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  Jim Brown   7/30/02,  5:34:51 PM
Pivot Trade Wrap
Clinging to the High Ground -
The Dow managed to cling to the majority of the points gained over the last five days while the Nasdaq managed to eke out some more points. It was a positive day for the bulls given the negative Consumer Confidence report and the opportunity for profit taking.

The Dow dropped -171 points just after the open and yet traded back to +50 before hitting resistance at 8760. Considering the +1000 points gained in the last four days this is remarkable. The Dow has serious resistance between 8760-8800 and it will take some serious buying to break those levels. Given the intraday rebound this is possible. The Nasdaq is doing even better by closing at 1343 with a gain of +9 points but even the revived Nasdaq will have trouble breaking 1400. This sets up both the major indexes for tough sledding ahead and without substantial gains soon the type A traders will start dumping long stocks and looking to go short again. They have very little patience when the momentum begins to fade.

Choosing plays on Wednesday will be a challenge again. Despite the gains the markets are not completely overbought. It will probably take one more surge upward to accomplish this. The resistance will probably hold and the bears will start coming back into the market. Until then it will take a lot of volume to push the market higher and that volume was lacking on Tuesday. It appears we are doomed to run in place, jumping back and forth, until the rally bloom fades. If you look back over the last couple months you will see several strong short covering rallies that lasted two days moving up and another 2-3 days going sideways before rolling over. That is where we are now, moving sideways. With lagging confidence, slowing consumer sales, continuing earnings warnings and August 14th in our future I am hard pressed to see the markets making a major move up from here. The markets need a wall of worry to climb but this may be too much.

Picture yourself running up Pikes Peak road (a little 14,000 foot mountain we have here). With a $100,000 reward to get to the top in a couple hours you would likely start out quickly with very strong intentions. Despite how strong your intentions are, somewhere around 10,000 feet with your lungs screaming for oxygen, your chest pounding like it is going to burst and your legs like rubber, you will have to stop and rest. As the clock ticks away and you see the prize slipping from your grasp the urge to drive your body onward slowly bleeds away. Once you see you are not going to make it you turn around and start walking back down. The Dow began its race to 9000 five days ago and after an amazing start has begun to gasp for breath and steeper sections (strong resistance) are still ahead. I am not saying it cannot make it but the clock is ticking closer to the next accounting disclosure and the volume (oxygen) is becoming scarce. See you tomorrow - bring your own oxygen!

 
 
  Steven Price   7/30/02,  4:02:36 PM
Reader Question: Steven, Is it best to leave the butterfly till expiration date or is it possible to close out earlier. Commissions is one consideration.

Response: Commissions are definitely a consideration with this strategy and will need to be calculated when determining profit and loss points. The butterfly can be traded out of at any time, however allowing the out of the money long options to expire worthless will probably save commissions. Of course if you enter the position for $0.80 and have an opportunity to trade out for a healthy profit prior to expiration, the commissions may be worth it.

 
 
  Steven Price   7/30/02,  3:54:39 PM
A reader has asked where to calculate the delta of an option. The CBOE website has a section under Trading Tools called the Options Calculator that can be used for this process. Here is the link Link

 
 
  Leigh Stevens   7/30/02,  3:51:19 PM
Subscriber QUESTION: What do you think about GOLD stocks? "

RESPONSE: In terms of the Gold & Silver Index ($XAU.X), I calculated last night that the Index could easily have a rebound to 65, from recent lows in the 55 area - today, its last at 61.6. If XAU can climb above 65, then 70 is an objective, where I would short the stocks and buy puts.

For now, I think the Bull move in Gold is over. I had the chart up last night, with notations at Link

 
 
  Leigh Stevens   7/30/02,  3:44:24 PM
Subscriber QUESTION: "I just read your 12:53 commentary that identified 24.75-25 as a key QQQ resistance area, whereas yesterday the top range you mentioned 24.40-24.75. I wonder if this indicates that you are somewhat more impressed with today's move, and if so, what observations are influencing you. All I see is that the Q's moved up into yesterdays cited range and fell out again, which doesn't much impress me. Thanks for your thoughts. "

RESPONSE: It was the same area I was looking at in both cases in QQQ - the top end of its hourly downtrend channel - today is when it go up to it. Sometimes you don't have a obvious prior high to suggest that it again may be resistance - but, in this case I had this projected trendline off the 7/17 highs - since I had a well-defined LOWER trendline, with multiple "touches" to it - then, the projected upper channel line is a parallel line to the lower one placed so it touches at least one extreme high - or, it could be a 2-3 lows that all touch this straight line.

You have to look at my Index Trader Wrap to get this picture of the QQQ trend channel - such as last night at Link

 
 
  Jeff Bailey   7/30/02,  3:39:41 PM
The 3:15 PM intraday update has been posted. Link

 
 
  Leigh Stevens   7/30/02,  3:34:14 PM
Subscriber QUESTION: ": Re: FNIS - Could you take a look at this stock chart and give me your opinion?"

RESPONSE: Fidelity National Info Solutions (FNIS) at 19.4, remains in a downtrend, but has recently repeatedly found support at, and rebounded from, its 200-day moving average in 17 area. If the stock can clear substantial overhead resistance in the $21 area, particularly on a closing basis and then stay at or above this level, think it could get up to 23.75-24 next. That’s about best upside I see for awhile. Break of 17 on close would be suggesting a new down "leg" however.

 
 
  Jim Brown   7/30/02,  3:33:09 PM
Pivot Trade Exit Point Alert - OEX/SPX/DJX/DIA/SPY
That was not fun! We were stopped out at 15:24:16 when the OEX traded above 452.50 (SPX 902.27, Emini 902.00, DIA 86.81, SPY 90.60, DJX 86.76, NDX 980.36, Compx 1341.00) We were stopped out by 19 cents in a move reminiscent of yesterdays 25 cent stop out at the close. Tomorrow is a new day but we need the market to make up its mind!

 
 
  Steven Price   7/30/02,  3:25:28 PM
Reader Comment: Steven, Could you delineate the long/short strikes of the IBM butterfly strategy? I think it would be very instructional for readers to follow this play.

