The Option Investor Newsletter Tuesday 2-1-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 2-01-2000 High Low Volume Advance Decline DOW 11041.00 + 100.50 11073.30 10908.00 981,000k 1,680 1,318 Nasdaq 4051.98 + 111.63 4053.16 3911.84 1,409,362k 2,326 1,824 S&P-100 769.09 + 12.63 769.09 751.38 Totals 4,006 3,142 S&P-500 1412.49 + 14.82 1412.49 1384.79 56.0% 44.0% $RUT 503.75 + 7.52 503.75 492.65 $TRAN 2576.63 + 4.98 2578.38 2553.97 VIX 26.90 + 0.70 26.90 23.97 Put/Call Ratio .45 ************************************************************* Is the fourth time the charm? On December 31st the Nasdaq closed at 4065. Since then the Nasdaq has been up to 4192 then crashed to 3711 (-481 points). It then rebounded to 4072 (+361) then crashed to 3834 (-238 points). Another rally took it to 4303 (+469) then a correction of -555 points took us back to 3748. Dizzy yet? In two days this week we have now rebounded +303 points to the close today. The volatility swings on the Nasdaq for the 21 trading days of 2000 have been enormous. -481, +361, -238, +469, -555, +230! All but one of these swings have been more than the total point spread from high to low for the entire month of February in 1999. From the Feb-1st high of 2532 to the Feb-18th low of 2224 there was only a -308 point drop. Average daily volume last February was less than half of the average volume for January of 1.6 bln shares. This is not your fathers market! As active traders today we are learning to survive and prosper in the most prosperous period in history and what a market! The Dow managed back to back triple digit days and the best two day gain since Jan-7th. After teetering on the edge of the correction cliff the Dow squeaked out a close back over 11000 support again. The new market strength is based on the analysis of cooler heads after last Friday's stronger than expected economic numbers. The worry that the Fed would raise more than the traditional +.25% increase has eased since there is no rate noise coming from any of the Fed heads. The Fed has been very good about telegraphing rate hikes in advance and this pre-meeting has actually been fairly quiet. Greenspan watchers almost all agree that he will only raise in small increments. There is more ink and airtime devoted to analysis of this event than almost anything else in the financial sector. By the time we get to this point the actual announcement is anticlimactic. We often get a post announce spike and then a pullback as the "buy the rumor, sell the news" becomes the trading rule. Still the nice rally we had so far this week has taken some of the sting out of the correction. After a triple digit Tuesday for both the Dow and the Nasdaq should we expect a continued rally if the Fed only raises by +.25%? Ahh! The million dollar question. NYSE stocks have been beaten down for so long that they could rally on the news but nobody cares. Techs are it and the Dow this year will suffer from the flight to the Nasdaq stocks. In reality we only need to be concerned with the NASDAQ's future. Yes, the Dow can and will cause us problems if it starts a downward spiral but as long as the Nasdaq is strongly positive the Dow will not sink completely. The Nasdaq crossed over the 4000 mark today for the fourth time ever. This level has been weak support several times in the past. Will this fourth time prove to be the one that sticks? Analysts are mixed on whether the two -10% corrections already this year were enough. Considering the gains made on the Nasdaq last year many were expecting a more severe drop, something in the -20% to -25% range. But instead are we moving into a new trading era? The number of active traders increases every day and with them comes increasing volume and competition for available shares. Thousands of investors who have never traded stocks before now plug in every day and experience for the first time the shot of adrenaline that comes from trading stocks instead of investing long term. Up at dawn placing trades and up late at night researching plays for the next day. The worker productivity, which Greenspan tracks, would be much higher without the millions of online trading junkies watching live quotes/charts and reading streaming news to monitor their positions while at work. Times have changed and maybe the trading patterns of even last year are changing also. The current group of traders has never seen a real correction. The term "buy the dip" means any 200 to 300 point drop. With the ability to be in or out of the market in just moments the need for long term planning has been ignored. After all, techs always go up. Right? Margin debt is at the highest on record. The stocks held by this new generation of traders are in historically weak hands. But are they weak if every time the market dips millions of traders simply buy another 100 shares? Institutions have tried to sell off the market and every hundred points we drop has just brought in more retail buyers. Now the quandary. Cash flow watchers claim $24 billion of new cash came into funds in January. If institutions are sitting on piles of cash waiting for a February sell off that never comes then they will be forced to chase stocks as they continue to move up. When will this decision be made? Wait or chase? I am guessing next week. After the Fed smoke clears and the market direction is determined the funds will decide to buy or wait. Compounding the problem is the close of earnings season. Earnings are the fuel for every stock market rally. With earnings almost over for the fourth quarter period there is no excitement left in the market for February. This is normally the period when institutions regroup, reshuffle and invest for the next cycle. Institutions historically move slowly due to the logistics involved in buying/selling millions of shares in dozens of companies. Without a cooling off period in February they will be forced to throw money at the stocks they want before they get away. This will be similar to a short covering rally and could be strong. The key to this puzzle will be first the Fed. +.25% or +.50% I don't think it matters. Still we must wait for the dealer to show his hole card before placing future bets. The rally this week has been a combination of relief rally and investors betting against Greenspan acting out of character. Once this Fed event is over the real conviction must come out. Do we believe in the market and are we willing to maintain our convictions or is this simply a trading rally before the next correction cycle begins? We had two bear trap rallies in January, should February be any different? The next market cycle is the April earnings run. This normally begins with traders taking positions beginning around Feb-18th. That gives us two weeks before the market should establish a direction for the next ten weeks. Two weeks without direction. Two weeks of waiting to exhale. Two weeks, long enough for another correction and recovery. Should that happen, it would really be a buyable dip. Trading the next two weeks could be tricky. The Nasdaq is only 19 points away from the 1999 close. Only 19 points when the average weekly movement has been 400. Since the Nasdaq was up 85% in the last twelve months there should be volatility at this level. Still, unless we can hold over 4000 this week we are doomed to another, possibly more severe correction. It would be welcomed by the institutional community and would be the last major dip in my opinion until May. Although the markets have put together two nice days there is still weakness under the numbers. For instance Nasdaq leaders, CSCO is up $18 in two days, MSFT +$7, INTC +$8, ORCL +$8, QCOM +31. These stocks could see some pullback on profit taking. Some Nasdaq favorites did not participate in the rally. Stocks like YHOO -4.69, VIGN -4.00, JDSU -2, RHAT -2.64, AOL -1.69 all finished lower with the Nasdaq adding +111. The Internet gains were on the back of a select few huge gainers. NSOL +32, EXDS +10, DCLK +9, VRSN +8, BVSN +7. If the rally broadens it should hold. If the regular names don't participate it will fail. My suggestion would be to trade the rally but keep your eye out for weakness. Look under the surface for confirmation by individual stocks. Beware the possible "buy the rumor, sell the news" drop after the Fed meeting. Monitor your long positions carefully. Keep your stops close. On the surface it looks too good to be true and you know what that means. Seminar update: Session two is now sold out also. We are taking names for the waiting list in case someone cancels. If you have previously registered and HAVE NOT RECEIVED A CONFIRMATION, please contact us immediately. We have added another speaker for the second session. A name you have probably never heard before, Howard Ruff. In 1975, Howard Ruff began publishing THE RUFF TIMES, a financial advisory newsletter written for Main Street, not Wall Street, which became the largest-circulation financial advisory newsletter in the world. Trade smart, sell too soon. Jim Brown Editor **************************************************** ANNUAL OPTION INVESTOR SEMINAR UPDATE - IMPORTANT !! **************************************************** The second seminar is sold out. We are taking names for the waiting list on each seminar. Sometimes plans change and people cannot attend. We will contact the readers on the waiting list in the order they registered. If you decide you want to attend you need to register quickly to get your name on the list. http://www.OptionInvestor.com/bootcamp/oinmain.html ********** STOCK NEWS ********** Correlation or Causation By S. P. Brown January's gone, thank goodness. And now that winter's longest month has finally been delegated to the annals of history, market pundits have started pontificating on what effect, if any, the month's shoddy equity performance forebodes for the rest of the year. http://members.OptionInvestor.com/stocknews/020100_1.asp ************** Market Posture ************** As of Market Close - Tuesday, February 1, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,700 11,250 11,041 Neutral 2.01 * SPX S&P 500 1,350 1,500 1,409 Neutral 2.01 * OEX S&P 100 730 800 768 Neutral 2.01 * RUT Russell 2000 475 500 504 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,702 Neutral 1.06 MSH High Tech 1,650 1,900 1,806 Neutral 1.06 XCI Hardware 1,300 1,460 1,390 Neutral 1.28 CWX Software 1,200 1,420 1,287 Neutral 1.07 SOX Semiconductor 700 745 802 BULLISH 12.21 NWX Networking 800 900 875 Neutral 1.07 INX Internet 700 800 722 Neutral 1.06 BIX Banking 645 690 557 BEARISH 11.30 XBD Brokerage 400 450 417 Neutral 11.30 IUX Insurance 625 650 560 BEARISH 11.30 RLX Retail 950 1,000 918 BEARISH 1.28 DRG Drug 340 400 360 Neutral 1.28 HCX Healthcare 700 790 743 Neutral 1.28 XAL Airline 180 190 128 BEARISH 5.21 OIX Oil & Gas 280 315 274 BEARISH 1.27 Posture Alert The pre-Fed relief rally continued Tuesday, with investors picking up shares in all sectors across the board. The volatility continues, as the NASDAQ posted it's 4th largest point gain ever on volume of 1.4 billion shares. Sector leaders today include Retail (+4.89%), NASDAQ 100 (+3.69%), Software (+3.59%), and Hardware (+3.19%). With this week's quick reversal, we have upped the Dow, S&P 100, and S&P 500 to Neutral from Bearish. **************** Market Sentiment **************** Tuesday, February 1, 2000 Ahhh, relief! The Pre-Fed relief rally is starting to become very trendy and almost expected, as the NASDAQ and Dow have both been strong these last two days before the big announcement. Last year, the NASDAQ rallied into the other interest-rate hikes which occurred on June 30, Aug. 24 and Nov. 16. The Dow, on the other hand, posted gains on only two of those occasions. This now makes the NASDAQ 4 for 4, and the Dow 3 out of 4. Pretty good batting averages by any standard. Now, with the bond market pricing in another rate hike in the springtime, we should be more prepared for the volatility down the road and take full advantage of both the upswing and the downswing. Unless, CNBC starts hyping the likelihood of a Pre-Fed rally, then we will all run the opposite direction. In Sunday's letter, Pinnacle Capital stated that, due to all the put speculation that was rampant on Friday's downdraft, we though that the sentiment was too bearish and that a relief rally would be in store for this week. Well, we got the relief. With the big jump in the broad market, sentiment has slightly shifted to the bullish side. However, at this time, sentiment is not overwhelming in either direction. What this tells us is that the market has a good chance of trending slightly higher, but most likely, in the short-term; we may be trading range bound. The trump card for the bears or bulls in the short term will come down to Greenspan & Co. and what their future indications are for the bond market. Below, we have highlighted the yields on the major T-Bond issues and have reflected some thoughts for your benefit. Currently, the yields on the Treasury Bond are as follows: 5-year: 6.661% 10-year: 6.617% 30-year: 6.421% Most of our readers should know (especially fixed income buyers) that the longer the maturity of a bond, the higher yield you will receive. However, this is currently not the case in the Treasury market. The yields right now are inverted, which indicates a incredible demand in long-term issues. For those of you who have purchased bonds in the past, you may recall that 1994 was a very poor year for the bond market. Towards the end of 1994 and beginning of 1995, yields on the Treasury became inverted as they are today, with shorter-term maturities yielding higher rates. Below is a graph of the 30-year Treasury since the beginning of 1994. As you can see, the long bond has rallied considerably since that time-span when interest rates were inverted as they are today. The stock market has also done pretty well over that time span to boot. The bottom line is that in the short-term horizon, we will see more rate hikes and with it, pressure on equities. Looking out longer term past this current market noise, the bond market is indicating lower rates, and lower rates will help a stock market head higher! BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. Cash Flow: The cash that has been sitting on the sidelines has been put to use as of late, as record volumes for the major indexes have been shattered. Short Interest: From a contrarian stand, short interest (JAN-14) on the NYSE is still very high, totaling 3,973,256,735 shares. The short interest on the Nasdaq rose another 2.11% in the latest figures, its fourth consecutive record, to 2,413,628,695 shares. Mixed Signs: Interest Rates (6.421): The current yield is now off of the highs, but any major economic indicator can knock it back to the highs. Currently, there is an inverted yield in the treasury market, which is technically bullish long term. BEARISH Signs: Volatility Index (24.82): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. 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. Pinnacle Index OEX Friday Tues Benchmark (1/28) (2/1) Overhead Resistance (765-785) 1.02 1.59 OEX Close 738.04 766.89 Underlying Support (740-760) 0.54 1.25 Underlying Support (700-735) 18.11 10.38 What the Pinnacle Index is telling us: In Sunday's letter, we stated that based upon the Pinnacle Index numbers, we would not be surprised to see a relief rally this week on the OEX. Well, we got it. From here, the sentiment is not overwhelming in either direction. Overhead resistance (765-785) is moderately light and underlying support is gaining strength, but is still light. Based upon the sentiment numbers, we do have upside potential, but will most likely be trading range bound. Put/Call Ratio Friday Tues Strike/Contracts (1/28) (2/1) CBOE Total P/C Ratio .60 .45 CBOE Equity P/C Ratio .45 .38 OEX P/C Ratio 1.41 1.05 Peak Open Interest (OEX) Friday Tues Strike/Contracts (1/28) (2/1) Puts 700 / 7,185 700 / 7,748 Calls 800 / 6,190 800 / 7,307 Put/Call Ratio 1.16 1.06 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 January 28, 2000 Bottom? 29.09 February 1, 2000 24.82 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 11041.05201.66 100.52 302.18 Nasdaq 4051.98 53.28 111.63 164.91 $OEX 766.89 16.22 12.63 28.85 $SPX 1409.28 34.30 14.82 49.12 $RUT 503.75 -8.39 7.52 -0.87 $TRAN 2576.63-10.10 4.98 -5.12 $VIX 24.82 -2.89 -1.38 -4.27 Calls Mon Tue Week PMCS 205.56 -9.56 25.06 15.50 A fabulous day for PMCS! LVLT 119.56 13.00 1.63 14.63 Dropped, a fond farewell BRCM 296.75 5.31 7.44 12.75 BRCM zeroing in on high? CMGI 115.44 7.06 2.88 9.94 CMGI takes it to heart NTAP 107.81 1.19 7.44 8.63 What we were looking for LLTC 97.69 3.94 3.00 6.94 New, accelerating to $100 MUSE 169.38 0.31 6.19 6.50 MUSE showing resiliency PSIX 86.75 -0.75 6.88 6.13 New, a split and earnings MFNX 70.19 2.53 2.50 5.03 A new Buy rating for MFNX VOD 59.00 1.38 2.06 4.25 Getting the upper hand? VECO 58.75 -1.13 3.88 2.75 VECO has been range bound BGEN 94.38 -6.00 8.13 2.13 Buyers jump in to BGEN AFFX 229.00 3.38 -2.50 0.88 Dropped, earnings Thurs. COVD 74.00 -2.44 3.25 0.81 New, pending breakout?? LU 55.75 0.25 0.25 0.44 We have three words ICIX 44.63 -2.00 1.63 -0.38 Investors feeling good EMIS 39.13 -1.75 1.25 -0.50 EMIS is feeling better FRX 68.31 -1.75 0.81 -0.94 One of the best in group TQNT 158.38 -7.72 5.59 -2.13 Can you say trading range? PEB 151.00-15.25 1.25 -14.00 Did PEB find its feet? SILK 142.38-14.38 -5.25 -19.63 Could be good opportunity ADAP 99.00 -6.47 -20.00 -26.47 Dropped, stomach to test Puts ADBE 55.88 -2.50 0.81 -1.69 A very accommodating play UAL 57.94 -0.75 0.81 0.06 Seat belt sign still on BBY 49.69 -2.25 1.94 0.94 News today, gone tomorrow IPG 48.19 -1.00 2.19 1.19 Day one right on track SLR 73.69 2.56 1.06 3.63 Dropped, bottom forming? INTU 64.81 2.56 4.50 7.06 Dropped, talk about bounce ************ WOMANS WORLD ************ EVALUATING THE MARKETS IN HAIRY TIMES AFTER ABSTINENCE If you had been away from the markets for 10 days, what would you buy tomorrow? I've had a nice 10-day break from trading which was badly needed. My challenge now is deciphering both the short and long term market conditions, and deciding how I want to play it. My trading time in February will be markedly decreased due to other professional commitments, including more traveling at the end of the month. These factors will influence my short-term trading decisions. I want to share with you how I think through re-entry after a vacation, returning to uncertain markets. Preparing to travel, I made a point do things differently this time. I closed out option positions so I did not feel compelled to stay current with the market. I know from past experience, if you leave town with open positions (not a good idea), and expect to watch things occasionally from your hotel room, it can drive you absolutely nuts! A market crisis will always happen once you leave town with open positions and leaving your hotel room then becomes an "iffy" situation as you forget about the conference you went to attend. What is worse, is that eventually someone will find out.... usually as you start to stutter, trying to come up with an explanation that makes sense, other than you were stuck in your hotel room watching your positions. I hate to admit it, but I've done that once, back when I was a type A personality. I think I learned my lesson. I always learn lessons when I loose money! Imagine how crazy one could get, if they were fighting a brutal sell-off with lots of open positions, right when it was time to pack, check out and rush to the airport to come home. No, uh huh, I don't know anything about that!! The safer alternative, is exiting to cash so you travel with total peace of mind. Sitting on cash has a calming effect, which turns to euphoria if you come back to a sold-off market with buying opportunities. The challenge becomes evaluating if it is a real buying opportunity. First, I look at the big picture. The 4th quarter of 1999 saw an upside, which was unprecedented. Y2K was a once in a lifetime event. It affected the markets