The Option Investor Newsletter Thursday 8-12-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 8-12-99 High Low Volume Advances Decline DOW 10789.39 + 1.59 10900.83 10780.84 745,630k 1,484 1,528 Nasdaq 2549.49 - 15.49 2586.10 2548.51 959,442k 1,978 1,850 S&P-100 673.07 - 3.32 681.52 681.52 Totals 3,462 3,378 S&P-500 1298.16 - 3.77 1313.61 1298.60 50.6% 49.4% $RUT 428.82 + 0.63 429.70 428.19 $TRAN 3157.46 + 24.13 3157.46 3157.46 VIX 26.07 + 0.04 26.08 24.29 Put/Call Ratio .69 ************************************************************* Atlas shrugs, but it doesn't work First thing this morning, traders fresh with retail sales news shrugged off July's .7% jump in retail sales once they understood that June's figures were revised downward to show a decline of .2% for the month. An almost convincing gain ensued, but couldn't hold up into the close, as someone turned out the lights (literally). To understand what happened, take a look at the action on the NYSE (the DOW in particular) and the NASDAQ. As we alluded to last night, the DOW carried on yesterday's strength through amateur hour this morning, touching 10,850 before falling back to 10,800 (actually, 10,780), where it found support (surprise!). Recall that this was the resistance level up 'til then. The 30-yr. bond rate was rising during that period too from 6.20% to 6.23%. Just as the bond rate reversed direction back toward 6.20% (hesitating briefly at 6.21%), so too did the DOW reverse back up to 10,850, where it hesitated before leading a charge all the way to 10,900. The recovery was looking very real as advancers were edging out decliners 1520 to 1298 at the time. Remember that bonds had been leading the index all day, since as goes inflation fear (as reflected in bond rates), so goes stock price. As rates go up, stock prices fall. At almost the very peak of the day, bond rates began to rise again (the 30-yr. treasury auction didn't go so well - weak demand from the usual inflation fears) and stocks began to fall in sympathy until the close. Despite being up as high as 120 points from the open, the DOW finished up just 19 points at 10,807 on 748 mln. shares traded. The A/D line had crossed over to show decliners edging out advancers 1484 to 1528 - almost even. Significantly improving, but still negative, new lows were down to 163, while new highs progressed to 55. The last 2 days were certainly worse. Suffice it to say that the NASDAQ had a similar pattern, but with its own nuances. Keeping a damper on NASDAQ was Merrill Lynch's issuance of a PC sector warning, wherein they predicted that PC sales prices would fall 11.5% this year and 11% each in the next 2 years. Sorry folks, but how is that any different from the last 15 years where the $3000, 4 MHz, Intel 286 box has morphed into a $1000 400 MHz Celeron? Oh well. . . monkey see; monkey do; PC makers get pounded all in a day's work. The chip sector got crunched too as reflected by the SOX (semiconductor index), down almost 3% from 521 to 506, with the biggest hits taken by AMAT (-$5.13) and KLAC (-$3.56). Who said markets are rational? In the end, paralleling the trend of the DOW (and bond rates - remember technology issues are a bit more rate sensitive), the NASDAQ gave up 15 points to close right at support of 2549. Advancers were ahead of decliners 1871 to 1665 at the high point of the day. Though the NASDAQ finished down, advancers still won 1985 to 1848 over decliners. New highs gained lost ground on new lows compared to previous session - 55 new highs to 78 new lows. Volume clocked in at 959 mln. shares, slightly more than Yesterday. Hmmm. . .Dow just over 10,800; NASDAQ 2549. Is that support or resistance? There are 2 sides to this story. So let's start with the negatives to get it out of the way. Notice the relationship between movement of the DOW and the NASDAQ. They reflect an inverse relationship to interest rates. Both indices fell back from their intra-day highs by a significant number, as we suspected they might in front of the PPI release tomorrow. Also, volume hasn't reflected money mangers getting back in the game yet. We need to see over 1 bln. shares traded on both indices to give us that clue. When that happens, the recovery is probably for real. Also, though the A/D line has improved a bit in the last 2 days, a 2:1 ratio would be more convincing (maybe wishful thinking). We'd also like to see new lows best new highs by at least 2:1. We're not there yet. Furthermore, any "bad" news in the PPI will likely point us south again. Now for the good. Recall that today's action, as in the past, was tied to interest rate fears borne of perceived inflation by the Fed, as reflected in the bond rate. First, we expect the PPI to be friendly, which given the still bearish tone of the market, may put a real squelch on the idea of a second rate increase later in the year. That could actually spark a rally back over 10,900. Here's the kicker. Remember that bond rate hike that sent everything lower? Well, right about that time, the electricity literally went out at the Chicago Board of Trade where bonds are traded, traders had to make a decision on what to do with their holdings, since their trading day ended abruptly and early. These guys (and gals) don't want to go home with positions in their pockets with the chance that the power may not be on tomorrow morning, especially in the face of a PPI report. What to do? Sell of course. Sell early and call it a day. That's just what they did. When a bunch of sell volume comes into any commodity, what happens to the price? Right, it drops. If bond prices drop, what happens to the corresponding