The Option Investor Newsletter Tuesday 11-2-99 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) ************************************************************ 11-2-99 High Low Volume Advances Decline DOW 10581.80 - 66.70 10751.90 10572.70 906,760k 1,651 1,348 Nasdaq 2981.63 + 13.98 3014.84 2971.68 1,244,140k 2,073 1,879 S&P-100 707.82 - 4.39 720.40 706.87 Totals 3,724 3,227 S&P-500 1347.74 - 6.38 1369.44 1346.49 53.5% 46.5% $RUT 432.39 + 0.57 435.34 431.64 $TRAN 2968.08 - 8.42 3005.12 2962.26 VIX 23.94 + 1.71 24.03 21.34 Put/Call Ratio .57 ************************************************************* NASDAQ 3,000 - Easy Come, Easy Go It appears that stocks have finally lost a little of the momentum that pushed the Dow and NASDAQ up so strongly since the marketlow on October 18. Most stocks had a lot of trouble holding on to morning gains and sold off in the afternoon. This morning the Dow rose on comments from Alan Greenspan and much-improved market sentiment for both bonds and stocks. At one point this morning the Dow traded up about 98 points, but as the afternoon progressed a wave of selling forced the major indexes off of their highs, and pushed them to their session lows. It was reported that at least part of the reason for the afternoon sell-off was comments made by a JP Morgan analyst who predicted no less than 3 Fed rate hikes over the next 9 months. If that alone could cause a market decline, some traders must be begging for a reason to sell their stocks and take some profits off of the table. Greenspan's comments are more closely watched, but more ambiguous than any analyst's. This morning the Fed chairman addressed another group of bankers and essentially said that rising real estate prices have contributed to America's collective spending spree more than soaring stock prices. How we translate that into anything useful is anyone's guess. It seems Mr. Greenspan and many of the other Fed governors enjoy having every economist, analyst, and trader hang on every word they say, hoping every small piece of economic data pleases the wise, father figure. I'm sure Freud had some sort of theory to describe that behavior. The Dow ended the trading day down 66.67 points, or .63%, at 10,581.84. With an intra-day range of about 170 points it's fair to say it was another volatile day, although triple-digit moves don't even raise eyebrows any more. Even with its newly realigned index, the Dow underperformed the NASDAQ and S&P 500 for the second day in a row. The following chart show's the Dow's relative underperformance. The NASDAQ set yet another record high today, but, like the Dow, saw the bulk of its gains melt away in the afternoon. After trading as high as 3,014.84 and spending most of the day well above the psychologically important 3,000 level, the NASDAQ settled off its highs and closed up only 13.96, or 0.3%, at 2,976.50. After running so hard it is natural that the NASDAQ would eventually begin to struggle a little while trying to push to new highs. The S&P 500 also had an afternoon sell-off, closing more than 20 points off its highs. It finished at 1,347.74, down 6.38 points, or .47%. Today's volume was very strong again, with about 1.15 billion shares trading hands on the NASDAQ and 878 million on the NYSE. In spite of the negative afternoon, advancing stocks beat decliners 17 to 15 and 16 to 13 on the NASDAQ and NYSE respectively. Chip stocks were again among the best performing in the market today. Shrugging off yesterday's earthquake in Taiwan, many chip stocks rallied to all-time highs. The widely followed SOX index hit a new all-time high today at 571.57, up 2.9%, but off of the day's highs. Chemical and banking stocks also had a good day, as both indexes rose 0.5%. Those were the only mainstream sectors outside technology who put in a good day today. As hard as it is to believe, HMO stocks were probably the strongest in the market today, with the HMO index rising 6.6% today. The index has risen about 20% during the past five trading sessions, which is a strong move, but when you consider that it is still about 30% off of its 52-week high, it still has a long way to go. With such a strong, quick move in HMO stocks, one would think that would be a cue for Hillary Clinton to start clamoring for socialized medicine again. The Internet sector continued to struggle today, as TheStreet.Com Internet index fell 1.2%. Internet stocks have been languishing in the wake of earnings season as investors have been trying to decide if they are still willing to wait indefinitely for good earnings. Several Internet stocks, such as eBay, who merely met but did not exceed expectations, have suffered as a result and the rich premiums many Internet stocks have commanded may be causing some investors to balk. There are indications that traders of Internet stocks are becoming more selective and requiring more of the companies they invest in. The 30-year Treasury bond had another respectable day. The benchmark rose 10/32 and brought the yield down to 6.14%. We have been getting mixed messages about the future direction of interest rates, with some seeing a resumption of the yearlong decline in prices and others pointing to last Monday as a bottom. Nothing fundamental has changed and it appears that a 25 basis point hike is priced into the market. We will probably see the yield trade in a range until something substantial gives us some direction. The following chart shows the yield on the 30-year Treasury, which is currently sitting at a long-term support level. If it is broken it could signal a top in bond yields. Friday's employment reports for October will be another indication of inflationary pressures, and this week's only real piece of potentially market-moving data. Analysts are currently expecting earnings growth to slow a little and the unemployment rate to remain steady with September's data. The overall sentiment for the market has turned more bullish than it was a few weeks ago. That alone should cause us to be a little more cautious. A lot is being made of the NASDAQ reaching the 3,000 level. CNBC is planning a 2 1/2-hour extravaganza show when it has a close above that level. While in the "Information Age" it may not be quite as bearish as it once was when your shoeshine boy gives you a stock tip, it can be dangerous to trade based solely on news. NASDAQ 3,000 has only psychological significance, which can drive the market temporarily, but can also be very fickle. It would not be surprising to see the market a little weaker tomorrow morning, based on today's sloppy close. Even with the big rally in the stock market there are still a lot of good plays for both value and momentum investors. Look for pullbacks to either initiate or add to positions. Good luck and happy trading. Chad Poulson Research Analyst ********** STOCK NEWS ********** Show Me the Money By S.P. Brown "In the long-run we're all dead," so said famed British economist John Maynard Keynes. Some investors in Internet retailer Amazon.com (AMZN) are beginning to wonder if Keynes' simple declarative sentence will eventually hold true for their investment. http://www.OptionInvestor.com/stocknews/110299_1.asp **** Legislation Beams New Competition to Cable Operators By Cindy Christ Congress is ready to dish up legislation that could send satellite TV subscriptions into orbit, CNN reported today. On Monday sources close to negotiations said that congressional lawmakers have reached tentative agreement on a bill that would allow direct satellite television companies to offer local programming. http://www.OptionInvestor.com/stocknews/110299_2.asp **** Shooting for the Stars: IPO Watchers Look For High Flyers By Cindy Christ Tech stocks helped power the Nasdaq Composite Index above 3,000 for the first time today, a scenario which bodes well for a burst of new issues slated for November. More than 70 IPOs are scheduled to debut this month, according to Thomson Financial Securities Data, who reports that the success of recent deals has netted more than $1 billion in issuances for six straight weeks. http://www.OptionInvestor.com/stocknews/110299_3.asp **** A Value Play in Cyberspace By S.P. Brown "Buy on bad news, sell on good" is a cliché as old as the stock market itself. For investors who believe in this old axiom, and who are adventurous, there's an Internet company that may be of