from April '99 earnings, till the end of the year; be that from fear, sidelined cash or opportunity buying. To me, with a run-up that severe, regardless what happened on January 1st, 2000, the market was bound to slide backwards like a bungee cord. After that run-up, who wouldn't try to beat the clock and take profits off the table early? February has been a weak month for many years, so why invest then? Add to that, the anxiety over increasing interest rates for February and most likely March too, and jumping in for enthusiastic long term trading gives this trader reason to pause. Sure, there may be a relief rally, but those are sometimes only quick head fakes. The big picture is that earnings came in strong, companies appear healthy, oil is up, employment tight and significant inflation signs are sketchy. The Feds job is to keep all in check, by way of rate adjustments, to keep this economic expansion going. Since the last time Greenspan raised rates 50 basis points, the markets crashed in October 1987, my gut tells me they are not likely to do that again unless under very extreme circumstances. Since it takes roughly 6 months for the economy to adjust to interest rate changes, with the confusion of Y2K, I don't think it is clear what affects the rates have had, especially since Y2K may also skew some economic data in this first quarter. Certainly it will take time for the dust to settle from the extremities seen in late 1999. I'm not sure it is any clearer for the Fed, than to all of us. With Greenspan being an "incrementalist" since Oct. '87 and it being an election year, my gut tells me that I see no reason to lose faith in the bullish undertones of the long-term market. But, I am an option trader and therefore I must be very critical of the short term conditions, since options have deteriorating time premium. Entry points are critical and entering prematurely only to wait for a temporary correction to be over, can quickly put one in the poor house. Going to cash before my trip protected me from this sell-off disaster. That was not done by accident. I anticipated the sell-off due to the upcoming fed meeting. I also anticipate another one, before the March meeting. I've learned that stock prices do not follow common sense and market movements can be extreme. "The trend is your friend". Don't fight it, or you will be crying in the soup line. Also, I've learned that uncertainty is the most damaging sentiment to an option trader. Uncertainty causes indecisiveness in the big players which can take the wind out of your option premiums. Many players have a hard time trading consolidation patterns and stocks that trade range bound in a sideways market. Look at your current plays. If the stock stays flat, will you still make money? Have you taken the time to learn how to trade during those times? Probably not. Short term I saw the correction which hit -10%, which is typically playable for me. I reviewed Daily Charts of the Nasdaq, Dow and VIX, which hit over 30 (entry level alert), before pulling back. I checked the 30 yr bond rates and indexes. I reviewed OIN for an overview of news and sentiment. I looked at market leaders to observe their strength, then my personal watch list. I observed pertinent daily charts and the activity around moving averages. Next comes a quick glance at particular charts. The daily, the 30-min to look at the last days activity, along with the 1-min because I always like to know if the stock closed pushing up or down, with or without increased volume. After this review, I did not feel comfortable with any particular Singular stock. But, yesterday I recognized the Nasdaq entry point on the correction and bought February 174 calls of QQQ (the Nasdaq 100 index tracking stock). Today I bought OEX expecting a short-term rally after the announcement. I do not expect to hold these positions long. At this time, I am still concerned about continued weakness later in February. Until I feel differently, I will back off, play with less money, less often, less contracts, lesson my profit expectations, and take profits much more frequently. Also, it's a nice time to review trading strategies for sideway markets. Renee White Contact Support ************** Traders Corner ************** The Anatomy of a Major Turning Point By Pinnacle Capital Advisors Sometimes key turing points in the market reveal themseleves when traders least expect them and if you blinked Monday (1/31), you missed one! With everyone focused on the pending interest rate hike at the FOMC meeting Tuesday (2/1) and Wednesday (2/2), who would have thought that we would get a major turing point in the market. But that's exactly what we got acorss the key sectors of the market including the S&P 100 and several technology sectors. At Pinnacle Capital Advisors, we believe that savvy investors can remain above the fray by focusing on one of three key technical reversal signals. What's more, when these signals occur at key moving averages, such as the 50 day moving average, they become even more profitable. We will be talking about these powerful reversal signals in the days ahead and at the upcoming March Options Expo in Denver. But check out the major bottom reversal signal known as the "Tweezer Bottom" that appeard across several of the major indices on Monday, January 31st. Among candlestick charting technicians, a Tweezer Bottom is when a big DOWN day is followed by a big UP day. Depending upon the market index, the reversal occurred either at/above or below their respective 50- day moving averages and may have different implications. For example, when major indices reverse course at or above their respective 50-dma, this is generally a postive sign for the market. If however, the reversal appears BELOW their 50-dma, investors will want to make sure that the index does not fail when it finally reach its 50-dma. At / Above 50dma: Nasdaq NDX Hardware XCI Software CWX Semiconductor SOX Networking NWX BELOW 50dma: S&P 100 OEX S&P 500 SPX ***** Skiing, Swimming, Opera & Trading I am writing this from my Art & the Law class (last semester of school!), so that explains my creative references to skiing, swimming, opera & trading. When you ski down the hill, you constantly have to think of your next turn. Indeed, you generate the momentum to take you through the next turn from your current path down the hill. Movement in one direction builds power for the move in the opposite direction. So too, the markets -- 400 points down on any index builds power for a move in the opposite direction. Jim writes about 3 up days followed by 2 down days in a regular cycle even in an uptrending market. Successful traders figure out the markets direction, and ski down the oscillations between oversold and overbought -- both conditions create opportunities. Swimming is not about being strong. It is about efficient application of strength to achieve the flow of water over the body, thus moving the swimmer forward. Good swimmers glide. Novice swimmers "beat up the water" with lots of strokes -- I know! My Masters swimming coach made us do a drill called, "distance per stroke." The key is to generate power with one arm's stroke while one puts the other arm out in front of the body to glide for a second before executing the next stroke. So too, good traders do not trade more often than bad traders. Good traders achieve maximum cash flow per trade without paying brokers every day, if possible (sorry, preferred, I love you guys, but would rather not pay you every day, if possible). That's the beauty of efficient selling of puts & calls. If you sell calls at overbought levels, and if you sell puts below oversold levels, then you can simply sit in the bleachers and let the premiums evaporate. Moving forward in the water is like compounding. I swim in the ocean at the pier down at Santa Cruz. Sometimes there are waves, most of the time, it is just beautiful. I look out 500 or 800 meters, and pick a point, just like now I pick a financial goal. I take a stroke, and do it again, attempting to get maximum glide per stroke. Eventually, I get to my goal. So too, with each trade. Each trade increases my cash position, increasing my margin & buying power, and my ability to sell calls & puts at strategic moments. Moving me through the tides & waves towards my financial goals. Leitmotivs are the themes which swirl in operas, often established in one act, to be recalled throughout changes of scenery and situation throughout the work. So too, there are themes in the market (buy tech stocks on the dip) strongly established during one act, or regime of volatility (eg, Nov - Dec 99), but which fade into the background as Alphonso the Great and the BEAR-itones warm up in the wings. Now, we move into a new act in the market -- with earnings over, with the liquid triumph of the market over Y2K in the rear view mirror, the Fed takes center stage. Yet, all the Red Hots are just as good fundamentally as they were in the last week of December. Some of the dips during the Feb - Mar period will indeed be worth buying, but the background for the scenery has changed. More of those dips will be better opportunities to sell deep OTM puts with great care -- a subdued version of the dominant theme of this big cap, tech lead bull market. Which brings me to my trades -- Sold BRCM Feb 270 Puts Sold AFFX Feb 210 Puts I did this early on Monday morning, before both of these stocks dropped to the strikes, then rebounded strongly, both finishing 20 points out of the money. My lessons -- 1. Be prepared to buy these stocks if you sell the puts. Chips & biotechs are taking center stage... and, as one trader in our local group noted, intellectual agility in following the newest "Red Hots" is at least as important as trading agility. 2. Look for market & sector support. 