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  Jonathan Levinson   10/18/02,  8:39:29 AM
Bonds have opened up, with yields modestly lower with FVX down 4 bp.

 
 
  Linda Piazza   10/18/02,  8:22:49 AM
For what it's worth, Bloomberg reported this morning that markets have been down 5 out of the last 7 days after Microsoft reports.

 
 
  Jonathan Levinson   10/18/02,  8:18:59 AM
Since CNNfn decided to not report the Philly Fed number yesterday when it was released, I've become measurably more sceptical of the media's reporting of or explanations for moves in the market. Well, CNNfn, which is no longer occupying my start page in Explorer, is blaming this morning's dump in the futures on ERICY and SUNW. I personally blame it on OpEx antics, given that the market never thought twice about either GE or C's earnings reports. Either way, the 3AM Geyser got pointed south for a change, and 6AM compounded it, with NDX -17.50 and S&P -8.50. QQQ is off .35 from its close to 23.20. The Fed owes 6.25B today just to avoid draining liquidity, and I expect a smaller or no repo today, because the selloff in bonds is, in my opinion, more destructive to bulls than a selloff in equities would be. By draining some liquidity and cooperating with market makers who seek lower prices to blow out some October contracts, the Fed might be able to stem the rally in equities and bond yields. So, we'll have to see. On the other hand, perhaps the markets were just overbought :)

 
 
  Alan   10/18/02,  3:36:26 AM
Index Futures
ES futures are now 884.50 x 884.75 and any shorts from suggested entry would now be filled at the +2.50 target (or better). YM (dow) 8295, NQ 955

 
 
  Alan   10/18/02,  3:30:11 AM
Index Futures
Futures Trade Signal EXIT
At 3:27:20 AM, with ES at 885.25 x 885.50, the + 2.50 gain target was hit from Entry.
Futures Trade Signals now back to FLAT
Gain : +2.50 ES points, $ + 125 per contract, Gain +12.5% based on $1000 margin.
Goodnight and Au Revoir~

 
 
  Alan   10/18/02,  3:17:54 AM
Index Futures
Secondary reason is ES 890 is some minor resistance

 
 
  Alan   10/18/02,  3:16:26 AM
Index Futures
Futures Trade Signal ENTRY
Open Short ES (sp500) futures at 888.75
There's very often an exhaustion top right after Europe opens.
1 pt stop, 2.5 pt target

 
 
  Alan   10/18/02,  2:47:01 AM
Index Futures
3 AM / ES 889 , YM 8342, NQ 962
Up for Europe's open, which is set to open higher; as traders seem to be saying "what bearish semi book-to-bill numbers" [grin]

 
 
  Alan   10/17/02,  11:48:40 PM
Index Futures
Asia does not seem to care about the bearish Semiconductor book to bill information which came out long after MSFT's earnings.
Nikkei gapped up 100 pts, and continues to climb over the pysch 9000 level, currently at 9100. Twaiwan, Hong Kong are also very green, and at/near day highs Futures: ES 887, YM (dow) 8323, NQ 961

 
 
  Jeff Bailey   10/17/02,  10:37:49 PM
Citigroup (C) $35.75 +5.61% ... Dear Jeff: i am short 500 c @28.40.shoul i lick my wounds & go on or wait see what happens . thnk you for great work. aprecciate if you respond if get a chance.

Don't "wait and see" what happens! Gut feel is you may have been "waiting and seeing" the past five sessions. Hey... I've been there and done that.

Let's take some inventory real quick. Right now, if you take a loss and call it quits at $36.00, that's a $8.40/share hit. That's a lot of heat to have taken and lordy knows how many other's are in the same boat, but perhaps short hundreds of thousands of shares.

One thing a trader might do that doesn't want to consign a loss right now is to buy a protective call in the C November $35 (CKG) for $2.10/contract, or roughly $1,050 (+ commission). This provides protection for another month above $35.

Now, the $2.10 actually has you short C at $28.40 - $2.10 = $26.30. This now gives us a risk/reward ratio to now assess.

Only YOU can answer this question, but is it worth an additional $2.10, to buy another month to see if C would pull back more than the $8.40/share hit you would currently take if you "lick your wounds" right now?

C's p/f chart has now rallied right back to a level of past resistance at $35.00, but shows FIRM support at $27. It wouldn't surprise me to see C pull back to $32-$31 as a "normal pullback," but the current bullish vertical count of $52 is alarming to your short position.

If YOU don't like the idea of hedging with a protective call, then I would suggest you establish a firm stop loss order, then tomorrow morning, place that order with your broker/on-line trading firm, and from then on, the only adjustment to that stop is LOWER.

A trader that does go the route of a protective call, then buys some time/insurance. If C does fall to $32-$31, you could always then sell a put at that strike, generate some cash and work down the cost of the protective call that was bought.

Right now.... the ULTIMATE goal is to stem further damage, SECONDARY goal is to get out of this trade break-even, and LAST goal is to make a profit.

FYI ... I was in similar situation years ago and short AMZN near $22.50. At $25 I called it quits even though I "knew" AMZN was overpriced. Eventually AMZN reached $113 when the MARKET realized it was overpriced.

 
 
  Jim Brown   10/17/02,  10:33:44 PM
The Swing Trade Game Plan has been posted: Link

 
 
  Jeff Bailey   10/17/02,  9:53:51 PM
Professor Davis' Probabilities ... Jeff, is there a way to buy the Second Edition, yet get the probability study separately, perhaps through you?

Yes!... I posted these in an update on Friday, August 30 in the 09:00 Update Link

Also... for p/f chart pattern recognition, stockcharts.com has a nice example and description of some of these patterns at this Link

What does supply/demand and trend "say" about the stock you're holding?

 
 
  Alan   10/17/02,  9:29:53 PM
Index Futures
Many of you have emailed requests for information on suggested futures brokers, we shall address this topic very shortly via detailed information on the website"

 
 
  Alan   10/17/02,  8:39:04 PM
Index Futures
Futures : ES 887, NQ 961 and very quiet. Dow futures reopen in about an hour but are super thin overnight, Last (at 5pm) was 8351
ES is now at gap fill - 887-888 was also the level they opened Thursday at.

 
 
  Jeff Bailey   10/17/02,  7:59:46 PM
Microsoft (MSFT) ... calm now at $53.14

 
 
  Jeff Bailey   10/17/02,  7:53:42 PM
Point and Figure Jeff: I'm interested in trying to learn more about these point and figure charts. Can you suggest a good book or reading material on the topic?

Yes! In our bookstore, we have (per my request) Tom Dorsey's "Point and Figure Charting" book. His 1st addition has Professor Davis' probability study in it (pg. 30-31). I see somebody on e-Bay selling some "used" books and they might be 1st additions.

Tom's 2nd addition book didn't have Professor Davis' study in it because some traders/investor's were not using the bullish % charts to better understand what market phase was in play.

I see one e-bay advertiser saying.... "Absolutely New - Never Been Read" My guess.... the seller is going to take what money he/she gets from the book and buy some more WMB Link ???

I've also written a couple of short pieces in the Bailey's Basics section of the OI site. "The BULLISH vertical Count," "The BEARISH vertical count" and "Understanding Risk is Key" Link

 
 
  Jeff Bailey   10/17/02,  6:42:32 PM
Sun Microsystems (SUNW) $2.99 +6.78 .... trading $3.09 after company said on conference call it will lower FY03 capex to under $500 million from FY02's $2 billion.

 
 
  Jeff Bailey   10/17/02,  6:34:29 PM
North American Semiconductor Equipment Industry posts September 2002 book-to-bill ratio of 0.84. Lehman Bros. estimate was 1.06 versus August actual 1.14. This would indicate that it was worse than expected.

I (Jeff Bailey) think Intel's earnings/guidance the other night was a hint of tonight's book-to-bill.

After hours has INTC ticking 35-cents above $14.23 close. AMAT 27-cents above today's close of $13.25.

Now.... I hate to admit this, but.... Jim Brown and I had a discussion one night (a couple of months ago) regarding book-to-bill. Jim was telling me after a recent release of book-to-bill that was reported somewhere near 1.26 (I'm going from sketchy memory of exact numbers here) that the "stagnating" level of 1.26 versus the prior month, which was also pretty close to 1.26 was a sign that things were slowing down in the Semi's. I disagreed with that analysis as a 1.26 was still showing growth.

However.... as time has passed, I've had to admit that I was WRONG, and Jim was RIGHT (again, something I hate to do BIG GRIN).