interest. http://www.OptionInvestor.com/stocknews/110299_4.asp *************** Market Posture *************** As of Market Close - Tuesday, November 2, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,582 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,348 Neutral 10.29 OEX S&P 100 690 725 708 Neutral 10.28 RUT Russell 2000 440 465 432 BEARISH 9.14 NDX NASD 100 2,320 2,500 2,627 BULLISH 10.28 MSH High Tech 1,120 1,250 1,322 BULLISH 10.28 XCI Hardware 1,000 1,090 1,062 Neutral 10.15 CWX Software 750 800 984 BULLISH 9.03 SOX Semiconductor 450 525 572 BULLISH 10.29 NWX Networking 525 615 639 BULLISH 10.28 INX Internet 450 525 495 Neutral 10.15 BIX Banking 660 690 669 Neutral 10.28 XBD Brokerage 410 440 425 Neutral 10.28 IUX Insurance 645 660 606 BEARISH 7.23 RLX Retail 915 960 884 BEARISH 7.23 DRG Drug 365 390 380 Neutral 10.19 HCX Healthcare 720 785 756 Neutral 10.19 XAL Airline 180 190 147 BEARISH 5.21 OIX Oil & Gas 280 315 289 Neutral 10.21 Posture Alert Profit taking continued Tuesday, even though the Nasdaq broke the 3000 barrier midday. Sectors were mixed across the board, with real strength only in Semiconductors (+2.89%). Losers were lead by the Drug sector (-2.01%), followed by Internet (-1.79%), Oil & Gas (-1.59%), and Networking (-1.39%). As a side note; even with last week's rally; the Dow never broke into Neutral territory, and as such, could be indicating a failed rally for the broad market. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, November 02, 1999 This was Expected! After last week's monster gains, the start of this week has been quite lackluster. This momentary stall should come as no surprise, considering we just ran the equivalent of one mile in 3 minutes, so taking a breather was only due. The initiation of the new Dow stocks (INTC, MSFT, SBC, HD) has been a non-event, as the Dow has given back 150 points to start the week off. One thing that bothers us about current market conditions is that the DJIA failed to break above previous highs set many weeks ago. Granted, it is still early, but this could be the start of a failed rally. We've had leadership in technology, which is expected, but we need confirmation for this latest up-move with participation from the DOW. If we don't get confirmation, we could be back to a trading range market. We had mentioned in Sunday's letter that the Volatility Index (VIX, 22) was at the low end of its 52 week range. Historically, we mentioned that this number was a good exit for selling some positions. So far this week, it has proven again to be a good selling point. It now stands at 23.94. Lastly, the 30-year treasury continues its rally, closing at a yield of 6.136%. This bodes extremely well for the market, and should it hold, may help propel this market into new territory for the new century. However, as quick as everyone is to pull the trigger, we need to make it through this upcoming Fed meeting, so be patient. As a side note, we would like to thank all of the OI subscribers who made it to the San Francisco Money Show. Your intelligent input and positive feedback is greatly appreciated! BULLISH Signs: Bears have quick triggers: After being beaten up for many years, bears are quick to run & hide, and will cover short positions in a flash. Earnings: The results are in, with exception from a few stragglers, and the quarter ended up very solid. Investor Intelligence: As a contrarian indicator, we may have witnessed the bottom in pessimism, and should this prove right, this market has a lot more upside in the months ahead. Interest Rates: The yield on the 30-yr Treasury is now safely off the 52-wk high. Mixed Signs: Volatility Index: The VIX continues to prove that 32-33 is a great buying opportunity, and also shows that the low 20's have been a good exit point. Advance/Decline Line: The A/D line is showing signs of basing out. BEARISH Signs: Miscellaneous Uncertainty: Y2K, inflation, higher interest rates, slowing corporate earnings, earthquakes, U.S. Dollar uncertainty, are all leading to an abundance of uncertainty for professionals and investors alike. OTM Call Analysis As we move closer to the November expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-780 among option speculators. As we have been documenting, excessive out-of- the-money (OTM) call may serve as overhead resistance. November Expiration Cycle OEX OTM Call Analysis (Open Interest November 680-780) Date Open Interest Change % Alert Friday, October 15 39,072 - Friday, October 22 61,250 +56.8% Friday, October 29 75,022 +92.0% 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 Benchmark (10/29) (11/2) Overhead Resistance (720-740) 14.60 9.08 OEX Close 717.03 707.82 Underlying Support (700-715) 0.21 1.46 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Based on 11/2/1999, support is still light, and overhead resistance is heavy. Put/Call Ratio Friday Tues Strike/Contracts (10/29) (11/2) CBOE Total P/C Ratio .69 .57 CBOE Equity P/C Ratio .42 .46 OEX P/C Ratio 1.51 1.33 Peak Open Interest (OEX) Friday Tues Strike/Contracts (10/29) (11/2) Puts 670 / 11,886 670 / 10,895 Calls 690 / 7,626 740 / 8,223 Put/Call Ratio 1.56 1.33 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 5, 1999 Bottom 32.12 October 15, 1999 Bottom? 32.06 November 2, 1999 23.94 Investors Intelligence 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 Oct. 13, 1999 Bottom? 39.2 37.5 Oct. 27, 1999 41.1 38.4 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 10581.84 -81.35 -66.67 -148.02 Nasdaq 2981.63 1.22 13.98 15.20 $OEX 707.82 -4.82 -4.39 -9.21 $SPX 1347.74 -8.81 -6.38 -15.19 $RUT 432.39 3.18 0.57 3.75 $TRAN 2968.08 -82.48 -8.42 -90.90 $VIX 23.94 -0.33 1.71 1.38 Calls Mon Tue Week SEBL 119.56 7.88 1.88 9.75 SEBL continues to reward ORCL 53.00 3.63 1.81 5.44 New, momentum is back ADIC 41.75 7.38 -2.88 4.50 Waiting for a bounce AOL 133.13 4.69 -1.13 3.56 AOL keeps moving on up ADPT 48.06 1.81 1.25 3.06 New, the comeback kid MXIM 81.50 -0.56 3.13 2.56 New, split candidate LVLT 69.88 -0.25 1.75 1.50 LVLT goes a few rounds GMST 88.00 0.25 0.88 1.13 GMST continues to sparkle DELL 41.19 0.63 0.44 1.06 Slow and steady WMT 56.13 -0.06 -0.13 -0.19 Never discount earnings SYMC 47.00 0.13 -0.88 -0.75 A gallant break through CMVT 112.38 -3.88 2.75 -1.13 A break through resistance RATL 41.25 -1.19 -0.31 -1.50 Providing possible entry PCS 81.00 1.75 -3.69 -1.94 A new spin on old news VRTS 104.75 -1.88 -1.25 -3.13 Testing new territory IMNX 59.44 -1.06 -2.50 -3.56 A tough day for Biotechs VSTR 91.69 -3.75 -3.31 -7.06 VSTR-reality takes over EMLX 144.19 -4.94 -6.81 -11.75 Guilty by association Puts BBY 50.88 -4.19 -0.69 -4.88 Future earnings concerns INKT 96.94 -3.63 -0.88 -4.50 Are we back on track? GT 39.25 -2.00 -0.06 -2.06 The smell of burning rubber LTD 39.13 -1.19 -0.69 -1.88 The clouds begin to clear ALD 56.06 0.81 -1.69 -0.88 Sending mixed signals PBI 44.75 1.19 -2.00 -0.81 Risk reward in our favor VISX 65.50 -1.69 4.63 2.94 Blinded by the light? 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 Tuesday 11-2-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. 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: ***** No dropped calls today. PUTS: ***** No dropped puts today. ***************** PICK NEWS - CALLS ***************** LVLT $69.88 +1.75 (+1.50) After a few rounds of profit-taking in the shares of LVLT, the momentum players resurfaced today pushing the shares as high as $72.19. Late in the day after an announcement out of J.P. Morgan that they expect the Fed to raise interest rates three more times, this spooked the overall market and caused the pullback in LVLT. From a technical standpoint, it looks as though the recent profit- taking pullback just filled the gap, between $67-$69. The moneystream and volume still remain strong. This should continue to trigger higher prices, although you should remain cautious in these current market conditions. Continue to look for buying opportunities on any pullbacks to support levels. Current short-term trading support is at the $67.25 level and then again major support at the $64.50 level. In the news this week Juno Online Inc announced a relationship with LVLT. Juno will use LVLT's fiber network. RATL $41.25 -0.31 (-1.50) After two big volume days last week, and with some stocks following through this week to the upside, pushing the Nasdaq above the 3,000 level intra-day, today's