Response: A long butterfly in IBM would consist of the following:

1 long 65 call/put

2 short 70 calls/puts

1 long 75 call/put

At expiration this can be worth anywhere from $0.00 to $5.00. If the stock is at $70 it is worth $5.00. Above $75, or below $65, it is worth $0.00. As you move either direction away from $70, the spread loses money.

 
 
  Steven Price   7/30/02,  3:18:25 PM
Reader Question: HI, STEVEN IS IT POSSIBLE TO DO BOTH CALL AND PUT TOGETHER BUTTERFLY FOR A TOTAL DEBIT OF 1.8 TO 2 AND AS PER YOUR COMMENTS, IT CAN MAX FOR 10.0. THANKS!!!

Response: It really doesn't matter which butterfly you do. They will end up with the same profit and loss. Doing both call and put is no different than doing twice as many call butterflies or put butterflies. I would probably look for whichever one is offered cheaper. These involve 6 different strikes (3 each for call and put) and sometimes strikes can get out of line, giving you an opportunity to get into a call or put butterfly cheaper than the other.

 
 
  John Seckinger   7/30/02,  3:16:18 PM
Let's take a moment to further dissect the 30-year bond. What could also be at work here? Well, remember the yield curve does hold significant weight in the bond pits and elsewhere, and all the steepening (buying five years and selling 30s) trades put on as the Dow collapsed are most likely beginning to be unwound (read: sold). When a steepener is "unwound" it means traders are selling fives and buying bonds. Now if there is a massive unwinding, then the 30-year yield would really go relatively lower when compared to 5s. Looking at futures, there was an 18 tick unwinding between 5s and 10s. Is this significant? Yes and No. 32 and more would be means to look at a fundamental change; however, adding up the last four days of unwinding there is room for speculation that some institutions are booking profits and heading to the sidelines - waiting for the Dow to prove guidance. Stay tuned!

 
 
  John Seckinger   7/30/02,  3:03:03 PM
With the bond market coming to a close, the 30-year Treasury Bond Index (TYX.X) is right at the 5.4 percent while the high yield (5.422%) did not really test the bearish channel beginning in May. This is a good example on how settlement levels can be helpful. Getting back to the Dow, Guess what? The 8600 pivot doesn't want to go away; amazing.

 
 
  Jim Brown   7/30/02,  2:56:39 PM
Pivot Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
We were triggered on the broader market SHORT at 14:50:54 when the OEX traded below 449. (SPX 895.67, Emini 894.50, DIA 86.15, SPY 89.85, DJX 86.18, NDX 970.88, Compx 1332.23) The initial stop loss will be tight at 452.50 (SPX 903) Resistance at 455 held and the advance/decline line is dropping rapidly. Let's hope it continues until the current overbought conditions reverse into a new upside opportunity.

 
 
  Jonathan Levinson   7/30/02,  2:54:00 PM
Perhaps the windows were a little overdressed. The COMPX is sliding from its highs, currently 1332. The Nasdaq TICK is currently -278, as the QQV begins to rise from its lows, still down .66 on the day. Ditto the TRINQ, now .72. The QQQ should find support at the area formerly known as resistance at 24.

 
 
  Steven Price   7/30/02,  2:47:26 PM
IBM: I've noticed IBM stuck in this range (73-66) for sometime now. I also see the October 70 straddle bid at $10.50, which makes me want to sell it. Of course the risk associated in either direction is unlimited, so I'm now looking at the October 65-70-75 put or call butterfly offered between 0.80 and $1.00, which can max out at $5 with the stock at $70 on Oct expiration. I like it.

 
 
  Steven Price   7/30/02,  2:39:32 PM
Reader Comment: Re: BRCD

Steven:

Perhaps you might include the fact that the Soundview Storage Technologies Conference is being held yesterday and today. Brocade may be one of the presenters, although I have yet to hear a report of their presentation. However, many of their competitors are presenting and have also sold off prior to the Conference, only to rebound afterwards. Specifically, I point out NTAP and VRTS.

Jeff

Response: Jeff, thanks for the update.

 
 
  Steven Price   7/30/02,  2:13:49 PM
Reader Question: Hi Steve,do you know what's is going on on brcd?????Has been very week on friday,but on fire on monday and today,is this a good short in your opinion or not?

Response Brocade (BRCD)$20.03 (+1.36) This stock breaking through $20 doesn't make me want to short it. A rollover from here might, but I see downside support of $16-16.50.

Note: I have received many emails today from readers with a desire to short this rally. I'm looking for a definable trend before getting short. Right now we are in a short-term up trend and I'm not rushing to fight it. We could certainly retrace this rally by 50% and give back 600 Dow points, which would provide some short opportunities. However, I'd like to see evidence of a rollover before getting short.

 
 
  Jonathan Levinson   7/30/02,  2:02:40 PM
COMPX 1375-80 is the next resistance level to watch.

 
 
  John Seckinger   7/30/02,  1:59:20 PM
Can you comment on Millennium Pharmaceuticals (MLNM)? The Biotech Holders (BBH) seemed to have broken out, and I wonder how much more room is left to the upside?

Response:

With AMGN and the Biotechs, first I would look at a chart of AMGN; however, regarding MLNM and the BBH, I turn primarily to the Holders. Therefore, looking at the BBH, 90 becomes the short term objective and an intra-day print would have me sell half of a long position. The real objective would be for a move to 98.30, but that may be too optimistic. Risk to downside? A close underneath 83.60 would be worrisome; however, more conservative traders could use the 50 DMA (currently at 79.45). Ok, now to MLNM....I would like a close above 11.84 to remain optimistic, while weakness underneath the 22 DMA (11.09) should extinguish all optimism. The upside objective (if shares begin to trade opposite of BBH, since BBH takes precedence) would be for a move to 15.25. More realistically, 1/2 the position should be unwound at 13.50.

 
 
  Jonathan Levinson   7/30/02,  1:59:02 PM
Interesting breadth on the COMPX: 1,726 advancers to 1,517 decliners. 76 new lows to 19 new highs, with advancing volume nearly 3x declining volume. As usual, the strongest buying is focused in few stocks.

