The Option Investor Newsletter Thursday 4-13-2000 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) ************************************************************ 4-13-2000 High Low Volume Advance Decline DOW 10923.50 - 201.60 11144.10 10920.80 1,036,314k 1,254 1,711 Nasdaq 3,676.78 - 92.85 3914.68 3676.67 1,906,015k 1,423 2,794 S&P-100 777.29 - 15.61 797.57 775.97 Totals 2,677 4,505 S&P-500 1440.51 - 26.66 1477.52 1439.34 37.3% 62.7% $RUT 489.22 - 4.22 502.51 488.94 $TRAN 2903.56 - 49.07 2961.00 2900.20 VIX 33.95 + 2.07 33.95 31.39 Put/Call Ratio .71 ************************************************************* Did anybody get the license number of that truck? That was really painful, again. After appearing to be setting up for a bottom on Tuesday we were greeted by a stealth downgrade of the entire tech sector before the open on Wednesday which started another new round of selling. The Goldman Sachs analyst only officially downgraded estimates for Microsoft revenues, not earnings. Looks simple on the surface but the language of the downgrade was a stealth downgrade of the entire PC sector, software sector and networking sector. How did he do this? When he said Microsoft revenues would be weak from slowing sales the magic words were "slowing PC sales." If PC sales were slowing then all PC vendors, Dell, HWP, GTW, CPQ all would have earnings problems by implication. The lack of new computers would mean fewer software sales for the software vendors. Fewer PC sales means fewer network cards, routers, hubs, Internet connections, etc. Funny how a simple revenue reduction estimate for Microsoft only could ripple through the entire Nasdaq by default. The -160 Dow drop at the close on Wednesday was due solely to the four major Dow tech stocks, MSFT, INTC, HWP, IBM, which accounted for exactly -160 Dow points. That was the story for yesterday and today was a pure role Reversal for the major indexes. As I had written on Tuesday the chances for the Dow to continue upward without some serious profit taking, as the major Dow components announced earnings, were slim. As the majors like GE announce and traders move on to other plays the post announce depression arrives. For example GE announced this morning with a +20% increase in profits but the stock lost -6.25 today. After the Dow tech wreck yesterday started the Dow slide, today was momentum driven with the post earnings sparks. After climbing out of the recent trading range between 10900-11200 today's drop slammed us right smack against the bottom of the range again. Right on recent support as well. The earnings announcements are picking up speed. Just some of the notables today included: Stock Actual Estimate PAIR -.03 -.03 PMCS +.17 +.16 DS +.35 +.32 ODP +.32 +.29 GM +2.80 +2.68 GDT +.38 +.38 JNPR +.06 +.04 FDRY +.14 +.09 AMTD +.02 -.04 EGRP +.00 -.16 GTW +.41 +.41 SUNW +.26 +.23 GE +.78 +.77 The most notable in our opinion is the SunMicro announcement after the bell. This announcement has the potential to put a floor under the tech market. They announced on their conference call that order growth was the strongest in the last ten years and revenues should grow by +25%. Revenues this quarter broke all previous records and was the first time over $4 billion. This very positive report could counteract the MSFT downgrade and refocus the outlook on gains. Gateway also posted revenue gains and increasing unit sales. These positives on top of the AMD blowout and bullish forecast could put a floor under the Nasdaq. The Greenspan speech this morning had little or no impact on the markets as he carefully avoided any bearish statements. The PPI report this morning was benign as well. Posting a +1% increase on the surface but only +0.1% for the core rate the feared inflation monster is still invisible. The most serious thing impacting us is still the tax selling by late tax filers. However, there is light at the end of the tunnel. After significant fund outflows last week, there was actually positive cash flow this week. AMG Data reported that in the week ended 4/12 there was +$8bln in positive cash flow into equity funds. $1.8 Bln went into aggressive growth funds and $4 bln into large cap growth funds. Much of this money is late cycle retirement contributions and although positive this week they may shrink after the April-17th filing date. What this does show is that the retail investor is still putting their money to work in the markets and have not been scared off by the bearish activity. This is not the week to IPO your company and several were pulled from the market. With many recent IPOs trading for less than their IPO price the underwriters do not want to launch new offerings when there are no buyers. It is not good for their reputation or their future business prospects. Where to from here? Ask 100 people and you will get 100 answers. One or two might be right. On Tuesday I thought we were due for a bounce and the Goldman Sachs downgrade torpedoed the support that had been building. The rally today just could not get out from under the Dow shadow and the lingering "we have to retest 3650" comments. Well great, they may get their wish. With the Nasdaq only 28 points away from 3650 we may get to retest a lot more than that. Part of the thought process on Tuesday was that any bounce would only be a trading rally for two to three days before the yearly post April earnings dip. Two of those days are now gone and we are very close to the post earnings depression cycle. Now for the catch. Since we are already -27% from the March highs, will there be a post April earnings depression or have we been beaten down far enough already? If you look at the big cap Nasdaq stocks today there was some really big drops at the close. Some would say there was fear and capitulation. Look at the end of day spikes on INKT, AMAT, EBAY, YHOO, AMZN. There were some big drops but some of them only pulled back to zero. There is a term called "shooting the generals" and no pullback is complete without a shooting. Tomorrow we will see if 3650 holds and if not then 3500 could be the next stop. The best of all scenarios would be another capitulation dip at the open and a quick rebound. Because everyone expects this retest and rebound we could be setting ourselves up for a sucker punch. Dip, rebound (because it is expected) and then a real dip as the final selling climax takes place. We all hope it does not come to that but who would have expected the carnage up to this point? I bought the dip on Wednesday and got stopped out, twice! I nibbled again this morning but only slightly and then bought some QQQ calls for $1 at the close. Simply a lottery play. When we get to the point where everyone stops guessing where to buy the next dip and decides to move to the sidelines then the selling will be over. Until the last diehards, like me, decide to sit on cash regardless of how tempting the dip looks, the market will continue to drop. Well, listen up! I am on the sidelines and I plan to stay there until the volume proves the rebound. It would be nice to buy the bottom but I have plenty of false bottoms in my account already so I am going to wait until up volume exceeds down volume by at least 2:1 and advances are beating decliners by at least 2:1. 3:1 would be better but 2:1 should work. I have resigned myself that if it takes weeks I am going to wait. Waiting is cheap compared to getting stopped out over and over and I strongly suggest you consider this as an option. The market is showing NO STRENGTH. The Nasdaq and the Dow closed at the absolute low of the day on heavy volume. None of this wimpy 60% of normal volume stuff. On the bullish side the VIX is at 33 and screaming a buy signal and the put/call ratio is .71 which is also a buy signal. Still there has been no capitulation. So I promise to do my part. I will buy 100 expensive put contracts on the OEX and QQQ at the open in the morning and that will be the capitulation signal that the last bull died and the rally will be instantaneous. (just kidding but you know what I mean) When in doubt, sit out, and doubt about market direction is the only sure thing tonight. Trying to trade this extremely volatile and choppy market will only waste your money. Take Friday off and play golf, fish OR go shopping with your wife. Trust me, it is cheaper than being stopped out again! Trade smart and don't buy too soon. Jim Brown Editor Current long position: Lottery play on $1.00 QQQ calls only. ********** STOCK NEWS ********** General Motors Top Estimates, Sort Of... By Matt Paolucci General Motors Corp.'s (GM) first quarter profit fell 2 percent, as higher rebates depressed earnings, in lieu of higher sales revenue. The world's largest automaker earned $1.78 billion, or $2.80 a share. In the prior year period, it