closing pullback in most stocks should not come as a big surprise. RATL in particular suffered from some profit-taking after recent 52-week highs at the $43.38 level. The positive technical picture remains in place with the volume and moneystream still bullish. These pullbacks should provide us with some possible entry points at current levels. The stock hit an intra-day low of $40.63, before bouncing back to close at $41.25. We warned in Sunday's write up to confirm the upside trend before entering a position. The street remains positive on the shares going forward. On Monday Hambrecht & Quist analyst Chris Galvin came out with positive comments on the software sector in general and specifically RATL. We remain bullish at this point, and find trading support at the $40.38, and major support at the $39.50 level. CMVT $112.38 +2.75 (-1.13) Here we are again on CMVT. It is flattening out on light volume. We saw this happen last week before CMVT rattled off $8 to the upside. The sellers have been on light volume on any pullbacks thus far. This gives us time to plan an entry point before the next move. The move I am talking about looks like it may have began at 3:00pm EST as the stock took off despite the market declining. There was no news to spur the rally but rather just part of the trend that CMVT has been following for the past 2 weeks. We closed today above resistance at $112 thanks to the final spurt. That puts the next resistance at $115, which is the old high from last week. Support is at $110, followed by support at the 10-dma at $107.50. ADIC $41.75 -2.88 (+4.50) Watch out above! That is what ADIC screamed as it headed out of the gates on Monday. We mentioned on Sunday about the late Friday sell-off that provided us with a great entry point. ADIC opened at $39 and never looked back by hitting $46 at the end of the first hour of trading. From there it was consolidation that pulled it back below $42 for just a moment and slowly trended up for the rest of the day. Tuesday saw a new 52-week high at $47 early before trending down for the rest of the session. We haven't seen any fresh news this week it trade on. From here it is a matter of finding another good entry point for the next move. We have support at $41.50 which held today and then again at $40. The market may be a factor too with the fresh economic numbers due on Thursday and Friday. If ADIC wants to drift lower, we will let it show us a bounce off support before initiating a new play. VRTS $104.75 -1.25 (-3.13) It tested new territory but fell with the markets. Veritas is holding the line at $104 and even took a stab at a new high of $110.63 today. Everything was looking good after VRTS took Monday off to rest. This morning VRTS shot out of the gate but when the NASDAQ topped out at 3014 and sold off, VRTS was taken with it as investors started to lock in profits from a three day run. If you recall on Sunday, we said to watch for a pullback and today it appears to have stated. Should the selling continue VRTS looks to have support at $100 price or 10-dma. EMLX 144.12 -6.81 (-11.75) Guilty by association. Even though EMLX has been a stellar performer, it could not hold up to the market pressure and has sold off for the past two days. Where will it stop you might ask? Support is at $137 and strong support at that. Watch for volume as sellers can tend to over react with market forces. Emulex is still on track for a nice run into their shareholder vote on the 18th but is capable of large price swings in either direction. Volume was slightly below average and the decline today was slow and steady. Balance of power continues to remain peaked and the selling was primarily small amounts of shares indicating the big players are still in for the long haul. When the markets return to strength you can be sure EMLX will be out in front. Watch your positions close over the next couple days and plan for good entry points if the $137 level holds. GMST $88.00 +0.88 (+1.13) Our star continues to shine as GMST traded up to another new 52-week high. GMST picked up the pace early on in trading today, set a fairly solid support at $88 and continued all the way up to a high of $90.41. GMST pulled back with the market in the afternoon and settled in right around $88. Being that this is an earnings run, a new entry is still possible, however it will be imperative to close your positions out by next Wednesday, as GMST is set to announce after the bell. Should the $88 support hold, it would make for a nice entry point tomorrow. If GMST opens down tomorrow, the next support is at $87. The only resistance is the new high of $90.41. Today, it was announced that TV Games Network, a subsidiary of TV Guide, entered into a ten year marketing alliance agreement with EchoStar to convert its C-band customers to its DISH Network. EchoStar has also agreed to broadcast TVG's live horse racing and interactive wagering network. As you know, TV Guide entered into a merger agreement with GMST at the beginning of October. VSTR $91.69 -3.31 (-7.06) We are waiting for VoiceStream to settle back into it's channeling pattern as the takeover rumors die down. VSTR made a solid bounce at $90 in afternoon trading and should this support hold, could make for solid entry tomorrow. VSTR has further support at the 10-dma, currently at $88. VSTR traded all the way up to $102.94 on Monday, a new all time high. We see resistance at $100 though as VSTR demonstrated yesterday, it has no fear of trading above that level. Obviously, you will want to make sure VSTR has finished the takeover rumor pullback and see a return of positive momentum before entering a new play. WMT $56.13 -0.13 (-0.19) Wal-Mart has had a few rather flat days in the market, but we are not ready to discount it just yet. WMT has set and repeatedly tested support at $56. It closed just $0.13 above this level and being that Wal-Mart is on an earnings run, could provide a solid entry point to take advantage of the current earnings run. WMT has further support at its 10-dma of $55. We are nearly $2.50 below resistance, of which WMT should have no problem reaching and possibly breaking through as it enters into the final days of it's earnings run. Be prepared to close out your positions by next Monday, as Wal-Mart is set to announce before the bell on Tuesday. Wal-Mart announced today that they plan to test the new Wal-Mart Neighborhood Market, a full service grocery, in Texas by the end of next year. A panel of various financial gurus gathered at The Money Show in San Francisco this last weekend and discussed the future of the DOW. WMT was named as one of the best places to have your money as the majority of panel participants see the DOW heading toward 13,000. PCS $81.00 -3.69 (-1.94) Did you protect those profits with stop loss orders? Good! Though up yesterday, PCS got bush-whacked today for a $3.69 loss as a result of a news story noting that Comcast Cable was selling its holdings in PCS. Our question is "what took you so long?" This is actually old news re-spun to the negative. All of the founding partners of Sprint PCS have already sold their interest back to Sprint Communications, PCS's parent, in an agreement reached and announced last year. Comcast opted to HOLD part of their position and resell in the open market at a later date. Besides, PCS doesn't play strategically well with Comcast's plans for the future. The point here is have no fear - there is no collapse coming. In fact in the last 10 minutes of trade, volume came in strong, causing the issue to close just shy of its high of the day. For those wanting the numbers, 4.5 mln shares traded after the bell at $81 - can you say "support"? This could be a great buying opportunity so long as the rest of the market cooperates. Historical support is at $80 intraday, $78 at the next level down. Resistance is at $85, so there's room to run. Confirm market direction and keep your stops set just in case the market isn't as cooperative as we'd like. IMNX $59.44 -2.50 (-3.56) Stocks in the biotech and drug sector had a tough day for the most part. The index lost over 3% today mostly on the heels of Gilead Science(GILD). Yesterday a FDA panel nixed a Gilead drug, recommending the FDA not approve the company's antiviral drug adefovir. Adefovir is a drug that would be used in the treatment of HIV patients. With the decline the past two