's break lower at $59, he/she too may look to sell some option premium. Could alway look to sell the Aug. $50 puts, lower your cost basis in the longer-term Jan puts as supply/demand chart a bit "neutral" here. Link

 
 
  Jeff Bailey   7/18/02,  10:32:38 AM
Interesting conversation with Steve Price a couple of days ago. We were talking back and forth about how option traders should be selling puts/calls and taking advantage of higher volatility premiums.

As CBOE trader, he was in agreement and was mentioning how under past circumstances his trading book would completely flip from past call/put buyer of months ago, to call/put seller on the "jacked" premiums.

Steve's thoughts were perhaps more related to the higher VIX, while mine were more related to the "oversold" bullish % charts.

 
 
  Jeff Bailey   7/18/02,  10:29:40 AM
Oxford Health (OHP) $44.59 +4.18% ... stock getting a "pop" after United Health (UNH) $95.45 +3.18% earnings. HMO's still look strong and good earnings found, not just from cost cutting, but good pricing pressures.

OHP responds with buy signal at $43 Link.

 
 
  Jonathan Levinson   7/18/02,  10:22:45 AM
Ditto, Jim.

 
 
  Steven Price   7/18/02,  10:21:37 AM
Eli Lilly (LLY) $48.30 (-$2.60)Lilly has come off its morning's lows, after announcing a 20% profit drop from low sales of Prozac and warning of possible product delays. A close below $47 looks very bearish, considering the rest of the sector. If this happens, look for company execs to increase the bottom line by strong personal usage of Prozac! Merck (MRK) $43.83 (-0.67) Yesterday's Play of the Day (Put) looking weak, continuing downward from its original pick price of $45.75. MRK releases earnings tomorrow, however, so look to close this play by the end of the day.

 
 
  Jim Brown   7/18/02,  10:16:55 AM
Pivot Trade Signals
The markets are trending toward the bottom of the recent range but there is not enough negative sentiment to make me want to go short if the 446 support is broken. I would rather wait for a move to either end of the broader range with a dip to 440 or below to go long or a bounce to 457 or higher to go short. There is no compelling reason to trade this morning and I will continue to remain flat until there is a valid reason to do otherwise.

 
 
  Jeff Bailey   7/18/02,  10:16:19 AM
Short an underlying stock and thinking of covering?

One benefit to you is that option premiums are high. If getting ready to cover a short position, then think about selling a put! Try raking in a little premium.

For instance... if short at $15, stock trading $14 and just not looking like it is going to get smoked lower, then the current month $15 puts may be bid $1.50. If stock closed below $15, then you'll have to "buy" at $15, but you got $1.50 from the selling of the put. If stock edged up to $15.50, you've raised your cost basis in your short from $15 to ($15 + $1.50) or $16.50.

OSIS Aug. $17.50 puts (UOJVD) are bid $2.05. If short the triple-bottom at $18, then selling the put would have you OBLIGATED to buy the stock at $17.50, but take your cost basis in the short higher at $18 + $2.05 = $20.05.

 
 
  Leigh Stevens   7/18/02,  10:13:52 AM
Trader's Corner article that I did on the Arms Index or TRIN ($TRIN) referred to by Jonathan in reply to a Subscriber wanting to know more about this indicator, is at Link

 
 
  Jonathan Levinson   7/18/02,  10:09:12 AM
The COMPX reached a low of the day at 1374, and the QQQ is trying to bounce off the 25 level again, though not with the vim and vigor of a rip snorting bull. The US Dollar Index fell with the COMPX, currently around 104.70. The TRINQ is off its highs as the sellers take a breather, but is still at 1.31.

 
 
  Jeff Bailey   7/18/02,  10:07:06 AM
Earnings Have been seeing some upside earnings reports recently, but improvement continue to be from "cost cutting" or "market share gains" and not necessarily due to increasing sales that would indicate demand for products/services imroving. Notables recently have been EK (cost cutting), IP (cost cutting), DELL (market share gain)...