earned $1.82 billion, or $2.68 a share in the same quarter. But take these results with a grain of salt. Earnings per share increased because fewer shares of GM are on the market now than a year ago, due to Company's share buyback program. The number of shares outstanding declined to roughly 637 million in the first quarter from about 667 million in the same period last year. It was part of the reason why results beat Wall Street expectations of $2.66 per share. Revenues totaled $46.9 billion, a 10 percent increase over $42.4 billion in the same quarter in 1999. Sales rose as GM continued pushing its higher-margin vehicles such as pick-up trucks and sport utility vehicles (SUVs). The auto giant's first quarter U.S. market share fell to 28.6 percent from 28.8 percent. GM said its automotive operations earned $1.5 billion, matching the results in the first quarter of 1999. GM's North American unit saw its earnings decline 8 percent to $1.3 billion from $1.4 billion a year ago despite a 9 percent increase in U.S. vehicle sales. Revenue increased 7 percent to $30.1 billion from $28 billion. Shares of GM were unchanged in afternoon trading, at $87.50. "Profits were buoyed versus a year ago by a mix that was greater on the passenger truck side of the business," said Richard Hilgert, an analyst with Fahnestock & Co. in Detroit. "And North America was bolstered by operations overseas." GM built 50,000 more trucks and 32,000 fewer cars in North America than it did in the first quarter of 1999. Profits on trucks are higher than cars, sometimes as much as $10,000 or more on the more popular models of sport utility vehicles. "It's a fantastic volume (sales) environment industry-wide, and that tide is lifting all boats, including GM," Merrill Lynch analyst John Casesa said. GM's vehicle sales in the profitable U.S. market rose 9.2 percent in the first quarter from a year earlier, paced by strong demand for high-margin gas-guzzlers such as the Chevy Silverado pickup, the Chevy Blazer SUV and the Cadillac Escalade SUV, as well as the Cadillac DeVille luxury sedan. Another bright point, GM reported profits of $1 million and $7 million in Latin America and Asia, respectively, compared with losses a year ago. The results were stronger than analysts had expected. But GM Chairman Jack Smith said higher sales in North America and Europe came with "unrelenting competitive pressures." Rebates and cut-rate financing deals have been on the rise this year. GM, Ford and DaimlerChrysler AG have all carried a wide variety of incentives on their U.S. products; GM even brought back a $500 coupon for millions of GM vehicle owners. GM's profit margin in North America declined from 5 percent last year to 4.3 percent this year. Last year's financial performance was a record for the quarter, as the company was still building up inventories after the 1998 strike. Also, its Hughes electronics unit reported a $77 million loss for the quarter, compared with a $78 million profit for the same time in 1999. GM said that was due to investments in new technology. All in all, with the volatility and uncertainty swooning in this market, holding a strong, blue chip company like GM may be just what the doctor just what the doctor ordered. One thing to keep in mind, higher gasoline prices could have a negative impact on future sales of GM's higher-margin luxury and SUV lines. But GM, unlike some of these dot.coms, will most likely be around in a couple of years. ************** Market Posture ************** As of Market Close - Thursday, April 13, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,850 11,250 10,923 Neutral 4.13 ** SPX S&P 500 1,410 1,475 1,441 Neutral 4.13 ** OEX S&P 100 780 800 777 BEARISH 4.13 ** RUT Russell 2000 470 580 489 Neutral 4.04 NDX NASD 100 3,800 4,700 3,554 BEARISH 4.13 ** MSH High Tech 900 1,150 898 BEARISH 4.13 ** XCI Hardware 1,480 1,510 1,440 BEARISH 4.13 ** CWX Software 1,450 1,670 1,202 BEARISH 4.04 SOX Semiconductor 1,050 1,360 1,010 BEARISH 4.13 ** NWX Networking 1,070 1,190 918 BEARISH 4.04 INX Internet 800 940 582 BEARISH 4.04 BIX Banking 520 615 578 Neutral 3.16 XBD Brokerage 450 580 483 Neutral 4.04 IUX Insurance 520 620 602 Neutral 3.16 RLX Retail 900 1,000 976 Neutral 4.13 ** DRG Drug 330 380 374 Neutral 3.30 HCX Healthcare 680 760 747 Neutral 3.30 XAL Airline 130 160 152 Neutral 3.10 OIX Oil & Gas 265 300 291 Neutral 3.16 Posture Alert The pain continues for the Bulls, as the broad market suffered another staggering loss. The Dow lost -1.81% on volume of just over 1 billion shares, while the NASDAQ lost another -2.46% on volume of 1.96 billion shares. Sectors leading the loser board include Internet (-6.46%), Retail (-4.28%), and Semiconductors (-2.70%). With this most recent action, we have downgraded Retail, the Dow, and S&P 500 to Neutral; and have downgraded the NASDAQ 100, S&P 100, Morgan Stanley High Tech, Hardware, and Semiconductors to a Bearish stance. **************** Market Sentiment **************** Thursday, April 13, 2000 If You Say it Enough, it Becomes the Truth! After three days of major losses for technology stocks, Thursday's trading looked as if bargain hunters were finally moving in for an apparent bounce, however; by the end of the day, the NASDAQ closed down another -92 points while the Dow got hit for -202. Speaking of poor performance, the Internet sector (INX) led the losers today with a -6.46% drop, and is not down -39% from the highs just attained on March 24! Statistics like these are looking more common these days, and will probably get worse before getting better. One unfortunate factor that is starting to face this market is complacency. Recently, we have had numerous analysts calling for NASDAQ to be at 3200 or some other magic number, or we have heard that you should be in 50% cash, or in all blue chips, etc. Well, if the media continues to state bearish phrases such as these in such a repetitive manner, it is only a matter of time before it becomes the truth. Psychologists have documented how people who lie about a subject, will then tell the lie so many times, until they believe it is the truth. This scenario has now occurred with technology stocks. This bearish sentiment is knocking the bull's confidence to a complacent demeanor, which only has a compounding effect. To make matters worse, when you see the best companies in the world taking it on the chin (Microsoft, Oracle, Sun Microsystems, Yahoo, Intel), you shouldn't be surprised when your whatever.com is now down -50%. If you were to look at the Market Posture section, the board is not a pretty one to view, with not a single sector in the Bullish category. This can change very quickly; however, it is our belief that this market will continue to be trading range bound, with an emphasis on the bearish side. Too many sectors (and bellwether stocks) have suffered too much damage, and this will take time to restore. Too many investors continue to have the "wait until I'm break-even" syndrome. This will only put more pressure on equities into the rallies. Now to end on a positive note, corporate earnings still look positive, and we'll see if Sun Microsystems blowout earnings can cause a short squeeze for technology stocks Friday. Put/call ratios have not been at this level since October 1999, which was the last time that the market looked potentially poor. Also, the Volatility Index (VIX, 33.95) is currently indicating an oversold condition for the S&P 100, and has held the 35 level for the last year. Finally, the Put/Call Ratio for the NASDAQ 100 was a whopping 4.25 today, indicating extreme pessimism for that index. All of these reasons suggest that we may have another good Friday, as long as complacency doesn't set in! BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. General Electric is the latest bellwether to give positive comments regarding earnings. Short Interest NYSE: Short interest continues to climb as quickly as the market. The short interest on the NYSE increased +5.7% to 4,110,510,698 shares on March 15. This bearish level would suggest further upside potential. Short Interest NASDAQ: Short interest jumped +3.49% to 2,710,141,156 shares on March 15. This bearish barometer would indicate further upside potential. Interest Rates (5.803): The current yield is in bullish territory. Volatility Index (33.95) 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. Mixed Signs: None BEARISH Signs: IPO Dilution: With so many IPO's hitting the market, there seems to be dilution occurring where shares of finally freed up to sell by insiders. $58.6 billion of stock was freed up for trading in March, $67.3 billion this month, and $118.3 billion in May. This is too much stock for the system to handle. 