days in the price of IMNX we are waiting for a bounce as an opportunity to buy calls. Sunday we mentioned support for IMNX is in the $59-$60 area and then again at $55-$56. Volume on the pullback at this point has been light, suggesting what we are seeing is probably profit-taking. Remember IMNX was up $9 last week so a pullback of $4-6 would not be out of line and may provide us with a great opportunity to jump in later this week. If investors can't shake off the GILD news and the sector continues to be weak, our chances for a profitable play on IMNX will be diminished. The mood in the broader markets became somewhat uneasy late in the day today with investors becoming skittish again concerning interest rates. Before entering a new play consider the movement in the broader markets as well as IMNX. As always consider your risk profile prior to entering any new play. SEBL $119.56 +1.88 (+9.75) SEBL investors continued to be rewarded this week with an abundant 8.9% gain! The intensity behind this powerful split play has propelled the stock to new 52-week highs for the past four consecutive trading days. Yesterday SEBL advanced a whopping $7.88 and today the stock edged even higher, peaking at $124.38 on double the normal volume levels! After the huge gains be prepared for natural consolidation - this would present opportunities for a variety of lower entry points. Near-term support is firm at $95, but a downdraft below the 10-dma ($101.19) should raise warning signals. SEBL will split 2:1 on Friday, November 12th after the bell. SYMC $47.00 -0.88 (+0.13) Once again SYMC has advanced into new territory. Today it gallantly broke through the $50 mark during an uninterrupted climb from the open. Before the profit-takers came charging in to take some cash off the table SYMC set its latest 52-week high at $50.25. Trading volume was double the ADV (918 K) with over 2 mln shares exchanging hands. Even with the afternoon sell-off, SYMC held firm not dipping below yesterday's daily low. Near-term support may be evolving in the proximity of the 10-dma ($44.36) and any dip to this level would be an excellent entry point into this momentum play. In the news yesterday, Prudential Securities reiterated a Strong Buy rating and issued a 12 to 18-month price target of $60. Remember it's important to confirm SYMC's volume and the general market sentiment before opening any new positions. DELL $41.19 +0.44 (+1.06) Finally, DELL broke through stubborn overhead resistance at $41 and closed smack on its daily high at $41.19! Things are beginning to look up ahead of earnings scheduled for next week on November 11th. For those following this technical play, you know we've been disappointed in DELL's slow recovery however we've kept it on our call list anticipating an earnings run. For the past four days DELL has made small, but steady gains on moderate volume. Technically the stock is now positioned above its 10-dma ($39.71) and this is a good sign. Of course you'll want to confirm the continued upward movement before beginning a play on DELL. AOL $132.88 -1.13 (+3.50) AOL just kept stepping on up this week advancing $4.88 in Monday's moderate trading activity. The momentum on this split play is intact and even today, AOL broke yesterday's daily high hitting $136.50 before pulling back with the markets in the afternoon. Near-term support is firm at $120 just below the climbing 10-dma ($124.13). Keep this technical indicator in mind when planning your strategy. Historically AOL trails above the 10-dma during its run ups and always suffers a downdraft after it slips below this mark; therefore it can be used as a gauge for entry/exit points. AOL will split 2:1 on November 22nd so that gives traders a couple weeks of profit opportunities. **************** PICK NEWS - PUTS **************** PBI $44.75 -2.00 (-0.81) The current market conditions have remained somewhat subdued. Shares of PBI have bounced off of the 52-week low $42.50, after positive news last week concerning an internet infrastructure that is in development for the company. We had discussed the oversold bounce in the Sunday report, a bounce that actually went through our resistance point intraday on Monday, which looks to be strictly a movement of momentum, but weak volume and moneystream. The stock quickly retreated off of the highs and continued the downtrend, after the momentum dried up. There was no follow through and the shares should remain bearish until the volume and moneystream returns. Going forward the price surges were not accompanied by strong volume, so we remain bearish and look for lower prices. Our new target for resistance is $47.38 and support is $43. BBY $50.88 -0.69 (-4.88) After a bounce from the recent sell-off, today stocks turned mixed late in the day on Tuesday as investors took profits once again when the Dow reach that short-term resistance level around 10,750. BBY is still being hit because of the questions that are still in place concerning BBY's future earnings. We started the week looking for the shares to remain bearish below the $58.13 level and so far this week the shares have not disappointed us. The volume picked up to the downside, as the downtrend re-established itself. The stock traded as low as $50.19 today, before closing the day at $50.88. In current market conditions we expect the selling pressure to continue. The overall retail sector remains weak although it was reported today that strong spending patterns for consumers are not at risk. With profits being made so far this week in current market conditions, keep stops tight to protect gains. A bounce off of the $54.25 level looks good for a possible trading entry point if there is an oversold bounce. Confirm the downtrend followed by nice volume before entering a new trade. LTD $39.13 -0.69 (-1.88) Apparently, the clouds of good tidings have begun to clear as LTD has once again settled back into its downward trend. Monday, LTD lost $1.19, closing just pennies above the low for the day. LTD also violated its 10-dma on Monday and continues to trade below it by $0.75. LTD did make two small bounces at $39 and therefore, you will want to see a breakthrough of this level to confirm continuing negative momentum before entering a new play. Should LTD drop below $39, it looks to possibly fall down to $36, the next formidable support. Earnings are set to be announced on Tuesday, November 16th so we will want to keep our stops close in case of an earnings rally. As we mentioned in Sunday's write-up, we don't see anything specifically tied to The Limited to keep it moving up. As economic fears continue to plague the market, we expect to see continuing weakness in much of the retail sector. Also retail sales for the month of October will be released on Thursday. GT $39.25 -0.06 (-2.06) Sniff. Sniff. Ahhhhhh...there's nothing quite like the smell of burning rubber to get your attention, as we all watch Goodyear go up in smoke. Poor earnings and a delisting from the DJIA have caused the price to drop as index funds rebalance their portfolios, which means they must now sell GT. Even the "Dogs of the Dow" funds (a theory that has fund managers picking the highest yielding DOW-30 stocks for the best appreciation potential in the coming 12 month period) have to sell it, thus driving the price lower yet. Though it closed at its low of the day (a good negative technical sign), volume has been decreasing, indicating that the selling momentum may be losing speed, or perhaps it's just a slow market in comparison to the last 4 days of trading. Anyway, there appears to be some support at $39, so tighten up your stops to protect any profits and wait for a clear descent under $39 with volume, or a bounce south of $41 (if GT should happen to spike up with the market) before taking anew position. Be prepared to exit if GT gets any traction. VISX $65.50 +4.53 (+2.94) Blinded by the light? While we can find no news on this laser vision equipment manufacturer, volume remains high. However, it tapered off from the extreme level of 5.6 mln shares yesterday (ADV = 1.8 mln). There is a good chance that some of today's gain resulted from short traders attempting to cover. Aside from yesterday's descent to the basement ($57), support can be found in the $62-$64 range. We want to be a bit careful here. This is still a volatile play, which has climbed straight