Now... I'm one to learn from my mistakes and would at some point look for the book-to-bill ratio to start flattening out a bit. Anyway..... just some notes here.

 
 
  Jeff Bailey   10/17/02,  6:13:33 PM
Bear's have a chance tomorrow? On a historical note.... The October crash of 1987 took place on October 19th, with the Dow Industrials falling 22.6% in one day.

On a "neutral" note .... StockTrader's Almanac has October expiration (tomorrow) showing 6 up and 5 down days in past 11 years.

 
 
  Jeff Bailey   10/17/02,  5:26:34 PM
Jeff: I was just reading your 4:06 post and find it interesting that as I watch the after-hours action in MSFT, the high trade so far has been $54.00. This is pretty close to your $53.78 and 38.2% retracement level. Is it possible that market makers were actually neutral as you thought, but shorting the stock in after-hours to all the smaller retail traders?

Good question, and the answer may be "yes." BUT.... last night, I traded some SNDK bullish from $17, with a target of $17.75. I never got filled in after-hours at $17.75, so I held overnight. This morning, stock opened right at $18.00, which was a level I had thought market makers might be sitting (retracement from high close $23.06 on 4/17/02 and low close $9.80 06/21/02 had 50% at $16.45 and 61.8% at $18.00). I dumped the stock at $18.40 and "sure enough" stock came back to $18.00 then rocketed higher.

With this observation made.... what I'd look for in the morning is this..... Make an observation of tonight's "high tick" in MSFT at $54. I don't know what takes place between now and tomorrow morning, but if we were to see MSFT open above $54.00 then might see some type of early trade above $54.50. I'd then look for some type of support from $53.78-$54.00 and any move higher from there may have stock on the move to next retracement of $57.57. Note: 200-day SMA is at $54.52 and most likely see some resistance there.

 
 
  Alan   10/17/02,  5:03:02 PM
Index Futures
4:50 PM: Futures : ES 887-888 (yea the 888 guess was right [grins], NQ 964-5, YM 8345x8350
No other possible trade until the Guidance section of MSFT's conference call, and that's not likely until at least 6 PM

Real world example of HEDGING
If one was holding winning "20 MSFT Oct 50 calls" perhaps from yesterday morning; when MSFT stock got close to $54 15 minutes ago, you might have very happy to "sell to close" those Oct 50 calls and take your profit; but of course are not able to do so. You have 20 contracts, that's 2000 shares of stock, you could have Locked-In your profit by shorting 2000 shares of MSFT stock at $53.90, but that requires $53,900 of capital on a 2:1 leverage to take both positions home overnight until you can sell the winning calls tomorrow morning.
Instead of tying up $53,900 overnight, you could have "hedged" in a very similar fashion by shorting Futures and taking home both the "Long MSFT calls" and the "Short Futures" position. Lack the time to compute exactly, but guess would be if using futures, would only require $8,000-$10,000 vs. $54,000 with stock.

 
 
  Alan   10/17/02,  4:50:59 PM
Index Futures
4:45 PM: Futures re-open : ES 885, NQ 960-962, YM 8334
4:00 PM comparision levels: ES 878, NQ 946, YM 8250

 
 
  Alan   10/17/02,  4:47:37 PM
Index Futures
MSFT prints 54.0, retraces to 53.50; EBAY down off its earnings; 58 to current 55; "quote : Microsoft CFO: Tech Spending Climate Remains Tough>MSFT"
Futures Trade Signal: If anyone did grab a YM (Dow $5) Long around the 8270-90 level when the MSFT .50 number came out, I would consider taking some profit in the current 8330 level before MSFT's 5:30 PM conference call. YM (Dow) 8350 which printed about 5 minutes ago is also a resistance pivot level.

 
 
  Alan   10/17/02,  4:34:57 PM
Index Futures
Given the so-very-quick violent Futures moves, similar to last night off IBM, it's almost impossible to suggest a Futures trade signal other than "go long or short dow futures depending on what MSFT does" is certainly a very non-exact trade signal. At the time of the 4:18 post (typo and all) of "MSFT crushes earnings , 50 centns " - YM Dow futures had an Ask price of 8270-8280 area.
4:30 PM MSFT 53.60, YM (dow) 8351
ES and NQ futures re-open at 4:45 PM; next higher resistance levels on ES (sp500 futures) is 892-895, and then obvious pysch level of 900; my guess for ES re-open is 888

 
 
  Alan   10/17/02,  4:29:47 PM
Index Futures
Microsoft (MSFT) currently $53 (day highs, up 3 from 4 PM) , YM dow futures (8330) up 80 from 4 PM off MSFT beating earnings with 50 cents (expected was .43, whisper was .45); Revenue was better than expected as well with $7.75B vs. 7.1 expected. MSFT is often "cautious" on their forward looking statements.
MSFT revenue number is a bit confusing with some one-time gains coming from how they sell the Office product to corporations.
MSFT conference call at 5:30 PM, hear it at this link Link

 
 
  Jim Brown   10/17/02,  4:29:00 PM
Complete text of the MSFT earnings announcement: Link

 
 
  Jeff Bailey   10/17/02,  4:23:57 PM
Microsoft (MSFT) $50.75 +0.67% ... ticking higher at $52.05 after reporting EPS of $0.50 and revenue of $7.75 billion. EPS was well ahead of consenus $0.43 as were revenue estimates for $7.1 billion. Seems to be some confusion if EPS of $0.50 is comparible to analyst's estimates given smaller revenue beat.

 
 
  Jeff Bailey   10/17/02,  4:19:57 PM
Sprint Corp. (FON) $10.67 +2.59% ... Reports Q3 earnings of $0.44, which was 7-cents better than consensus. Link

 
 
  Alan   10/17/02,  4:19:20 PM
Index Futures
MSFT crushes earnings , 50 cents but seems to have Q4 lower ? stay tuned

 
 
  Alan   10/17/02,  4:18:45 PM
Index Futures
MSFT crushes earnings , 50 centns

 
 
  Alan   10/17/02,  4:18:09 PM
Index Futures
415 PM: ES and NQ futures now closed: ES 879s, NQ 944; YM (Dow futures) still are open till 5 PM , currently 8253. ES and NQ futures reopen at 445 PM

 
 
  Jeff Bailey   10/17/02,  4:18:01 PM
Rational Software (RATL) $5.60 -9.09% ... recoupes some of today's losses with after-hours trades at $6.30 after reporting Q2 EPS of $0.04, which beat estimates by a penny. Link

 
 
  Jeff Bailey   10/17/02,  4:15:14 PM
Sun Microsystems (SUNW) $2.99 +6.78% ... ticks higher at $3.08 after reporting Q1 loss of $-0.02 per share, which a 1-cent better than estimates. Link

 
 
  Alan   10/17/02,  4:11:03 PM
Index Futures
408 PM: futures still sideways ahead of you-know-who : ES 878, YM (dow) 8245, NQ 945

 
 
  Jonathan Levinson   10/17/02,  4:10:08 PM
Now that the markets have closed, the real trading will begin.

The Jaws of Life Pattern is reminiscent of the "Dubya" pattern we saw on the daily COMPX chart starting on June 15th or so.

 
 
  Jim Brown   10/17/02,  4:07:56 PM
A reader sent us a new chart pattern he noticed today. The "Jaws of Life" Link

 
 
  Linda Piazza   10/17/02,  4:07:20 PM
To the reader with the rnchicago.com address, my response could not be delivered to your address. Sorry.

 
 
  Jeff Bailey   10/17/02,  4:06:42 PM
Microsoft (MSFT) $50.75 +0.67% .... I've had a retracement bracket on MSFT from $73.64 to $41.50 since I can't remember when. This has 19.1% at $47.64 (support on bad news?) and $53.78 at 38.2% retracement (gap higher on good news?). Market makers look to have stock well-positioned at "neutral" between these two retracements. Tonight's earnings will be interesting.

 
 
  Steven Price   10/17/02,  4:06:16 PM
I made a remark on the MM that I didn't want to short IBM last week, after it had received an upgrade from a big firm a few days before earnings. I knew nothing else, but it's funny how that happens.

 
 
  Linda Piazza   10/17/02,  4:02:27 PM
More on exhaustion gaps: Usually, exhaustion gaps occur with blow-out volume, and we're not seeing that on the gaps in RYL's chart, mentioned in an earlier posting. It's possible that they're not exhaustion gaps, then, but common gaps. The truth is that technicians often look askance at repeated gaps, but the proof is in what happens afterwards. At least recognizing gaps and knowing this information alerts us to be on the lookout for trouble and other signs of trend reversals.