 
 
  Steven Price   7/30/02,  1:57:36 PM
Reader Question: Hi Steven, Wondered what you think of shorting GS here 74.45--thanks

Response: Goldman Sachs (GS) $74.60 (+2.61) Ouch! This stock has been a thorn in my side! A strong sell signal was given back down at $69 on the PnF chart, and the stock went back to $74 (with a prudent $70.00 stop costing us only a dollar). A look at the daily chart shows a range between $77 and $69, with a drop from this channel last week, before the recovery. $75 has shown some resistance as well. I wouldn't short this one on two green candles in a row, as well as a break above the 10, 21, and 50-dmas, as has occured the last 2 days. Of course the last time this happened, GS dropped from $73 to $65. The bottom line is that this has been a confusing stock, and wihtout an identifiable trend, I'm staying on the sidelines.

 
 
  Steven Price   7/30/02,  1:46:29 PM
Expedia (EXPE) $51.17 (+1.74)

Reader Question: Steven,

Realizing that you've closed the put play yesterday, would a longer term play in EXPE still be viable? Currently holding a Oct 40 put, SL @ 52.1 (just above Jul 02 close), PnF target at 23. Since I'm trading a fairly small account, I'm trying to avoid the day-day whiplash of this market but still play a longer term trade. Thanks, David

Response: We closed this play as we were stopped out. If you are looking long term, I'll give you some charting and spread observations. You are correct on the bearish vertical PnF count, and looking at that chart I see some congestion around $53, which could serve as resistance. I also see the 200-dma of $54.52 in the same general area, which could serve as resistance as well.

It appears the Oct 40 put is currently trading $2.80-$2.95, so there is still quite a bit of premium to lose if the stock doesn't fall. I don't see any listed strikes below this that you can sell to make up for the time decay, but the September 40 put is $1.70-$1.95, and if you want to hold the position, this might be an alternative to pay for decay in the October put. This would create a long time spread (long Oct, short Sep). If the stock is still above $40 at September expiration you will still hold the Oct 40 put, but have collected the premium from the September put to help pay for it. Of course, if the stock drops below $40 by September expiration you will be put the stock and wind up with a long stock + long Oct put position (essentially the same as being long a call).

 
 
  Jonathan Levinson   7/30/02,  1:41:25 PM
Shhproinnng! The COMPX peaked at 1354 before easing off, currently trading at 1347, just above the 20 day EMA and at the upper end of the 1340-50 congestion zone. QQV has fallen off 1.14 on the day to 48.96, and the TRINQ is off its lows of the day but still overbought at .39. The Nasdaq TICK is fluttering between low positive and negative readings.

 
 
  Jeff Bailey   7/30/02,  1:40:41 PM
Dow Diamonds (DIA) $87.41 +0.8% ... Jeff: Any update on DIA? I got in the Aug85Puts this morning at 1.80, now at 1.60 bid. Any change to Stop Loss point? Wondering about my choices of strikes, but didn't want to over leverage.

As outlined in 09:44:EST Update. Stop on underlying DIA (not the options) is $87.75. Session high has been $87.66.

I DON'T personally trade stops on options, so of little help. In the Aug $85 puts, trader is/was risking $1.80, that's about what risk profile was from $86.20 profile to a stop of $87.66, so I'm confused about why a put trader would need a stop? Unless of course the trader OVERLEVERAGED on the trade. Three weeks until expiration and would be a pitty to stop out on an option with a 50% loss, then have the DIA pull back to $83.

I'll use a "profit stop" to protect a gain in an option, but not a "stop loss" as risk is assessed in the underlying security first, then translated to the option before an option trade is run.

 
 
  Jeff Bailey   7/30/02,  1:37:08 PM
The 1:00 PM intraday update has been posted. Link

 
 
  John Seckinger   7/30/02,  1:34:59 PM
What are your thoughts on AMGN?

Response:

Currently up 5.5 percent at 46.40, shares have left both the 22 DMA and 50 DMA (39 and 41.6, respectively) behind in just four trading sessions. The 200 DMA remains higher at 53.76; however, that may be a tad too optimistic. So, what is realistic? If a position was established right now, my risk to the downside would be for a settlement below 45.33 (taking sentiment neutral), while 1/2 the position could be unloaded near 50. Once at 50, then the 200 DMA can be re-evaluated. If more aggressive, the 22 weekly moving average at 46.76 could used instead of 45.33 (settlement purposes); however, a settlement under 45.33 could be used to scale out of the entire position while 46.76 (if AMGN fails to settle above) should be the catalyst for scaling only out of maybe 1/4 of entire position. Note: 50 is not used for settlement purposes.

 
 
  Jim Brown   7/30/02,  1:33:37 PM
Pivot Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
Let's raise the entry point for the short signal to an OEX trade below 449. (SPX 897) This may not get hit today with the current trend but we will eventually correct. Resistance at 455 did blunt the rally as expected but the trend has not yet changed.

 
 
  Leigh Stevens   7/30/02,  1:28:59 PM
Subscriber QUESTION: "With the reference to the last question on Open Interest (OI) - as OI is the total # of contracts traded how can the open interest drop ?? "

RESPONSE - - Open interest , as I said, is the total number of contracts "open" in either calls or puts but how it goes up or down, needs a further bit of explanation - (Open interest is not the same as the number of contracts traded - this is Volume)

For Open Interest (OI), there are 3 possibilities - on each transaction, OI either goes UP, DOWN or is UNCHANGED

UP - If you buy or "open" one new put position and this option is also a new short put position for the seller, total put open interest goes UP by one.

UNCHANGED - If you buy one new put but the seller is liquidating (exiting) the contract, then total open put interest stays the SAME - you have "replaced" the person exiting.