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. Investor Expectations: More and more investors are now expecting high double-digit growth if not triple-digit expansion in their portfolios. This extreme positive sentiment could help fuel a future selloff in technology shares. 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 Thurs Benchmark (3/31) (4/04) (4/06) Overhead Resistance (800-825) 1.25 1.43 0.86 OEX Close 821.52 816.76 777.29 Underlying Support (770-795) 2.17 2.47 2.46 Underlying Support (740-765) n/a n/a 3.62 What the Pinnacle Index is telling us: Based on Thursday's sentiment, underlying support is moderate, while overhead is light. Put/Call Ratio Friday Tues Thurs Strike/Contracts (4/7) (4/11) (4/13) CBOE Total P/C Ratio .37 .51 .71 CBOE Equity P/C Ratio .32 .42 .57 OEX P/C Ratio .71 1.86 1.25 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (4/7) (4/11) (4/13) Puts 800 / 9,650 800 / 10,754 700 / 8,672 Calls 830 / 11,175 845 / 19,040 845 / 18,321 Put/Call Ratio 0.86 0.56 0.47 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 April 13, 2000 33.95 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 10923.55 75.08 100.52 -161.95 -201.58 -187.93 Nasdaq 3676.78 -258.25 -132.30 -286.27 -92.85 -769.67 $OEX 777.29 -4.87 -0.38 -23.86 -15.61 -44.72 $SPX 1440.51 3.72 -11.89 -3.87 -33.42 -45.46 $RUT 489.22 -24.32 -8.53 -16.69 -4.22 -53.76 $TRAN 2903.56 15.41 78.68 30.82 -49.07 75.84 $VIX 33.95 1.07 0.94 2.93 2.07 7.01 Calls Mon Tue Wed Thu Week ENE 73.81 0.31 -1.94 2.82 2.69 3.88 New WLA 107.00 3.31 0.19 0.63 -1.13 3.00 Be patient UAL 63.00 1.06 1.19 -1.50 -0.63 0.13 In uptrend CL 59.00 0.94 2.38 -0.63 -3.00 -0.31 Earn.4/19 LTD 46.88 0.06 2.63 -3.63 -0.94 -1.88 Safety MER 98.56 3.44 0.38 -3.13 -2.94 -2.25 Dropped AMAT 89.00 11.50 1.25 -7.06 -8.56 -2.88 Semi sweet KSS 101.06 2.56 -2.75 1.06 -6.00 -5.13 Dropped HYSL 25.50 -1.69 -2.50 -3.56 -0.25 -8.00 Dropped ADBE 113.56 -7.81 2.31 -7.44 1.50 -11.44 Split?? IBM 110.63 -1.00 -3.13 -6.69 -3.13 -12.50 Dropped LXK 105.00 -4.31 -9.94 -0.06 -0.19 -14.50 Earn.4/24 INTC 121.13 -5.69 -0.38 -8.88 -0.75 -15.69 $120 entry DISH 52.94 -9.00 -3.06 -9.88 2.00 -19.94 Up today SEBL 105.94 -16.43 2.62 -10.06 3.00 -20.88 $100 Supp. ABGX 81.06 -15.00 -14.06 -1.25 8.38 -21.94 New HWP 131.94 -8.75 -1.44 -10.81 -3.06 -22.56 Bouncing NXTL 113.56 -10.69 -3.50 -17.56 2.88 -28.88 Poised SILK 65.50 -13.88 -4.69 -14.31 -4.31 -37.19 Dropped Puts FIBR 36.13 -19.00 -4.50 -6.75 -3.88 -34.13 How low? ICGE 41.81 -8.69 -6.44 -10.44 -5.31 -30.88 Heavenly CNXT 54.44 -6.19 -0.25 -9.25 -7.56 -23.25 New MCLD 58.44 -11.00 -3.75 -2.31 -4.50 -21.56 New IIJI 48.56 -4.38 -2.69 -11.19 0.31 -17.94 Toward $40 LVLT 75.63 -3.75 -4.50 -12.56 6.31 -14.50 Sinking LU 53.50 -1.19 -1.63 -1.94 -2.06 -6.81 Down 11% KO 47.25 -1.19 2.75 1.31 -1.25 1.06 Rst.@ $50 ************ WOMANS WORLD ************ Using Volume to Understand Direction When Your Begging For a Reversal By Renee White When you were a kid, did you ever get into trouble and wish they would just go ahead and punish you so you didn't have to listen to the sermon which never seemed to end? I feel like I am being nagged to death. This bear just keeps chewing us up....chewing and chewing. The maceration is felt by all. Would someone just punch him in the stomach for me and make him swallow, please!! It seems like a year now that we have been hearing that we should "retest the lows of last Tuesday" before a confirmation appears. I don't know about you, but I could swear I have been hearing that comment for what seems to be eternity. Boy, profits sure can vaporize fast, can't they? If we are lucky, Friday may prove to be "D" day. De Day we hit bottom and De Day we rally back. Problem is, I don't know which word is more pertinent, the "if" or "lucky". Either way, those are shaky words to trade against. For a while this afternoon, I thought we were going to rally back. However, when I heard Hugh Hefner's daughter talking more than he, as he just smiled and nodded in agreement, I knew something was up. In any event, I am sitting on some calls bought today, thinking the end is near. Thank You SUNW, for the good numbers tonight. Today, I picked up a book that had some information worth sharing. Day traders know little tricks of the trade which can help option traders. One of these is how volume on the underlying equity can help you decide when to buy, hold or sell a position. I am assuming all new option traders know that they must watch the movement of their underlying equity in order to make decisions about a trade. Sometimes I am questioned about that, which always sends a chill down my spine. You MUST watch the equity and the option price. Just as volume affects the liquidity of an equity, it also affects the option. But, the option is different because liquidity is a matter of the open interest on that particular strike price for that option. Basically, if you decide to be an option trader, you should be good at complicated puzzles and enjoy assimilating abstract details. There's three times the amount of information to interpret per every equity you decide to trade, in order to stack the deck in your favor. When the market is on your side, it is easier. When the market is against you, it feels like you are running through a field of land mines at high speed. Even though you know that every step must be carefully determined, you still end up stepping on something. We have all been caught by the bear's claw from time to time. He needs to eat too and thus, only the strong survive. Comparing volume with the price movement of the underlying equity can help with a portion of your decision making process. In Clifford Pistolese's book, "Using Technical Analysis Revised Edition," he presents an easy-to-read-and-understand overview of technical analysis. He describes technical tools, then gives you charts to self-test your new knowledge. I think it is a good introductory book on technical analysis for the layman. I've decided to review his basic points concerning daily volume and the stock price. The 1994 book I have does not address the effects day-traders have on volume and prices, much less the speed of change from their activity. So, I've added my own thoughts to his basic points. In order to use volume effectively, one must know what the average daily volume is for a particular equity. We mention volume a lot in our daily market wraps, but those numbers are concerning the broader market only. Once the broader market is on your side, then the underlying equity's volume is important. These indicators give us confirmation of a potential trend before us, either intra-day or daily. Volume can be found in several places; possibly your brokers web site, Yahoo Finance, or even your charting service. At this point, a lot of damage has been done to many issues. Since we are in a nasty sell-off, I will start with his volume characteristics of downtrends. It is possible that some previously high PE stocks may stay depressed for some time. Even with an extended rally, their previous lofty valuations may be stunted for several months. Pistolese's comments regarding downtrends are more directed towards stocks that have been going down for a while. So this information may be valuable for those that do not recover immediately. Keep in mind that the speed we are now witnessing with sell-offs and recoveries, has never been seen before in the trading community. Typically, when a stock goes into and maintains a downtrend, the average daily trading volume usually declines. People lose interest with the stock and turn their attention elsewhere. (Remember internet day-traders 1st quarter last year and AOL after its April sell-off last year?) This decreased volume does not take into account a rapid sell-off from bad news or the rapid sell-offs of a major market correction like we have now, but the general trading patterns of a stock under "normal" conditions. Actually, downtrends can occur while the average daily trading volume decreases, increases or remains the same. A downtrend can occur as a rounding top pattern forms on the daily chart, even though no significant change is seen in the daily volume. Pistolese believes that if you are holding a stock that starts to roll over into a downtrend, you should sell once the downtrend is established, since the bottom is not known. (For you stock traders out there, how many wished they'd sold their stocks three weeks ago at the first sign of a downtrend instead of continuing to hold for a 25-30% hair cut?) Also, if a downside price breakout occurs breaking down through a trading pattern, he feels the sell signals are so strong that he ignores volume. Downside breakout patterns to watch for which give clues to further declines are seen with head-and-shoulder formations, double-tops, triple-tops, triangles and rectangles. Although there