While cost cutting is good and can really drive numbers to the bottom line when demand for products builds, "blow out" earnings above consensus that comes from cost/cutting just not a "impressive" as when they come from higher sales.

 
 
  Jonathan Levinson   7/18/02,  10:03:25 AM
I love your service, I feel like I'm in the traders pit with a group of diverse specialists. So what's the trinq and qqv - can you point me to some old writups. A word search capability thru your old articles would be great.

The QQV is the Nasdaq-100 Volatility Index, essentially the VIX for the NDX/QQQ. The TRINQ, is the Nasdaq TRIN. Leigh has an article discussing the TRIN in Trader's Corner. Unfortunately, my primary harddrive failed last night, and I'm using my "beater" machine, a Pentium 233 MMX (remember those), so I can't dig up my old references just yet, but you'll find all the articles on the website.

 
 
  Jeff Bailey   7/18/02,  10:02:43 AM
Research in Motion (RIMM) $13.90 -1.2% .... will note this NASDAQ stock also gave a "buy signal" yesterday at $15.50, right at its old "triple-bottom-sell" which represents overhead supply. Vertical count now bullish to $21. Would look to remove some risk from bearish trade at $12.50 should pullback occur, or stop from here is just above yesterday's high of $15.91 or retracement resistance at $16.14. (retracement from $29.03 to $8.00) has 19.1% at $12.07 (served as support on 07/11/02) and market maker support and 38.2% at $16.14 may be near-term market maker resistance.

The RIMM Dec. $15 puts (RULXC) profiled 05/23/02 at $2.60 are bid $3.20 here. Smaller gain still here, but profit stop would be advised as outlined above.

 
 
  Leigh Stevens   7/18/02,  10:01:28 AM
Wall Street Journal (WSJ) - This morning's WSJ has front page story on AOL, discussion how one failed effort ot coordinated adds was and is represenative of infighting among the divisions - sort of the internet go-for-it culture meets buttoned down Corporate Man, a bit like oil & water.

Also, front page: "For Silicon Valley, Stocks fall Upsets culture of options" - in-depth article talks about the old "cheap" way of motivating and "paying" workers is less (or NOT) viable these days - no more magic in options in a falling market. Too many of those options are at exercise prices that are ABOVE current stock prices. Having been there, done that, I say go for the CASH, not magic beans.

Inside story on lawsuit involving Solomon, aledged to have doled out shares of hot IPO's to CEO's in bid to win investment banking business - Main Street take - time to end "business as usual" on the Street of Dreams.

Inside, Money & Investing story on how more individual investors are shorting stocks - Journal presents this as a "risky strategy" and has a tone that it may be slightly "un-American" or otherwise suspect as the practice is seen as contributing to the steep market slide. It might also have anyting to do with the screw ups by corporate America and the culture of greed that Greenspan talked about! There is some info on the NYSE Short-Interest ratio and its rise to a recent record high. Ah, the Journal, that hotbed of go-go traders who also happen to be Journalists. Some discussion is made of the money also being poured into the hedge funds who likely account for the majority of the short-interest currently.

 
 
  Jim Brown   7/18/02,  10:01:01 AM
Pivot Trade Signals
This would be a good time to remind everyone about moving into August options. Here is an updated reprint of the post I made last month about the process.

Expiration Friday
Unless you live in a cave you know that tomorrow is expiration Friday. I always have people ask "what if.." What if I don't sell my calls and they are in the money? What if the stock price is just above my PUT strike? There are so many questions that it is impossible to answer them all in the Monitor. I will touch on just a couple.

First, don't buy any August options Friday. The premium is huge. Volume is the only thing that determines a fair value and until they become the current month you will not have enough volume to take the market makers profit out of the equation. The market makers know that current month traders will be moving into August options today, Friday and Monday. They know that many traders will be rolling out unprofitable July positions and "have" to pay the price.