 
 
  Jeff Bailey   10/17/02,  4:02:12 PM
Microsoft (MSFT) $50.70 +0.53% ... taking 1/4 position in the MSFT Nov. $50 calls $3.80 and look for target of $57 on or before expiration.

 
 
  Jeff Bailey   10/17/02,  3:59:03 PM
Johnson & Johnson (JNJ) $60.00 .... "X gets the square" and a confirming double-top buy signal after the recent triple-top at $57. Bulls long from recent profile of $56 looking good. Still a long-road to travel, but bullish vertical count of $74 gets a little closer. Link

 
 
  Jonathan Levinson   10/17/02,  3:56:25 PM
Kevin points out that we owe the market makers a round of golf clapping here. Beautiful action on MSFT.

 
 
  Steven Price   10/17/02,  3:51:58 PM
Reader Question: Steve, what's your observation on GIS, seems like its making a push upward and i dont see anything in the news. I have checked some of the booking houses and only show selling volume over buying.

Response: $42.50 (-0.15) I'm not very favorable to the bounce off $41 today. I wouldn't recommend a new entry until we break below that level. The relative weakness has me leaving the play open another day, but under $41 is the strategy at this point.

 
 
  Jonathan Levinson   10/17/02,  3:51:13 PM
Don't sweat it, Jim. The rally will prosper because I'm still short. So short, I'm knee-high to a grasshopper. Besides, I believe that Nasdaq, in an impressive display of self-preservation, has removed the 1$ minimum listing requirement.

MSFT has flipped red now. What an amazing game this is.

 
 
  Jim Brown   10/17/02,  3:47:51 PM
Swing Trade Exit Point Alert - OEX/SPX/DJX/DIA/SPY
It was a mercy killing. The SHORT signal was stopped out at 15:41:04 when the OEX traded at 446. SPX 878.39, DIA 82.76, SPY 88.19, DJX 82.58, NDX 944.42, Compx 1271.94, QQQ 23.47, Emini 878.50. We can now go blissfully into the close knowing that MSFT will probably miss horribly, EBAY will announce it is closing its auction business due to lack if interest and SUNW will announce a 10:1 reverse split to keep from being delisted after a announcing a horrible quarter.

 
 
  Jim Brown   10/17/02,  3:25:05 PM
Swing Trade Exit Point Alert - OEX/SPX/DJX/DIA/SPY
15 min after the 3:PM turn and the market is moving up in front of MSFT earnings. I am changing the stop loss on the open SHORT signal to OEX 446. If you want to hold over MSFT earnings then feel free. I think they will match or beat based on analysts comments but Intel, AMD and Gateway all say PC sales were terrible in the 3Q. If they surprise with negative comments then it is lights out in the face of positive expectations. You are in control. Close now at OEX 445.00 or wait for the stop.

 
 
  Alan   10/17/02,  3:24:38 PM
Index Futures
I do not know if MSFT will report before or after ES and NQ futures close at 4:15 PM, but remember that Dow Futures are open until 5 PM. I shall not be looking for any Futures trade signals until MSFT earnings come out.

 
 
  Jeff Bailey   10/17/02,  3:09:14 PM
Market Volatility Index (VIX.X) 40.41 -3.7% ... continues to hold that 40.00 level. Rather surprisiing perhaps and all may "hedge" on tonight's earnings out of Microsoft (MSFT).

Only way to really "trade smart" into the close is make sure account manement has a trader NOT OVERLEVERAGED in any specific trade. I'm sure there's as many bulls as well as bears playing the Dow Diamonds ahead of MSFT earnings with thought that $83.00 holds resistance and gap to $81.00 is possible on "bad news." Not a bad risk/reward bet, but TERRIBLE if OVERLEVERAGED and DIA opens $84.00-$85.00.

Seeing some selling in MSFT into the close, but yesterday we saw same in IBM. Obviously, that wasn't an accurate "predictor" of MARKET response to IBM's earnings.

 
 
  Jonathan Levinson   10/17/02,  3:08:54 PM
Here's a motivational picture of this rally's fearless leader hard at work. For comedic relief only:

Link

 
 
  Alan   10/17/02,  3:02:58 PM
Index Futures
Jonathan: an un confirmed rumor on the day before Option Friday? {grins}

 
 
  Linda Piazza   10/17/02,  3:01:52 PM
RYL: I forgot to mention one caveat. When a stock gaps the first time, it's often a measuring gap, occurring about midway through a move. A second or third gap is often an exhaustion gap, however. Ryland's recent gap may be an exhaustion gap, which fits with my thesis and the reader's, but I would need proof from this strong group before assuming that's what it is.

 
 
  Jonathan Levinson   10/17/02,  3:01:06 PM
Trader talk that TheStreet.com is reporting that something might have been said by Wachovia about the possibility of an earnings miss for MSFT. Looks like an unsubstantiated rumour to me.

 
 
  Jeff Bailey   10/17/02,  2:59:05 PM
Allergan (AGN) 62.00 +3.79% ... hello jeff, i took PI's suggestion on the AGN short yesterday and am using the 200 DMA plus a few cents as a stop. daily chart shows the 200 has pressured it since mid- jan. even though AGN seems to have stalled here. i'm concerned that, should the .DRG continue to head up toward its 200 DMA ( 20 points away ), it may pull AGN along for the ride. i dont' think i yet have a good, working grasp of retracement levels and other technicals, so i'm left to look to the "market/sector/stock" approach for help and AGN seems ready to work against me here. how far off the mark am i in my limited analysis?

Hmmm... I'm looking at horizontal resistance at $62.90 (07/17/02 high, then 08/27/02 high of 63.00). With 200-day SMA right here , would give a little romm, but follow with tight stop, say $63.10 if you're comfortable with that. Don't give much more as stock did give double-top buysignal at $57 and bullish vertical count is $78. Link

 
 
  Jim Brown   10/17/02,  2:57:37 PM
MSFT It appears that a MSFT software test site was hacked and 20,000 users had to be reissued passwords. Maybe the reason and maybe not. Link

 
 
  Linda Piazza   10/17/02,  2:53:04 PM
Reader Question: What do you think of buying puts on RYL near current levels $40.2)? If so, what would be correct stop?

Response: While I believe that the homebuilding industry may be in a bubble, and that Ryland should probably turn over at the 50-dma at 40.24, and just under the 50-week MA at 42.53, the charts sure aren't supporting my thesis just yet. After the recent dip, Ryland gave a low-pole reversal signal (a signal that some bears were being trapped) on the P&F charts and now it's close to giving a buy signal. It's above it's 22-dma at 36.70. Stochastics are hinging up on the weekly charts. (5)(3)(3) are overextended on the daily chart, but not yet turning down, and neither is RSI. Being the cautious trader that I am, I'm sure not willing to argue with the markets. Insistent Krispy Kreme shorts got their hands slapped for a long while, and I paid attention to what happened to them. Your supposition that RYL should turn over is right, but that doesn't mean it will. Therefore, being cautious, I won't be entertaining a put play on this just yet.

 
 
  Jim Brown   10/17/02,  2:51:41 PM
Swing Trade Signals
Did somebody at MSFT leak their earnings early? What the heck happened to MSFT at 2:PM? The volume picked up significantly and most of it was down. There are buyers coming in at $50 but the bloom definitely faded.

 
 
  Jeff Bailey   10/17/02,  2:49:36 PM
Dow Diamonds (DIA) 82.40 +1.9% .... back near afteroon's lows. 1,2,3 times today its traded the $83.00 mark, but sellers are there.

 
 
  Jeff Bailey   10/17/02,  2:44:24 PM
PeopleSoft (PSFT) $16.43 +10.7% ... hey jeff...thinking of the IBM play last night..... what do you think of a strangle on PSFT for tonight's earnings announcement? currently at 16.70 17.5 call - 0.40 15 put - 0.40 (competitior SAP up 25% on yesterday's announcement)

Aha! Good thinking. PSFT and SAP sell same type of software and are competitors. I like both an October and November strangle. Don't load the boat on either, but MSFT also in this business (not to the degree that PSFT and SAP are). MSFT has earning's tonight after the bell.

On PSFT, looks like somebody may be trying to sell it into the close, and may want to initiate the trade right near the close. Not sure if $15 is a peg level.