are times that a decline will have a short-term duration, he feels the underlying is frequently set for either an intermediate or extended decline in price. I see that volume typically increases at this time, on the breakdown. (Those of you who attended the OI Denver seminar, understand this from my Chalk Talk). For anyone new to technical analysis, understanding how to identify these basic patterns on a chart will improve your trading decisions immensely. This book will help you easily identify those patterns. It is hard to discuss price patterns without understanding trendlines. Seeing a stock break a trendline can give you a quick "heads up" to potential problems or alert you to a potential opportunity. It is these trendlines that we trade against on an intra-day basis which alert us to reversals. Remember "The trend is your friend", usually because it makes you money if you learn to perfect it. Hopefully, after suffering through a sell-off, there comes a time when the volume becomes stagnate. Typically, this signals that the majority of the sellers are gone and no one else wants out of the stock. Sometimes this occurs after a rapid capitulation to the downside with volume. It can feel like a flutter of death or a flutter of life. In the old days (a few years back), it happened over several days and a consolidation pattern would then be seen after which, a further breakdown or an uptrend began. These days, it may occur intra-day and the challenge is determining whether the new uptrend is for real or a bear trap rally head fake. For confirmation, the uptrend must continue and take out the previous days high, on strong volume. This weekend, I'll share more on his thoughts (and mine) about volume characteristics of an uptrend. If we do get confirmation of the bottom followed by a rally tomorrow, be very cautious. Many traders will take any profits made before they leave for the weekend. Contact Support ******* Leaps and Time Value Decay By Mary Redmond I thought the drop in the NASDAQ this week and last week was a good opportunity for me to buy leaps on some of my favorite tech stocks. I have traded both short term options and leaps but I have had more success with leaps. To trade both leaps and short term options successfully you need to understand the concept of time decay. A leap is a long term option to buy 100 shares of stock in the underlying security at a specified price. For example, if ABC is $100 and the Jan 01 100 leap is $20 then you pay $2000 for the right to buy 100 ABC at $100 before Jan 01. If ABC goes to $200 the leap will be worth $10,000 at expiration for a profit of 500%. The maximum loss is $2000 if ABC is worth less than $100 at expiration. The rate of decay of an option is not linear. The rate of decay is much faster in the last few weeks of an option's life than it is in the first few months. The rate of decay (loss of time value) of a three month option is approximately twice the rate of decay of a nine month option. The rate of decay is actually related to the square root of time remaining, but few traders actually use this mathematical formula in their daily trades. I think it's usually best for beginners to trade leaps, as many beginning option traders buy near term options because they are cheap. They don't realize that a near term (expiring) option will lose value as it reaches expiration even if the stock price goes up. You are fighting the clock and the odds are against you. A leap is a long term option that expires in the month of January. Nowadays there are two and even three year leaps, which I love because with a two year leap, the rate of time decay is very slow. If the stock goes up you can make as much money or more with a leap as you could with a short term option. With one year to expiration, a leap will lose very little time value during the first three months. For example, if the leap costs $20 (or $2000 for one) and the stock stays flat for the first three months, you will still have a leap that is probably above $19 1/2. After the first three months (when the leap has about nine months to expiration), it will start to lose some value slowly depending on the movement of the stock. If the stock stays flat you could lose about one percent the first month and two or three percent in the second or third month. The actual loss depends on many factors, so it will be different with each stock. When the leap is six months or less to expiration you will see a significant erosion of time value. In other words, even if the stock stays the same the option will be worth less than it was at a year. From this point onward, the rate of time decay starts to accelerate. Every month the rate of decay gets faster until the final week before expiration at which the option will trade close to its intrinsic value. One of the primary problems with technology stocks over the period when the NASDAQ dropped was decreased money flows to this sector. A combination of tax payments, decreased mutual fund flows and decreased buying by technology funds have contributed. Some of these factors are related to each other. For example, when the NASDAQ dropped 575 points last week many people had margin calls. If you get a margin call and have to pay taxes at the same time, youmight have to sell your mutual funds. This has a spiraling effect. At the same time, if there are alot of pending IPOs, it can drain money from the tech stocks which are already public. Why? Many of the largest buyers of IPOs are large mutual funds and private institutions. A very encouraging and optimistic statistic was reported Thursday evening by AMG Data Services. For the week which ended April 12, equity mutual funds received inflows of approximately $8.4 bln. Over half of the money went into large cap growth funds, the largest inflow in over 4 years. Other sources report that $1.8 bln went into aggressive growth funds, and $922 mln went into technology funds. I don't believe that the funds are going to stop buying. They have to show quarterly returns and can't sit on cash very long. I don't know for sure, because nobody knows for sure, but I think they will start buying technology stocks again and this could be one of the catalysts for a rise in the techs. If you were a fund manager and wanted to show a 20% quarterly return, what stocks would you buy now? Probably the stocks in a sector which has just taken a hit. Contact Support ************** TRADERS CORNER ************** Is this Reasonable and Necessary? By: Molly Evans We'll just call this market The Great Character Builder. Do you have so much character now that you can't stand it? You undoubtedly know the story of the frog and how he relates to us as investors or traders. If you throw a live frog into a pot of boiling water, he's going to jump out very quickly! However, if you have the same frog swimming around in temperate water and then slowly turn up the heat, he'll stay there until he's cooked. You feeling any heat? Our friends at CNBC and other writers say there's not enough fear in the market. Mmmm Hmm! Checked your water temp lately? If you're still fully in and playing both of these indexes like a drum...well then, kudos to you! It's one tough place to consistently bring home a buck right now but then I'm not telling you anything you didn't already know. Actually, I used to be quite the reliable contrarian indicator. Perhaps I still am. Time will tell. Back in January and February I'd come home from work, look at how much money the market put in my account and frowned about where I could have done better had I been home to actively trade it. I started to whine to my family and friends that I could make so much more and have so much more fun doing it by staying home to trade. I am a nurse anesthetist (CRNA); I put people to sleep and administer spinals and epidurals for surgery and obstetrical cases. Yes, I wake them up too. I knew that one was coming! It is often said that the practice of anesthesia is 99% boredom and 1% sheer terror. I don't want to scare you, but there's a lot of truth in that. I take my career and position very seriously of course but I find my mind wandering to "wonder what the market is doing now?" There's no internet connection or TV in operating rooms. Drives me nuts! The thing is, in the good ole days of last fall and winter, I didn't have to worry too much because what I really meant in my question was, "I wonder how much the market is up today???" When I got really serious about hanging up a lucrative career that I spent years of education and training in, a little voice inside said, "Wake up you fool! This is a sure sign of a market top!" Sure enough, it was. Where's all this leading? I can't wait to get back to my cold, windowless operating room next week! Pencil in a rally