rate? Right, it goes up. Now if you are an equity trader and all you know is that bond rates are spiking up, what do you do with the positions you hold? Right again, you sell. Isn't it great that there are buyers ready to support prices at their current levels (yesterday's closing prices) - that's bullish. In short, what we are saying is that equity prices, while continuing to take their cue from falling bond rates derived from power outages, may have blindly sold off without understanding exactly why. It is thus possible that the sell-off is artificial and not truly reflective of the market's underlying real sentiment. Think of it this way. Had power remained on, bonds would not have likely sold off, thus equities would not have likely sold off, and today's close might have looked a whole lot better in a technical light. Now before you buy everything at the open tomorrow with a market order, remember, this is only a theory! We may be out to lunch on this and you can write it off as a nut case conspiracy theory, while going about your business. Today's action, aside from the machinations of power outage, didn't look too bad. Watch for tomorrow's interpretation of the PPI numbers though. If it's "bad", we could resume course downward and dismiss the last 2 days as a temporary breather before things turn ugly. After all, the CPI comes out next Tuesday and will be feared if inflation shows up in the PPI first, bringing the market down with it - and that still leaves an FOMC meeting on August 24. We remind you too that except for DELL and HD next week, earnings season is all but over. That's no longer a reason for a move up. If the PPI is "good" or just inconclusive, we might get a bump borne of relief from the simple elimination of more uncertainty. (The devil known is better than the devil unknown.) We're optimistic, but still cautious. Decide on your course of action tomorrow morning and stick to your plan. Let the market give you the signal to take a bullish or bearish position if you must play. Of course, sell too soon. Buzz Lynn Research Analyst *************** Market Posture *************** As of Market Close - Thursday, August 12, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,808 Neutral 7.20 SPX S&P 500 1,330 1,420 1,298 BEARISH 7.30 OEX S&P 100 675 735 673 BEARISH 8.06 RUT Russell 2000 430 465 429 BEARISH 8.06 NDX NASD 100 2,250 2,468 2,214 BEARISH 8.10 MSH High Tech 1,125 1,250 1,117 BEARISH 8.10 XCI Hardware 920 1,090 986 Neutral 7.20 CWX Software 725 844 718 BEARISH 8.10 SOX Semiconductor 450 535 507 Neutral 7.20 NWX Networking 555 625 550 BEARISH 8.05 INX Internet 500 580 392 BEARISH 7.20 BIX Banking 690 710 624 BEARISH 7.23 XBD Brokerage 410 440 376 BEARISH 7.23 IUX Insurance 645 660 581 BEARISH 7.23 RLX Retail 915 960 833 BEARISH 7.23 DRG Drug 370 400 340 BEARISH 7.20 HCX Healthcare 750 800 697 BEARISH 7.22 XAL Airline 180 190 154 BEARISH 5.21 OIX Oil & Gas 285 310 315 BULLISH 8.10 Posture Alert Interest Rate Alert! The broad market could not tack on any more gains from Wednesday's rally, as interest rates keep inching higher. Brokerage (XBD +3.09%) stocks led the way Thursday, thanks to continued speculation that Merrill Lynch will merge with Chase Manhattan. Drug and Healthcare sectors were also up 2.33% & 2.38%, respectively. No changes to the posture board. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Power Outage! This market looks like it is going to stay trading range bound for a little while. For the second week in a row, the broad market could not tack on additional gains after having a nice rally. We seem to be starting a weekly trend of 4 down days with an up day tossed in for good measure. This lack of conviction by the bulls will only keep this market locked in a range until the interest rate environment settles down. Looking at some of the charts below, we are seeing lower highs and lower lows. Not a good sign to say the least. We would expect the bulls to be hidden tomorrow, since it is a summer Friday, which usually turns out to be a yawner. If the PPI shocks the street, then we will have a selloff. If the PPI comes out without any surprises, most traders will still wait until next week's CPI. So there was really no upside in buying this afternoon. One positive note that we are seeing here at Pinnacle Capital is the Investors Intelligence Survey. From a contrarian standpoint, the percentage of Bullish investors has decreased 5% this last month while the percentage of Bearish investors has increased 3%. Once we shake out the weak hands, combined with bears getting to confident, then we will be poised for a strong rally. On a side note, if you had any problems with option orders this afternoon, it was due to a power outage in Chicago. The CBOE went down for about 2 hours this afternoon. This was the most excitement that we have seen on the floor of the CBOE in weeks! BULLISH Signs: Pinnacle Index: The Pinnacle Index for the OEX (630-670) is now reaching levels of extreme pessimism. From a contrarian standpoint, support is building in this area, and may indicate a short term base. Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased 2.2% and Bearish sentiment increased 1.5%. Mixed Signs: None BEARISH Signs: Russell 2000: Broke below both the 50 and 200 day moving averages, proving very bearish. Interest Rates: The yield on the 30-yr Treasury broke out to new highs, which could spell potential disaster for this market. Peak Open Interest: The contraian put-call ratio clocking in at 1.1 suggesting bullish sentiment picking up steam. Market Posture: Several indexes have just rolled over, including the Dow, OEX, SPX, networking, and software. Market Posture 2: Several indexes continue on their bearish decline, including drugs, healthcare, brokerage, banking, airlines, Russell 2000, Insurance, and Internet. Advance/Decline Line: The A/D line has been rolling over, and will continue to prove Bearish if decliners continue to out-pace advancers in the weeks ahead. OTM Call Analysis As we move through the August expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 710-780 among option speculators. As we have been documenting, excessive out-of-the-money (OTM) call may serve as overhead resistance. July Expiration Cycle OEX OTM Call Analysis (Open Interest July 680-750) Date Open Interest Change % Alert Friday, June 19 35,225 - Friday, June 25 63,342 +79.8% Friday, July 02 87,833 +149.3% Friday, July 09 99,855 +183.5% August Expiration Cycle OEX OTM Call Analysis (Open Interest August 690-780) Date Open Interest Change % Alert Friday, July 16 32,285 Friday, July 23 62,455 +93.4% Friday, July 30 74,895 +131.9% Friday, Aug. 06 113,258 +250.8% Market Sentiment at a Glance Friday Tues Thurs Indicator (8/06) (8/10) (8/12) Alert Pinnacle Index (OEX): Overhead Resistance (715-745) 6.5 6.8 7.0 Overhead Resistance (680-710) 1.4 1.9 2.2 Underlying Support (630-670) 6.3 5.7 5.3 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 .6 CBOE Equity P/C Ratio .5 .6 .5 OEX P/C Ratio 1.1 1.0 1.2 Peak Open Interest (OEX): Puts 620 650 650 Calls 700 700 700 P/C Ratio .7 .7 .8 Market Volatility Index (VIX): CBOE VIX 26.07 Investors Intelligence: Bullish 50.00% * Bearish 29.30% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Thurs Benchmark (8/06) (8/10) (8/12) Overhead Resistance (715-745) 6.30 6.78 7.02 Overhead Resistance (680-710) 1.41 1.86 2.23 OEX Close 674.13 665.41 673.07 Underlying Support (630-670) 6.50 5.73 5.25 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 715/745 level while the underlying support is holding at the OEX 630/670 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (8/06) (8/10) (8/12) CBOE Total P/C Ratio .66 .71 .62 CBOE Equity P/C Ratio .54 .62 .48 OEX P/C Ratio 1.10 1.01 1.16 (OEX) Peak Open Interest Friday Tues Thurs Strike/Contracts (8/06) (8/10) (8/12) Puts 620 / 11,005 650 / 11,622 650 / 11,833 Calls 700 / 14,674 700 / 16,566 700 / 15,526 Put/Call Ratio .74 .70 .77 (VIX) Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top? 18.13 * August 12, 1999 26.07 Investors Intelligence Survey Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 07, 1999 52.6 27.2 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 July 28, 1999 53.6 24.6 Aug 04, 1999 52.2 27.8 Aug 11, 1999 50.0 29.3 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10789.39 -6.33 -52.55132.65 1.59 75.36 Nasdaq 2549.49 -28.99 -28.87 74.87 -15.49 1.52 $OEX 673.07 -2.39 -6.33 10.98 -3.32 -1.06 $SPX 1298.16 -2.49 -16.37 20.50 -3.77 -2.13 $RUT 428.82 -2.15 -3.07 5.37 0.63 0.78 $TRAN 3157.46 0.42 -82.91 -7.01 24.13-65.37 $VIX 26.07 0.63 0.31 -2.27 0.04 -1.29 Calls Mon Tue Wed Thu Week SNE 124.50 -0.19 3.19 1.25 0.25 4.50 New highs? INTC 75.94 1.88 -1.69 4.25 -0.06 4.38 Bounced NXLK 87.25 0.88 -3.50 -1.19 7.56 3.75 What a day SLB 66.50 4.06 -1.00 1.19 -1.06 3.19 Oil higher LXK 66.75 -1.13 2.69 0.56 0.75 2.88 New TXN 145.25 -1.00 -3.00 7.75 -1.00 2.75 Split play LSI 55.25 0.94 -0.88 2.81 -1.00 1.88 New high! DELL 40.25 1.19 -0.56 1.81 -2.00 0.44 Earnings! HGSI 60.00 -0.63 -2.63 1.75 1.00 -0.50 Creeping HWP 103.06 -3.31 -1.00 2.69 -6.31 -7.94 Dropped Puts TAN 41.75 -3.88 0.25 0.69 0.00 -2.94 Rebound NITE 33.94 -4.88 -1.50 1.88 1.81 -2.69 Apprehensive TBH 72.75 -1.13 -0.38 2.00 -1.75 -1.25 Fed fears AMR 60.94 -0.56 -2.06 -0.44 2.06 -1.00 Bounce? DH 57.81 -0.69 0.13 0.88 -0.88 -0.56 Dipping CMGI 76.94 -3.75 2.94 -0.63 1.38 -0.06 Warning U 32.81 0.06 -1.44 0.13 1.63 0.38 Caution AMZN 91.75 -4.06 5.50 -0.06 0.81 2.19 Volatile BRCM 113.38 -1.88 -2.25 6.63 1.88 4.38 Beware! MWD 88.13 0.31 0.88 3.19 1.63 6.00 Head-fake AXP 129.75 1.94 -0.50 2.50 2.75 6.69 Dropped MER 71.38 0.63 -0.81 3.31 4.38 7.50 Dropped EBAY 91.38 -3.63 9.63 -1.56 3.69 8.13 Comeback? SEPR 76.00 4.88 0.00 2.00 3.75 10.63 Dropped **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** HWP $103.06 -6.31 (-7.94) It was a rough day for HP as well as the Computer sector as a whole on Thursday. This morning Merrill Lynch announced that low-cost personal computers will have a negative effect on future profit margins in the PC sector. Analysts Steven Fortune and Kumar Cidambi predicted slowing times over the next few years and stated that he saw 'overwhelmingly depressive effect on average selling prices'. This was more than enough justification to put a halt to the momentum that HP closed with on Wednesday. The fallout from this downgrade has tremendously altered the trading environment for HP as well as our outlook on this play. The decision was obviously made to drop HP as a call play as HP's earnings run never truly materialized this week. It would now be prudent for investors to search for an exit point on this play before the close on Friday. PUTS: ****** AXP $129.75 +2.75 (+6.69) A break through resistance broke our play and broke our hearts today. The recent financial sector strength coupled with the market rally over the last two days was too much for us to stay on the bearish side of AXP. We must drop this one and look for more co-operative plays. AXP has also been accepted as one of the first of the big three credit cards to be honored at Costco. Since our pick at $126.69, we have seen a low of $121.87 which allowed us to be profitable if we placed our stops at the right points. The stock did manage to stay below the 