DOWN - If you sell a put contract you own (exit) and the buyer is also exiting (liquidating) a short put position, then total put Open Interest goes DOWN by one

 
 
  John Seckinger   7/30/02,  1:20:13 PM
Trading Thoughts: The Dow definitely used 8600 as an important psychological barometer during morning trading on Tuesday, and buying in Treasuries (yields falling from 5.4 percent level) was not surprising as well. Yes, the Dow at 8735 is impressive; nevertheless, both the Dow and the bond market have been somewhat "technically projected". In my opinion, when technical analysis continues to be an extremely accurate tool, most likely there is not a fundamental shift in the market place. My point? Without a fundamental shift, this bear market still holds a firm grasp on investor psychology and traders (if long) should continue to play the odds and take profits where technically prudent to do so.

 
 
  Steven Price   7/30/02,  1:16:04 PM
Emerson Electric (EMR) $49.48 (-0.45) This OI Watch List short candidate is looking weak at the top of its downward trending channel. EMR did clear the $50 resistance yesterday and traded $50.59 on 7/19. The channel began at the start of June and has been mostly reliable. A tight stop of $50.75 looks prudent in current market conditions. Current PnF bearish count of $44. The stock is currently on a 4 box reversal up with bearish resistance at $54.

 
 
  Jim Brown   7/30/02,  1:11:20 PM
Looks like Jonathan must have bought some puts on the QQQ and did not tell us. The Nasdaq is on fire and headed for that 1345 resistance he mentioned earlier. At least he could have told us so we could have gone long calls.

 
 
  Jim Brown   7/30/02,  1:00:58 PM
Pivot Trade Signals
Notice how quickly the market bounce faltered when the White House called the Consumer Confidence numbers "worrisome"? The bullishness is very thin and very tentative. The market is priced to perfection after the big gains and it may not take much to deflate it.

 
 
  Steven Price   7/30/02,  12:56:24 PM
Cooper Industries (CBE): $30.05 (+0.97)

Reader Question: It looks like CBE has broke $30. Would this pull it from OI put list?

Response: A close above $30 would violate our stop loss and we would close the play. The stock had trouble getting over this level last week, but has now crossed it. I'm not overly bullish, especially considering they are about to lose the State of California's business. However, in an upward trending market, at least short-term, it is important to respect stops. My favorite rule of trading is to always make sure you can come back and play tomorrow.

 
 
  Leigh Stevens   7/30/02,  12:53:25 PM
Subscriber QUESTION: "Leigh-Thanks for all your input-I am gaining alot of insight to trading from your articles along with the rest of OI.My question is : I had a knee jerk reaction and sold my Sept 25 Q's right after the consumer confidence report, as it hit my SL. Should I get back in now that it seems to be holding support or wait? I'm still learning."

RESPONSE: Well, one of the great things about the market as a challenging subject is that it continues to "teach" us all - if you read stories of superb traders, they are always learning from their "mistakes" or sloppy entry, etc.

QQQ is now getting closer to testing key-resistance in the 24.75-25.00 area, so suggest waiting to see what happens after that. I know that when I "give up" or am stopped out a call or long position, only to see the index go a lot higher, I then can have a tendency to jump in again, but then buy to high - the next correction then takes me out due to my Stop-Loss (SL). This situation is what being "whip-sawed" is all about.

I've learned that trading opportunities with a good risk to reward don't come along every day, but if I wait for them, they do come. In the case of the Q's, whatever level of correction (how deep) develops, it will come back down and do some "basing" - when you see that there is support in an area, you have a better shot to get back in and NOT get stopped out again.

 
 
  Jim Brown   7/30/02,  12:46:35 PM
Pivot Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
Let's raise the entry point for the short signal to an OEX trade below 447. (SPX 892)

 
 
  Leigh Stevens   7/30/02,  12:39:50 PM
INDEX Comments: S&P/DJX - Now the S&P indices are challanging yesterday's high. The bears are not being let off the "hook" too easily here - nor, are those looking to buy a good-sized pullback assuming that the market will fall apart due to the near-term overbought situation - per the "usual" pattern of the past few months - however, as Jim noted earlier, this phase may not be "normal" relative to past bear market action.

We have to look at the tendency for the market to "confound" the majority and also the SECOND "correction" possibility for a prior trend - it can have "price" consolidation or a "time" consoldiation, which is a LATERAL or sideways type move - this also tends to "throw" off a near-term overbought situation.

Trading Strategy? - well, risk to reward for new call positions is not great - the indices will correct at some point more deeper, price wise, so good risk management strategy suggests waiting for new positions, either on call or put side until a better entry persents itself. If long, particularily in Nasdaq, it looks like there is some more upside here - maybe also in the S&P if they can clear yesterday's high in a decisive way. Stay tuned!

 
 
  John Seckinger   7/30/02,  12:37:08 PM
Side Notes: Morgan Stanley has raised stock allocation to 70% from 68% within Macroscope Global Balanced Portfolio. Two percent is not significant in itself; however, this is their first increase in equities in 2 years. Cash is reduced to 3% from 4%, while bonds were tapered to 23% from 24%.

 
 
  Jim Brown   7/30/02,  12:31:57 PM
Pivot Trade Signals
The bulls are attempting to push the indexes toward positive territory but I do not have enough confidence in the strength of any potential breakout to risk the spread and launch a LONG signal. The TICKS are rising as well as advances. There is definitely a bullish tone growing. I would rather be criticized for sitting out than taking a risk I don't believe in today. I could be wrong and there could be a +200 point afternoon in our future. Instead I see OEX resistance at 455 and a likely entry point for the next short play. Resistance over 455 is at 460 and 465. Any of those levels could be the critical point where the bulls run out of steam. I may be overly cautious today but this is how I see it.

 
 
  Jonathan Levinson   7/30/02,  12:31:46 PM
The 20 day EMA, which should provide resistance, appears to be dead ahead at 1345 COMPX / 24.38 QQQ.

 
 
  Jonathan Levinson   7/30/02,  12:27:18 PM
The Semiconductor Sector was upgraded by Bear Stearns just before noon.

 
 
  Jonathan Levinson   7/30/02,  12:26:06 PM
The COMPX is attempting to fill its opening gap, currently at its high of the day at 1330, while the NDX has already exceeded it. The QQV is now flat on the day at 50.1, and the TRINQ remains in neutral buy territory at .63. Volume breadth has just turned slightly positive with this last surge.