For all these reasons the premium on the August options is TOO HIGH. In reality the best course of action is to wait until Tuesday OR pick a month farther out. By using a September/October option for instance you will pay a lot more money but any move in the underlying stock or index will be reflected in the option price. There is no sudden depreciation of the premium over the weekend. With months to go the price is stable. The only reason for picking an August option on Friday is if you are selling time by writing covered calls or naked puts. This artificial premium then works in your favor.

If you are bored on Monday, pick some option strikes and just watch the premiums. You can actually watch the premiums shrink as the day progresses. If you are playing the OEX/SPX/DJX then Monday and Tuesday it is better to buy/short the DIA/SPY securities instead. The profits are less but the risk is also less. These securities trade like the QQQs. Speaking of the QQQs, the options on the Qs are not as susceptible to this problem as individual stocks or the OEX/SPX. The volume is so high it is hard to maintain an artificial price.

Closing Positions - Always close positions you don't want exercised. A reader once was short 10 contracts of a $200 PUT on a stock that closed at $201.25. At the close the contracts were bid an eighth, ask a quarter. Right after the close somebody in their sector issued a severe warning. The stock opened on Monday at $184 and the reader found that he had 1000 shares in his account. He had been put all 10 contracts at $200 for a loss of $16,000. This would not have happened if he had closed the position. I have heard of this happening several times. People fearing the worst will PUT the stock to void "wasting" the premium they paid. (can you say DUMB?) Institutions that were looking to get out of stocks sometimes execute their insurance puts if the stock is close. It avoids having to take market risk when selling.

Do you want your broker automatically exercising your calls because they are 50 cents in the money? I don't! Take the time to close all positions YOU DON'T WANT EXERCISED by 3:30 in the afternoon. Don't wait until the last minute. Computers go down, things break, orders get lost in the closing rush, etc. Better to be safe than sorry. One broker I used in the past would leave the expired contracts in my portfolio for as long as a couple weeks before they were deleted. Take the time to close the positions and avoid the risk!

 
 
  Steven Price   7/18/02,  9:57:52 AM
Johnson and Johnson (JNJ) $50.98 (-0.26) A look at this chart shows JNJ once again having bounced off its 21 dma to the downside. With the sector looking weak, and their recent admission that all the noise created by Amgen about side effects of JNJ's Eprex, I think the Aug 50-45 put spread at a $1.40 debit looks like a decent possibility. the stock would have to clear support around $48 in order to get down to its next level at 45 to really max this spread out, but I like it.

 
 
  Jeff Bailey   7/18/02,  9:55:23 AM
OSIS I added a few comments to previous 09:39. I think comments may also help bears in other trades where similar technicals may exist.

 
 
  Jim Brown   7/18/02,  9:50:08 AM
Pivot Trade Signals
No volatility today! After the two weeks of wildly gyrating opens the flat open appears to be indicating a boring day. With bullish expectations about MSFT earnings after the close the downside possibilities appear to be limited. Even with the problems at AOL, SEBL, LLY, etc this morning the bears are noticeably quiet.

 
 
  Jonathan Levinson   7/18/02,  9:46:46 AM
More selling enthusiasm than we saw yesterday on the COMPX, with the TRINQ at 1.36 and the QQV up .63. The COMPX has just printed a low of the day as I type at 1385.

 
 
  Jeff Bailey   7/18/02,  9:45:03 AM
NPS Pharma (NPSP) $19.05 -0.47% ... what a "point and figure" bear would set up is a 1/2 position short/put, with stop just above trend at $21.Link

But may use the "inside day" technique from the bar chart (yesterday was "inside day). Link and target a pullback near-term to $16.50. Here a tighter stop on action at $18.02 would be followed with a stop above $19.96.

 
 
  Jeff Bailey   7/18/02,  9:39:13 AM
OSI Systems (OSIS) $18.34 -0.86% .... Hi Jeff, Are you suggesting to close any put position on OSIS?