3. Red Hot specific Technical Analysis -- lots of resistance becomes support out there in the most volatile stocks. Will that support hold??? 4. Be patient. I should have waited 2 hours and sold the BRCM Feb 260s and the AFFX Feb 200s. In another trade, I was monitoring my short VRSN Feb 145 Puts (from a coffee house in San Francisco's Richmond district!), which came very close to my action line. My lessons -- 1. Be Prepared to Hedge at your action line. If you have to hedge too often (have a limit, such as 4 trades in an out of a hedge), then just buy the contracts back and take the loss. Don't get tumbled in a wave so you can't swim to your goal. Protect your endurance & capital. 2. Give a big buffer zone. 15 points looked big on Friday when I sold those puts, but the stock dipped to 146.5 -- too close for comfort! 3. Be Patient. Should have sold Feb 135 Puts on Monday morning. 4. Cash Flow is King. Same basic principle, different form. 5. The beauty of writing calls and puts in this environment is that you don't need to be exactly right. Close only counts in horseshoes, hand grenades & naked option writing (and the last two have a great deal in common!) A good one from my corporate tax prof: Amazon.com = America always needed a not for profit bookstore Think Creatively, Good Luck! Janar Wasito Contact Support 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: ***** ADAP $99.00 -20.00 (-26.47) Well, we said this one was not for the weak stomached, but even if you had a stomach of steel, today's session would have put it to the test. ADAP gapped down $4 at the open and was trading in the $100 neighborhood just over an hour into today's session. Being that the 2:1 stock split is not happening until March, we are concerned about the near-term picture for ADAP. There was no new news on ADAP other than a reiteration of ADAP's earnings report from last week, which admittedly, we found slightly puzzling. Though we see some support at $95, we believe that the risk of continuing on with this play is not worth it at this point. We will be keeping this one on our radar screen. LVLT $119.56 +1.63 (+14.63) What a great run we have seen from LVLT! We began playing LVLT on January 16th at $86.75. We cited our anticipation of LVLT's building momentum to carry us through to earnings as the reason for initiating the play. Since then, LVLT has traded up to a new 52-week high of $120.25 and offered a trading range of $35.50. Not bad at all, if we do say so ourselves. Unfortunately, the time has come that we must bid LVLT adieu, as earnings are set to be announced on Thursday before the open. Be sure to close out your positions before the market close tomorrow. AFFX $229.00 -2.50 (+0.88) It is eerie when we make a call that is right on-the-money, but that is what happened with AFFX. It is hard to drop AFFX because of the earnings announcement pending on Thursday. Nevertheless, we are disciplined in our approach. The following update is for those who want to keep following the stock tomorrow and Thursday. The selloff on Monday took the stock right down to support in the $207-$208 area. A call position placed in that area would be up 20+ points as the stock rebounded right back to the closing range of the upper $220's. Today's action was surprisingly muted as the sideline cash found other places to go. By taking out yesterday's high print of $234.38, the short-term trend is still bullish. By selling into the close to finish the day down a little is also bearish. Let's call it a wash. Another strong day in the NASDAQ coupled with a break above $237 could take the stock to $250. Otherwise, look for the stock to continue trading in 15 point ranges, zeroing in on closes in the high $220's. A competitor of AFFX burst onto the scene today with a stellar IPO. SQNM was up over 200% in its first day of trading and closed at $79.25. It appears that some of the money destined for AFFX might have found its way into this new issue. Keep a watchful eye out to see if this is a developing trend. PUTS: ***** SLR $73.69 +1.06 (+3.63) Does anyone else sense a bottom forming? If you answered yes, you may be right. SLR put in a double bottom on Thursday and Friday of last week and has traded up since. That bounce just under $70 also correlates with the 100-dma, currently at $71.75. Morgan Stanley Dean Witter also played a role in killing our call play by upgrading the stock on Monday from an Outperform to a Strong Buy. Not a bad entry point for an upgrade really with a stock split just over a month away. Besides, we knew our play was ending with the split coming. Overall, we will take our profits from a good play and walk away happy. INTU $64.81 +4.50 (+7.06) We thought INTU might bounce a little and provide us with a great entry point for our new put play. Well INTU bounced all right, so far it jumped up over $7 this week. We are dropping our play in INTU, not so much for the jump in price, rather for the conviction or strength behind the move. With the volume a bit light in the major indices, INTU saw volume near its average. We could see the software giant fall from these levels, but at this point in time, we believe the prudent move is to step back and let the bulls have their way with this one for now. ******************** PLAY UPDATES - CALLS ******************** SILK $142.38 -5.25 (-19.63) After almost a $20 bump in the road, SILK looks like it is finally setting up to give us the entry point we've been waiting for. The correction has taken place on light volume, indicating there is not a rush for the exits. SILK needed to have some air let out in preparation for the next leg up. Sitting right near support at $140, SILK has stronger support near $132. New positions can be considered on a bounce from either of these levels, but more conservative players may want to wait for SILK to trade through the 10-dma (currently $151.50). Any renewed upward move should be accompanied by increasing volume, so confirm that the buyers have returned before opening new positions. Recall that this is a volatile internet, susceptible to large daily price swings. Evaluate your risk profile accordingly and protect yourself with stops. Analyst Richard Davis at Tucker Anthony Cleary Gull initiated coverage of SILK today with an Accumulate rating. VOD $58.88 +1.94 (+4.25) VOD seems to be getting the upper hand in the ongoing merger battle with Mannesmann and investors responded today by pushing shares to a new 52-week high of $59.43. The move over the past 2 days has been accompanied by strong volume, reinforcing the strength of the move. Amateur hour on Monday saw sellers push shares as low as $53.38, before the bounce, which was accompanied by increasing volume. Returning to its familiar pattern, VOD gapped up this morning and headed higher for the balance of the day, closing above the old 52-week high of $58.50. The negotiations continue between the two companies and although the outcome is anything but certain, the tide seems to be shifting towards VOD as the victor. The surprise announcement of an alliance between VOD and French Telecom group Vivendi this weekend was a double blow to Mannesmann. The German company has been courting Vivendi in an effort to ward off the hostile takeover, and the fact that VOD got the nod will make the takeover that much more attractive to Mannesmann shareholders. Use caution with this play as the expiration date (Feb 7) of VOD's offer approaches. A rejection by Mannesmann shareholders will likely be negative for the shares of both companies. *********************************************** PLAY UPDATES - CALLS - CONTINUED IN SECTION TWO *********************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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The Option Investor Newsletter Tuesday 2-1-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ******************************** PLAY UPDATES - CALLS - CONTINUED ******************************** LU $55.75 +0.25 (+0.44) We have three words for the current trading in Lucent. Boring, boring, boring. You could sum up today's trading by realizing that the stock never hit the tape without the number $55 in front of it. That's right, the high was $55.81 and the low was $55.13. Not what you like to see on a day like the Nasdaq had today, but this has been a value play for tech investors and they left it for momentum today. We are keeping LU to see if it can muster a rally after the Fed announcement. In reality, it did a good job in the face of the Nasdaq downdraft in recent days and the downside appears limited. The unknown is the upside. If we get more dull action like today, we will undoubtedly be dropping LU soon. Support looks strong at the 10-dma at $54.50. Resistance was on every up tick today, almost painful to watch. Technical resistance is still between $58 and $58.50. CMGI $115.00 +2.88 (+9.94) We still insist that you shouldn't try to pick a bottom, but in retrospect, that is where we entered our play of CMGI. The stock closed Friday near $106 and we said that $100 would be support and a buying opportunity. Someone out there must have taken that to heart because after a brief morning dip to $100 on Monday, CMGI really took off. You could see from the first bounce off $100 in the early moments of trading on Monday that buyers were ready because it shot the stock back up $6 instantly. Then it traced down to $100 again and this time the bounce really took hold. CMGI has been trending up since noon on Monday to close above the 10-dma ($114.25) and right near the day high. No real news out there to drive the stock, just lots of money wanting to buy this stock. Now its up to the Fed as to whether this will continue. It's obvious that investors are ready to buy if we get the green light, i.e. no 50-basis point move. Support is at $112.50. Resistance which was at $115 is now at $120. This stock should remain active tomorrow with the Fed decision so pay close attention. BGEN $94.38 +8.13 (+2.13) What goes down, sometimes doesn't stay down, or at least that's been the sentiment the past two days. Monday traders sold shares of BGEN like there was no tomorrow, after the announcement from IMNX, that their drug Novantrone, had been approved by an FDA panel. Apparently investors had concerns that the