folks!!! Seriously though, you hear all kinds of talk and speculation about what is the bottom number, how much volume do you need to call it a true capitulation, yadda, yadda, yadda! Enough already. To do this with any reasonable guess factor you simply need to look at a chart. And it just so happens that I've provided one here for you: This is a weekly chart of the Nasdaq from mid 1998 to today's close. I've drawn the trendline from the infamous October low to the straight line the Nasdaq "should" have taken. Then I drew another ray illustrating what the Nasdaq "did" take when it took off for the moon last fall. If you move the crosshairs to where the next candle will fall on in conjunction with that line...you get a thereabouts number as to the low valuation of the Nasdaq for the next week. I'm not even going to suggest that's what it'll get down to. I'm not going to say it can't go lower either. Remember, I'm that leaf in the stream. The only thing I can say is that unless, you were just incredibly intuitive and had your radar on to know to get out or start going short circa mid March, you've been sealioned like many of your fellow traders and investors. Arp! Arp! We're not in the market of October to March anymore. The dynamics have changed. Of course we "know" that really nothing fundamentally has changed. Someone finally just blinked and started rolling that big ole snowball down the mountain. We can't say we never saw this coming. I hate it just as much as anyone. I've put out fires in my own accounts all week and I'm still blistered! Hey! Did someone say "ribbet"? There's no need to get nasty! Better days ahead all! 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: ***** HYSL $25.50 -0.25 (-8.00) The tech tumble gripped HYSL by the throat earlier in the week. We warned in the last update to pay close attention to the broad market for further hints as to its direction. Unfortunately, as a result of HYSL's performance in the last two sessions, it became obvious the overall commanding sentiment has squeezed out any chance of it regaining last week's upward trend. It's possible that the stock could still have an upswing before its earnings on April 25th (confirmed for after the close). But at this point we're not waiting around. HYSL is a drop this evening. IBM $110.63 -3.13 (-12.50) The massive breadth of the technology sell-off eventually infiltrated the blue-chip laden Dow Jones. And yes, even Big Blue was effectively pummeled this week, especially in the past two sessions. A steady 10.2% correction is not what we want for a call play. Plus technically, IBM was thrust below major DMA indicators. This is a very unfortunate ending to a profitable momentum run. While we enjoyed playing the uptrend amid a multitude of entry and exits (sometimes with spreads topping 16 points!) it's time to retire IBM. Recall too, the company is reporting earnings this Tuesday on April 18th, after the close. For those dedicated readers who've been following the news on IBM, here's a few tidbits. IBM Japan won another computer outsourcing contract this week. This time they signed a 10-year $660 mln deal with Japanese steelmaker Sumitomo Metal Industries Ltd. IBM also won a five-year $50 mln contract to provide Scoot.com Plc, the UK's e-business directory, with advanced business technology. KSS $101.00 -6.06 (-5.19) Your probably wondering, if retail sales were so good in March and if consumer spending appears to be staying strong, why did investors dump shares of KSS and the retail sector today? That's a good question. We've said several times that what's good for main street, isn't always necessarily good for Wall Street. There has been no news out on Kohl's to change the fundamentals of the company, and they did report stronger retail sales than most of their peers last week. Call the decline today a change in market sentiment, call it profit taking that got out of hand, call it what ever you want. We are going to call this play a done deal. For those wanting to hang in there a while longer, KSS will split 2-for-1 on April 25th. It is possible this retailer could pick itself up, and dust itself off to make one more run into its split. With Kohl's breaking the $104 level of support late today, it could be a little tough to turn this one around in the next few days. For now we will concentrate our efforts elsewhere. MER $98.56 -2.94 (-2.25) Good thing we noted to confirm the earnings date in the initial write-up on Tuesday night. In fact MER reports earnings on Monday, April 17, BEFORE the bell, not on the 18th as tentatively scheduled. That leaves just tomorrow to close the play since on principle we never recommend holding through earnings. That said, for those quick on the trigger, a decent entry could have been had at the 5-dma ($102.63) yesterday, but you'd have needed an equally quick trigger to get out at the top of $107 just two hours later before MER slid back to close at $101.50. Today, it bobbed and weaved around $100, a level of support we thought was buyable if MER bounced from that level on volume. Alas, no entry today as MER slid under $100 to just over $98 by the close. Recall that's $100 is the level at which we thought it might be smart to find another play. Hopefully you did just that since as noted above, earnings are Monday, and thus, we are dropping the play tonight. SILK $65.50 -4.31 (-37.19) The high-flying favorites of yesterday are fading fast. SILK has quickly fallen out of favor as traders continue to evacuate the new economy and head for the blue chips. Blame it on margin selling, call it a valuation correction, or call it just plain ugly. We mentioned last Tuesday that SILK and KANA had both stabilized, and found support. Well the support didn't last long as SILK plummeted through $85 Wednesday, and traders didn't stop there. The selling continued Thursday as SILK slipped through its last major support level of $70. Another item pressuring shares of KANA and subsequently SILK, is the upcoming lockup expiration of 30 mln shares of KANA. The shares will be released after the merger is completed, we don't want to hang around as a flood of supply comes to a market with very little demand right now. PUTS: ***** No dropped put plays this evening. ************************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 ************************************************************** 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 Contact Support 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. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 4-13-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ******************** PLAY UPDATES - CALLS ******************** INTC $121.13 -0.75 (-15.69) The late session selling in the NASDAQ got the best of INTC today. As it traded as high as $129.25 and held at the $125 level for most of the day, INTC was looking decent. But the NASDAQ bleeding continued and brought the stock with it in the final hour. The NASDAQ has been the primary catalyst for INTC during the last few weeks. Even as ABN Ambro raised its rating from Hold to Outperform, INTC followed the broader trend. It is important to take note of this. The NASDAQ has closed at its low the past two days and doesn't appear to have truly retested last Tuesday's low of 3650. Although we are below our pick price, INTC certainly has given us plenty of opportunity. The Semiconductor sector still is a hot spot in the market as Rambus(RMBS), Altera(ALTR), and Advanced Micro Devices (AMD) all beat the Street's earnings' estimates. INTC is due to report on April 18th. So when trading INTC, watch for the NASDAQ's movement and direction. If it retests the 3650 level, watch for a capitulation in the sell-off with strong volume both down and back up. It very well may go below 3650. Remember that INTC bounced off $119 last Tuesday, which was just above its 50-dma last week. Its current 50-dma is $120.88. Target- shooting early tomorrow may be the best bet. DISH $52.94 +2.00 (-19.94) Along with many of the stronger stocks on the NASDAQ, DISH is bouncing at its 100-dma ($51) as investors try to decide whether they want to load up their plate again. Uncertainty in the broad markets is fueling their indecision. Yesterday saw another large decline, as DISH gave up nearly $10 on volume of almost 9 million shares vs. the ADV of just over 2 million. Today was a bit more encouraging, as DISH actually gained $2 on double the ADV. Showing good strength relative to the bulk of the tech sector, the stock may be putting in a bottom here. It was encouraging to see DISH hang onto its gains as the NASDAQ rally failed, but now intraday resistance is forming near $55. A retest of today's low at $47 or a bounce at the 100-dma may provide an attractive entry point, but