20-dma and could go down on renewed weakness but why risk it when we can find others with better momentum comparable to the market. SEPR $76.00 +3.75 (+10.63) For Sepracor, this week has been good for the stock and bad for our play. After taking a pummeling the past three weeks SEPR finally found its support as investors bought shares at discounted prices. We were hoping the stock would reach its next support level of $60-$62 range before ending the play however, like any stock that takes a beating for so long it was bound to bounce. Sepracor did exactly that and bounced hard at $65 and hasn't looked back. For many the stop loss orders should have ended the play earlier this week for a nice profit. It was a nice ride while it lasted but unfortunately all good things must come to an end, including this play. MER $71.38 +4.38 (+7.50) The resurrection of merger rumors have killed this play and we're dropping MER tonight from our put list. According to the WSJ, the new Merrill Lynch executives want to re-open talks with Chase Manhattan (CMB). The powerhouse combination would rival financial supermarket, Morgan Stanley Dean Witter. Investors responded positively to this news and MER shares immediately rose 6.5%. So we will let our stops pull us out of the play. ***** Play updates continued in section two ***** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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The Option Investor Newsletter Thursday 8-12-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** SNE $124.50 +0.25 (+4.50) Here we go again! Sony is on course to make an assault on a new 52-week high. It has already tried twice to break above $126.88 and failed but the back drop has changed for this attempt. Sony received an upgrade earlier this week from Merrill which has prompted buying. Also the Japanese markets will be picking up now that the holidays are ending. Plus the U.S. markets are showing some strength for the first time in weeks. These factors combined may be enough to propel SNE to new highs. In the news today, Sony announced they are developing the world's first plastic disks for computer hard drives with Nippon Co.'s chemicals. The costs for production are said to be much lower than for conventional aluminum disks. HGSI $60.00 +1.00 (-0.50) For the last two days HGSI has been clawing it's way back to positive territory. It has been almost a step approach. Range bound at $57 on Tuesday, then $57.75 on Wednesday and now $60 today. Investors are basically fence sitting here, with no news and no commitment from the market. We are maintaining the trend but since it has slowed, some caution is advised. The MACD and Stochastic is at a point where they could go either way, positive or negative, which is another reason to have your stops set. Since we have been slowly inching up, any confirmation and conviction in a market turn around should send us higher. A bullish sign today was the positive price gap this morning. Notice the tendency for HGSI to bump in the morning and also before the close. Use this to your advantage but remember speculation is the key word here! SLB $66.50 -1.06 (+3.19) As oil prices continue to rise and oil inventories diminish below expected levels, Schlumberger has slowly but surely enjoyed a continued climb. Economic factors helping the stock are the Feds anticipated interest rate hike on August 24. Investors have been seeking shelter from the interest rate sensitive stocks into those like SLB that are less effected by rate hikes. Yesterday, broker Bear Stearns initiated coverage on SLB at a buy. With all the good news about the stock, current economic conditions and recent oil prices, look for SLB to continue to set new highs. However use caution with this play because oil prices have been known to change overnight depending on rumors or other global events. Make the most of the stop loss orders just to be on the safe side. DELL $40.25 -2.00 (+0.44) DELL made a nice run yesterday on the coat tails of Cisco Systems good earnings report which helped the whole tech sector. Disappointedly, most of those gains were lost today as investors reacted to a statement released by Merrill Lynch. This statement warned that the race toward low-cost personal computers between PC makers will put a squeeze on future profits. Within that same press release Merrill initiated coverage on DELL at a neutral rating contradicting Monday's upgrade by BancBoston Robertson Stephens to long-term attractive. We currently are siding with BBRS and continue to play DELL as a potential earnings run candidate before it announces the results after the close on August 17. But we don't have much time left so continue to watch the tech sector as this dip may be the opportunity to take advantage of a last-minute run. However, because of the Producers Price Index numbers which will be released tomorrow morning be cautious and use stop loss orders appropriately. INTC $75.94 -0.06 (+4.38) We said on Tuesday that INTC might bounce back Wednesday and bounce back it did! Honestly, Intel was beginning to look a little overcooked and was trading like it might begin to give back some of its recent gains which is why we suggested that you move your stops up extremely tight and let the MARKET TELL us when it was time to get out. On Wednesday Paine Webber commented that personal computer sales will be strong in the second half of the year and that is all it took to light a fire under INTC. Intel opened up over $2 higher on Wednesday and made a new all-time high at $76.25. Volume picked back up as well with over 40 mln shares changing hands. INTC made another high