potentially strong sales of Novantrone, would cut into BGEN profits. Today BGEN, spun their own tale with a company press release citing a CHAMPS study which has shown the highly significant beneficial effect of AVONEX, in delaying the development of clinically definite multiple sclerosis. Buyers jumped back into BGEN stock in a big way, bidding the price of BGEN +8.13 higher for the session, closing at $94.38, its high of the day. BGEN closed back above its 5-dma at $93.91, which technically, is positive for this play. Until yesterday $90 had provided support for the Biotech company. If we get a pullback, we would look for that level to once again provide support. Continued momentum to the upside would also be an chance to re-enter this play. If anything, we are seeing a lot of volatility spurring wide trading ranges and a lot of play opportunities within. NTAP $107.81 +7.44 (+8.63) We said Sunday we were anticipating another chance to enter our play in NTAP. Monday's early sell-off and late day recovery gave us just what we were looking for. NTAP got clobbered early in the day falling all the way to $90.63, which was down -8.56 for the day. Shortly after noon ET, buyers began to enter the Nasdaq and the tech stocks they had dumped only hours earlier. NTAP finished the day +1.19 at $100.38. Most traders were expecting today would be fairly direction-less and choppy, due to the FOMC meeting. Buying started out slowly, but gained momentum as the session continued. At the close today NTAP finished +7.44, at $107.81. That's an 18% recovery in two days. There was no real company specific news behind the move in NTAP, just anxious buyers. Hopefully somewhere in the move, you found the nerve to re-enter this play. NTAP is now in the middle of a recent trading range. $100 would be seen as support, with the $115 level providing the next resistance. We would consider entering this play on further moves higher, but would do so cautiously, as profit-taking could occur at any time. BRCM $296.75 +7.44 (+12.75) The reported death of the tech stocks was greatly exaggerated. Things did look somewhat bleak early Monday, as investors sold shares of BRCM for most of the morning. Talk about volatility. BRCM head south at the open, trading down to $266, before buyers jumped in with both feet. Remember our primary interest in BRCM is for its split run potential. The company will split its stock 2-for-1 on Feb 14th. BRCM appears to be zeroing in on the high of $332.13 set back in the middle of January. We would point out the volume behind yesterday's decline and today's move was a bit light, compared to the ADV seen in BRCM. If you entered this play, be prepared to take some money off the table, as the FOMC meeting will end Wednesday approximately 2:15 ET, with an announcement from the Fed regarding interest rates. Some traders are seeing the rally the past two days as a "buy the rumor-sell the fact" scenario. If that's the case, we could see a sell-off as the Fed makes their announcement tomorrow. We do believe regardless of the Fed decision BRCM will end up with a nice split run, however the road getting there could be a bit bumpy. PMCS $205.56 +25.06 (+15.50) Monday turned out to be a gift from PMCS, as it yielded some wonderful opportunities for possible entry points. PMCS shot up to tag its $191.25 high for the day shortly after the open. Then once again, the profit-takers emerged from the woods and dragged the stock down to a low of $170.25. This level held as support and turned out to be a great entry level. PMCS closed the session just above $180. Today, PMCS put on its running shoes and made a break for it. PMCS opened up over $4, made a quick jaunt down to test $180 and then traded all the way up to a close over $200. We could not have asked for a better day for a call play. There was opportunity to get on board, good volume and a breakthrough and a close above a strong psychological number. PMCS looks to have a plethora of support starting at $200, with $194 (5-dma), $190 (10-dma), $185, $180 and $170 playing back up. We are roughly $3 under the 52-week high, which is serving as the only resistance at this point. Being that we have seen such a big run up today, we are bound to see some profit-taking in the near future. Watch for bounces at the above mentioned support levels followed by a reclamation of momentum for possible points of new entry. The 2:1 stock split is payable on the 11th of this month, so we have just over one week left of this play. Remember to use those stops to protect profits! PEB $151.00 +1.25 (-14.00) PEB obviously had a rough start to the week. Monday, PEB gave back $15.25, closed at the low of the day and posted volume double the daily average. Needless to say, we were concerned. PEB continued downhill for the first half of today before flattening out a bit and finally making a move up to close just pennies under its high for the day. It was this late day move up that has afforded PEB more time on our play list. PEB has support at $150 and looks to have some additional support right around $146, $143. PEB may encounter some resistance right around $155 and $161, where its 5 and 10-dmas are working to converge. A new competitor for PEB entered onto the scene today. A company by the name of Sequenom (SQNM) IPO'd this morning and closed up $56, which probably helped add some pressure to PEB shares. Don't forget, we have an upcoming 2:1 stock split on February 18th. Hopefully, we have seen a shake out of the profit-takers and are now cleared for a split run. Confirm continuing momentum before entering and remember to use your stops. EMIS $39.13 +1.25 (-0.50) Though the Biotechs rallied nicely late day on Monday, EMIS headed south to close the session smack dab on its low for the day. EMIS found some morning resistance on Monday at $39.50, a level which again provided the resistance for today's session. One point of concern, and therefore something to keep an eye on, is the volume levels. We saw volume slightly higher than average backing the decline yesterday and volume less than half ADV backing today's ascent. Obviously, we would like to see the reverse as an indication of continuing investor interest. EMIS does look to have some support at $39 with additional support backing right around $38.50, where its 5 and 10-dmas have converged. EMIS looks to have additional support at We are still looking for some trading and a close above the $40 level with a pickup in volume to confirm the positive momentum necessary to make this a worthwhile play. ICIX $44.63 +1.63 (-0.38) Monday, ICIX's 10-dma did a great job of providing support on a day that saw shares close $2 lower and just slightly above the low for the session. Today, ICIX did a nice job of regaining the majority of the ground lost. ICIX traded as high as $45.25. ICIX did seem to struggle with the $45 level throughout the day. We saw strong volume behind today's move up, a good indication that investors are still feeling good about owning this stock. ICIX does seem to have some support at $44 with $43 playing some solid looking back up. Look for ICIX's 10-dma, currently at $42.50, to continue to provide additional support when needed. Take advantage of pullbacks with holding support levels, as we saw yesterday, for possible entry points. Look for ICIX to trade through $45 to confirm continuing positive momentum. More good news on Monday from ICIX subsidiary, Digex. Digex announced that it was launching new Fail-Over services to provide better and more reliable service for ASP's and e-Business's. MUSE $169.38 +6.19 (+6.50) Micromuse has shown resiliency on the downside, but resistance on the upside the past two days. The stock is due to breakout one way or the other. With today's late strength it appears that the path of least resistance is to the north. However, the stock still needs to prove that assertion by trading above $172-$173 where it seems that the stock keeps running out of steam. There is some pretty good short-term support at $160. As long as support is not violated, an aggressive trader might consider buying dips. Some of today's rally can be attributed to the announcement that MUSE landed another monster client for its Netcool software product. Cox Communications, one of the largest broadband communications companies, will now be using Netcool to support end-to-end proactive management of its broadband network infrastructure. FRX $68.31 +0.81 (-0.94) A sizable trading range yesterday of 5 1/2 points was followed by an inside day today. The right side triangle formation that the stock is forming indicates that the stock may experience a sharp rally if it can take out resistance at the old high of $70.75. A close above that price could possibly take the stock much higher. As long as the bottom trendline holds at around $66.50 it might be possible to initiate potentially profitable bullish positions. FRX has been one of the best performers in the drug group. If money keeps spreading out to include "safe" drug stocks then look for Forest Labs to continue its leadership within the group. TQNT $158.38 +5.63 (-2.13) Can you say trading range? This is the single best way to describe the action of TriQuint's shares over the past several days. Day traders are having a lot of fun, but those of us who are looking for profits over a longer time span (say a week or two) will continue to have to be patient. The range is $152-$163. There is a little technical concern about the stock making slightly lower highs in each of the past four days. TQNT will have to reverse that pattern quickly if it is to continue as a favorite among momentum players. It appears that the SOX Index had a very nice reversal day. Semiconductors were the leaders of the last rally but seem to have cooled off this week. If they can re-establish their leadership, look for TQNT to make a nice move. Otherwise, make sure you are using a disciplined approach, just in case the past two days prove to be a counter-rally in an overall pullback and consolidation phase. Note the