don't try to catch the falling knife. Wait for signs of a bounce on increasing volume before moving in to nibble on this play. More conservative players will want to wait for buying volume to push prices through the $55 level before jumping on board. There is still over a month until DISH is scheduled to report earnings (May 15th), so that event is unlikely to provide any support in the near term. HWP $131.94 -3.06 (-22.56) Haven't we been here before? If that is your thought, you are absolutely correct. Over the past month, HWP has been stuck in a $25 range, finding support at $130 and resistance at $155. Yesterday saw HWP abused by investors as the computer maker gave up over $10, and the broad market weakness today dragged the stock even lower. We are now very close to support, which would normally bode well for a new entry point. However there are a few cautionary points to be aware of. Closing under the 50-dma ($135.44) and just above the low of the day at $131.94 is bad enough, but combined with above average volume the past two days and today's formation of a bearish Shooting Star candle pattern is making us a little timid going forward. Earnings, currently set for May 17th are far enough away that the event is unlikely to affect our play in the near term. We need to see the $130 support level hold and any bounce higher from here needs to be confirmed by strong volume. Look for entries to present themselves as the stock bounces, but be vigilant for a possible failed rally. As we have seen this week, even strong stocks like HWP cannot withstand the negative pressure created by a broad market downtrend. In their conference call today, Sun Microsystems claimed to be taking market share from HWP, which could be yet another negative factor going forward. LXK $105.00 -0.19 (-14.50) Still waiting for a definitive move from LXK, we are once again sitting at the $105 support level. There was a mid-afternoon buying spree yesterday that quickly added $4. Unfortunately there was no follow-though and the gains bled away as the afternoon progressed. Today's low was a couple dollars above the low from last Tuesday, and we again bounced at the 100-dma ($100.63). Even with the broad markets selling off towards the end of the day, LXK held its ground and the $105 level looks like a good launch point once the markets recover their footing. Volume has been bouncing around the daily average, but is not giving us a clear signal going forward. This is a good time to use caution - we still have earnings coming up on April 24th, but the health of the markets is indeterminate. Consider target shooting intraday dips near the 100-dma, but keep an eye on the broader markets; if their health doesn't improve, LXK will have a hard time moving higher. SEBL $105.94 +3.00 (-20.88) Managing to avoid moving lower with the broader markets, SEBL is holding support at the $100 level and is sitting just above the 100-dma ($104.13). The losses on the NASDAQ have prevented the stock from moving through resistance at $113. Although volume is sitting near the daily average, there just isn't enough buying interest to sustain any moves higher. This play has a short fuse, as earnings are set for next Tuesday after the close. We are seeing good support, but need to see the stock move higher in order for this to become a good play. Given the good relative strength, SEBL should be able to move higher if the broad markets can find their legs. Aggressive traders can consider target shooting intraday dips near the 100-dma, but play with caution. If the broad market weakness continues, the downdraft could spill over into stronger stocks like SEBL. A more conservative strategy would be to wait for buyers to push the price through resistance on strong volume. CL $59.00 -3.00 (-0.31) Trading volume is still perky and outpacing the ADV of 2.25 mln, but we've got a little bit of the Nasdaq trepidation permeating our "old economy" play. Plus CL may be experiencing some natural consolidation after making a charge the 52-week record high yesterday. The stock just missed its mark by $1.50, topping out at $65.25! The 200+ dip on the DOW today also had its effect, however CL held up quite well overall. The stock is currently perched just a smidgen below the 5-dma ($60.64) and 10-dma ($59.82). This is a relatively safe support level considering the circumstances, but look for a definitive upward move, preferably through $61, before beginning any new plays. Keep in mind too that Colgate-Palmolive is scheduled to report earnings next Wednesday on April 19th, before the bell, so be prepared to have your positions closed prior to the announcement. NXTL $113.56 +2.88 (-28.88) The research report from analysts at W.R. Hambrecht last week reiterated their Buy rating on NXTL. Analysts there projected a price target of $200, and said they believe the communications services company is poised for a strong first quarter. We'll find out about that later this month. They went on to say, they would use any weakness as a buying opportunity. Well folks we've had the weakness, and may have found another buying opportunity. No change in fundamentals just one of the many tech stocks that has followed the Nasdaq lower for most of the week. With NXTL losing another $14.69 in the past two days, why is it still on our play list? Maybe we're just stubborn, but the drop today to $104.63 marks a 26.5% loss for the week, and a 35% loss since its high in late March. $110 is an old support level and the fact NXTL was able to come up with a gain, albeit a small gain for the session, suggests that our play may have hit a near term bottom. NXTL did find buyers enter this morning and was trading +13.00 for the day going into the last two hours of the session. We aren't suggesting you run to jump in, but would view today's action as a chance to target shoot an entry depending on your risk profile. A bounce off $110 or a move back through $120 may be points to consider. WLA $107.00 -1.13 (+3.06) There's a pattern developing here. The past two days investors have sold shares of our drug company at the open. Nervous traders have come back in both days, attempting to bid shares of WLA back up. On Wednesday WLA did manage to finish the session in plus territory, but today there just weren't enough buy orders to do the trick. On the plus side of things, $106 did seem to provide support today, while $105 was the magic level yesterday. Again another pattern developing, higher-lows. The fly in the ointment facing our play is investors are just plain nervous. Whether they are retail traders, or professionals, traders seem to be confused. Let's face it, after you buy so many dips and get stopped out, it can be tough to buy the next dip. That's where discipline and patience comes in handy. WLA has held up fairly well this week and we would view any momentum to the upside as a chance to join in. The CPI data to be released in the morning will likely set the tone for the day. If investor psychology turns more negative, then stand aside and wait for an entry point. WLA did penetrate the 10-dma at $104.47, but was able to regain its footing, which is a plus for our play. Our advice, be patient and let the market dictate your next move. LTD $46.88 -0.94 (-1.88) Well, we thought we had a breakout happening when we picked the Limited on Tuesday. Unfortunately, the rest of the market would have nothing to do with it and took down almost everything in its path, including LTD. While intraday support near the 5-dma of $48.74 failed to hold (there aren't many 5-dma's anywhere that survived the last two days), the 10-dma of $45.90 never got tested - even today. Even if that can't hold tomorrow, prior resistance before the breakout was at $45, and should now act as support since retail stocks are maintaining their disposition much better than other sectors during this selloff. If there is good news, it's that the low volume is indicating more of a lack of buyers than an abundance of sellers. If volume comes into the issue as the rest of the market makes a recovery, it's probably safe to slip back into LTD. Good entries come on the average only once per week, but the rest of the market must cooperate too. That said, you may want to target shoot at $45, but in this market we think it makes more sense to see a bounce first. UAL $63.00 -0.63 (+0.13) PaineWebber airlines analyst Sam Buttrick cut his rating of UAL on Wednesday. Buttrick cut UAL to Attractive from Buy, noting the recent rise of 25% in the last month. He said as oil prices have fallen, revenue trends have improved. However, the recent run-up in shares of UAL now makes the stock "just merely good". The expiration of UAL's employee stock plan is looming as well. United's pilots and executives are headed to Washington