today at $76.75 in the first 30 minutes of the trading day but then basically consolidated for the rest of the session. The entire semiconductor sector tried to advance today only to turn south midday. The PPI numbers tomorrow will dictate the direction of broader markets and probably INTC as well. Technically Intel still looks strong but as always move your stops up and let the market do the rest. NXLK $87.25 +7.56 (+3.75) Nextlink traded sideways to lower for most of the day Wednesday closing down $1.19 for the day. Today NXLK opened $1.19 higher and traded sideways until just after noon ET. It was then that GTC Telecom announced it was waging "war" on the "big boys", directly challenging the large telecom companies with a five cent rate anytime, any day with no monthly fee and that's when NXLK caught fire. Nextlink started a run from about $82 to a high of $89.88 over the next four hours, that's right a gain of over $7 in four hours. There was no news that came out directly on NXLK but they are considered a firm in good position to gain business lost by the big three and become a telecom giant of the future. Today's bounce was more of a technical nature after consolidating on the 100-dma for the last week. Also don't forget about the upcoming split. It will hold investor attention until the completion on or about August 27. TXN $145.25 -1.00 (+2.75) Texas Instruments helped lead the semiconductor industry higher the past two days. After dropping $4.00 earlier in the week, TXN tacked on $6.75 in the last two sessions and is now up $2.75 for the week. The volume on yesterday's advance was strong at 3.4 mln shares. Remember TXN is primarily a split play which is scheduled for August 16th. That leaves you with one day to get out prior to the split. The semiconductor industry had gained about 1% today before falling apart the last 3 hours and ended up losing almost 3% for the session. TXN faired better than its partners in the industry today showing good relative strength. The tone for tomorrow's trade will be set early with the release of the PPI numbers at 8:30 ET. If you have not exited the play we would suggest start looking to so you don't get caught in any post-split depression on Monday. LSI $55.25 -1.00 (+1.88) On Wednesday afternoon the stock rallied for a $2.81 gain, hitting a new high along the way at $56.25. Today the rebounding chip sector suffered a little following the downturn of the PC stocks, resulting from Merrill Lynch's glum forecast for the sector over the next few years. However right out of the gate this morning LSI was strong and touched $57.50 to break yesterday's new 52-week high. A sell-off immediately ensued but LSI held firm around $55 for the remainder of the day. Tomorrow may be more volatile due to the release of the PPI. So for those looking to open a new play, you may get an opportunity. There was no other company specific news to affect trading the past two days. **************** PICK NEWS - PUTS **************** AMR $60.94 +2.06 (-1.00) And now for the inevitable bounce! It happens to every stock that suffers severe declines in such a short period of time and it is happening to AMR. The question is, will it last? We think the answer is, probably not. This is more of a technical move for the Dow Transports instead of a reversal in sentiment. This is because oil prices are still near $21.50 a barrel which is right at the week high. Also the market has made some nice gains over the last few days and it is unlikely to hold ahead of the PPI, CPI and FOMC meeting. These events should keep any rally on a short leash. So what we are left with is a chance to open new plays. The key resistance is the 200-dma at $64. Any move above that price on strong volume will be the signal for your stops to pull you out of the play. U $32.81 +1.63 (+0.38) I wish there were more to report on our play of USAir but today's action was purely technical. The stock had been down all week based on higher oil prices which continue to hold above $21. The airline group was hit particularly hard this week and was due for a bounce. This may have triggered your stops to exit the play but you may want to consider re-entering new plays after this bounce. USAir could rally to resistance from the 10-dma at $34 but even that may be out of reach. We will have to wait and see what kind of legs this rally has before jumping back in. Remember to let the stock confirm downward direction first. AMZN $91.75 +0.81 (+2.19) The markets were see-sawing back and forth today and in the end AMZN was left with only a small gain. But we have seen the Internets in general rally nicely this week. AMZN had moved over $10 off its intraday low on Tuesday before pulling back some half way through today's session. Some of the reason for the rally was that Banc of America started coverage of AMZN with a strong buy. That shouldn't last though we see more weakness ahead after today's failed rally. Most traders were looking to lighten up their holdings ahead of the key PPI report tomorrow. This report should really give direction to the market. The only problem is no one is sure which direction so needless to say, use caution. Keep the stops tight if you are involved in a play and hold off on new plays until AMZN starts to show some direction. BRCM $113.38 +1.88 (+4.38) All lights are yellow on Broadcom. That's because we're playing this on the short side. The unconvincing rallies that the market has given us the last two days has caused BRCM to move up, breaking through the 10-dma. Although this is a sign of caution, we're holding onto this play as we think the PPI and CPI numbers may