up from yesterday morning, not giving us much an entry point. The fact is that in a show of strength, VISX held steady today as the rest of the market fell. Technically, we could make a case for VISX going either direction. It could continue to move up from this support to test the low $70's, or it could roll over should the market succumb to more profit taking. Confirm the direction before making a play. ALD $56.06 -1.69 (-0.88) Monday ALD made an attempt to move higher right out of the gate. It did manage to hit $57.88 before traders got tired of playing. ALD traded in an extremely narrow $0.50 range for the balance of the session. Many times this kind of trading is a good indication that a trending stock is about ready to explode or fall apart as the volume was a bit better than the ADV at 1.95 mln shares. Traders came back to work ready to send shares ALD lower. As far as our put play is concerned, we aren't out of the woods yet but at this point things are beginning to shape up. Depending on your risk profile ALD gave us a good opportunity to ease our way into a play late this afternoon. Again after trading in a $0.38 range until 2 pm ET shares of ALD started to rollover. Check out an intraday chart for ALD and it looks pretty weak at this point. The 10-dma at $55.35 could provide support for ALD. If you entered today keep your stops close because as we said we are not out of the woods yet. If the interest rate concerns that came up late in the session today carry over into tomorrow then we could be off to the races with our put play. In the news ALD did announce yesterday it would acquire Tristar Aerospace Corp, a fasteners provider for the aerospace industry for about $291 million in cash and debt. In considering a new play, we would still like to see ALD break the $55.75 mark with conviction before jumping in with both feet. INKT $96.94 -0.88 (-4.50) With the action the past two days, we may be back on track with our put play in INKT. Again we say "may be back on track". INKT gave us a good entry point Monday morning just after the first hour of trading. Yes we're $4.50 lower than at the close of business Friday, which is certainly what we like to see for our play. However the combined volume in the last two days is about equal to one average day, which basically means the downturn could dry up at any minute. Fundamentally things don't look all that hot for the Web services provider either. Investors are starting to question whether INKT can hold its share of business in the market place. As for entering a new play in INKT watch the $95.50 and $93.81 areas as we need to see INKT be able to trade below those levels to keep it as a viable play. The psychology in the broader markets turned somewhat sour late in the day today and if it continues in the morning INKT could head lower, however as always assess your risk profile before entering or adding to a position. ************** NEW CALL PLAYS ************** ADPT - Adaptec Inc. $48.06 +1.25 (+3.06 this week) Adaptec, Inc is a market leader with host I/O, RAID, and CD recording software products that transfer, manage, and protect data. Adaptec empowers customers with high performance, reliable access to data stored on Internet, database, ERP, and other Windows NT servers. Adaptec also makes host adapter cards that plug into powerful computers and speed the transfer of data to and from devices like disk drives, scanners and CD-ROM drives. It's also the No. 1 maker of software for recordable compact-disc drives. Adaptec is an S&P 500 and Nasdaq 100 company. ADPT is your classic case of a stock out of favor on the Street a year ago and came through on the promises that were made. Adaptec fired 975 employees, sold unprofitable businesses, and replaced three top executives in the last 18 months. They also focused on improving there products, which has resulted in sales increasing. The recent second quarter earnings report exceeded all expectations, which caused analyst to up there ratings and increase there future earnings targets. From a technical standpoint we like the price surges that are supported by positive moneystream. The only question at this point is the volume, it is not as strong as we would like it to be, but the pattern is starting to converge. With the shares today hitting a 52-week high at $48.75, before pulling back in an overall market sell-off to close the day at $48.06, the average volume is understandable. In current market conditions any pullbacks to support levels would provide us a possible buying opportunity. Current support is at $45.75 and then again at $44.38. The stock is volatile, but the momentum is to the upside. After the first hour of trading the trend should be confirmed. Look for the higher highs when the volume joins the current party. Bear Stearns on Tuesday raised there price target for ADPT to $55 from $45. They feel that ADPT is now taking a more proactive stance on the high-growth fibre channel market. This upgrade and comments came on the back of the company's plans to buy privately held Distributed Processing Technology for $235 mln in a deal that would strengthen Adaptec's efforts to provide hardware and software for backing up computer storage systems. BUY CALL NOV-45*APQ-KI OI=319 at $4.00 SL=2.50 BUY CALL NOV-50 APQ-KJ OI= 40 at $1.38 SL=0.88 low OI BUY CALL DEC-45 APQ-LI OI=115 at $4.88 SL=3.38 BUY CALL DEC-50 APQ-LJ OI= 10 at $2.75 SL=1.63 low OI Picked on Nov 2nd at $48.06 P/E = 31 Change since picked +0.00 52-week high=$48.75 Analyst Ratings 2-3-2-0-0 52-week low =$15.50 Last earnings 10/21 est= 0.41 actual= 0.45 Next earnings 01-24 est= 0.47 versus= 0.24 Average daily volume = 2.14 mln Chart = http://quote.yahoo.com/q?s=ADPT&d=3m NEW PLAYS CONTINUED IN SECTION THREE ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 11-2-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ******************* NEW PLAYS CONTINUED FROM SECTION TWO ******************* MXIM - Maxim Integrated Products $81.50 +3.13 (+2.56 this week) Maxim Integrated Products designs, develops, and manufactures linear and mixed-signal integrated circuits. These circuits detect, measure, amplify and convert "real world" signals, such as temperature, pressure or sound into digital signals necessary for computer processing. They make over 1,500 kinds of linear and mixed-signal integrated circuits. The company owns manufacturing facilities in the U.S. and the Philippines. About one-fourth of their sales come from overseas. MXIM's primary competition comes from Analog Devices, Linear Tech and National Semiconductor. Our interest in MXIM is three fold. Number one we think its a great stock right now as its in an sector that has new found strength. For most of the summer MXIM had been stuck in a trading range between $60 and $75, and has held up very well during the recent declines in the semiconductor industry. Friday we saw MXIM break through the top of its four month trading range. MXIM took out the $75 mark that had provided some tough resistance with a very solid move, on strong volume. This which would indicate the company's stock has more room to go on the upside. Our other interest in MXIM is for a potential stock split. The annual shareholders meeting is scheduled for 11/18/99, and the board of Directors has requested a vote to increase the authorized shares from 240M to 480M. With this kind of news and a chart that looks like this one we believe there is a great potential for profits. In looking for an entry point keep in mind MXIM was trading just under $70 last Thursday and closed at $81.50 today. We could see somewhat of a pullback near the $77-$78 levels. $75 should provide solid support if MXIM were to pullback that far. If MXIM continues its climb to new highs we would view that as an opportunity to buy calls as well. As always assess your risk profile prior to entering a new play. No other news at this time. BUY CALL NOV-75*XIQ-KO OI=1052 at $8.63 SL=$6.50 BUY CALL NOV-80 XIQ-KP OI= 318 at $5.13 SL=$3.25 BUY CALL DEC-80 XIQ-LP OI= 391 at $7.75 SL=$5.75 BUY CALL DEC-85 XIQ-LQ OI=1007 at $5.00 SL=$3.25 Picked on Nov 2nd at $81.50 P/E = 59 Change since picked +0.00 52-week high=$82.25 Analysts Ratings 7-5-1-0-0 52-week low =$34.50 Last earnings 09/99 est= 0.35 actual= 0.37 surprise +5.70% Next earnings 01-27 est= 0.40 versus= 0.31 Average daily volume = 1.49 mln Chart = http://quote.yahoo.com/q?s=MXIM&d=3m **** ORCL - Oracle Corporation $53.00 +1.81 (+5.44 this wk) Oracle is world's largest producer, seller, and supporter of database management systems. If you need the ability to simultaneously access the same data for different applications all at the same time from mainframes to wireless handsets, Oracle has your software. Oracle's most eligible billionaire bachelor and CEO, Larry Ellison has developed the latest versions to support Internet appliances and PC's using Web-based programs. Despite spending millions on toys, including the coolest airplanes, boats, automobiles, and the authentic replication of a Japanese mansion in which he lives, he still owns about 24% of the company. The news is the story here. With other big software firms holding steady (a.k.a. Microsoft), but not producing stellar gains in this market, ORCL is moving rapidly up the charts, thanks in part to CEO, Larry Ellison keeping his promise to shareholders that this quarter will be better than the last. Yesterday, following a meeting with ORCL's CFO, Merrill Lynch's analyst left the meeting "with a reaffirmed confidence that Oracle is very well positioned for 2000, especially with a new applications product cycle and an increasing shift of data-base sales to e-commerce drivers". He upped his price target to $60, indicating Y2K is not an issue for the current quarter and that pipeline growth would be "explosive", as relayed by ORCL's CEO. ORCL noted in their meeting that database growth of 20% is sustainable. Technically, ORCL set new highs yesterday and today on strong volume. The chart looks great, but has spiked slightly high for our liking. We'd encourage you to target shoot at numbers commensurate with your risk profile. Support is back at $48, but you won't likely be filled there if volume remains high. Conversely, note that over 3 mln shares were sold at the bid price of $53 after the bell. We won't know for sure if $53 will act as support from here on out, or if it will become resistance acting as a catalyst for others to throw in the towel on the coattails of that 3 mln. share sale at the bid. Confirm direction before playing. The buzz is better than the technicals right now, which should keep the volume moving. In the news, following Merrill's kind words, Volpe Brown upped their target to $60 as well noting that leading Internet companies are ramping up their infrastructure in which ORCL will be the beneficiary. Also, ORCL is expected to announce an e- commerce venture with Ford. It has already announced deals with Veritas and Siemens. BUY CALL NOV-45 ORQ-KI OI=9171 at $8.38 SL=6.25 BUY CALL NOV-50*ORQ-KJ OI=9953 at $4.00 SL=2.50 BUY CALL NOV-55 ORQ-KK OI=2890 at $1.56 SL=0.75 BUY CALL DEC-50 ORQ-LJ OI=7329 at $6.00 SL=4.25 BUY CALL DEC-55 ORQ-LK OI=3776 at $3.50 SL=1.75 Picked on Nov 2nd at $53.00 P/E = 57 Change since picked +0.00 52-week high=$53.88 Analysts Ratings 11-15-6-0-0 52-week low =$19.69 Last earnings 09/99 est= 0.16 actual= 0.16 Next earnings 12-10 est= 0.22 versus= 0.19 Average Daily Volume = 11.9M Chart = http://quote.yahoo.com/q?s=ORCL&d=3m ************* NEW PUT PLAYS ************* No new puts today. ********************** PLAY OF THE DAY - CALL ********************** CMVT - Comverse Technology $112.38 +2.75 (-1.12 this week) Comverse makes enhanced telecommunications systems and is the 3rd largest firm in the voice mail market. Its TRILOGUE Infinity and Access NP product lines supply voice and fax messaging, automated personal assistant, and call answering services. TRILOGUE is marketed to telecom network operators and gives multiple telephone users access to integrated digital information and messaging services. Comverse's AUDIODISK and ULTRA lines are communications monitoring systems used by police and surveillance agencies, correctional institutions, emergency 911 services, financial institutions and tele-marketers. Sunday's Write Up Now that's more like it! You may recall from Thursday's write up that we were biting our nails a little over the fact that CMVT didn't participate much on Thursday. Well it must be a late bloomer because on Friday we got a decent rally. The stock rose 4.84% and finished up $8.69 on the week. The bonus is that the stock really came alive late in the day on Friday and hit a new 52-week high of $114.44. This may carry over into next week. The big announcement for the week was about CMVT's addition into the S&P 500 which took place on Tuesday and would thus explain the monster volume that day. We are also looking forward to earnings at the end of the month. We think CMVT may also announce a stock split. Besides these catalysts, we saw no fresh news to report for the second half of the week. Technically, we are looking strong as CMVT is setting higher highs and higher lows. At this point it is just a guess to how high CMVT may take us but we can define the support. $108 looks solid followed by the 10-dma at $104 but confirm the bounce first. We reported last Sunday that First Albany analyst Herbert Tinger had raised his price target from $93 to $105. Great call, Herbert! Now if he could just set a target maybe a touch higher so that CMVT doesn't knock it out a week later. I guess if you pick your points so close, you are less likely to be wrong. At an all-time high, we aren't going to guess at how high the momentum might go. Let's just go with the flow and see what unfolds. Tuesday's Write Up Here we are again on CMVT. It is flattening out on light volume. We saw this happen last week before CMVT rattled off $8 to the upside. The sellers have been on light volume on any pullbacks thus far. This gives us time to plan an entry point before the next move. The move I am talking about looks like it may have began at 3:00pm EST as the stock took off despite the market declining. There was no news to spur the rally but rather just part of the trend that CMVT has been following for the past 2 weeks. We closed today above resistance at $112 thanks to the final spurt. That puts the next resistance at $115, which is the old high from last week. Support is at $110, followed by support at the 10-dma at $107.50. BUY CALL NOV-100 CQV-KT OI= 446 at $13.25 SL=10.50 BUY CALL NOV-105 CQV-KA OI=1010 at $ 9.13 SL= 6.75 BUY CALL NOV-110*CQV-KB OI= 546 at $ 5.75 SL= 3.75 BUY CALL DEC-100 CQV-LT OI= 65 at $15.75 SL=12.00 Picked on Oct 21st at $102.13 P/E = 61 Change since picked +11.38 52-week high=$115.00 Analysts Ratings 8-3-0-0-0 52-week low =$ 24.50 Last earnings 08/99 est= 0.49 actual= 0.52 Next earnings 11/30 est= 0.53 versus= 0.41 Average Daily Volume = 1.2 mln Chart = http://quote.yahoo.com/q?s=CMVT&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Technology Issues Reach Record Levels.. Friday, October 28 Stocks rocketed Friday, with the technology sector climbing to record territory following a drop in interest rates. The Dow ended up 107 points at 10,729 while the Nasdaq composite was up an incredible 91 points at 2,966. The S&P 500 index finished 20 points higher at 1,362. In the broader market, advancing issues swamped declines 2,165 to 971 with volume over a billion shares on the NYSE. The benchmark 30-year Treasury bond soared 1-5/32, cutting the yield to 6.17%, the lowest since early October. Portfolio plays: For the week, stocks finished higher after the latest economic numbers reflected a favorable economy with low inflation. The Employment Cost Index rose less than 0.8% in the third quarter after a steep increase in the previous quarter while the gross domestic product rose at the fastest pace this year. Among the other reports, the Commerce Department said the number of new single family homes sold last month dropped to the lowest pace since December 1997. The market was also relieved that Federal Reserve Chairman Alan Greenspan avoided controversial comments in what analysts viewed as a balanced speech on Thursday night. Some experts now believe that U.S. industrial productivity can sustain higher growth rates without triggering an increase in inflation. Today's rally affected the majority of the plays in our Combos portfolio but technology issues and smaller stocks led the way. The best performer of the day was JDS Uniphase (JDSU), up $14 to $166, a $36 gain since the bullish position was initiated two weeks ago. Broadcom (BRCM) was runner-up, climbing $9 to a recent high near $127 in the