 
 
  Steven Price   10/17/02,  2:42:33 PM
Reader Question: Steve, I am in GIS Puts the Nov. 40's at .80c the stock is down around a $1 in a strong market. Do you think I should stay with the trend and stay in them?

Response: General Mills (GIS) $41.51 (-1.14) The trend here is still down. The stock has been sinking for three days now, and I'd love to see a break below $41. However, it is still moving in the right direction for the put play. The Dow has also run into heavy resistance in the 8300-8400 range, so I still like the play. If the Dow pulls back, we should get that breakdown.

 
 
  Jonathan Levinson   10/17/02,  2:33:28 PM
A random thought: Seller's remorse is unpleasant, but nothing compared with buyer's remorse. Cash can be a lovely position.

 
 
  Steven Price   10/17/02,  2:31:55 PM
Reader Question:

Late yesterday afternoon a reader wrote seeking your opinion as to holding IBM 65 Puts over their earnings announcement. Reader purchased at $0.80 on Tuesday and the option was trading near $3.00 at the time (close was actually near $2.40). Your advice was sound to take some of that profit off the table, even though your bias was for IBM to disappoint. I certainly hope the reader heeded it, if not closing the position entirely considering those options are now virtually worthless, as they are almost $7.00 OTM with only a day and a half left to trade. When I first saw the post I didn't have anything better to do and checked out the IBMVM options. My first impression was: "Why is the subscriber even asking this question?" SELL NOW! And get out of Dodge smiling. If IBM craters after the announcement, deal with the seller's remorse in the morning. As it turns out not even a sell stop could have saved a held position.

With this still fresh in my mind, my question is with regards to account management (or preservation) in this situation:

For the four years I've subscribed to OIN, I honestly can't remember a recommendation to ever hold over an announcement without a strong caution of the assumed risk. With a 300% gain (200% profit) why would any trader risk even a half position in this crazy environment? Profit lost is still money lost, isn't it? Sure there are occasions where the first half of a position is cashed out making the second half "free", but isn't this expiration week and a miscue unrecoverable? Am I off base here or have I just read too many of Jim's commentaries that end in "Sell too soon"?

Your comments are appreciated. Keith

Response: I commented that I thought the reader should take some profits, at the least and maybe leave a couple of options on overnight. "Profits" was the key to my statement. I do believe that you shouldn't look a gift horse in the mouth. The reader had benefitted from both movement and an increase in implied volatility of the options, which is ususally highest right before earnings. There have been many plays I have closed, only to see them continue in my favor. Therefore, if I were long 10 puts, I might take profits on 7 of them and let three ride. The "free play" is a nice idea, but I always favor taking something home after a nice gain.

 
 
  Alan   10/17/02,  2:29:28 PM
Index Futures
The 3 Indices "should be" selling off here as MSFT is selling off, but as of yet, ES has not lost 880, Dow Cash has not lost 8250

 
 
  Linda Piazza   10/17/02,  2:21:25 PM
KO: As a trader who has concentrated on the OEX for a long while, I'm thinking out loud here as I take another look at Coca-Cola this afternoon. If you read my earlier post today, you know I've been watching Coca-Cola (45.24 at this writing) since Wednesday. Since my earlier post, it gave a double-bottom breakdown sell signal this morning on the P&F charts with a target of 36, so far. That correlates fairly well with a target of 33 or so with a break of the H&S neckline. Since this H&S formation is so sloppy, with a couple of shoulders on each side, it's somewhat difficult to be precise about the targets or exact location of the neckline. The neckline lies in the 43.50-45 area, depending on how you draw the lines, so cautious traders might want to wait until a break of 43.50. Risk, however, is up to former support in the 47.50-48 region and then up to the 22 and 50-dma's at 49.43 and 50.33. Those may not be great risk/reward parameters just yet. The 43.50-45 area has provided support for KO since 1996, except for a few brief visits to the 42 area. With this area providing such strong long-term support, lots of supply should come available if that support level is broken, but I'm still thinking there might be another bounce from this support area before it retests. This is especially true with the quick drop the last couple of days and options expiration tomorrow. This is not a recommendation to jump into a play, but rather a discussion of how a cautious trader might look at different risk and reward possibilities.

 
 
  Alan   10/17/02,  2:16:45 PM
Index Futures
Other than 1-2 pt ES (SP500 futures) trades up and down the last hour, there remains no "easy" futures trade at the moment. That is, one with acceptable risk reward and one with a minimum target of 3 ES points or 35 Dow points. Frankly, it's almost impossible and not the aim of this service to have "only" 1 to 2 ES point targets. Futures Signals remain Flat. My guess is the market has some Long Profit taking ahead of MSFT tonight, but there are no short signals unless ES firmly loses 878. Since 10 AM, ES has traded in a non-tradeable 5 to 6 point range. There's always the 'urge' to put down a trade, but it's usually less risky waiting for your signal.

 
 
  Jim Brown   10/17/02,  2:16:29 PM
Any reader on dfw.net - We cannot reply to your email because your ISP is blocking OptionInvestor.com as spam. I have had several returned this morning. Sorry.

 
 
  Jonathan Levinson   10/17/02,  2:12:07 PM
More on the Fed:

thk u for ur comments on the Fed and the plunge protection team. I adhere to the same philosphy. By the way, the reaction to bonds selling off accomplished another very important roll for the feds. With the 2 yr yield below Fed Funds Rate, the feds were getting nervous without doubt that they wud be forced to lower rates whether or not they wanted to. A look back in history will show us that almost without fail that when the 2yr gets and stays below the FFR that the feds have responded with a cut. Having all but run out of powder, i am sure they were hell bent on changing this inversion. Just some food for thot. I really do enjoy your commentary at nite and during the day. Keep up the great work. - Bob

 
 
  Jonathan Levinson   10/17/02,  1:50:28 PM
Most readers responding to my comments about MSFT raised the issue of OpEx, and the likelihood that market makers will try to park the price between 50 and 52.50, given the large open interest of puts at 50 and calls at 55.

 
 
  Jim Brown   10/17/02,  1:46:03 PM
Swing Trade Exit Point Alert - OEX/SPX/DJX/DIA/SPY
Cancel the 1/2 position entry at OEX 444.

The day is nearly over and we did not get the big sell off from the morning bounce. It still may happen but do you really want to hold SHORT over the MSFT earnings tonight? Plus, with only one day left on OEX options the 445 put at $4.40 and the 440 put at $2.40 both require a major move to be profitable.

If you went short the OCT 440 put it would require a move to the 436-437 area to guarantee a profit by the close tomorrow. With October madness in full force we could get a marginal earnings report from MSFT and another bounce tomorrow at the open and another bleed off to neutral by the close for no win.

The Nov OEX options are too expensive to play today, tomorrow or Monday. The 430 put is $12 today and the odds are good we will get another bounce on Monday. Not a high odds play. The 460 call is also $12. With the OEX at 447 there is no safe move.

Gunslingers can sell any afternoon resistance today with October options but everyone else may want to lay low and wait for Tuesday to get back into the battle.

This brings up the DJX options for November. The 85.00 call is only $1.70 and the 80.00 put is only $2.40. (does that give you a clue which way the market makers are expecting the market to go?) 85 call, 2.50 OTM at $1.70. 80 put, 2.50 OTM $2.40..... Still the options are cheap and with 300 point daily moves there is plenty of possibility for profits.

 
 
  Steven Price   10/17/02,  1:43:22 PM
Reader Question: Have We Reached the LLY Entry Point? Would appreciate your thoughts. ...John

Response: Eli Lilly (LLY) $63.36 (-0.30) I'm not overly encouraged by the lack of upside movement in LLY, but I do like the recent support at $63 on the intraday chart (although it did dip below this level earlier today). Considering the recent resistance yesterday and today at $64, I would probably wait for entry on new plays above $64.01.