help take us lower again. Analysts are saying the market is range- bound but the fear of inflation still lingers. Hopefully we'll be able to profit from this fear. BRCM appeared very range-bound today along with the markets. It couldn't decide which way to move as it traded between $113 and $115. We are still below our 30 and 50-dma's and they will serve as short-term resistance at $119. To help us on the road lower, analysts are still listing the stock as "unattractive for fundamental and performance reasons." BRCM also announced they will buy AltoCom Inc for $180 million. This is a short term hedge for Broadcom in their bet that Cable modems will be the industry standard over phone lines. This is also a short-term hit on BRCM since it will affect their bottom line. We are hearing that investors are also expressing fear of a fall selloff as was experienced last September with the stock. That remains to be seen but do confirm a negative move in the market and stock before entering new plays. TBH $72.75 -1.75 (-1.25) TBH close the day in negative territory by dropping $1.75 to finally bottom out at the day low. Volume today was slightly above average with 2 million shares changing hands. Brazil's Bovespa stock index fell 1.2 percent to 9,919 amid domestic political squabbles. Congress representatives were unwilling to implement more of the economic reforms that President Fernando Henrique Cardoso has been trying to push through. We expect more volatility ahead as economic indicators continue to come in before the FOMC meeting on the 24th. Tomorrow morning PPI figures will be announced. If the numbers are greater than expectations, Telebras will more than likely loose ground once again. Over the last couple of days TBH has shown signs of wanting to retest recent lows but it will be up to the PPI report. CMGI $76.94 +1.38 (-0.06) The running of the techs was cut short today as investors once again prepared themselves for the latest economic numbers release. Even though the market expects the Fed to raise interest rates on August 24, many investors are waiting on the sidelines to see exactly what numbers the Producers Price Index will release. Afternoon profit takers made the most of the morning gains on CMGI closing the stock just below its support level at $77. Despite the recent gains, the overall trend of the stock remains on the downside. Like any Internet play use caution with entry points and watch the general sentiment of the market when the PPI numbers are actually released. TAN $41.75 +0.00 (-2.94) We are going to hang in there with Tandy for another day or two. After jumping off the cliff Wednesday dropping to an intraday low of $37.38, Tandy has bounced back and been in a narrow $2 range for the past two sessions. We have two scenarios shaping up here. First, is that Tandy has hit bottom and will consolidate and begin to recover from its recent decline. The second one is that it has fallen and it can't get up, leaving it to fall again under its own weight. Technically it looks as though it may be trying to form a base and consolidation for a new move back up. Many of the retailers have been reporting earnings this week, with most coming in with good numbers that beat analysts estimates. As has been the norm for this reporting season these numbers haven't ignited most of the stocks in this industry. Other than a technical bounce from this level we see no reason at this time why Tandy would change its trend but we must use caution. So what we are saying is, adjust your stops to protect your profits and wait for a drop below the $40 level before considering anything new in Tandy. MWD $88.13 +1.63 (+6.00) "Caution" turned out to be a virtue as MWD restored some of its heavy losses from the past two days. Even though brokerage house interest rate woes are still looming ahead, MWD rode the DOW's relief wave and advanced $4.82 (or 5.8%) on moderate volume. Granted this bounce may be just a head-fake but ultimately this play's fate will be determined by the outcome of the PPI numbers tomorrow. Therefore make sure the stock bounces off the 200 dma at $89 before opening plays. Any move above this point would be reason enough to close out your plays. DH $57.81 -0.88 (-0.56) On Wednesday, after an initial selloff with DH dipping to a daily low of $57.38, the stock was driven upwards on more than double its normal ADV. Retail investors however, are still fearful of rising interest rates and proved this today. They brought the stock back to negative a loss on the day, right on the day-low. This late day decline has wiped out all gains for the stock the past two days and left it sitting where it closed Tuesday. Tomorrow may prove to be crucial for this play as the PPI data will likely effect the overall market sentiment. NITE $33.94 +1.81 (-2.69) NITE's response to the whopping +74 point gain on the NASDAQ was rather bearish. Even with another advance today on strong volume the stock is still not situated above its 200-dma. This is a good indication since the online brokerage sector was up 6% on positive trading results at Schwab but remember caution. If the PPI numbers do not signal a rate hike (as the EPI numbers did) then NITE may bounce simply on general market relief. Be patient and confirm direction before trying to navigate an entry point. EBAY $91.38 +3.69 (+8.13) The Internets showed some strength again today and EBAY gained a few more points. Plus, the trading volume was exceptionally high. Generally, gains on strong volume is usually a bullish indication but tomorrow may be a different story. If the PPI event has a negative disposition than the