 
 
  John Seckinger   7/30/02,  12:25:11 PM
The Semiconductor Index (SOX.X, +4.24 at 341.07) tested the previous double low (now resistance) at 343.50 before coming under slight profit taking. Now poised to retest this area, follow-through buying should propel the index to near the 22 DMA (currently at 363.51). Note: A settlement above 344 must be attained for buying into materialize. If weakness develops, the SOX.X could fall back to near 325 before finding support.

 
 
  Leigh Stevens   7/30/02,  12:24:22 PM
INDEX Comments: QQQ , contrary to the S&P, breaking out to a new high for this move, tracking the NDX higher - COMP is still slightly under its prior swing high. I would not read too much into this, as Nasdaq lagged on the S&P rally - no super bullish action is apparent on any of the key Nasdaq biggies, except that they are holding "firm" not giving back much of their recent gains.

QQQ resistance looks like 24.6-24.75 - an hourly close above 25 would be bullish.

 
 
  Leigh Stevens   7/30/02,  12:17:27 PM
Subscriber QUESTION: "I got an email from TradeStation,which is charting application I use, regarding Open Interest data. I have an indicator called "Open Interest" that can be added to my charts. I did it with QQQ's at 60 min chart and it is there. By the way Open Interest seems to be going down while the prices are going up. See the chart on 60 min QQQ. Open Interest appears to be hitting the lowest point today. Does this mean that Put contracts are being closed and declining as a result and call buyers are hesitant and not buying that many until a clear trend is established, hence a possible market reversal? "

RESPONSE -- Open Interest, being of course, the number of "open" calls or puts in a particular contract or in total for an index or stock, is normally only tallied at the end of the day. I don't believe that the exchanges can calculate changes in Open Interest intraday - so I am wondering about the validity of data that they apply to an intraday chart; e.g., 60min.

As far as Open Interest in general - it's not a well-studied subject in terms of a "predictor" of the future trend, unlike it has been historically in the commodities futures markets.

Generally, when open interest in puts gets very high, relative to calls, that could indicate that bearish "sentiment" is overly high. However, the problem with this is that, as far as I know currently, there is a lack of historical "norms" as to what levels may be "overly" high. The information we have or can get is maybe too subjective to make many useful conclusions about the meaning of particular levels of Open Interest in index options, or in the Q's.

Your speculation on a significant number of QQQ puts being closed out, without being replaced with any equal number of calls, probably due to the lack of solid and substantial convictions on the bullish side, is probably a good guess to explain the decline in QQQ Open Interest you mention.

 
 
  John Seckinger   7/30/02,  12:17:13 PM
Biotech Index (BTK.X): 50 DMA (exponential) hit at 351.34.

 
 
  Leigh Stevens   7/30/02,  11:58:31 AM
Subscriber QUESTION: "Hi Leigh - ESST put - 08, strike 15, entry 1 - What might your target be for the stock?"

RESPONSE: ESS Technologies (ESST), last at 13.6, broke sharply the other day on very heavy volume relative to its daily average. Consolidation since then looks like it will preface another downswing. I would say the $10 is a reasonable possibility on the downside in the near-term - next 1-2 weeks.

 
 
  Jonathan Levinson   7/30/02,  11:50:38 AM
The US Dollar index has continued its slow slide this morning and is now hovering just above 106.50. The QQV has come down off its highs, as the QQQ's continue to trade just below 24. The COMPX is trading below 1325 resistance, and QQQ is showing good strength relative to the broader COMPX. Breadth has weakened a bit on the COMPX, and there are 63 new lows to 15 new highs. The COMPX TICK is currently 62. This is overall an excellent showing for the COMPX after its 5% upmove yesterday. I'd be betting on this to fail, as upward momentum has come to a halt, but the bulls were awe-inspiring yesterday. Thus the lack of action on the COMPX- bulls are afraid to buy the top, and bears are afraid of getting greased by a locomotive.

 
 
  Leigh Stevens   7/30/02,  11:48:41 AM
Subscriber QUESTION: "Leigh - do you know what time Bush is going to sign the new accounting measures, and do you think it will provide as pop for those looking to short? "

RESPONSE: Bush signed the bill already, earlier this morning. The signing did not provide a noticeable market influence unless it is just to provide a backdrop keeping this correction from going too deep.

The legislation, named the Sarbanes-Oxley Act officially, revamps oversight of the accounting industry with an independent audit board under the S.E.C. The act also includes tougher criminal penalties for corporate executives who swindle investors.

Bush finally seemed to go along with the tougher Senate bill after the Market continued to suffer following WorldCom's $3.8 billion accounting debacle. It seemed that Republicans, with all up for election in the Fall, felt they were vulnerable on this issue if they were perceived as being too "soft" on corporate America, especially with the public out for "blood" on this issue.

 
 
  Jim Brown   7/30/02,  11:46:19 AM
Jim: The markets are down, not particularly exciting, and the Vol on both NY and NASD are also down significantly. What does this tell you? Thanks, ML

No conviction to sell. Everybody wants to see the rally continue but knows it should sell off first. There is no rush of buyers because nobody wants to lead. There is no rush to sell because nobody wants to miss a continued rally. It is a standoff and from my position it looks like the bulls are becoming a little braver than the bears as the TICKS are improving and the advance/decline line has stopped dropping. Futures are ticking up with the Nasdaq leading. All of these indications are very tenuous and not enough to launch a long trade. Not particularly exciting was a good way to explain it.

 
 
  John Seckinger   7/30/02,  11:37:11 AM
Sector Search: Not surprised that the Biotech Index (BTK.X) failed to hit the 50 DMA of 351 yesterday; however, the index appears to be building into an apex (342) and looks to make an assault at 345. Once above 345, bids should begin to grow unless 342 is penetrated. 351 should provide significant resistance going forward, while weakness under 342 should take the index back to 337 with 328 as the intermediate objective.