strong support at $152 on an intraday chart during the past week too. VECO $58.75 +3.88 (+2.75) The shares have Veeco have been range bound the past two days (sound familiar?). Dips are being bought and rallies are being sold. If this pattern continues there could be trading opportunities between $54.50 and $60. We had a bit of a scare yesterday when the stock tried to move below the range, bottoming out at $52. A break above $60.13 is still shaping up to be a possible entry point for a rally into new high ground with a follow through to around $65 or beyond. Veeco was a presenter today at the Banc of America Securities Technology 2000 conference. Their presentation was a possible influence on today's rally. Let's see if we can get a follow through tomorrow. MFNX $70.19 +2.50 (+5.03) In Sunday's report we were looking for a test of support at $62.50 to initiate a call position. The selling took the stock to $61. Hopefully, you did not get stopped out because the bounce has been very nice. Despite the bounce, we are looking at a stock that appears to be holding on and trying to consolidate in the mid $60's. The trend of four lower-highs needs to be broken for this stock to skip along its merry way to new highs. Today's close ran right into the downtrend line and stopped. Even though it was a generally strong day for communications stocks. We would be strongly encouraged that MFNX is back on its way if it could trade above $72. The next resistance is the old high of $75.81. The first support level is $67 followed the low $60's. It might be prudent to make sure that support holds before trying to buy into selloffs. MFNX received new coverage with a Buy rating from Wasserstein Perella on Monday. ******************* PLAY UPDATES - PUTS ******************* UAL $57.94 +0.81 (+0.06) The descent in shares of UAL have begun to slow, but the captain hasn't turned off the fasten seat belt sign just yet. Actually, the 10-dma is still trying to catch up after the earnings warning of two weeks ago. The 10-dma is currently at $59.20 and falling fast. For those who typically watch our put section, you know that the 10-dma will usually be our guide and that is the case here. We want to see the 10-dma become resistance and to be watched for a possible entry point. Any close above that mark would be a good reason to close up shop and head for another play. We think UAL will weaken if the market heats up again. Those who are currently buying this as a defensive play will leave for greener pastures. With that said, watch the relative strength for signs of more deterioration. IPG $48.19 +2.19 (+1.19) Day one of play on IPG was right on track, while day two of our play left us tied to the track with a train approaching. After continuing the descent from last week during Monday trading, IPG bounced right off the 100-dma at $45 on Tuesday. The debate to whether the decline is over is a different story. IPG has had these moves of late where it goes down for a few days followed by a few days up, but the overall trend is still lower. We want to see if IPG can rally above the 10-dma at $50.36 currently. If not, we will have ourselves a new entry point. Support for IPG is at the bounce from Monday at $45.25. In the news today, IPG was mentioned in an article about e-dialog.com, but it wouldn't have done much for the stock. Volume was average signifying there may not be much in the way of power behind this rally, but IPG did hit the bottom of the Bollinger Bands yesterday signaling it was due for a small bounce. Therefore, let it bounce if it must, but we will be watching for resistance at the 10-dma for new plays. BBY $49.69 +1.94 (+0.94) The daily sector rotation continues, with retail stocks getting a boost today. BBY was not unaffected, managing to gain almost $2 on slightly less than average volume. Although it was an up day, BBY still sits below both its 30-dma ($51.63) and its 50-dma ($52.50). These levels should continue to provide resistance as investors rotate back out of retail stocks in the next day or two, and we should be presented with a nice entry point as BBY rolls over. The next support level looks to be in the $43-44 range and further market weakness could take us there rather quickly. Keep your stops in place, as a positive surprise from the FOMC meeting tomorrow could be supportive for BBY. Further support for BBY comes from today's announcement that the company will buy back an additional $400 million worth of their outstanding shares. This should be a one-day news event, forgotten by tomorrow. ADBE $55.88 +0.81 (-1.69) This stock was very accommodating in allowing us to put on a bearish position early Monday morning before really beginning to selloff. The breakdown confirms the downtrend. A new recent low was established at $53.44 before a bounce. Today the stock staged another rally, which is reasonable considering the overall strength of the market. It was critical that the stock did not even come close to Monday's high of $58.13. If ADBE stays below that resistance point look for it to possibly resume its downtrend during the next market selloff. A drop below yesterday's low of $53.44 could take the stock to the next support level at $52-$50. There is a lot of support in this area going back to August-September. It is possible that a good bounce could occur in this area so keep that in mind when determining your exit point. ************** NEW CALL PLAYS ************** PSIX - PSINet Inc. $86.75 +6.88 (+6.13 this week) PSINet wants to hook you up. Providing Internet access to businesses, government agencies, and ISPs in 22 countries, the company offers dial-up and dedicated Internet access, Web hosting, remote access to enterprise networks and e-commerce solutions. Much of the company's recent growth has come through the acquisition of an assortment of ISPs in several countries. Welcome to another combined split and earnings play. PSIX has been in correction mode with the rest of the NASDAQ for the past week, but bounced firmly at the 30-dma ($74) yesterday. We expect investors to start thinking about the upcoming split, payable on February 11th. Add in earnings, which are scheduled for the 14th, and we have the ingredients for a nice quick run. Moving up strongly today, PSIX closed near the high of the day on light volume. The nearest resistance is at the $90 level, with the 10-dma at $89. If volume returns and there are no surprises from the FOMC meeting tomorrow, PSIX could be ready to charge up to its 52-week high ($107.19), set only a week ago. Any return to support near the 30-dma, followed by a resurgence of buying volume is buyable, although more conservative investors may want to wait for a convincing break through resistance at $90. PSIX can have large daily moves, so play this issue with caution and stops. On January 27th, PSIX announced that it had sold 14 million shares of its 7% Series D cumulative convertible preferred stock in accordance with SEC rule 144A. The net proceeds are expected to be used for general corporate purposes including more acquisitions and alliances. BUY CALL FEB-85*SQP-BQ OI=568 at $ 9.13 SL=6.75 BUY CALL FEB-90 SQP-BR OI=974 at $ 6.50 SL=4.75 BUY CALL FEB-95 SQP-BS OI=573 at $ 4.88 SL=3.25 BUY CALL MAR-90 SQP-CR OI=414 at $11.00 SL=8.75 BUY CALL MAR-95 SQP-CS OI=131 at $ 8.75 SL=6.75 Picked on Feb 1st at $86.75 P/E = N/A Change since picked +0.00 52-week high=$107.19 Analysts Ratings 9-3-1-0-0 52-week low =$ 30.38 Last earnings 10/99 est=-1.38 actual=-1.35 Next earnings 02-14 est=-1.71 versus=-1.02 Average Daily Volume = 2.92 mln /charts/charts.asp?symbol=PSIX **** LLTC - Linear Technology $97.69 +3.00 (+6.94 this week) Linear Technology is a manufacturer of high performance linear integrated circuits. LLTC products include operational, instrumentation and audio amplifiers; voltage regulators, power management devices, DC-DC converters and voltage references; communications interface circuits and sample-and-hold devices. Applications for LLTC's circuits include telecommunications, cellular telephones, networking products and satellite systems, notebook and desk top computers, computer peripherals, video/multimedia, automotive electronics and military and space systems. Wow! It certainly is exhausting to try and list every product and product application for Linear Technology. It is that depth in product that makes LLTC a must own for any serious investor in the semiconductor industry. LLTC does not make the "sexy" chips that seem to get people's attention. Rather, they make everything else that keeps our technological world whirring away. The most recent tech rally seems to be dominated by old standbys. Comfortable names that have been core holdings for years, and LLTC is one of them. LLTC has garnered the interest of the shorter term investor by announcing a 2-for-1 split payable March 27th (a bit far off for a split trade, but an influencing factor, nevertheless). January was a great month for chip stocks and LLTC was definitely one of the beneficiaries. LLTC began the year in a straight uptrend from $73 to a new high of $99.69. After a pullback and consolidation into a range of $89-$95 for several days, the shares of LLTC seem to have gathered the strength to tackle that always critical price level of $100. Early traders may want a position now in anticipation of an attempt to break through $100. Other investors may want to wait for a close above $100 before initiating a position. Either way, LLTC is in a strong uptrend that should continue as long as this accumulation phase of major technology names continues. If the market sells off look for support around $89- $90 followed by more support in the low $80's. One of the reasons for all of the strength in Semiconductor sector last month was strong earnings and LLTC had one of the best reports. Sales for the second quarter were up 35% and earnings were up 41%. Guidance for the March quarter was very bullish. Because of the strong report, Goldman Sach's raised their earnings estimates for the company and CSFB raised their