Internets could very well rollover again. Only time will tell. Be careful as the stock's true direction unfolds. If eBay decides to rally, it would have lots of room to climb until it hits the 200-dma at $118. ************** NEW CALL PLAYS ************** LXK - Lexmark International $66.75 +0.75 (+2.88 this wk) Ever wanted someone to see things your way? Well LXK has made a business of it! By understanding customers needs and perceptions, they have become one of the leaders in providing printing solutions such as Laser, Ink Jet, Dot matrix, and all types of printers. They develop, manufacture and supply their extremely high quality products to 150 countries. They have taken their revenues up to 3 billion in 1998. LXK may just have success in their genes since they are a spin off of IBM and have retained innate values that contribute to their success. Values that focus on everything from customer value, relations, service and response. The company is continually seeking to raise the level of their playing field by providing firsts in quality and standards for the home and business printing industry. As an example, they were the one to introduce the first 1200x1200 dpi for laser and ink-jet printers. As LXK keeps up on their high resolution standards, we'll all be seeing and reading a little clearer. LXK just broke through it's 50-dma on over 3 times normal volume! Could it be a sign? We think so. It was announced that after the close on Thursday, they will be added to the S&P 500. Way to go LXK! We are betting that the market will be as proud of this child of IBM as we are and help the stock continue higher. It is a given that the index funds will be jumping on board if their strategy is to mirror the S&P 500. Today the stock powered ahead to a new four week high and moved the MACD to a bullish position. Short-term resistance looks to be around $70 and with continued interest as we saw today, LXK should gain enough momentum to power through this level and on to new highs. We are looking at the 50-dma at $66 to be support now that we have moved above that level. LXK also held up quite well today despite the markets late day sell off in anticipation of the upcoming PPI and CPI reports. Confirm positive direction and strength before playing. In addition to the above mentioned news of being added to the S&P 500 index, LXK has been selected as one of the 100 best managed companies in the world. This among the many other accolades the company has received lately should allow for the momentum to carry the stock higher over short-term. BUY CALL AUG-65 LXK-HM OI=2097 at $3.38 SL=2.38 very risky! BUY CALL SEP-60 LXK-IL OI= 22 at $9.13 SL=6.75 BUY CALL SEP-65*LXK-IM OI= 123 at $5.88 SL=3.75 Picked on August12th at$66.75 PE = 33 Change since picked +0.00 52 week low =$25.38 Analysts Ratings 5-4-1-0-0 52 week high=$74.38 Last earnings 06/99 est 0.49 actual 0.55 Next earnings 10/18 est 0.55 versus 0.41 Average daily volume = 821.6K Chart = http://quote.yahoo.com/q?s=LXK&d=3m ************* NEW PUT PLAYS ************* none today *************** PLAY OF THE DAY *************** AMR - AMR Corporation $60.94 +2.06(-0.56) American is the #2 airline in the United States behind UAL's United Airlines. AMR is a leader in air transportation, in the development and application of information technology for aviation, and travel and tourism. American serves about 180 destinations in the Americas and Europe with hubs in Chicago, Dallas/Fort Worth, Miami, and San Juan, Puerto Rico. They offer a wide range of other aviation-related activities, including management services, training and consulting. AMR also provides commuter service through American Eagle and owns Reno Air, which operates primarily in the western US. Sunday's Write Up We are adding AMR as a put play for a couple specific reasons. First, oil is one of the biggest factors, if not the biggest, in profits for airlines. We started the year with oil prices down in the low teens per barrel and analysts were optimistic about upcoming earnings. We now have oil holding over $20 per barrel which has caused some analysts to change their view. In fact, the last 4 of 5 rating changes have been downgrades. Second, most major airlines have had to reduce fares for the fall season due to an over capacity of seats. We now have signs that the economy may be heating up and the Fed may jump in to raise rates thus slowing demand further. Finally, AMR appears to be the weak stock in the group. They broke through critical support on Friday from the 200-dma. This is first time they have been under that mark since April 1st. AMR closed right on their day-low as well. The entire industry is showing weakening trends which confirms the direction. Monday will be an important day to see if the downside continues. Since this group is so highly tied to oil prices, we usually see lots of fluctuations. That makes entry points the key. You will see a correlation between rising oil prices and falling airline stocks. Use this to your advantage when choosing when to enter new plays. Tuesday's Write Up Another rough day for the transports as oil spent most of the last 2 days north of $21.00 a barrel. Plus this was one of the hardest hit sectors in the market today and the technical picture is worsening. That is why we are seeing such a selloff in AMR. It's the double whammy. A weak technical outlook due to lack of support and a bad fundamental outlook thanks to high flying oil prices. We are now convincingly under the $60 level and have seen no end to the trend that started last Tuesday. It has been straight downhill since then. Keep your eye on the weekly inventory