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SUBSCRIBER QUESTIONS

Q: The VIX seams to be caught in a range between 22 and 30. Could you discuss the implications of it breaking this range either way? To the upside (i.e. above 30), do you anticipate that to be linked to a "major" sell-off, maybe lower than the September bottom? To the downside (i.e. below 22), would you see an important rally accompanying the break and where would you see the VIX heading for next "support"?

A: The VIX is a sentiment indicator, and as such, it gives the best readings at extremes. We refer to the 'normal' range from 20 to 30, very much what the VIX has been tracking in of late. At the low end it shows complacency, i.e., little volatility in option prices and that indicates little fear that tends to drive the market. At the upper end it shows more anxiety that can fuel the market when new money comes in. In this normal range you can see readings near 30 trigger minor rallies as we saw two Friday's ago when the VIX spiked to 30 intraday before that move.

After strong selling, it usually takes more than a reading of 30 to make the turn. That would accompany stronger selling that typically drives the VIX higher. To break over 30, it would not need a selloff to the September bottom. The question is whether it needs to get much over 30. The VIX shot up to 57.31 during the week the market reopened, the highest reading since 1998. Other sentiment indicators spiked to highs as well. That was enough to turn the market from its continuing downtrend. I doubt whether the VIX would have to spike that high to turn this test back up from this current downtrend, but it certainly would take a reading well over 30. That can be accomplished without a major breakout to the downside. The volatility indexes are starting to move up sharply this downturn as the Nasdaq hit a new 2002 low and the S&P is heading down to test its low.

As for the downside breakdown of the VIX, it would not take a major upside move to lower volatility below the 2001 range. Indeed, at this low level, there would be little impetus for the market to drive higher outside some major unforeseen news. It is hugging that range most of the time now, somewhat disconnected from the action in the indexes. From this level, it is more likely that it rallies higher on further selling before the next major move higher. At that point we will see volatility head lower as the rally gains steam. Volatility gives signals at the extremes. The low volatility we have seen acts as molasses on any rally. Once it gives a sharp spike higher and the markets start to move, we don't get too worked up about it until it settles back down to extreme low levels as we have had.

TEAM TRADES

Continuing to play the downside when it presents itself, we had our eyes on PMCS (a trade on the Stock Split Report, one of the many puts on the reports) as it was ready to breakdown in a descending triangle pattern. Our buy point was 19.90, and PMCS gapped lower to 20.21. It fell down below the buy point at 19.75 and then rallied up to 20.10, testing the breakdown. We saw it look as if it was peaking out, and we waited another several minutes to confirm this as it sidestepped a bit. Then it started to fall and we made the move in as it crossed over 19.90 again. The options were trading at 6.50 by 6.70, and as the stock had already tested the breakdown and the spread was narrow (notice how the lower volatility has compressed spreads on options?) we entered a limit order at the ask. That was taken care of and the stock tumbled to 19.40 and held there for a few hours, gradually moving lower the entire session until it fell hard in the last hour. It made a modest rebound, however, taking some of the good move away. The options finished at 7.10 by 7.30.

THE PLAYS:

Good movers: BRCD fell like a rock and is close to our target at 25 (closing at 25.59). If it moves below that, can fall to the 22.50 range and we will see if it can get there with this drop. EMLX also fell, as did LEH, CA, CLS, VRTS (all five are puts plays). ITT hit the aggressive buy point (54.10) on Friday, and extended the bounce play Tuesday on strong volume. SLGN hit the buy point today (28.43) in the flying plateau, pulling off the high of 29.35 on strong volume. We will look for a continued move up (remains a buy on the move up to 29.85)! COTT, on February 12, hit the buy point of 17.55 for the bounce play, and after edging higher the last few days, broke out Tuesday on strong volume on no specific news. WTW, dropped from the weekend report, gapped up and on strong volume made a nice bounce from the 18 day MVA.

Targets hit Tuesday: OEX (549.38)

Stop Advisories: WCS (18.25), INRG (12.75), ACDO (50), AOT (24)

Previously covered and holding up well: CEY and ITG (see the 2-13 report).