 
 
  Steven Price   7/30/02,  11:36:33 AM
Reader Question: Cisco Systems (CSCO) $13.28 (-0.03) Hi Steve,what are your thoughts on shorting CSCO at this level? Thank you

Response: While I'm not bullish on Cisco, I see a trendline beginning in January 2000 which gives Cisco some upside room to around $14. I'd like to see it test this level and watch for a rollover before jumping on. A look at the PnF shows a current 3 box reversal up, above support at $12.50, after posting a very bearish quadruple bottom breakdown when it traded $12.

 
 
  Jeff Bailey   7/30/02,  11:31:14 AM
The 11:00 AM intraday update has been posted. Link

 
 
  Jeff Bailey   7/30/02,  11:28:31 AM
Amgen (AMGN) $43.99 -0.02% ... Hi, Jeff can you suggest stop loss on your recommendation of AMGN short. Since it looks little strong toady, what would be strategy.

I've taken retracement from $68.99 (12/06/01 high) to the recent low of $30.57. This gives us 38.2% retracement at $45.25, so a stop on an underlying short position could be place just above there at $45.55 (for now) and support retracement at 19.1% of $37.91 (stock gapped above this retracement on 07/26/02) and a "gap" that bears would like to see filled back. Link

Point/figure trader might be looking at a little more room with a stop above the $46 level, using bearish resistance trend along with overhead supply from the sprea-triple-bottom sell at $45 as resistance. Perhaps looking for those that were buyers at $46 that didn't get out and saw $31 sell into recent rally, then look for pullback entry near $38. Link

 
 
  Steven Price   7/30/02,  11:14:43 AM
Linear Technology (LLTC) $27.83 (+1.00)

Reader Question::What do you think of LLTC at this level? OI stop at 27.25.

Response: LLTC is above our stop, so I would not initiate a short play at this level. I do see the 21-dma of $29.18 and $30 as interesting price targets for a rollover, but I would wait to see if it approaches these levels and rolls. At that point I would re-evaluate. The quadruple bottom break down on the PnF keeps me bearish on the stock, but I'd like a better trend to jump on.

 
 
  Steven Price   7/30/02,  10:53:31 AM
Retail Index (RLX.X) : 283.29 (-6.49) Consumer Confidence numbers coming in below expectations may have taken a bite out of the retailers. The index is down to 283.29, with most of the majors (WalMart, Target, Home Depot) down fractionally. This group has had quite a run the last few days, breaking through resistance at 280, which should show some support for the group on the way down.

 
 
  Steven Price   7/30/02,  10:47:13 AM
Reader Question: Hi Steve, shorted BBOX yesterday at the open,so a little good profit so far,where do you think we should pull the trigger??????Thank you

Response: BBOX $35.54 (-1.45) A we noted in our play Link , a trade of $36 created a triple bottom breakdown on the PnF chart with a bearish vertical count of $24. The stock could see some round number support around $30, which I would use as my first target. A look at the Networking Index ($NWX.X), which is currently trading 125.39, shows some support at 120 and 114, so I would keep an eye on this indicator as well for signs of any renewed strength.

 
 
  Jonathan Levinson   7/30/02,  10:46:20 AM
Declining volume is still slightly ahead of advancing volume on the COMPX by a factor of 1.25:1. The QQV is the only interesting action so far, now up 1.69. While equity traders have maintained the same bias so far today, option traders are growing gradually more cautious.

 
 
  Jeff Bailey   7/30/02,  10:42:14 AM
Qualcomm (QCOM) $27.36 -2.7% ... Bears Stearns says that channel checks indicate Motorolla (MOT) $12.04 -0.41% is developing its own CDMA chipset, despite the fact that it had initially indicated it would go exclusively with 1x systems from QCOM. Bear Stearns says it appears that MOT is in advanced discussion and testing in order to approve chipsets from other suppliers, and firm suspects a private company will supply MOT for some 1x handsets late this year or early next year. Market has been expecting that all of the 1x business would go to QCOM and may imply rist to Bear Stearns' QCOM estimates.

 
 
  John Seckinger   7/30/02,  10:41:53 AM
Managing Risk: So, let's say I buy the Dow here. Am I taking on too much risk? After breaking apart a chart of the INDU (Jim and Leigh do a fantastic job), I turn to a chart of the 30-year bond. Currently at the top of its bearish channel, the TYX.X index is both below the important 5.4% level and the 22 DMA (exp.) of 5.388 percent. Well, should I hope yields go higher, break the channel and force assets to flow into equities? No. Therefore, there is a good chance longs are taking on too much risk at current levels. The Dow at 8619 is 8 points higher than its 22 DMA as well as above the 8600 pivot, so it most likely makes sense to be patient and wait for a confirmation (a mild sell-off from current levels).

 
 
  Jim Brown   7/30/02,  10:38:58 AM
Pivot Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
The oscillators are starting to roll over despite the small bounce after the sentiment report. Since the normal market cycle would be down at this point let's anticipate that by going SHORT with an OEX trade below 443. (SPX 884) This is below the low of the day and would represent a breakdown in the current bullish trend. This is a high risk trade considering the bullish sentiment. I repeat I have no confidence about a continued bounce and historical market wisdom predicts a profit taking sell off soon. This does not mean it will happen. Don't trade this signal if you are uncomfortable with my outlook.

 
 
  Jeff Bailey   7/30/02,  10:31:29 AM
Guidant (GDT) $33.55 -4.08% ... Announces it will buy privately held Cook Group in a stock-for-stock transaction. Under the agreement, GDT will acquire all of Cook for up to $3 billion in GDT stock, priced in two phases: the first at a minimum of $40 per GDT share, and the second at a minimum of $55 per GDT share; at the maximum share issuance, the transaction is expected to be earnings neutral in 2003 and substantially accretive in 2004. (There has been speculation in the past that this deal could happen after a judge ruled in favor of BSX in their paclitaxel stent licensing case against GDT's partner Cook).