to engage in negotiations with federal mediators. A United spokesman said mediation is part of the process and emphasized that there will be no disruption in service for passengers. The downgrade and nervousness surrounding the mediation gave traders a reason to take profits yesterday, but the stock managed to climb back above support to close at $63.63. Although UAL closed slightly lower Thursday, we'll take "just merely good" as UAL's recent trendline is firmly intact and the outlook for airline industry remains rosy. The volume has been weak in the last two days of profit taking, watch for the action to pick-up as UAL continues its ascent skyward. Use a bounce off the 5-dma, or confirm direction with volume as an entry point. ADBE $113.56 +1.50 (-11.44) ADBE took a bath along with the rest of the software sector Wednesday, on the heels of the MSFT downgrade. Goldman Sachs analyst Rick Sherlund revised his revenue estimates for MSFT's most recent quarter, citing a slow down in the PC sector due to the Y2K non-event. ADBE followed the market down yesterday, finding support at its 10-dma at $110. The stock managed to buck the trend Thursday and close in positive territory, continuing to show strong relative strength. ADBE was a presenter at the Apple publishing show Print 2000, on Thursday. The daylong conference for desktop publishing professionals gave ADBE the opportunity to debut its new InDesign and InProdcution software. The introduction of InDesign is expected to accelerate ADBE's sales growth as the company enters the publishing market. The chart for ADBE continues to look good as the stock finds strong support at its 10-dma. Watch for volume to continue to be strong and look for a bounce off the 10-day as an entry point. A conservative trader may wait for ADBE to breakout above resistance at $120 on heavy volume before entering into the play. We'll watch for ADBE to show continued strength as traders await the upcoming Annual Shareholder Meeting on April 26th. ADBE is expected to announce a stock split at the meeting which could further fuel the stock. AMAT $89.00 -8.56 (-25.88) Wall Street continues to pound the table on the Semi's. Salomon Smith Barney initiated coverage on AMAT Wednesday with a buy rating. Morgan Stanley raised their price target to $120 from $105. Finally, Robertson Stephens maintained AMAT at a Strong Buy, noting that AMAT is well positioned to benefit from Intel's announcement of an upward revision in capital spending to $6 bln in 2000. AMAT competitor, KLAC reported earnings of 0.38 cents per share Thursday, besting estimates by a nickel. And we should mention the blowout report from AMD Wednesday. The company reported $1.15 per share versus estimates of 0.58 cents. In spite of the stellar reports from the semi's, the Philadelphia Semiconductor Index ($SOX) fell 2.7% in a late day sell-off Thursday. At one point Thursday AMAT was better by $5, but later fell to sector weakness. Many money managers feel that the recent dip in market leaders like AMAT is a buying opportunity, considering the strong earnings reports thus far. While market technicians warn that the big tech names are currently trading at key support levels. Turning to the chart, we see AMAT is positioned at a key technical level. So far, AMAT has formed a pattern of higher lows and higher highs. Closing at $89 Thursday puts AMAT at a higher low in its recent trading range. From here, watch for the AMAT to rebound and momentum to return to the Semi's. Should the broad market rebound, AMAT could lead the rally. However, set your stops accordingly in case of a breakdown in support. AMAT will have to clear resistance at $100 before moving higher, a move above that level may provide a good entry point with less risk. ******************* PLAY UPDATES - PUTS ******************* IIJI $48.56 +0.31 (-17.94) For the fourth day in a row, IIJI pursued its aggressive track into deeper territory. In a last minute ditch on Wednesday, this foreign Internet even reached down below bottom support at $50 to tag $48. While the Nasdaq bounced off its lows early on today, IIJI followed suit and managed to climb to $57.88 during amateur hour. However the stock couldn't hold the positive move and quickly retraced from the vicinity of the descending 5-dma (now at $56.98). IIJI eventually corrected back below the $50 mark resulting from its own technical pressure and the broad negative tech sentiment. Assuming the sell-off in the Nasdaq resume, IIJI's intraday volatility should continue to provide an excellent environment for quick in-and-out plays. The next goal? It is for IIJI to slip under $48 and move towards $40, a support level not seen since the initial months following the IPO in August 1999. LVLT $75.63 +6.31 (-14.50 ) The sector sunk again on Wednesday making it the third day in a row the Internets lost ground. LVLT obediently peeled off another layer, this time shedding $12.56, or 15.3% in a single session. Again this dissenting move came alongside a Strong Buy reiteration by Banc of America Securities, the third positive recommendation since last week. Despite a boost in the share price today, LVLT couldn't manage to put a dent in the $80 mark. This is a good sign that LVLT can keep making moves under its historical bottom at the technical 200-dma indicator (currently at $79.02). Take a look at a six-month chart for visual confirmation. In the news yesterday, LVLT announced it would sell a 25% stake of its $150 mln undersea cable system to Viatel (VYTL), a long-distance communications service company. The Trans-Atlantic fiber-optic system is currently still under construction. Global Crossing Ltd (GBLX) is also participating in the project, which is expected to be operational by September 2000. LU $53.44 -1.88 (-6.31) LU may move at a snails pace, but the fact is the communications company has lost about 11% for the week. If you're a follower of volume, you'll note the average daily volume for Lucent, comes in near 20 million shares per day. This week the ADV is running closer to 13 million shares. The point we are trying to make is, is that no volume equals no buyers. The lack of interest in Lucent seems to be allowing it to drift lower. Lucent is approaching its low of $49.88 set back earlier this year. Another test of that level may bring buyers out of the woodwork and may not. The company is due to report earnings next Wednesday before the open, and at this time, there seems to be no earnings run in sight. An announcement that they had signed a $400 million pact with Fidelity Holdings didn't help the equipment maker today. Although time is beginning to run short, our play may not be over yet, as selling picked up in the last fifteen minutes today when LU fell about $1 with over 1.2 million shares traded. Bounces back to $54 or $56, followed by weakness may provide a last minute opportunity to buy puts. ICGE $41.81 -5.31 (-30.88) This is a put play made in heaven. Every level of support that we though had an inkling of holding has been snapped like a twig in a hurricane. First $60, then $56, then $50. Today, $50 acted as resistance, try as ICGE might to break back above it. In its failure, it rolled over to $40, nicely below its next level of support at $42. There is apparently no love lost in the B2B sector. While we would be remiss if we didn't point out that this issue is incredibly oversold and technically due for the mother of all bounces, we're also not going to fight the tape. Tread carefully. The next support level is down at $33. Perhaps the best entry would be to wait for a tick up to $42, then a decisive bounce south as the rest of the market confirms the downward movement. You might also wait for a simple breakdown under $40. Either way, be ready to cover quickly or with a stop loss should the market begin a solid recovery sometime tomorrow. KO $47.25 -1.25 (+1.06) The broad market rally that pushed KO higher last Tuesday carried the stock through Wednesday. But the momentum broke down late Wednesday afternoon as KO ran into major resistance at $50. That level has proved to be staunch resistance for KO in the past month. After hitting $50 yesterday, KO rapidly lost ground in the last hour of trading, culminating in a gap down Thursday morning by $1. The sell-off today put KO below its 10-dma which had provided support in its brief rally. The stock now trades just above support at $47. Look for KO to find resistance at its 10-day, which may provide a good entry point. Traders looking for less risk might wait for KO to break support at $47 before entering into the play. In the on-going racial discrimination lawsuit against Coke, a judge ruled Wednesday that an attorney chosen by the plaintiffs cannot represent them in settlement talks. The plaintiffs chose