report for oil that is due out late Tuesday afternoon. This will give us an indication of which way oil prices and thus the airline sector will move tomorrow. Thursday's Write Up And now for the inevitable bounce! It happens to every stock that suffers severe declines in such a short period of time and it is happening to AMR. The question is, will it last? We think the answer is, probably not. This is more of a technical move for the Dow Transports instead of a reversal in sentiment. This is because oil prices are still near $21.50 a barrel which is right at the week high. Also the market has made some nice gains over the last few days and it is unlikely to hold ahead of the PPI, CPI and FOMC meeting. These events should keep any rally on a short leash. So what we are left with is a chance to open new plays. The key resistance is the 200-dma at $64. Any move above that price on strong volume will be the signal for your stops to pull you out of the play. BUY PUT AUG-65 AMR-TM OI=1062 at $4.38 SL=2.75 BUY PUT SEP-60 AMR-UL OI= 192 at $2.63 SL=1.25 Average Daily Volume = 940 K Chart = http://quote.yahoo.com/q?s=AMR&d=3m ********* STRADDLES ********* Good Evening OI Traders! I am coming to you live from the Seattle where OptionInvestor and Optionetics are sponsering the Fall Money Show. From the early stages it looks to be a busy weekend. Speaking of busy, our straddle markets sure got busy so lets take a peek at each stock and where it is compared to Monday. Honeywell (HON) has continued its downtrend, from its breakdown early in the week. Are Allied Signal / Honeywell merger talks breaking down? Is the deal going to be a bad investment for Honeywell? Apparently, traders must think so cause the stock is down nearly 6 points since Monday. Bad for stockholders, good for straddle traders. I see no reason why this trend won't continue so look out below! First sign of resistance looks to be 112 7/8 made back on 7/7/99. This straddle is a keeper! Maytag (MYG) made new lows from the breakout signal last week. I must say, this is a classic straddle with all the right ingredients. Come into the kitchen, cause the profits smell good! If this stock keeps dropping, we may see a Christmas sale yet on those Maytag Neptune appliances. Whirlpool (WPR) OOPS! Just the opposite here folks. A dead appliance bounce. It did look to move lower with Maytag, but closed up today. One of these two stocks will eventually carry the other. Lets hope Maytag will force traders in WPR to sell. Either way, this is a good hedge against the Maytag straddle. Its not seldom that I see more than one breakout in the same sector. GM and Ford act this way often, and usually we have one good winner and one small loser. Centocor (CNTO) Double Yuck. (for lack of a better phrase) This stock has gone into a day traders dream. Not much volatility, plenty of liquidity but no movement in one direction. We will hold out and see if this is a dead week for the sector, but with a merger in the works, CNTO may just stay where it is. In any case, pick your exits with this one as all of the plays. I use a time stop that is 30 days before expiration of the options. Avery Dennison (AVY) keeps going down as now they are trying to make a presence known in the internet stamp department. Looks to me like Stamps.com is the king here due the name. AVY has as much chance of being number one in this sector as Books a Million does as trying to be the king of online book sales. Sorry AVY, but you dont fool this trader, and even if you did, it doesn't matter cause were hedged. Zion Bancorp (ZION) had their SEC file S4 released lately and they have had a negative reaction to it. The price has finally dropped and starting to breakdown. Yesterdays low of 52 1/4 is now the short term support, and if that were matched in the near term, it would give us 2 3/4 of intrinsic value on the straddle, or about half way to homeplate (a good profit). What could fuel the selloff is for the entire sector to be robbed of stock value. Straddle Mailbag for today I only have one question to answer today. Now don't get upset folks, I have been on a tough schedule and could not answer Email questions for the last few days, but I picked the most important one that I thought everyone could benefit from. Some smart options trader asked me how Dell could retain its options value on the straddle, even 2 weeks later. Where did time decay go, on vacation? Well, kinda -- you see with option volatility on the rise, it negates theta (option decay) due to more demand in the options. With Dell having an earnings report on the horizon, traders are getting itchy to get into options before the report comes due. Now I have no idea where Dell is going, but I do have an idea where the options volatility is going once that report is made known to the public. Options premium will sink fast, and only a big move after earnings will replace it with real value. This gives us something to think about. When to exit a straddle. Ask anyone who know me and they will tell you that I am very trigger happy on exiting trades. I dont have alot of patience with trades that dont go anywhere, and I will dump many before the earnings report is released. Not because I dont think the report will move the stock, but because I am afraid that the volatility will drop faster than the price will move. Just some food for thought. Obviously it takes research to figure out the best exit on each trade. See ya Sunday! Good luck, buy before the rumor, and sell before the news... Tom Gentile ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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