 
 
  Alan   10/17/02,  1:41:58 PM
Index Futures
Tomorrow after close, I shall provide the real-world final results of the "Selling expensive IBM option premium and hedged with Dow Futures" article from last night, viewable at Link

 
 
  Alan   10/17/02,  1:27:03 PM
Index Futures
2 READER QUESTIONS: Reader asks why I had thought ES 892-895 and Dow 8300 would be a resistance level:
Dow 8300 is clearly resistance, and the 50% retracement of Dow 7200 (Oct 10th) and 9050 top we saw about 6 weeks ago is 8125. If you shorted Dow 8300, that would became a target
ES 892-895 is simply chart resistance. I don't see it as Fib. number perse, merely from observations that "many times when ES traded there before, it was meant with lots of sellers and couldn't get over that level to test the physch level of ES 900"

Another reader asks if I ever use Futures Premium: (the difference between the Futures value and the Index Cash Value. Such as ES is now 877.50, and SPX Cash is 877.03;
Frankly, I seldom do as most days it's so close to the Cash Index +/- 1 point, it doesn't tell me very much. NQ Futures is usually about 3-5 points above its NDX Cash Index. Naturally, moments when the Premium becomes very wide, either way above Cash, or way below cash - yes, those moments are trying to tell you something.
Dow Premium: What is very very odd however, is the Dow Premium. Usually the Dow Premium is about 10 to 15 points ABOVE Dow Cash. It was most of the summer months. Dow Premium changed to NEGATIVE (that is, 10 to 15 pts UNDER Dow cash) the last 2 months or so, reflecting the market's bearish action the last 2 months. During those bearish days of day-after-day of selling, Dow Premium went as low as 20 to 30 points UNDER Dow Cash. What's puzzling to me a bit is that during the last week, during this Dow 1100 point rally from Oct 10th to current, Dow Premium continues to be about 10-12 points under Dow cash, this moment: Cash: 8237, YM (Dow $5 december futures) 8225. At no time during this recent rally has Dow futures even once gone above Dow Cash. Not once. And that's oddish.

 
 
  Steven Price   10/17/02,  1:25:18 PM
Reader Question: Steve what do you think of shorting gm here?

Response: General Motors (GM)$35.15 (+1.01) I was just discussing my desire to short GM with Jeff B. I do like it as a short; however, I would be concerned about the Dow rising today, and possibly tomorrow if we get decent earnings from Microsoft tonight. If I were to short it, I would put my stop at $37.25, just above yesterday's high.

 
 
  Jonathan Levinson   10/17/02,  1:21:01 PM
I've been watching volume breadth slowly deteriorate from eyepoppingly bullish to slightly less extremely bullish- from 12:1 advancing:declining COMPX shares to now just under 9:1. The TRINQ remains effectively silent at .29, mirroring the day's very narrow range. The TICK.NQ slightly less bullish at +286. I see a rising wedge on today's COMPX chart, but the range is too narrow to get excited. My thought is that MSFT is the only factor that will make a very big difference to most of our accounts in the short term, and it's effectively a gamble. The consensus seems to be for a positive report, and I believe that MSFT has the resources to deliver, or to dress up a bad report very attractively in the event that it isn't positive. However, with the market expecting it, we might see some limit to its upside impact. This is all my own speculation, and I'm just thinking out loud. Any strong opinions will be welcome during this quiet trading day.

 
 
  Steven Price   10/17/02,  1:19:03 PM
Reader Question: Steven, Which would will better either to sell short or buy November put of TGT with stop limit of 31.25? Thanks Ashok

Response: Target (TGT) $29.40 (-1.43) I would prefer a long put, as opposed to shorting the stock, since the broader market is rising.

 
 
  Steven Price   10/17/02,  1:17:04 PM
Reader Question: Hi Steve,how about the action in C? are your thoughts on this stock? Shall we take this strenth a gift to short or it may be better have it settle before!

Response: I still like Citigroup (C) $35.17 (+1.33) as a short, but I'd like to avoid the speeding train and look for a move below $34.00, which is the low of the day, for evidence of a failed rally, before entering short.

 
 
  Jim Brown   10/17/02,  1:07:28 PM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
Just a reminder we are going to move to a full short position at OEX 444. The sideways move over the last three hours never gave a strong indication of failure that would have given us a high odds entry point for another position increment. In hindsight we could point to 447 at 11:41 but at the time it looked like just a dip on the bleed up. The Dow is moving to the low of the afternoon and like John said many times 8245 is failing again and that could be a critical failure for the bulls.

 
 
  Alan   10/17/02,  12:58:48 PM
Index Futures
Hello. It was not my intent to not share Dow 8300 with you this morning, however the change-of-season sinus cold, and 101 degree fever i had last night had other plans. If anyone had shorted YM (Dow$5) futures at Dow 8300 cash, bravo ! Consider taking perhaps 1/4 position size for 50 dow points, (+$250, or +31% gain based on $800 margin)
Something to notice: time of day : look at the ES chart at 9:45AM today. There are many times when that time of day provides Long Exit/Short Entry after a very large gap up: why? : Large gap up occurs, some shorts cover the first 15 minutes, and then there's an exhaustion top as the Longs start to take some profit.
At this moment, Futures volume is extremely low (which means it's easy for the index to make sudden up/down moves)

 
 
  Jeff Bailey   10/17/02,  12:38:42 PM
US Dollar Index (dx00y) 108.42 +0.74% ... breaking higher above 1-month resistance of 108.00. Yesterday's move brought the dollar ABOVE its longer-term 200-day SMA and hints of a longer-term change toward bullishness in the Dollar. May be interpreted that US assets now starting to attract more global capital. With selling in Treasuries, the "asset class" that stands to benefit would be equities.

 
 
  Jeff Bailey   10/17/02,  12:16:57 PM
Treasuries see some buying after Philly Fed, and shorter-term 5-year 111'295 finding intra-day resistance at 112'00. A move above this 112'00 could be short-term signal of "concern" from bond market toward the Philly Fed report.

 
 
  Jeff Bailey   10/17/02,  12:08:37 PM
Seeing some pullback in the major indexes after the Philly Fed index fell to -13.1 in October from 2.3 in September.

 
 
  Jonathan Levinson   10/17/02,  12:04:53 PM
This big sell candle at noon looks like a bad reaction to the Philly Fed numbers.

 
 
  John Seckinger   10/17/02,  12:01:48 PM
I actually believe the recent move higher in equities can help a short position. Why? With the 8245 area a pivotal level, this rise, followed by a move back towards 8245, would signify a "bull trap". This trap would then force longs out and get shorts to become more aggressive; twice as much selling pressure than before. When should this not be viewed as a trap? I would use 8279.

 
 
  Steven Price   10/17/02,  11:56:23 AM
Reader Question: Re: TGT short play

Steve - If you were to enter this trade, could you comment on a suggested put. November 30 @ $2.35? Thanks!

Response: I like the Nov $30 put at $2.25 and the Nov 30-25 put spread at $1.70. I also like the Jan 30-22.50 put spread at $2.60. All of these are debit spreads.

 
 
  Jim Brown   10/17/02,  11:37:56 AM
Swing Trade Signals
The market is starting to bleed up and the second bounce levels from 10:15AM are being tested. The TRIN has gone to a flat line at .91. We talked about a dull market yesterday but if you take away the first 30 min today this market would qualify as even more dull than Wednesday. The OEX has traded in a two point range for over an hour. There is a strong move building but the direction is still unclear. I feel like the leader of an Israeli bomb squad today. Every passing minute brings us that much closer to a surprise ending.

 
 
  Jonathan Levinson   10/17/02,  11:28:35 AM
I have little to report on the COMPX, which has been parked just below 1270 from its gap up open at 1272. The TRINQ is unchanged at .28, the TICK.NQ is slightly weaker at +230, yields are holding their substantial gains, and HUI has been hammered but is still holding, -2.93 to 107.56. The CBOE p/c ratio opened down to .64 and is now creeping up, last reading at .76. If it makes it back up to above 1, it will look like further upside is in store, but for now it indicates that current levels should be close to the near term top for the indices. I expect little action until MSFT's news causes the next gap up or down. This week is all about account management. Please be careful with you accounts.

 
 
  John Seckinger   10/17/02,  11:24:53 AM
Traders appear to have not forgotten the low in the Dow on July 15th at 8245, since prices continue to gravitate towards this level. What does the bond market tell us? The yield curve is flat, so nothing there. The 30-year is down '31 ticks at 108'26 and underneath its 22 PMA (five minute chart) of 108'27. Relatively pivotal as well.

 
 
  Jim Brown   10/17/02,  11:19:53 AM
Swing Trade Signals
When I was responding to the prior email I noticed that IBM had rebounded to a dead stop at 72.50 which was previously strong resistance. I checked MMM as the biggest impact on the Dow and it also came to a dead stop at strong resistance of $126. Neither should be a factor in any further Dow gains. PG, the next largest weight at 7.81 came to a dead stop at 91.00, also strong resistance and is now negative on the day. JNJ is the only heavyweight that could add gains without hitting serious resistance for another two points. MSFT has the possibility to impact the Dow the most. With strong resistance four dollars above the current $51.25 level, a strong report tonight could add +4 which would add something close to 20 points to the Dow. That does not sound like much but it would also bounce HPQ, INTC and IBM. Still it appears that breaking that 8300-8400 level may be very difficult in the current environment.

