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Issue No. 4 September 5, 2005 Options Strategist and Editor: Ike Iossif, President & CIO, Aegean Capital Group, Inc. Market Commentary: In my weekly commentary for the previous week I had said the following: "All major indices managed to close below support for the week, while most technical indicators remained deeply in negative territory. Consequently, the odds favor that the indices will make contact with the first downside targets listed on our table, which are only 1.25%-2% below current levels. The question is; will they stop there? More than likely, yes. Unless the market is about to collapse, the first downside targets ought to provide -at least- a temporary respite for the very simple reason that as it stands right now, the Volume McClellan Oscillators for the NDX, and the OEX are very close to the -100 level indicating a deeply oversold condition, which usually acts as the "starter fluid" for a rally. In addition, the market has a historical tendency to rally during the week that precedes Labor Day, therefore, although market participants must be cognizant of the negative technical picture, they also have to be on alert for a rally, especially if they have profits to protect from existing short positions. If the market follows its historical pattern, then the most likely scenario would be a continuation of the decline into Tuesday, and then a reversal and a rally into the end of the week. In the absence of any exogenous event that would justify a sell-off- the real news would be if we get the opposite type of action, such as a rally during the first part of the week, and a sell-off going into the Labor Day weekend, because it would indicate a change in "character" induced by a change in investors' psychology. In bear markets, investors are more risk averse -than in bull markets- thus they have the tendency to buy early in the week, and they book their profits at the end of the week, because they do not feel comfortable holding positions over the weekend, especially during a long holiday weekend. The opposite holds true -in general- during bull markets. Consequently, if we get a sell-off going into the holiday weekend, the message to be derived from such action would be that market participants are becoming more risk averse, and less enamored with the equity markets." (9-5-05) Last week, the indices followed their historical pattern declining into Tuesday, and then rallying to end the week with gains, despite some minor losses on Friday. From a technical point of view, we got a total "mixed bag." Most indicators are either a handful of points below, or, above their respective zero lines implying that the odds favoring either higher, or, lower prices are almost even, and thus, we can't dismiss either outcome. Based on the patterns exhibited by price, and by the technical indicators, the two most probable scenarios are illustrated in the two graphs below. Keep in mind that the odds favoring either scenario are roughly even, therefore, we need to pay attention to daily resistance at 1230, and daily support at 1210. If the SP is below 1210 by mid-week, then more than likely scenario#1 will end up playing out. Conversely, if the SP is above 1230 by mid-week, then more than likely scenario#2 will end up playing out
Because I believe that the odds are almost even for either scenario, I want to have a balanced approach in our trading next week, with added emphasis on taking minimum risk in order to preserve our gains so far, and wait for a better set-up in the near future. Consequently, I have selected a long, and a short trade, and we also have a "conditional" trade on the XAU. Trade #1 Company: Neoware Systems Inc. Symbol: NWRE Suggested Trade: Long: Sep12.5 calls Special Conditions/Other: NO
Comments: NWRE broke above resistance leaving behind a large gap, which probably is a "run-away gap" which means it may never get filled. I believe the stock is targeting the 17-17.5 zone over the next 8-10 trading days. Trading Strategy: We will buy to open 5 of the Sep12.5 calls (symbol: QQAIV) and we will use a close below 12.5 by the underlying stock (NWRE) as our exit point for a stop loss. P/L Analysis Powered By OptionVue:
*SEE TRADE UPDATE AT THE BOTTOM OF THE PAGE
Please note: The recommended minimum starting capital is $50,000.00. Trade #2 Company: Esterline Tech Corp. Symbol: ESL Suggested Trade: Long: Sep40 puts Special Conditions/Other: NO
Comments: ESL has closed below its 50 DMA, and it ought to be targeting the gap between 35 and 36 over the next 8-10 trading days. Trading Strategy: We will buy to open 5 of the Sep40 puts (symbol: ESLUH) and we will use a close above 42.5 by the underlying stock (ESL) as our exit point for a stop loss. P/L Analysis Powered By OptionVue:
*SEE TRADE UPDATE AT THE BOTTOM OF THE PAGE
Please note: The recommended minimum starting capital is $50,000.00. Trade #3 Index: Phil. Gold/Silver. Symbol: XAU Suggested Trade: Long: Oct. 95 calls Special Conditions/Other: YES
Comments: If the XAU is going to move higher, then in all likelihood it will pull back to support in the 96.25-95.75 zone, first. If support holds, then it ought to rally up to the 102.5-103.5 target. Trading Strategy: If the XAU pulls back to the 96.25-95.75 zone, and it reverses to the upside then, and only then, we will buy to open 5 of the Oct95 calls (symbol: XAUJS) On a print above 97.5 we will add another 5 contracts, and on a print above 99 we will add 5 more. We will exit the position when the XAU reaches the 102.5-103.5 zone. I will send out an email letting you know my thoughts if the XAU pulls back to the 96.25-95.75 zone, and then it reverses to the upside. I strongly suggest that you do not get involved in this trade without knowing my latest views even if the XAU has acted according to the expectations I just described.
P/L Analysis Powered By OptionVue: (Not available due to the fact that the trade is conditional on the XAU pulling back approximately 3-3.5 points, which will alter the entry price, and the resulting P/L)
(Please note the expected bid/ask at the time of execution, is 2.5-3.25 points below current levels. *SEE TRADE UPDATE AT THE BOTTOM OF THE PAGE
Please note: The recommended minimum starting capital is $50,000.00.
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