 
 
  Jonathan Levinson   7/30/02,  10:24:08 AM
"You first" "no, please after you..." The COMPX is trading within a range between 1325 and 1315, with a brief dip below following the Consumer Confidence number. The hourly 5(3) stochastic is in a bear roll, but price is holding up well, printing a new high at 1325 as I type. QQQ is holding up particularly well, trading above yesterday's close. The QQV has increased slightly, currently up 1. The TRINQ is in neutral buy territory at .69. Yesterday's uptrend appears intact.

 
 
  Jim Brown   7/30/02,  10:16:46 AM
Pivot Trade Signals
Sure wish I had those puts back we lost by a quarter at the close yesterday! The Sentiment was lower than expected but the market shrugged it off and is consolidating just below 8600. Ticks are decreasing as well as advance/declines. It would seem to be consolidating here but still directionless.

 
 
  Jeff Bailey   7/30/02,  10:03:38 AM
Consumer Confidence for July comes in at 97.1, which was below consensus of 102.3.

Stocks at session low with Dow -133, S&P 500 -14 and NASDAQ -20.

 
 
  Steven Price   7/30/02,  10:03:37 AM
BBOX: Reader Question:Hi, Your play of the day says "BUY PUT SEP-35*QBX-TG OI=405 at $2.05 SL=1.00".

Response: This put designation is incorrect, the correct symbol for the Sep 35 put is QBX-UG

 
 
  Steven Price   7/30/02,  9:57:02 AM
Black Box (BBOX) $35.98 (-1.01) OI Put Play BBOX trading down to level not seen since April 1999

 
 
  John Seckinger   7/30/02,  9:54:39 AM
Bond Talk: Apparently a fund last week sold 1.5 billion in U.S. Treasury Strips (bonds stripped of coupons; creating two separate entities - the coupons and single principal payment), allocation the proceeds towards equities. Also in the news is the Brazilian Real coming under pressure and really hurting Brazilian bonds in the process. Corporate bonds are trading mostly flat (can be an indicator of consumer sentiment regarding accounting practices), while short dated maturities are seeing a better bid than expected (possibly central banks not believing the dramatic rise in the Dow).

 
 
  Jonathan Levinson   7/30/02,  9:51:09 AM
Declining volume is slightly ahead of advancing volume at the open on the COMPX, 84M to 52M. The QQV is up slighly from yesterday's close, up .83 to 50.93. TRINQ neutral at .9. COMPX 1315 resistance has held so far with a low print at 1316. Price is currently bouncing at 1322, just below the opening gap print at 1323.

 
 
  Steven Price   7/30/02,  9:48:00 AM
3M (MMM) $126.21 (-0.45) After yesterday's almost 6 point gain in this OI call play, I'm raising my stop to from $117.50 to $120, just below the level we originally entered. I may adjust as the day goes on, but this is a good point to start.

 
 
  Jonathan Levinson   7/30/02,  9:45:37 AM
Goldman Sachs has upgraded a number of XAU components, including Barrick, Placerdome, and Anglogold. See Link

 
 
  John Seckinger   7/30/02,  9:44:33 AM
Yesterday's pivot clearly seemed to be 8600, and this level seems to be acting psychologically significant this morning as well. This is analogous of a bell-shaped curve, with 8600 right in the middle. Liquidity can be found, shorts and longs are able to square or add to positions before the sentiment figures, and there becomes a sense of neutrality within the marketplace. By definition, pivot.

 
 
  Jeff Bailey   7/30/02,  9:44:18 AM
Dow Diamonds (DIA) $86.20 -0.62% ... would expect short-term bears to be shorting this morning's weakness, stop $87.75 and targeting a pullback to $82.75. Link

 
 
  Steven Price   7/30/02,  9:41:33 AM
Our play list is looking red across the board, however at this point only giving back a fraction of yesterday's gains.

 
 
  Jeff Bailey   7/30/02,  9:40:15 AM
Market Internals saw notable improvement yesterday.

Both the S&P 100 Bullish % ($BPOEX) Link and S&P 500 Bullish % ($BPSPX) Link reversed into "bull alert" status. Traders can begin making some risk assessments to early October (red A) and perhaps understand the importance of account management.

If not, please read "Understanding risk is key" in the Bailey's Basics section. Link

 
 
  Leigh Stevens   7/30/02,  9:36:37 AM
Wall Street Journal (WSJ) - This morning's WSJ has front page story on of course - what else - on the "record 4-day rally", with speculation on what comes next. Fueling the rally is Investor sentiment that the market had fallen too far and their were some bargains to be had in stocks, particularily in the financial sectors. However, earnings will still need to pick up to sustain an up trend.

Inside WSJ story on the congressional investigation into dealings between Merrill Lynch (MER) and Enron - particularily on a sale that is thought to be a transaction designed to hide debt - helping the fake bottom line was so much the focus of Enron, makes you wonder when they found time to pull in some real earnings.

Meanwhile, Qwest's disclosure that the company improperly accounted for $1.1 billion of transactions may "spark a wider SEC investigation".

Investor attention certainly is forced back onto the corporate scandals of the day. President Bush is due to sign the new accounting measures into law today. Should be some sound bites from that!

 
 
  Jeff Bailey   7/30/02,  9:32:42 AM
Amgen (AMGN) $44.04 ... (per 09:26:03). Look for AMGN to find technical resistance at current levels as the stock tests bearish resistance. Look for pullback to $38-$39 as area to cover short positions. Link

Relative strength is improving, but it too may find some relative resistance at these levels. Here's a RS chart of AMGN versus S&P 500. Would be read "buy signal and column of X," which is considered stronger. Link could see a RS pullback to a reading of 42.

 
 
  John Seckinger   7/30/02,  9:31:31 AM
Following its worst performance of the year, Treasury Bonds are only slightly higher ahead of the Dow opening and a plethera of economic releases. Remember: The Conference figure today has seven times survey participation as does University of Michigan.

 
 
  Steven Price   7/30/02,  9:30:23 AM
Cooper Industties (CBE) $29.08 California State Treasurer Phil Angelides announced the State of California will no longer do business with companies claiming headquarters offshore in name only. These tax-havens don't sit well with the states and California may be setting a precedent for other states to follow. OI put play Cooper has made this list of companies California will no longer do business with.