 
 
  Steven Price   10/17/02,  11:16:06 AM
Per my last post on a short play on TGT, conservative tradres may want to wait for $29.00, which is the PnF reversal level

 
 
  Steven Price   10/17/02,  11:14:48 AM
Target (TGT)$29.60 (-1.23) I like a short play here on TGT under $30, after the Sears news. I still think the retailers are in for a weak holiday season, that seems to have been ignored . I would have an inital target (no pun intended) of $25, with a tight stop of $31.75, which is the failure point on Monday, and would most likely correlate with the Dow breaking out above 8400.

 
 
  Jim Brown   10/17/02,  11:06:33 AM
Knowing that the Dow is a weighted average, how much weight does IBM carry? Right now the Dow is up 198 and IBM is up 6.50. What multiplier is applied to IBM ? What about the higher priced Dow stocks (MMM & PG) how much more influence do they have Dow movement then the lower priced stocks like T, HPQ & INTC? Thanks Bob

You can go to www.dowjones.com and get the daily weighting on all the Dow components. Today for instance MMM has the highest weighting at 10.61. That means for every point MMM moves the Dow will move 10.61 points. IBM has a 5.60 weighting today. The other heavy weights today are PG 7.81, KO 4.07, MRK 4.30, UTX 4.71, WMT 4.89, JNJ 5.07, MSFT 4.35.

 
 
  Steven Price   10/17/02,  11:02:21 AM
looking at the Dow, the 50-dma, currently 8270, has kept a lid on it for the last three days. We also have several levels of resistance just above that were outlined in last night's Market Wrap Link .

 
 
  Steven Price   10/17/02,  10:57:12 AM
Reader Question: Steve, A question about premium deflation. Other than a weekends worth of time decay what will the effect be on November premiums after the October expiration? Does I know on high volume strikes the market makers will skewer those who wait until the last minute to roll out. Thinking about Nov. vs Jan IBM 75 puts here and don't want any premium surprises after this Friday.

Thanks for all the great work! The real examples you provide for different option strategies are more useful than any book I have read on the subject. CKM

Response: For as long as I can remember, options which are about to become front month, in this case November, get beat up on rolls on expiration Friday (firms buying back short Sep and selling Nov). On Monday, they get beat up some more. Therefore, if I were looking to buy Nov, I would wait until at least Friday afternoon, if not Monday mid-day. Jan is probably somewhat safe, as it is still two months out. Of course, all traders should remember that if we get a drop in overall market volatility, the back months will lose far more, since they have more premium built into them.

 
 
  Jim Brown   10/17/02,  10:55:35 AM
Jim, It is a nice approach to use staged entry - going 1/4 position each entry point. But if one cannot afford to take multiple positions, what is best approach? Should he enter at level where you give entry signal for final/full position? Thanks. AK

That would be up to the individual trader. The initial 1/4 position is usually the most risky in that it is speculative. The last 1/4 position may provide the least amount of profit since 4-6 points have already passed. If I had to pick one entry point and I was only going to trade one of the increments I would probably recommend the second 1/4 entry. This would be a confirmation of the initial move but not too far into the trade to limit profits. This is just my suggestion for cautious traders.

Aggressive traders may want to go with the first quarter increment since it represents the most extreme position. The entry at 448 this morning provides the least risk because the overhead stop loss is only three points away and at strong resistance. The second entry point has five points of risk and while it may have been made on what appeared to be a confirmation of the initial move it does involve more risk.

In any trade there is risk regardless of the entry. The risk is just different. Do you want to try and catch the falling knife with a small amount of money and possibly profit from the maximum move or do you want to wait for the move to be strongly underway and take a smaller profit on a bigger position?

The staged entry (laddered entry) concept is an attempt to limit the risk on the initial entries by limiting the initial amount of money at risk. By adding to an already winning position you lower your overall profit potential but also greatly lower the total risk in the trade. You are the final decision maker in any trade. You can decide to enter the first 1/4, second 1/4, a full position or none of the position depending on your market outlook and risk profile.

 
 
  Linda Piazza   10/17/02,  10:50:35 AM
CNBC just trumped me talking about Coca-Cola (KO). I've been watching this stock for a couple of days, noticing Wednesday that it was not participating in the gains and then yesterday that it fell precipitously on strong volume. KO's earnings disappointed yesterday and their worries about overseas sales led many to bail from this stock that had been considered a safe haven. A glance at the weekly charts shows a loose H&S formation, with a neckline in the 43.5 area. This H&S formation is also visible on the daily charts. Stochastics are rolling on the daily charts, too, although from a more overbought level than on these weekly charts. However, those daily stochastics are moving down quickly toward oversold again. I'm not recommending a play on this stock at this time, because I wouldn't be surprised to see a bounce from the 43.5-45 area before KO moves down and retests or breaks through that level. That level has held for several years, however, and a break would see even more people bailing out of the stock. Put it on your radar screen. One caution: if a new intermediate bull market is beginning, KO's boat may be lifted along with all others. Link

 
 
  John Seckinger   10/17/02,  10:46:15 AM
Jeff, always a pleasure. Looking at the DIA as it relates to the "open to close" article, it was actually this morning when the contract traded underneath the 83.23 level that signaled a possible downdraft. As far as the Dow is concerned, it was a move under 8279 that seemed to give ammunition to shorts.

 
 
  Jeff Bailey   10/17/02,  10:40:50 AM
Calling John Seckinger! John... can you comment on your "open to close" short-term trading strategy here? Looks like a short-term fade if the DIA breaks moring low of 82.10.

Thinking this as the 30-year YIELD is at a retracement resistance and might see a little pull-back in YIELD and stocks?

 
 
  Jonathan Levinson   10/17/02,  10:36:46 AM
My guess is that the fed money has been used to trade not stocks or bonds, but futures, which explains the extreme moves in afterhours coincident with Europe's open. As Jim points out, the economy has not changed overnight, and everyone knows that analysts have been aggressively lowering estimates ahead of this week quarter. The plunge protection team has been using the leverage offered by futures to ramp the markets, which explains the huge moves made while we sleep, and then the narrow ranges once we awaken. That's purely a guess on my part, though it explains the phenomena I've observed.

That said, we trade price. The COMPX is so far printing a shooting star on the daily candle, though only an hour has elapsed and it will likely change. Price is printing an expanding triangle within an expanding wedge on the hourly chart. The TRINQ is holding at .27, and the TICK.NQ is bullish at 530. This is a buyer's market today, even if price is still undecided above this massive opening gap.

The selloff in bonds is the big news today. Bonds appear to be forming a massive top this week, and as yields tick up making huge daily moves, it becomes apparent to me that it was easier for Greenspan to talk about "accomodation" while defending SPX 775 and sparking an equities rally with his 4.5B repo last week and allowing bonds to sell off, causing yields to rise. This jump in yields accomplished the same end as if he had raised interest rates himself. Politically expedient. However, what will happen to consumer and corporate debtors as the price of money increases? We can't trade short term based on these long term fundamentals, but it's important to consider these factors in determining our longer term outlook.

 
 
  John Seckinger   10/17/02,  10:35:34 AM
The low on July 15th in the Dow was 8245, and this level has proven pivotal on several occasions since. The longer the Dow stays under this level, the more likely sellers' confidence will rise.

 
 
  Jim Brown   10/17/02,  10:32:13 AM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
Let's add the last 1/2 position to the current SHORT if the OEX trades below the 10:05 low at 444.16. If the OEX breaks that low with a trade at 444 we want to go to a full position. The stop loss will remain OEX 451, just over the high of the day. If we get another bounce before hitting OEX 444 we will consider entering another 1/4 position on a failure of that higher bounce. The Dow tried to rebound at 10:15 but stopped right at Tuesday's resistance of 8250. The battle is underway and it is still too early to project a winner.

 
 
  Jim Brown   10/17/02,  10:23:33 AM
Swing Trade Signals
This mornings trading brings up an important point. I am sure you were as frustrated as I was at the monster bounce this morning after going into the close short. It is painful and the urge to sit on the sidelines and lick your wounds after a big loss is very strong.