target to $105. BUY CALL FEB- 90 LLQ-BR OI=296 at $ 9.75 SL=7.25 BUY CALL FEB- 95*LLQ-BS OI=168 at $ 6.75 SL=5.00 BUY CALL FEB-100 LLQ-BT OI=460 at $ 3.88 SL=2.00 BUY CALL MAR- 95 LLQ-CS OI= 9 at $10.38 SL=7.75 low OI BUY CALL MAR-100 LLQ-CT OI= 56 at $ 7.38 SL=5.25 SELL PUT FEB- 90 LLQ-NR OI= 30 at $ 2.88 SL=4.50 (See risks of selling puts in play legend) Picked on Feb 1st at $97.69 P/E = 67 Change since picked +0.00 52-week high=$99.69 Analysts Ratings 7-10-4-0-0 52-week low =$41.75 Last earnings 01/00 est= 0.38 actual= 0.40 Next earnings 04-13 est= 0.41 versus= 0.31 Average Daily Volume = 1.6 mln /charts/charts.asp?symbol=LLTC **** COVD - Covad Communications $74.00 +3.25 (+0.81 this week) Covad communications is in the high speed Internet business. The motto at their Web site says "The Internet, the way it should be". COVD has more than 350 qualified ISP partners across the U.S. to offer Covad DSL. They concentrate primarily in the metro areas, operating more than 16,700 lines. They have formed strategic alliances with AT&T, Nextlink and Quest. Operating over existing copper phone lines allows the company to offer lower rates and 24 hour connectivity. Their primary competition comes from NorthPoint and Rhythms Netconnections. COVD is one of the three major providers of digital subscriber line (DSL) services. Recently they have pulled ahead of their competition in the high-speed Internet business. Investors have rewarded COVD by bidding the price of their stock higher During the fourth-quarter COVD installed more DSL lines than its other two competitors combined. Although they showed an -$0.80 per share loss last quarter, COVD came in well ahead of analyst estimates of -$0.94 per share. Sales rose from $2.76 million to $30.9 million. Not only did they beat the street last quarter, they have exceeded expectations the last three quarters. Bear Sterns analyst James Henry last week issued a Buy rating on the telecommunications company due to the recent strength and performance. Actually many analyst had forecasted a drop in the per share price due to the increased competition in the industry. COVD hit a high at $79.25 Thursday before the major indices fell apart. Tuesday in the early sell-off COVD bounced off a support at $66 and began to rebound, as buyers stepped up to the plate at the Nasdaq. The buying continued today as COVD added another $3.25. The volume was a bit light, but could probably be attributed to traders on the sidelines, with the FOMC meeting going on today and tomorrow. COVD appears to be poised to make a run at its old high of $81. Intraday support for COVD is seen at $72.50 and down at $68. Last week two analysts jumped on the bandwagon with COVD. Axxel Knutson at Platinum Securities reiterated his Strong Buy rating of COVD, while analysts at Frost securities reiterated their Buy rating of the telecommunications company and raised their price target from $62 to $82 over the next twelve months. BUY CALL FEB-65 COU-BM OI=802 at $11.13 SL=8.75 BUY CALL FEB-70 COU-BN OI=511 at $ 7.63 SL=5.75 BUY CALL FEB-75 COU-BO OI=301 at $ 4.88 SL=3.25 BUY CALL MAR-70*COU-CN OI=453 at $11.38 SL=9.00 BUY CALL MAR-75 COU-CO OI=110 at $ 8.50 SL=6.50 Picked on Feb 01st at $74.00 PE = N/A Change since picked +0.00 52-week high=$81.00 Analysts Ratings 6-7-1-0-0 52-week low =$24.83 Last earnings 01/00 est=-0.97 actual=-0.80 Next earnings 04-25 est=-1.05 versus=-0.56 Average daily volume = 2.61 mln /charts/charts.asp?symbol=COVD ************* NEW PUT PLAYS ************* No new put plays tonight. ********************** PLAY OF THE DAY - CALL ********************** BRCM - Broadcom Corp. $296.75 +7.44 (+12.75 this week) Broadcom develops integrated circuits used in broadband data and video transmission products. The company's integrated circuits are in more than 80% of all cable modems and in digital set-top boxes. The company depends on two company's for the majority of their business, General Instruments, which is now part of Motorola and 3Com. BRCM's integrated circuits are also used in Ethernet networking, digital broadcast satellite, and digital subscriber line products. The competition in the industry is stiff, but they hold their own against Conexant Systems, Lucent and Texas Instruments. Sunday's Write Up After a shaky start at the first of the year, BRCM experienced a great earnings run. Now we are adding BRCM to our list of plays for its potential to give us an equally fantastic split run. This earnings season investors have bid the price of many companies stock higher going into earnings, only to punish them by selling shares after the announcement, regardless of the report. Jan 18th, BRCM reported solid earnings, beating the street by 14%, with revenues increasing by 116%. That same day the company declared a 2-for-1 stock split. Since that time BRCM has seen the share price fall from its high at $332.13 all the way back to Friday's low of $272.44. The ex-date for the split is Valentines Day, February 14th, and we believe BRCM is setting up to provide us with a sweet play as well. Friday during the carnage in the broader markets, BRCM found buyers late in the day and managed to finish the day in the plus column. BRCM and the Internet sector has taken a drubbing this week. The $274 area has provided good support for BRCM on three different occasions during the week. The fact that we saw buyers step in and buy shares of BRCM, on a day like Friday tells us the split run is about ready to begin. BRCM can obviously be a volatile stock and may not fit everyone's risk profile. The option premiums are a bit expensive due to the volatility, but if we get a good split run, it should provide a nice return. Although the price of BRCM stock has declined, it hasn't changed the mind of analysts that follow the company. After reporting earnings, Morgan Stanley Dean Witter reiterated an Outperform rating for BRCM, raising year 2000 earnings estimates and the target price from $250 to $400. Tuesday's Write Up The reported death of the tech stocks was greatly exaggerated. Things did look somewhat bleak early Monday, as investors sold shares of BRCM for most of the morning. Talk about volatility. BRCM head south at the open, trading down to $266, before buyers jumped in with both feet. Remember our primary interest in BRCM is for its split run potential. The company will split its stock 2-for-1 on Feb 14th. BRCM appears to be zeroing in on the high of $332.13 set back in the middle of January. We would point out the volume behind yesterday's decline and today's move was a bit light, compared to the ADV seen in BRCM. If you entered this play, be prepared to take some money off the table, as the FOMC meeting will end Wednesday approximately 2:15 ET, with an announcement from the Fed regarding interest rates. Some traders are seeing the rally the past two days as a "buy the rumor-sell the fact" scenario. If that's the case, we could see a sell-off as the Fed makes their announcement tomorrow. We do believe regardless of the Fed decision BRCM will end up with a nice split run, however the road getting there could be a bit bumpy. BUY CALL FEB-280 RDW-BP OI=1516 at $30.13 SL=23.50 BUY CALL FEB-290*RDW-BR OI= 791 at $25.00 SL=19.50 BUY CALL FEB-300 RDW-BT OI=1739 at $20.38 SL=16.00 BUY CALL FEB-310 RDU-BB OI= 632 at $16.38 SL=12.75 BUY CALL FEB-320 RDU-BD OI= 658 at $13.00 SL=10.00 Picked on Jan 30th at $284.00 PE = 401 Change since picked +12.75 52-week high=$332.13 Analysts Ratings 8-13-1-0-0 52-week low =$ 46.25 Last earnings 01/00 est= 0.27 actual= 0.31 Next earnings 04-18 est= 0.31 versus=-0.19 Average daily volume = 2.09 mln /charts/charts.asp?symbol=BRCM ************************ COMBOS/SPREADS/STRADDLES ************************ Stocks Rally As Investors Ignore Potential Rate Increase.. Monday, January 31 Banking stocks led the Dow to solid recovery just one day before officials of the Federal Reserve meet to discuss interest rates. The blue-chip index surged 201 points to end at 10,940 while the Nasdaq closed 53 points higher at 3940. The S&P 500 Index was up 34 points at 1,394. On the Big Board, declines beat advances 16 to 14 on 972 million shares traded. There were 21 stocks at new highs and 175 at new lows. The 30-year U.S. Treasury bond slipped 14/32 and the yield closed at 6.49%. Sunday's new plays (positions/opening prices/strategy): Chris Craft CCN FEB70P/FEB65P $0.93 credit bull-put Extreme EXTR FEB70P/FEB65P $0.62 credit bull-put Newbridge NN MAR17C/FEB25C $6.25 debit diagonal Triquint TQNT FEB135/F140C $3.75 debit bull-call Applix APLX JUL15C/JUL15P $6.50 debit straddle Portfolio plays: Monday's session provided most traders with a welcome reprieve from the recent slumping market. Our portfolio was no different with a number of issues rising to the occasion. Unfortunately, the majority of gains were simply rebounds to previous trading ranges and only a few of the positions offered favorable exit opportunities. Boston Communications (BCGI) moved up $0.50 to $7.25 on news they are offering BCGI Prepaid Connection, their latest prepaid wireless solution, at a discounted rate to all RCA members. BCGI, recently approved as the preferred vendor of prepaid wireless for RCA members, created this prepaid wireless solution so carriers in small to mid-size markets can provide their customers with seamless, roaming prepaid wireless service. Our bullish diagonal position; JUN5C/FEB7C, is now offering a $0.75 profit on $1.31 cost basis. Another of our recent bullish issues actually fell during the day's trading. Silicon Valley Graphics (SVGI) dropped $1.75 to close near $21. Our original spread; JUN17C/FEB20C at a debit of $2.88, was in need of an adjustment and the decline provided an excellent opportunity to roll-forward and up to the MAR-$22 calls. There was no cost for the transition and our new position has better upside potential (at the loss of a small amount of downside protection). The big mover today was Sprint PCS (PCS). The stock gapped-up almost $10 in anticipation of positive earnings on Tuesday. The