Continued Plays that look good today and/or are holding up in their patterns:
RJR hit the sell point (62.40) for the covered call play but closed a cent higher. Volume was rising; still looking for the move down to the 18 day MVA.
RTN: A lower volume pullback in the pennant/ascending wedge pattern. Holding support at the 10 day MVA.
URS: Tight at the 18 day MVA in the pennant.
KROL: Looks good on rising volume and the move up in the wedge/pennant.
BRKS: Holding up well. Buy point is 49.51 for a breakout from the ascending wedge, but the aggressive can look at playing it on a move back over the 18 day MVA (which is at 46.76 Tuesday). The stock showed a tight doji after 2 days of a pullback; if the trendline in the wedge holds up, BRKS could move back over that resistance on a good day! Buy point over 47 on that move.

New upside:

ESRX (Express Scripts--$52.25; +0.54; optionable): Health Services
http://biz.yahoo.com/p/e/esrx.html
STATUS: Pulling back in the handle to a 19-week cup with handle base (part of a larger 7.5-month base). The stock hit the 10 day MVA on the open Tuesday, then bounced up on strong volume (2.34 million; avg. 1.3 million). ESRX broke out over the 200 day MVA earlier this month from a pennant pattern, and is now, in the handle, pulling back in the handle. Looking for a breakout over the handle high (53.75). Money flow not at super levels but is trending higher, and relative strength it out ahead of price, a bullish sign. Target: 65
BUY POINT: Breakout: 53.85 on continued strong volume (min. breakout volume met at 2 million). Stop advisory (7%): 50.08.
POSITION: Stock and/or May $45 calls to buy (XTQ EI).

http://www.investmenthouse.com/ct/esrx.html

Revisited:

ACTN (Action Performance--$38.10; +0.60; optionable): Basic Materials Wholesale
http://biz.yahoo.com/p/a/actn.html
STATUS: ACTN broke out of a short base at the end of January and early the next month tested back down to the 50 day MVA (now at 35). The stock quickly moved back over the 18 day MVA (37.34) and has held there except for last week's Thursday dip below the support; it was back over the next day and is holding above the support again. Tuesday volume sank back down to 450,600, just below average, and ACTN showed a doji at the support. We are looking for a strong move back off the moving average to kick off a series of 18 day bounces after the move off the 50 day. Target: 47.50
BUY POINT: Aggressive: 39.15 on volume of 520,000 or higher. Stop advisory (7%):
36.41
POSITION: Stock and/or July $35 calls to buy (QNC GG).

http://www.investmenthouse.com/ct/actn.html

New Puts:

CC (Circuit City--$22.11; -4.29; optionable): Retail
http://biz.yahoo.com/p/c/cc.html
STATUS: Down on concerns that remodeling plans could affect earnings more strongly than anticipated. The stock was already on the move down Friday (made a double top with end of February and January highs) with volume strong but gapped lower Monday with volume screaming up to 11.7 million (avg. 3.2 million). We are looking for a continued drop at least to the 200 day MVA down at 18. Following the downside momentum.
BUY POINT: 22 on continued strong volume.
POSITION: July $30 puts to buy (CC FS).

http://www.investmenthouse.com/ct/cc.html

CACI (Caci International--$34.20; -2.61; optionable): Diversified Services
http://biz.yahoo.com/p/c/caci.html
STATUS: Moving down the right side of the second shoulder in a 19-day head and shoulders pattern. Volume was rising as the stock butted the 50 day MVA (36.65) then headed down (435,800; avg. 545,000). On the move CACI broke support of its up trendline (connects the October, January, and previous February closing low), the neckline, on the move. It may attempt a test of that level (at 35) first, but on the drop look for a move to 30.
BUY POINT: 33.99 on volume in the range of 550,000.
POSITION: June $47.50 puts to buy (KFQ RB).

http://www.investmenthouse.com/ct/caci.html

FRX (Forest Labs--$78.25; -4.33; optionable): Drug Manufacturers
http://biz.yahoo.com/p/f/frx.html
STATUS: Failed an efficacy test that would prevent FDA approval for an osteoarthritis drug. Volume was quite strong on the break of the 50 day MVA (79.19), and we are looking for a fall to the 200 day MVA (74.48). Could run into some support at the 76 level before it falls to the target. Volume was up to 3.6 million (avg. 1.2 million).
BUY POINT: From here (aggressive): 77.90 on continued strong volume. From the 50 day MVA (on a test then "kiss of death"): Aggressive: 78.95 on continued strong volume.
POSITION: May $90 puts to buy (FHA QR).

http://www.investmenthouse.com/ct/frx.html

For a review of frequently asked questions, please use the link below:

http://www.investmenthouse.com/1questions.htm

Good Investing!
Jon L. Johnson and the Technical Traders Team

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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