However, every trade must stand on its own merits. Just because we got a bloody nose on the short from yesterday we need to look at every trade as if we had been flat for a week. The bounce to resistance (OEX 450) this morning was a perfect short entry if you had taken your chips off the table last night. Just because we did not go into the close flat does not change the entry point technicals this morning.

Economic conditions did not change overnight. Continuing Jobless claims rose to nearly a two decade high today. Remember the Intel miss and warning from Tuesday? PC unit demand is very light and all the data points to this, not just Intel. IBM has been known for twisting numbers for years. They are very aggressive in the share buyback arena in order to raise earnings per share as well as using many other aggressive accounting tactics. Had they said glowing things about business spending and mainframe growth going forward then things would have been different.

We may be wrong with the entry at 450 but based on the game plan from last night it was the right move when looking at all the facts objectively. We can only analyze all the facts at hand and make an informed decision based on those facts. Sometimes we will be wrong because the market reacts illogically. Other times we will be rewarded handsomely.

 
 
  John Seckinger   10/17/02,  10:20:12 AM
The Volatility Index (vix) is lower by 3.45% to 40.69 and near the pivotal 40 area.

 
 
  Jeff Bailey   10/17/02,  10:15:59 AM
30-year YIELD ($TYX.X) 5.061% ... Hi Jeff, when you gave the rec. for the call in the 30-yr. treasury, TYX CW, March 47.50 - $3.90 at the time, what kind of targets were you looking for in the TYX. Just need to keep a watch for exit. I see TYX is up 0.80 at $50.84. Unfortunately, I'm only holding 1 contract but would like some goal to watch for.

Glad you took the trade, not that many did is my thought as this is a little "less conventional" than other option trades we're used to. Hey, I just dabbled with 2 myself. In last night's Index Trader Wrap Link I show a chart of the 30-year December futures. That's a PRICE chart, but the YIELD chart would be just the inverse. I also have a retracement on 30-year YIELD from the March highs to recent lows. With MARCH expiration (quite a bit of time) I'm looking for 52.30 (50% retracement) MINIMUM. Right now 50.61 (5.061% YIELD) we're at a retracemnt level, which would be near-term resistance. I think John Seckinger calls this a PIVOT level right now.

Also.... P/f chart of 30-year YIELD Link is right at its bearish resistance trend. This should be some rather firm resistance near-term. However, bullish vertical count for this YIELD now builds to 47.00+((8*2)*0.5)= 55.00, or 5.5%.

Wow! 47.50 entry had you in just BEFORE that YIELD "buy signal" at 48.50. If you NEED a profit, then I'd try and work a trade in between the spread right now. The March 47.50 is now bid=5.40 ask=6.10. Could try working an offer at 5.90.

Otherwise, think of this as a "hedge" type of holding for any equity shorts you might put on between now and March. Do you see how this YIELD call actually participated bullish with the broader stock market? Kind of "picked a bottom" didn't you?

 
 
  Jonathan Levinson   10/17/02,  10:06:40 AM
The fed has announced a 6.25B overnight repo, which amounts to a net drain of 1.5B. Of course, the banks need to give back that 6.25B tomorrow, but it's many hours away (grin). Given the spectacular selloff in bonds, I consider this drain to be mostly insignificant. After all, what's 1.5 billion dollars between friends?

 
 
  Steven Price   10/17/02,  10:05:25 AM
Reader Question: Steve, Thanks for bringing up a new idea in playing a huge move with ATM butterfly. With 3M's earning around on Monday and given that 130 has been a top since 2001, I looking to see how I can play this big DOW Mover using your strategy. Having played only the vanilla bull and bear call spreads, I feel like breaking new grounds in learning something new here.

Stock: $124 ( Nov Options)

Buy: Two 125 calls @ $4.7 for a debit of $940 (the body of the butterfly)

Sell: One 120 call @ $7.3 for a credit of $730 (one wing)

Sell: One 130 call @ $2.3 for a credit of $230 (other wing)

Total Credits: $960

Total Debits: $940

Net Credit: $20 After all the commissions,not sure how much profit potential? May be i am picking the wrong strikes.

Reader Question: Response: You can only profit the amount you collect on the short butterfly. I mentioned this in the last line of yesterday’s post, so your max profit here is $20, which is probably a loss after commissions. Butterflies get more expensive as you get closer to expiration and the back months tend to be cheap because of the uncertainty of where the stock will finish. Therefore October butterflies have the most premium, but will be expired by the time of 3M’s earnings. The IBM butterfly had more premium because we were discussing the October ATM, as opposed to November. Playing simply a long straddle to catch a big move in 3M is expensive. If you want to play a move to the upside in MMM, with a $130 top, I would be looking at the more “vanilla” bull call spread Nov 125-130. However, it is currently offered at $3.50 which I think is too much risk for the potential reward. If we get a pullback, you could look for entry around $2.00 on the spread

 
 
  Jim Brown   10/17/02,  10:04:11 AM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
The OEX has dropped below 446 and you should now be short 1/2 position

 
 
  Jim Brown   10/17/02,  10:03:09 AM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
Change that entry point for the next 1/4 position to an OEX trade below 446. It appears we may not get a meaningful second bounce.

 
 
  Jim Brown   10/17/02,  9:59:24 AM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
We will add to the SHORT postion with an OEX trade below 445 or on a second bounce. Stay tuned.

 
 
  Jonathan Levinson   10/17/02,  9:58:39 AM
Didn't notice Jim's post while I was typing my early morning diatribe, but just want to put my neck out to agree with the call to short this early, fwiw.

 
 
  Jim Brown   10/17/02,  9:57:02 AM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
We were triggered on the 1/4 position SHORT signal at 9:49:38 when the OEX traded below 448. SPX 882.73, DIA 83.08, SPY 88.65, DJX 82.88, NDX 947.22, Compx 1272.23, Emini 882.50. The initial stop loss will be OEX 451. By entering quickly we can benefit from an early exit if we get a second bounce.

Remember, IBM beat estimates but did not say anything good about the IT spending trend. This October volatility is mostly reactionary and not based on fundamentals. Industrial Production was down not up as expected.

 
 
  Jonathan Levinson   10/17/02,  9:53:59 AM
FYI: In regards to your comments below to take advantage of the futures market you would need to start trading @ 3:00am EST and the volume is so thin it can be moved on a whim....

Yes, I agree. But I'm growing increasingly frustrated by the impossibility of trading this market during business hours. There has been very narrow action intraday, and trading has become a game of gap prediction, nothing more. The COMPX chart has so many islands that the gaps are gapping themselves at this point. It goes without saying that ordinary investors have very little chance to invest intelligently long or short in a market where the markets are moved before they open and then trade flat from there.

Whew. Thanks for enduring that editorial expulsion of steam.

The Fed is in with a 2B 28 day repo. These small 28 day repos are standard, though usually between 3B and 4B. There remains 5.75B in 6 day repos and 2B in overnight repos to refund, and I'm awaiting the fed's word regarding the remainder of the day's action. With 7.75B due to come out of banking reserves today, the fed's action will be critical to my assessment of the remainder of the day's action.

There remains a great deal of debate as to asset allocation and reallocation. Most believe that money flows from bonds to stocks and back again. Others assert that money flows from lower yielding to higher yielding bonds and back again, from treasuries to corporates, etc. Depending on your outlook, this will affect your view on equities for a day like today.

 
 
  Steven Price   10/17/02,  9:53:42 AM
Wellpoint (WLP): $89.20 +$2.44 This play, entered at $80 and closed for profits around $85, should still have some OI readers long if they were watching the MM yesterday. It is approaching our original target of $90, so I would expect some resistance and look to take significant profits here.

 
 
  Steven Price   10/17/02,  9:50:36 AM
General Mills (GIS) $41.97 (-0.65) Admittedly, watching OI put play GIS is akin to watching paint dry. However, the stock is down on a big gainer for the broader markets once again, and I'm still looking for a break below $41 for new entries.

 
 
  Jim Brown   10/17/02,  9:50:11 AM
Swing Trade Entry Point Alert - OEX/SPX/DJX/DIA/SPY
Go SHORT the broader market with 1/4 position with an OEX trade at 448. Let's get it early if it fails.

 
 
  Jeff Bailey   10/17/02,  9:49:36 AM
IBM Spread/Straddle $72.51 +11.78 .... from yesterday's 03:15 intra-day comments, trader that implemented the IBM straddle/strangle uses the VOLATILITY found here to close out the trade for nice gain. Don't risk it with expiration this FRIDAY!