No, not here at bearish resistance of $19 Link as stock moves into overhead supply. If short full position, then look for 3-box reversal lower to $17.50 as covering point. For stop on underlying stock, could go just above the 50/200-day of $19.50. Bar-chartists "love" this technical to short/put and we have observed past selling into rally at the 50-day MA Link .

However... subscriber is wise to at least be cautious. With the stock back on a "buy signal", this puts the bullish count currently under construction at $24 and bear must at least assess risk to that point, but can control his/her risk with stop adjustments. Only a "sell signal" at $16 would negate yesterday's "buy signal" at $18.50.

As long as in the trade, continue to monitor that NASDAQ-100 Bullish % ($BPNDX). If it reverses into O's and we continue to see OEX, SPX edge lower, then greater probability exists for OSIS to edge back.

 
 
  Jeff Bailey   7/18/02,  9:32:50 AM
Watch your trends! NPS Pharmaceuticals (NPSP) $19.01 as bears may be lurking near bearish resistance trends. Link

 
 
  Jim Brown   7/18/02,  9:28:42 AM
Pivot Trade Signals
Another day another major earnings announcement after the close. With the IBM spin not being as well received as Intel's overnight the markets are set to open mixed. With MSFT being the 800 lb gorilla in the earnings parade today the markets are likely to go nowhere fast. The indexes will likely move sideways as the negative feelings about IBM are offset by positive expectations about MSFT tonight.

The OEX, my indicator of choice for gauging direction, is dead center in the middle of its recent range. With strong resistance at 464 and good support at 446 it is free to wander in an 18 point range without straying much from the 453 close.

With MSFT tonight and lingering bullishness from the positive close yesterday there may be a slight upward bias. We are going to stand aside unless we get a bounce to resistance. I see this as being the most likely entry point for a new trade signal. I don't want to try and trade the chop in the middle with expiration tomorrow to cloud the issue. Repeat: I am standing aside without a compelling reason to enter.

 
 
  Jeff Bailey   7/18/02,  9:26:37 AM
Market Internals Bull's not getting any type of "confirmation" in the various bullish % charts.

While the NASDAQ-100 Bullish % ($BPNDX) Link saw a net gain of 5 stocks to "buy signals" at 34% as it moves above the "oversold" level of 30% (last weeks reading was 13%), but none of the other bullish % charts showed any improvement and were left pretty much at previous session's levels.

For instance, the narrow, yet not as volatile S&P 100 Bullish % ($BPOEX) Link stayed at the 14% level for the second consecutive day (last week's reading was 28%)

The broader S&P 500 Bullish % ($BPSPX)Link inched lower to 21.6% from 22%.

This type of action still hints that bears are doing the bulk of the buying and were broadening out some of their short-covering efforts in the NASDAQ-100 into other stocks again yesterday.

Bulls that are playing some of these supply/demand traders should not be "greedy" with gains when they get them as the broader market internals just aren't confirming the moves in some of the NASDAQ-100 stocks currently.

Bears can continue to look for bearish trades, but with the lower levels of bullish%, caution is advised and 1/4 or 1/2 positions can be initiated on stocks that rally into technical resistance/overhead supply. Preferable are stocks that still have a "sell signal" intact on the chart, where the bearish vertical count offers favorable risk/reward to a downside target, relative to stopping point.

 
 
  Leigh Stevens   7/18/02,  9:22:02 AM
Pre-Opening INDEX Comments - IBM was trading off about 5 cents - its numbers, more or less in line with expectations seems neutral for tech, but caution warning from Nokia and some selling in software stocks based on Sibel Systems lowered guidance and ahead of MSFT earnings tonight are impacting lower trade in Nas futures. As well I suspect, traders are taking some profits off the table in Nasdaq stocks - the index has had a pretty good run up and hit technical resistance in terms of NDX & QQQ at closing levels yesterday.