semiconductor rally. Our current combination position (a credit-spread strangle) can be closed for a favorable profit. Those who trade aggressively may also consider using the new rally to profit on the bullish side of the spread, closing the short position in the short-term and hoping for a continued upward movement on the break-out. Many of our spreads are candidates for early exit. Issues that have performed very well include CMG Inc. (CMGI) and Gemstar (GMST). Both of these plays are trading near maximum profit and should be closed to protect gains. In the group of small-cap stocks, Apollo Group (APOL), Allied Waste (AW), Aware Inc. (AWRE), IDT Corp. (IDTC), Network Associates (NETA), 3dfx (TDFX), and 3Com Corp. (COMS) all made favorable moves. The long-term portfolio benefited from the bullish activity and Sun Microsystems (SUNW) was the leader in that section. As we said last week, our diagonal position was in need of an upside adjustment and Friday's market provided a perfect opportunity. Our new spread is LJAN75C/DEC90C at $16.25 debit. Other stocks in the LEAPS/CC's category are starting to recover from recent losses. Cabletron Systems (CS), Computer Associates (CA), The Limited (LTD), and Solectron (SLR) were among the rebounding issues. We also have two recently bullish issues that may need to be rolled-up and forward, due to downside adjustments during last month's slump. Those of you the participating in the plays on Motorola (MOT) and General Motors (GM) should be pleased the stocks have successfully rebounded, bringing those positions to profitable territory. In the tracking portfolio, we will adjust these spreads back to neutral positions as the stocks approach the (current) sold strikes. Motorola (MOT) is the most bullish and today's gap-up (at the open) through recent resistance may be signaling the beginning a new trading range. The transition to a $100 strike was the first step in maintaining a favorable position in this issue. General Motors (GM) has also moved into an old trading range near $70 and the character change prompted another other upward adjustment in the long-term portfolio. Our new spreads both have DEC-$70 calls as the sold (short) option. There were some disappointing issues in today's market. Global Crossing (GBLX) fell $2.38 on news that it is in the process of completing a billion dollar aggregate liquidation of cumulative convertible preferred stock. The CPS will be convertible into common stock of GBLX at $45 per share and is expected to issue on November 5, 1999. Global Telesystems (GTS) fell $1.56 to the middle of a recent range near $23, but the issue appears to be holding above its short-term (bullish) moving average. Twinlab (TWLB) and Proxymed (PILL) have not performed as expected, with both issues falling through near-term support and testing the bottom of their respective ranges. Electronic Data Systems (EDS) jumped $3 at the open after posting third-quarter earnings of $0.51 a share, beating the 18-analyst estimate of $0.49 a share. The trend reversal started in the middle of the week and today's move to the old trading range was on heavy volume and increased institutional buying. The closing prices for the short position (OCT-$60 Call) opened significantly higher on the new volatility but faded with the stock later in the day. Those of you choosing a credit spread roll-out should have achieved a debit near $1.62 for the short option (OCT-$60 call). An exit target of $0.50 for the long option (OCT-$65 Call) would close the position with a small loss (almost break-even). There is a fair chance that the stock will fill the gap and offer a profitable exit before the expiration date. Monday, November 1 A new week and a new look for the Dow produced mixed results as traders sold blue-chips for profit and bought technology issues to a new record. The Dow closed down 81 points at 10,648 on the first day of trading with its new technology issues. The Nasdaq composite finished relatively unchanged after rallying early in the day to a high of 2,997. The S&P 500 index was down 8 points at 1,354. In the broader market, advancing issues led declines 1,535 to 1,522 on the New York Stock Exchange, with 838 million shares traded. The 30-year Treasury bond was down 7/32, pushing its yield up to 6.18%. Portfolio plays: Today's economic report came from the National Association of Purchasing Management. The NAPM provides a measure of business conditions in the manufacturing sector and their index fell to 56.6 in October from 57.8 in September. Economists had expected a reading of only 56.4 but investors reacted modestly after the report showed that price pressure in manufacturing was slightly higher than anticipated. Recent favorable data on inflation and comments from Fed Chairman Greenspan have placated analysts but there are still concerns of another rate hike at the November 16 meeting of the Federal Reserve's policy-setting committee. News of another earthquake in Taiwan (where a majority of chips are made) started a panic in technology stocks but the affected issues recovered most of their losses after a lack of damage was reported. Luckily, none of our major positions were affected and lower-priced technology and telecom issues continued to lead the way. Global Telesystems (GTS) recovered over $1 of Friday's loss to finish near the middle of a symmetrical pattern forming near $25 and for the now the trend appears slightly bullish. E*trade Group (EGRP) gained $2 to close just short of $26 after a recent slump to support near $22. Our April diagonal spread is near the break-even range but we expect the stock price to move higher in the coming months. Pixar Animation (PIXR) recovered nicely with a $2 gain to $40.12 on a perfect technical bounce from a 60-day price support line. The strong buying interest at $37 suggests it should easily remain above our cost basis for the next month. In the calendar spreads section, 3dfx (TDFX) continues to rally over the short-term, up almost $1.50 since our pick a week ago. The long-term bullish issue is approaching our ATM position and should be monitored for further upside potential. Talk.com (TALK) is consolidating near $15 and with the shrinking volatility, our recent calendar spread is now trading at a $0.25 profit (in just one week). Other stocks in this section that continue to exceed expectations are Bell Atlantic (BEL), LG&E Energy (LGE), Zoltek (ZOLT), Occidental Petroleum (OXY), and Peoplesoft (PSFT). Our debit spreads portfolio is performing very well and many of this month's positions have already been closed for favorable profits. There are a few plays that have yet to produce positive returns including IDT Corp. (IDTC), MessageMedia (MESG), Network Associates (NETA) and Twinlabs (TWLB). All of these issues are long-term and have plenty of time to make favorable recoveries. Motorola (MOT) led the way in our LEAPS's/CC"s portfolio, up $5 to a recent high near $102. This rally is exactly what we hoped would follow the technical change of character on Friday. Those of you in the static position at $105 should be well ahead and our adjusted position at the $100 strike will be profitable if the stock remains in a small range near the new price. Cabletron (CS) has also recovered nicely over the past few days, moving up to its old range near $17. You may want to use the current rally to roll-out into (ATM) December options for downside protection. Our straddles section is going to be included in the regular part of the narrative until we have something major to report on any of the neutral positions. Internet issues continue to lead that section and American Online (AOL) is currently the best performer. Our new AOL straddle traded as high as $22.00 credit (a $4 profit) during the session. Optionetics positions (from Tom Gentile) have done very well in recent weeks and the newest standout is Go2Net (GNET). The Internet community builder skied to new highs on good earnings last week and produced a $5 profit in just five days. If you want to learn how to find those issues on a consistent basis, consider attending one of Tom's (Optionetics) seminars next year. Tuesday, November 2 Blue-chip stocks closed lower Tuesday as investors followed the Nasdaq rally through the 3,000 barrier. The index of technology stocks was up 13 points at 2,981 after a midday rally to a new high at 