 
 
  Jim Brown   7/30/02,  9:29:21 AM
Pivot Trade Signals
The debate continues. Is the bottom behind us or in front of us? The futures are showing a little weakness but not as much as you would think after seeing the Dow put in the 3rd biggest day in history. The bulls may be a little cautious in front of the Consumer Confidence at 10:AM. I am not sure the market really cares after ignoring the Qwest news yesterday. Maybe it has just been so commonplace for a major corporation to announce their earnings were just smoke that traders are numb to the news. Of course with all the problems Qwest has had, this news was already factored in. It is amazing how quickly the bearish sentiment has changed with no major shift in fundamentals.

The major indexes are at resistance and the "normal" sequence of events would be a retracement of 50% or so of the +1200 point gain in the last four days. Even in prior bubble days this kind of gain would not go without a sell off. The terms "retest lows" and "too far too fast" are starting to sneak back into commentator vocabularies but are being ignored. Is this true irrational exuberance?

I am going to be cautious about entering a position today because of the conflicting signals. I hesitate to go long with heavy resistance above us and I hesitate to go short again due to the strong bullish sentiment. The best play may be to just wait for a new trend to develop or for the market to consolidate at this level before attempting to move up again. Like Leigh pointed out also, the normal cycle would be two days down now but the markets are far from normal. In any event I will wait until after the 10:AM Sentiment report before taking any action.

 
 
  Jeff Bailey   7/30/02,  9:26:03 AM
Trade/Account management Traders may want to have a firm grasp of their account management at current levels.

Bears that may be holding short/put some trades where demand for the underlying stock may have been stronger than initially predicted, should begin reviewing the position and perhaps looking for levels where a pullback allows the trader to exit the position without harming the account too much. At the same time, putting into place a finite stopping point in the underlying stock position to simply cut the trade before further damage can be done.

Bulls at this point have to be considered a rather "aggressive" bull that has been taking full positions is looking for short-term gains. I'd continue to be rather aggressive with profit stops if gains of 10% or more are found.

Begin looking for stocks in the view of where a short, that has taken some heat, may be looking for a pullback to cover into, thus providing some support. If the stock you identify does not pull back, then chances are that demand is strong for the stock, and a break higher from consolidation could then find stocks getting squeezed higher as shorts begin battling bulls exposure to the stock.

Relative strength will become a key part of bullish/bearish trading here. Stocks that still exhibit poor relative strength and trade below trend with overhead supply nearby are the best short/put candidates. Conversely, stocks with good relative strength that have simply been washed lower with the broader market, but have perfromed strong RELATIVE to the market (S&P 500) are most likely the stocks that find buyers on pullbacks to support.

 
 
  Jeff Bailey   7/30/02,  9:25:51 AM
The 9:00 AM intraday update has been posted. Link

 
 
  Leigh Stevens   7/30/02,  9:20:56 AM
Pre-Opening INDEX Comments - In terms of the various indices, the Dow closed at resistance implied by the upper resistance trendline of its hourly downtrend channel - and, not far above its 21-day moving average, currently at 8638. If the rally is going to falter I figure it'll do so in this area around 8700. DJX support looks like 84.4-84.5, then 82.7. Next resistance above yesterday's high at 87.1 is 88.5, at the prior hourly (up) swing high.

In terms of SPX, the close was at resistance in the 896-898 area, at the low end of a prior hourly trading range of some importance - the mid-month breakdown from this area led to the last big downswing. SPX key support is in the 850 area.

OEX overhead technical resistance looks like 455-458, then 466-470. Support is 425 area, then around 417.

Nasdaq Composite - COMPX - stopped right at resistance in 1335 area, at top of its hourly downtrend channel. Support looks like 1286, down to 1260 area, the area of its price gap (up) from yesterday. QQQ stopped short of its resistance yesterday in 24-24.4 area. Support in 23 area down to 22.70, the low end of its upside price gap. 22-22.25 area is "best" technical support, forming the low end of its recent trading range.

Think we can anticipate corrective downside action over next 1-2 days based on near-term overbought condition. Pullbacks to support areas should develop, so nimble short-term traders will want to play indices on the short/long put side until we see if there will be another bullish play that sets up.

 
 
  Leigh Stevens   7/30/02,  9:18:54 AM
Pre-Opening, Stock INDEXES - Good Morning!

Index FUTURES snapshot: S&P 500 > -2.90 at 890.80; Dow Industrials > -40.00 at 8625; Nasdaq > -3.00 at 958.50

"Fair Value" numbers: S&P 500 futures ($SP02U): .80 -- Nasdaq 100 futures ($ND02U): 3.00

 
 
  Jonathan Levinson   7/30/02,  9:18:46 AM
For an list of companies whose CEOs and CFOs are required to file sworn statements with the SEC, along with the status of the filing, see this Link

 
 
  Jonathan Levinson   7/30/02,  8:19:27 AM
Looking at the daily and weekly charts and beyond for the Nasdaq, I'm struck by the divergence between what they indicate and what we're hearing from the press. Despite the impressive rally, we are a long way from being able to declare that "happy days are here again". The rally has yet to challenge the descending channel on the daily and weekly charts. Perhaps it will do so successfully, but it hasn't yet. With the daily and intraday 5(3) oscillators topped out and the longer trend down, I will continue to watch the action with a view for short entries. Those of you who are bullish should be watching these levels from a cautionary perspective. Above all, we try to trade what we see and do what works. I will switch to focusing on bullish call plays as soon as I see that this bear market has either bottomed or reversed.

I see immediate resistance at the 1335 level, and general congestion between 1340-50. Support is below at 1315, weak at 1300, 1290 and 1250-55.

 
 
  Jonathan Levinson   7/30/02,  8:02:36 AM
The US Dollar Index has come down from its highs and is currently trading around 106.70. Futures are slightly negative.

 
 
  Leigh Stevens   7/29/02,  7:33:55 PM
The Market Monitor for Monday, 7/29 can be viewed in our archive at Link

 
 

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