 
 
  Jonathan Levinson   7/18/02,  9:18:54 AM
Hi, Jonathan- Thanks for the caution. I was sitting in front of my monitor, recounting other option expiration weeks when technical analysis, fundamental analysis, and any other type of analysis failed to predict what might happen. With earnings announcements added to that mix, I was wondering whether I wanted to risk my small account trading these last two days of this week. Still, some days those cheaper-than-normal OEX option prices tempt me, someone suggests a trade that I'd been considering, and before I know it, I've entered a less-than-optimal trade. Your cautious approach helps remind me that I don't want to enter unless all the signals line up, and even then to be cautious with my stops, and maybe to avoid those cheaper front-month options.

Exactly. Note that with tomorrow being Third Friday, July contracts are now officially in "hot potato" territory.

Please note that my outgoing mail server seems to be offline, and I'm having difficulty getting replies out. Sorry for the delay.

 
 
  Jonathan Levinson   7/18/02,  9:16:16 AM
Bond yields are easing off their morning highs, as is the US Dollar Index.

 
 
  Leigh Stevens   7/18/02,  9:13:50 AM
Pre-Opening, Stock INDEXES - Good Morning!

Index FUTURES trading: S&P 500 > +3.00 at 908.00; Dow Industrials > +25.00 at 8550; Nasdaq > -7.50 at 1026

"Fair Value" numbers: S&P 500 futures ($SP02U): 0.95 -- Nasdaq 100 futures ($ND02U): 3.40

 
 
  Jonathan Levinson   7/18/02,  8:57:44 AM
It looks like the rest of the world was very impressed with IBM, if the US Dollar Index is any indication. It's well off yesterday's lows of 104.20, currently above 104.80.

I went flat yesterday before the close, not willing to risk profits on the market's reaction to IBM's spin. We now have a similar issue after today's close, only with MSFT. Many readers have noted to me how resilient MSFT has been, and good news in a strong stock could provide some jet fuel to the indices, particular the COMPX and the Qs, while bad news could act as TNT. Add to this options expirations, and you get a very uncertain climate in which to trade. As always, I counsel caution. As Jesse Livermore's fictional character Larry Livingston notes in Reminiscences of a stock operator, successful traders don't try to create opportune setups, and only suckers feel they have to trade all the time. Unless something very clear occurs, which at the moment I'm having difficulty imagining, I intend to protect my account by sticking to the sidelines. Leigh's provided an excellent analysis of the COMPX and QQQs in last night's newsletter, and I strongly suggest everyone take a close look. Traders trying to get to the sidelines should be studying the levels he's outlined and the channels he's drawn to find their exit. More aggressive traders should be watching their stops closely today.

 
 
  Jim Brown   7/17/02,  9:29:50 PM
Possible Scenarios I was testing a new chart upload process tonight and was running some scenarios through my head for the rest of the week. With the futures bouncing all over the board at 9:15 PM there is no clear indication of tomorrow's direction. I see two possible scenarios.

Scenario one: Traders feeling like the IBM earnings were not that positive could close those positions they optimistically opened Wednesday afternoon and despite the MSFT earnings Thursday night the market could drift back down to retest the Monday 436 low. Microsoft would then make a positive statement and we rebound back up the overhead resistance, which has now fallen to the 456-460 level. (see blue line on the chart)

Scenario two: Traders feeling bullish after the IBM earnings could try to buy another rally but there are multiple levels of resistance above us which converge around 464 on the OEX. Without any strong fundamental backing we could fail at those levels and drift back down to retest the Monday 436 low within a couple days. (see the yellow line on the chart)

Chart: .. Link

Either scenario would eventually have us retesting Monday's 436 low either this week or next. With accounting problems and falling 3Q estimates any rally would begin on shaky ground.

The wildcard here is the VIX which has spent most of the last couple days over 40. Nothing says it can't go higher or linger in this range for several more days. Normally this is a screaming buy signal but these are not normal times. The bottom line is "trade the trend" and that is what we will try to do.

 
 
  Staff   7/17/02,  9:09:20 PM
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See you at 9:15 tomorrow !

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