With put side of this trade now out-the-money, could hold this open until expiration, but it's the calls that hold the profit/gian, and what a trader protects.

 
 
  Jim Brown   10/17/02,  9:48:52 AM
Swing Trade Signals
OEX 450 was my ideal SHORT entry from last nights game plan but after the monster open and strong bullishness I am not as convinced this morning. Will the market rally more than +275 on mediocre guidance from all the techs? Will the October madness push us all the way to the 8400 level or will it run out of steam at the +300 point gain of 8310?

After getting slapped for a serious loss if you held over from last night should you jump right back in this morning? I have to tell you that each trade stands on its own merits and if you were flat this morning then Dow 8300 is looking like a pretty good entry point.

 
 
  John Seckinger   10/17/02,  9:45:57 AM
Will today be the first time in over a month the dollar will settle above 108? Let us hope so. Currently at 108.07, the recent strength in the Greenback could add more fuel to an already impressive rally in equities. Looking elsewhere, Gold is lower by 3% at 59.26 and right on a trend line that began on July 26th. A close under 58.70 would confirm a break in trend and also be bullish towards stocks. Moreover, the Oil Index is at 463 and just below its 50 DMA of 464.19.

 
 
  Steven Price   10/17/02,  9:44:17 AM
Intermune (ITMN) $36.76 (+1.56) OI call play ITMN is back on the rise, but I would wait to initiate new positions for a trade over $37.25, which has given us some resistance the last few days.

 
 
  Jim Brown   10/17/02,  9:41:53 AM
Swing Trade Signals
Dow 8400 is the next resistance level and the next test of the real strength of this short covering rally. The big earnings stories tonight are MSFT, SUNW and EBAY. With the IBM and QLGC surprises from last night traders may be expecting the same thing from MSFT tonight. SUNW is expected to disappoint to the downside but at $3.00 there may not be much impact unless they really talk down their guidance.

 
 
  Jeff Bailey   10/17/02,  9:40:02 AM
Citigroup (C) $35.02 +3.42% ... stock breaks ABOVE "inside day" and bear should not give a short too much more room. Would follow here with a tight stop just above morning high of $35.20. MARKET doesn't seem to be buying the "quality of earnings" argument from other brokers.

Note: Comments here are STOCK specific. Not option related.

 
 
  Steven Price   10/17/02,  9:39:46 AM
Sears (S), which closed at $33.90, is indicated onder $30 after lowering forecasts again for the full-year. I'm keeping my eye on several of the retailers, which had enjoyed an enormous bounce with the rest of the market. Stocks to watch for possible shorts are KSS, WMT, PSS, TGT. Of course, I'll wait for breakdowns, rather than step in front of a speeding train

 
 
  Jonathan Levinson   10/17/02,  9:38:35 AM
When in doubt, zoom out. Well, that's what I am and that's what I've done. For not the first time this year, but for the first time in months, the indices are up against the top descending trendlines on their weekly charts.

 
 
  Jim Brown   10/17/02,  9:38:05 AM
Swing Trade Exit Point Alert - OEX/SPX/DJX/DIA/SPY
The exit numbers for yesterday's 1/2 position short were OEX 442.02, SPX 869.61, DIA 83.27, SPY 88.86, DJX 80.63, NDX 952.62, Compx 1276.46, QQQ 23.69, Emini 885.50.

 
 
  John Seckinger   10/17/02,  9:35:02 AM
The 30-year bond is already down over a full point, lower by 1'07 at 108'18. Looking at the yield curve, the spread between the 5/10 year bonds is 13 ticks flat and nicely bullish for equities. A chart of the Dec 30-year bond shows some support at 107'22, and solid support at 107. Note: Bond prices should trade inversely with stocks.

 
 
  Jonathan Levinson   10/17/02,  9:34:11 AM
40 point gap up to 1272 on the COMPX with an opening TRINQ of .09. That's three 40 point gap opens in 3 days. Time to start trading futures, where the bulk of the market's moves now occur.

 
 
  Linda Piazza   10/17/02,  9:28:48 AM
Economic numbers released this morning include housing starts, which leaped 13.3% to 1.843 million, the best numbers since 1986. Economists expected 1.64 million. Permits rose 3.7%. These rosy numbers were balanced by a jump in jobless claims of 22 thousand, up to 411 thousand. US Sept. industrial production was down 0.1%, and capacity utilization was down to 75.9%. Annualized industrial production was up 3.6%.

 
 
  Jim Brown   10/17/02,  9:22:02 AM
Swing Trade Signals
Today should squeeze out the rest of the shorts. Anyone with any doubts about the potential of an October rebound should have those doubts erased. Any glimmer of hope for the bears will now rest on the Dow resistance at 8400-8600. With the Dow futures up +272 at 8310 there is a good chance that first number at 8400 will be tested quickly.

There is no play at the open. A bounce this strong will likely repeat the Tuesday action. Very strong gap open and then a moderate move trending up the rest of the day. Those hoping for a gap and crap may be disappointed today.

If you held the 1/2 position short over the close last night I would suggest you close it at the open and move to the sidelines. We need to wait until the smoke clears to decide the next entry.

 
 
  Steven Price   10/17/02,  9:19:16 AM
Wellpoint (WLP):$86.76 For those readers holding the WLP call play, we should see additional gains after United health (UNH) reported 3rd quarter profits 53% higher than the year ago, partially due to increased revenue for premiums and services. The earnings of $1.12 per share beat estimates by 8 cents. If we get a boost toward $90 on the play, which was triggered at $80, I would look to take some profits.

 
 
  Jonathan Levinson   10/17/02,  8:56:31 AM
Bond yields are indeed rallying, with FVX up 12 basis points so far, TNX up 12, and TYX up 6. QQQ is trading 23.51 from its close of 22.78, and GE is at 26.98 from its close of 25.60. Today is going to be yet another fascinating day.

 
 
  Linda Piazza   10/17/02,  8:36:36 AM
I hope everyone heeded Jonathan's advice to keep overnight exposure to a comfortable level, according to one's account size and risk aversion. Right now, the best technical analysis tool is a crystal ball, with these big gaps up and down before the markets open each morning.

 
 
  Jonathan Levinson   10/17/02,  8:21:16 AM
The sound of party favours is strong in the futures markets, with NDX +27 and S&P +20.70. Gold is flirting with 310/oz as the US Dollar Index hovers around 108.00. I'm waiting to see how the bonds open, but it looks to be a big rally on the menu for yields this morning.

 
 
  Alan   10/17/02,  4:29:40 AM
Index Futures
4:30 AM ES 877, YM 8174, NQ 937
Futures overnight highs, and higher than Wed's open
Europe at 3 AM has followed US futures and gapped up higher, and so far, as held the gap up.
good night, make that good morning.

 
 
  Alan   10/17/02,  12:31:07 AM
Index Futures
Friday is Option Friday: we've seen some not-expected market action sometimes on Option expiry days, and then the following Mon and Tue start a "new" trend and given how thin the earnings calendar is next week; the "news" might just catch up with the market *BUT* until the trend changes, it remains "buy the good news and ignore the bad news"

 
 
  Alan   10/17/02,  12:27:05 AM
Index Futures
Friday is Option Friday: we've seen some not-expected market action sometimes on Option expiry days, and then the following Mon and Tue start a "new" trend and given how thin the earnings calendar is next week; the "news" might just catch up with the market *BUT* until the trend changes, it remains "buy the good news and ignore the bad news"

 
 
  Alan   10/16/02,  11:51:26 PM
Index Futures
Given what happened after hours tonight, and what may happen with europe tonight, don't forget to use the free, 10 minute delayed www.livecharts.com Thursday morning to see what happens overnight. Tickers are "ES02Z" , "NQ02Z" and YM02Z for Sp500, NDX, dow futures
Nikkei continues its 9000 battle and very green for the day.

 
 
  Alan   10/16/02,  10:41:04 PM
Future's Informational Article has been posted: Link This article explains an elegant but somewhat complicated IBM Option position that could have been opened today, and then hedged at 4PM with Dow futures once IBM earnings came out.

 
 
  Alan   10/16/02,  10:29:40 PM
Future's Wrap for Wed. has been posted: Link

 
 
  Jim Brown   10/16/02,  10:23:56 PM
The Swing Trade Game Plan has been posted: Link

 
 
  Alan   10/16/02,  12:08:35 AM
Index Futures
IF ES takes out Tue's high of 882-884, next upper resistance doesn't come into play until about 892-895

 
 

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