3014. The Dow Jones industrial average slipped 66 points to 10,581 after climbing more than 100 points. The S&P 500 index was down 6 points at 1,347. In the broader market, advancers led declines 1,652 to 1,350 with more than 903 million shares traded on the NYSE. The 30-year U.S. Treasury bond was up 17/32 with the yield slipping to 6.15%, well below its recent highs. Portfolio plays: Technology issues continue to lead the market, even in the wake of today's profit-taking, and many of the stocks in our portfolio moved higher. Global Telesystems (GTS) broke-out through a recent resistance area to close at the upper end of its trading range at $26.62. This calendar spread has performed better than expected (directionally) but the time frame was too short and we may need to exit the short option early to maintain a profitable position. In any case, our risk is low (initial debit was $0.62) while the probability of profit is very high. 3dfx (TDFX) is another issue that appears to be breaking-out to the upside and we will treat that position in the same manner. This bullish calendar spread also has a very low (initial) cost with a large margin for error in future adjustments. Data Broadcasting (DBCC) has successfully tested a short-term bottom near $10 and this issue is ready to continue higher. Our December diagonal spread will need slightly more upside movement to become profitable. Message Media (MESG) was also a big gainer today, up $1.12 and above our sold strike at $12.50. We suspect this bullish diagonal position will offer another (profitable) early exit in the coming weeks. Electronic Data Systems (EDS) came back to earth today, offering a second exit opportunity for those of you closing the bearish credit spread early. The stock price finished near session lows at $58.50 and the spread (closing) debit was at $1.18 at the end of the day. It appears this stock still has a bullish outlook in the short-term but that opening gap from last Friday's session has a unique gravitational effect. Broadcom (BRCM) has surprised even the most bullish analysts, climbing another $7 to a midday high near $145. The bullish portion of the neutral position is now ITM but we expect the issue to consolidate soon. We hope that most of you took the early profits or used the recent change in character to extend gains in the bear-call portion of the play. Apollo Group (APOL) also made an unexpected move today, falling $2.38 to a recent low near $23. The position previously traded in the profitable zone and we had planned to let it expire ITM (for maximum return). Now well will have to manage the play to protect against any potential losses. There is certainly more to discuss in the LEAPS/CC's & Straddles portfolios but for now, most of those positions are doing fairly well. Unfortunately, we must move on to the "new play" research and revisit those sections at a future date. On another subject, I want to personally thank those of you that attended the OIN's welcome banquet at the San Francisco Money Show. It was a great event and a wonderful way to meet our subscribers and share new strategies and trading ideas. We look forward to meeting you at the next show at Lake Buena Vista in Walt Disney World, January 26-28, 2000. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* Today's positions are based on a request I received at the Money Show for bullish, limited risk plays that combine the advantages of in-the-money debit spreads and calendar (horizontal) positions. CSCO - Cisco Systems $73.50 *** Techs Are Leading The Way! *** Cisco Systems develops, manufactures, markets and supports high performance, multiprotocol internetworking systems that link geographically dispersed local-area and wide-area networks to form a single, seamless information infrastructure. Products include a wide range of routers, local-area networks and Asynchronous Transfer Mode switches, dial-up access servers, and network management software solutions. October was a month of consolidation for the market (and for CSCO) but institutions held fast to their positive outlook for the company. Each time the stock hit short-term lows, another brokerage would offer an upgrade or "buy" rating. Look at this list of recommendations in the last three weeks: 10/15/99 Morgan Stanley Dean Witter reiterates strong buy, optimistic about near term business trends, expect new acquisitions in next couple of months 10/25/99 First Boston reiterates strong buy, target $75 - $80, use weakness as buying opportunity. 10/25/99 Morgan Stanley Dean Witter reiterates strong buy 10/25/99 Prudential reiterates strong buy, SBI and select list, target $80, fundamentals strong. Technology continues to lead the market and this issue is fairly bullish with a recent close at an all-time-high. The short-term indicators reflect a positive outlook for this widely known stock and support from institutional buyers appears to be at $65. That should offer a favorable range for the issue in the event of any near-term correction. PLAY (conservative - bullish/diagonal spread): BUY CALL DEC-65 CYQ-LM OI=1049 A=$10.12 SELL CALL NOV-75 CYQ-KO OI=29770 B=$1.75 INITIAL NET DEBIT TARGET=$8.25 ROI(upside max)=21% Chart = http://quote.yahoo.com/q?s=CSCO&d=3m **** PGEX - Pacific Gateway $24.38 *** Solid Earnings *** Pacific Gateway is an international telecommunications carrier, which provides international telecommunications services to its target customers; long distance service providers worldwide as well as retail buyers. As a "facilities-based" carrier, they own or leases an international network facilities including: digital undersea fiber optic cable, international switching facilities and operating agreements with foreign carriers. The earnings run for PGEX started in late September and today they reported favorable revenue and sales for the third quarter of 1999. Strong revenue growth was at the core of the report, up 22% over last quarter to $170 million. Gross profits were up 39% from last quarter to $25 million and achievements in the retail segment were huge with 85% growth. Earnings were $3.5 million or $0.18 per share, compared to $2.6 million or $0.13 per share for the previous quarter. So the announcement was favorable (and well managed) and the future looks bright with significant growth expected in their voice business along with an expanding portfolio of services that includes bandwidth and data offerings. The company also signed a new letter of commitment for $100 million in credit with Deutsche Bank Securities and Bank of America to fund the expansion. We rarely open new positions after earnings but this issue is favorable in the short-term and the chart is very strong. We will try to initiate the conservative spread at a slightly lower price (than quoted) but if the stock moves higher, the aggressive play may be our only alternative. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN-15.00 QAE-AC OI=1111 A=$10.00 SELL CALL NOV-22.50 QAE-KX OI=373 B=$2.88 INITIAL NET TARGET=$6.88 ROI(upside max)=12% PLAY (aggressive - bullish/diagonal spread): BUY CALL JAN-15.00 QAE-AC OI=1111 A=$10.00 SELL CALL NOV-25.00 QAE-KE OI=1383 B=$1.56 INITIAL NET DEBIT TARGET=$8.31 ROI(upside max)=20% Chart = http://quote.yahoo.com/q?s=PGEX&d=3m **** CYOE - Coyote Network $6.38 *** Cheap Speculation *** Coyote Network is engaged in the sale of telecommunications equipment, international long distance services and network services, primarily to entrepreneurial carriers, competitive local exchange carriers and Internet service providers. We found this play while searching for covered-calls but it may now be played as a spread. Implied volatility remains high and volume is heavy as more traders speculate on this issue with call options. Merger rumors have driven this stock in the past and the current technicals are very bullish. The issue has moved quickly above the July-August lows on heavy volume and appears ready to challenge the September high. The disparity in front month option pricing offers a great opportunity to speculate. PLAY (conservative - bullish/diagonal spread): BUY CALL DEC-5.00 QTO-LA OI=0 A=$2.12 SELL CALL NOV-7.50 QTO-KU OI=429 B=$0.50 INITIAL NET TARGET=$1.50 ROI(upside max)=66% Chart = http://quote.yahoo.com/q?s=CYOE&d=3m ************ See Disclaimer in section one ************
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