company is expected to report a loss of $1.44 a share, with an adjustment for the 2-for-1 stock split. Traders say the earnings will come in higher based on an increase in operating income and the record pace of new customer acquisitions. Regardless of the eventual outcome, today's rally offered a favorable early-exit opportunity on the aggressive portion of our current debit spread position. Another portfolio surprise was General Motors (GM). The stock closed above $80 after The Wall Street Journal reported the world's largest auto-maker is close to a deal with Toyota Motors to offer GM's Onstar in-car communications system in Toyotas sold in the United States. The deal would be a boon to GM, which hopes to develop Onstar into a major source of revenue from consumers even after cars are sold. Toyota would be the first auto-maker unaffiliated with GM to offer Onstar, which combines a cellular phone and global-positioning equipment to link drivers to a help center for auto services and emergencies. Our long-term position; LJAN75C/FEB80C, is at maximum profit near the current price but will need an adjustment if the stock moves significantly higher. Keep in mind that speculation of the Hughes (GMH) spin-off will also have an effect on the stock price in the coming weeks. Tuesday, February 1 The markets roared and the U.S. economy set a record for growth just a day before the FOMC's much anticipated interest rate hike. The Dow Jones industrial average ended 100 points higher at 11,041 while the technology-laced Nasdaq composite rallied 111 points to 4,051. The S&P 500 Index was up 14 points at 1,409. On the NYSE, advancers edged-out decliners 16 to 13 with 978 million exchanged. There were 33 stocks at new highs and 136 at new lows. The 30-year U.S. Treasury bond climbed 22/32 while the yield fell to 6.43%. Portfolio plays: Today's rally came right on schedule as investors decided that any rate increase has already been factored into market prices. The majority of issues in our portfolio made favorable moves and there were a number of new winners. Newbridge Networks (NN) was by far the most surprising, climbing over $4 on news the company would sell 1.3 million shares of Crosskeys (CKEY), lowering its ownership in the telecommunications software company to 19%. The network gear developer, whose sale is said to be imminent, has rallied in recent weeks on buyout speculation. Rumors suggest European telecom group Alcatel Alsthom is leading the list of suitors, which includes German industrial firm Siemens AG and Swedish telecoms equipment maker Ericsson. North American firms named as potential buyers include Nortel Networks (NT), Cisco Systems (CSCO) and Tellabs (TLAB). Our new diagonal position offered a its first early-exit opportunity with a $0.75 profit available on $6.25 invested for just two days. Another issue that rallied today was Tera Computer (TERA). The stock price jumped $1.12, closing at $7.75 on an increase in institutional buying. Analysts suggest Tera is poised to steal the high-performance computing mantle from SGI/Cray and expand the market for their computing systems. They lead this unique industry in development of multi-threaded computer systems and expect to become dominant in the production of high-performance computer systems in the next decade. The stock is now trading near an area of maximum profit for our bullish diagonal position but the play will need an upside adjustment (or early exit) if the issue moves higher. General Motors (GM) announced plans today to issue $15 billion in new shares of the stock that tracks the performance of its Hughes Electronics (GMH) unit. GM said it will offer its shareholders $8 billion in Hughes tracking stock in return for their regular GM shares. GM will also contribute $7 billion of Hughes' stock to trust funds for retiree benefits. The move will reduce the number of GM shares on the market, driving up their earnings per share. The transaction will also reduce GM's holdings of Hughes stock to 35%. GM shares climbed $4 on the news, ending at $85. Our bullish LEAPS/CC's position may need an adjustment to maintain its upside potential. We will watch for any consolidation in the issue to assist with the move. The wireless industry also helped lead the market higher and Sprint PCS (PCS), the wireless segment of long distance company Sprint (FON) rose $1.75 to close near $112 after announcing it had added more than 1 million new customers in the fourth quarter. Their earnings were also favorable and our recent bullish debit positions are expected to expire at maximum profit. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* PFE - Pfizer $37.00 *** Cheap Speculation *** Pfizer is a global health care company operating in two business segments. The Pharmaceutical segment includes prescription drugs for treating cardiovascular and infectious diseases, central nervous system disorders, diabetes, erectile dysfunction, allergies, arthritis as well as non-prescription medications. The Animal Health segment makes anti-parasitic, anti-infective and anti-inflammatory medicines, and vaccines for livestock, poultry and companion animals. Pfizer's major pharmaceutical products include a number of well known drugs like Procardia and Viagra. Their popular over the counter brands are Visine, Bengay, Cortizone, Unisom, Desitin, Bain de Soleil, Plax and Barbasol. Pfizer's leading animal health products include market leaders Nemex and Terramycin among others. Analysts suggest that Pfizer may conclude a bitter, three-month takeover battle for Warner-Lambert (WLA) sometime this week. The company originally made an unsolicited bid for Warner-Lambert in early November but Warner-Lambert opposed Pfizer's advances in favor of a deal with American Home Products (AHP). A deal between Pfizer and Warner Lambert would create a drug giant second only to the proposed conglomerate (merger) of Glaxo and SmithKline Beecham. Pfizer's current offer is 2.5 PFE shares for each WLA share, but they may raise the bid to complete the deal. Experts believe the outcome will be favorable and the ratings on PFE are positive. Last week, Salomon Smith Barney reiterated their BUY recommendation with a $45 target. Gruntal posted a new target of $44 in the short-term, with a bullish future outlook after key products post solid growth. They also expect the stock to rally from the recent oversold conditions. Our contention is that PFE will move higher in the next few weeks and this position offers a simple, low cost method of speculating on the eventual outcome of the current activity. PLAY (conservative - bullish/calendar spread): BUY CALL MAR-40 PFC-EH OI=13586 A=$0.93 SELL CALL FEB-40 PFC-BH OI=7716 B=$0.25 INITIAL NET DEBIT TARGET=$0.62 TARGET ROI=25% Chart = /charts/charts.asp?symbol=PFE **** PZL - Pennzoil/Quaker State $11.69 *** On The Move! *** Pennzoil-Quaker State is a premier automotive (after-market) products and consumer car care company. They are engaged in the manufacturing and marketing of lubricants, car care products, base oils and specialty industrial products and in franchising, ownership and operation of fast-lube centers. Pennzoil-Quaker State has strong brand-name recognition in key products such as motor oil with Pennzoil, Quaker State and Wolf's Head, fast-lube centers with Jiffy Lube and numerous car care products such as Slick 50, Rain-X, Blue Coral, Black Magic, Westley's, Gumout, Fix-A-Flat, The Outlaw, Snap, and Classic car wax. This week's technical break-out above a recent trading range near $10 surprised a number of analysts. Josepthal & Company is the leading brokerage for this issue and today they reiterated their BUY rating based on expected favorable earnings. PZL is planning to report in the next few weeks and Josepthal says the numbers will exceed quarterly (consensus) estimates. Apparently investors agree as the stock has risen 10% on heavy volume over the past two days. We will participate in the new bullish trend with a conservative, low cost position. PLAY (conservative - bullish/diagonal spread): BUY CALL APR-10.00 PZL-DB OI=259 A=$2.19 SELL CALL FEB-12.50 PZL-BV OI=20 B=$0.38 INITIAL NET DEBIT TARGET=$1.68 TARGET ROI=30% Chart = /charts/charts.asp?symbol=PZL **** CVD - Covance $14.38 *** Technicals Only *** Covance is a leading contract research organization that provides a wide range of integrated product development services on a worldwide basis to the pharmaceutical, biotechnology and medical device industries. Covance also provides health economics and outcomes services for managed care organizations, hospitals and other health care providers and laboratory testing services to the chemical, agrochemical and food industries. The services Covance provides constitute two segments: early development services (preclinical and Phase I clinical), and late-stage development services (clinical and clinical support services). Covance is one of the world's largest biopharmaceutical research organizations and one of a few that are capable of providing comprehensive global product development services. Last week the company reported favorable quarterly earnings and a solid future outlook based on a $1 billion backlog of business. In addition to focusing on stronger financial performance in 2000, the company will continue to develop new products including a Web-enabled service entirely focused on enhancing the efficiency of drug development. The recent technical change of character indicates that investors are also positive about the company's outlook and today we found a low risk position that returns a favorable profit for those of you who don't mind owning the stock. PLAY (conservative - bullish/covered-combo): BUY STOCK - CVD ASK = $14.50 SELL CALL FEB-12.50 CVD-BV OI=112 B=$2.25 SELL PUT FEB-12.50 CVD-NV OI=148 B=$0.25 INITIAL NET DEBIT TARGET=$12.25 COMBINED ROI (MARGIN)=8% Chart = /charts/charts.asp?symbol=CVD ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ See Disclaimer in section one ************
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