a new lawyer, claiming a "breakdown" in their relationship with attorneys. FIBR $36.13 -3.88 (-34.13) What can you say about FIBR. No news, just sellers, and the question now becomes how low can it go before buyers begin to appear. The one thing we would point out is Osicom is not a big cap stock that gets a lot of press and attention. Those that do trade this company seem to be familiar with it and the day to day goings on. So what has caused this company's price to drop over 50% this week alone. Unfortunately we don't really have a good rumor or news on the company that would change the outlook going forward. And that just may be the problem. There is apparently little going on that will change the losses currently being experienced by FIBR. Investors will only hang in there so long, before they say enough is enough and move on. Plenty of traders have moved on in the past two days as FIBR made another new low for the month today at $35.50. Closing near the low, doesn't paint a pretty picture, although intraday charts today, would "appear" to suggest Osicom is trying to find a bottom. A bounce back to the $39 to $40 area, followed by a move south may be another chance to enter this play. Keep in mind FIBR has lost about 68% of its market value so far this month. $35.50 did provide support for FIBR back in the middle of January. A move through there and the next level of support is seen near $30. ************** NEW CALL PLAYS ************** ABGX - Abgenix Inc. $81.06 +8.38 (-21.94 this week) Operating in the biopharmaceutical field, Abgenix develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions including transplant related diseases, inflammatory and autoimmune disorders, and cancer. Harnessing the power of the mouse, ABGX has developed XenoMouse technology, a proprietary technology which the company believes enables quick generation of fully human antibody product candidates using mice. Current internal product development programs have yielded four antibody product candidates, with ABX-CBL being the current front runner. It sounds like science fiction, producing human anti-bodies in mice, but ABGX claims to be doing it. Chasing the holy grail of the Biotech industry, cures for the most feared diseases, cancer and autoimmune system afflictions, ABGX will be a very hot property, if they can pull it off. Posting a new all-time high over $200 in early March, ABGX has been abused along with the rest of the Biotech sector since then. The only respite to the decline was a brief move up in advance of the company's 2-for-1 split which took place last Friday. Since then, the stock has declined back below the 100-dma ($87.75), and seems to be building support near $71. The tech sector (Biotechs included) have now declined significantly off of their highs of only 5 weeks ago, and ABGX itself has endured a 75% decline in that time. In the midst of the broader markets continuing to decline, ABGX is making a convincing show of holding support in the low $70's and actually moving strongly higher today, on nearly double the average daily volume. If the recovery can continue, look for ABGX to run into resistance at $87 (near the 100-dma) and then $94. Bounces off support are buyable as long as volume confirms the move, although conservative players may want to wait for ABGX to take out that first resistance level first. Earnings are just around the corner, confirmed with the company for April 25th, and if the markets cooperate, ABGX could have a nice run. In the news today, ABGX has hired Dr. Steven Chamow as VP of Process Sciences. Dr. Chamow, a biochemist with extensive industry experience in biopharmaceutical development, will be responsible for building and leading process science groups at ABGX. BUY CALL MAY-80 AZG-EP OI= 0 at $9.63 SL=6.75 New Strike BUY CALL MAY-85*AZG-EQ OI= 0 at $8.13 SL=5.75 New Strike BUY CALL MAY-90 AZG-ER OI=55 at $6.50 SL=4.50 BUY CALL MAY-95 AZG-ES OI= 2 at $8.75 SL=6.25 low OI Picked on Apr 13th at $81.06 P/E = N/A Change since picked +0.00 52-week high=$206.50 Analysts Ratings 2-0-0-0-0 52-week low =$ 6.41 Last earnings 01/00 est=-0.06 actual=-0.05 Next earnings 04-25 est=-0.11 versus=-0.22 Average Daily Volume = 661 K /charts/charts.asp?symbol=ABGX ENE - Enron Corp. $73.81 +2.69 (+3.88 this week) For four years running, Fortune magazine has named Enron the "Most Innovative Company in America" and last year named them one of the "100 Best Companies to Work for in America." This worldwide energy giant isn't into just power generation. They also are the number 1 buyer and seller of wholesale gas, the top wholesale power marketer in the U.S., and operate 32,000 miles of gas pipelines. Not only that, they run far flung operations including paper, coal, chemicals, engineering and construction, and the emerging jewel, a fiber-optic bandwidth development and marketing business. Welcome to Enron's world where beating the street's earnings estimates by 8% can actually get your stock price to go up while plain old technology stocks crumble around you. All kidding aside, the energy sector has been a big beneficiary in the flight to quality. Those issues within the sector that offer investors more than just a dividend and can offer a growth story run by the best management teams too are seeing a real payoff in the stock price. ENE reported earnings yesterday that exceeded analysts $0.37 estimate by $0.03. That's particularly impressive when they have over 700 mln shares in float and over $1 bln (with a "b") in annual profits. So why open a play on a company that reported? What about post split depression? It didn't happen. In fact, the price gapped up at yesterday's opening and moved up, while the rest of the market did its best submarine imitation and went underwater. Volume has picked up noticeably too since the earnings announcement. That tells us that investors want more and are in no hurry to sell. Technically, $71 formed a nice intraday bottom over the last two days and might make a nice target at which to shoot. The one-day hammer formation on the candlestick looks pretty good too. The most interesting part however, is that ENE bumped its head on $74. As the lows get higher, you've seen the ascending wedge pattern before. If ENE can get through $74, the next stop would be $78, then on to blue sky. So if you want to play a bit more conservatively, wait for the breakout over $74 backed by volume. Otherwise you might also shoot at the 5-dma ($70.85), the 10-dma ($70.26), or the 50-dma ($68.82), which are all bullishly nestled together after a recent consolidation. In the news, Salomon Smith Barney issued a Buy rating and a price target of $100, while First Union upgraded from Buy to Strong Buy and issued a price of target of $90. Dain Rauscher last week did the same with a price target of $97. That's plenty of support right there. BUY CALL MAY-70*ENE-EN OI= 310 at $8.00 SL=5.75 BUY CALL MAY-75 ENE-EO OI=1429 at $5.38 SL=3.25 BUY CALL MAY-80 ENE-EP OI=4156 at $3.13 SL=1.50 High Risk! BUY CALL JUL-75 ENE-GO OI=1077 at $9.38 SL=6.25 BUY CALL JUL-80 ENE-GP OI=1689 at $7.00 SL=5.00 SELL PUT MAY-65 ENE-QM OI= 249 at $1.75 SL=3.50 (See risks of selling puts in play legend) Picked on Apr 13th at $73.81 P/E = 55 Change since picked +0.00 52-week high=$78.06 Analysts Ratings 7-6-4-0-1 52-week low =$30.50 Last earnings 04/00 est= 0.37 actual= 0.40 surprise=+8% Next earnings 07-12 est= 0.31 versus= 0.27 Average Daily Volume = 3.1 mln /charts/charts.asp?symbol=ENE ************* NEW PUT PLAYS ************* CNXT - Conexant Systems Inc $54.44 -7.56 (-23.25 for the week) Conexant is the world's largest provider of modem chips and other integrated circuits (ICs) for communications electronics. With more than 30 years of experience in developing communications technology, the company draws upon its expertise in mixed-signal processing to deliver integrated systems and semiconductor products for a broad range of communications applications. The company aligns its business into five product platforms: Network Access, Wireless Communications, Digital Infotainment, Personal Imaging, and Personal Computing. About half of Conexant's $1.5 bln in revenue come from sales in the Asia/Pacific region. Investors pounded their fists on news of Conexant's fourth acquisition this year. Yesterday the company announced it agreed to buy Canada's Philsar Semiconductor for as much as $213.8 mln in stock in an effort to boost its line of wireless products. All in all, it will put out between 2.685 and 3 mln shares of common stock for the closely held Philsar. CNXT dived almost instantaneously below the established support of $70 losing $9.25, or 12.5% by the finish. Of course the nasty and unruly environment encompassing the Internet sector is adding salt to the wound; however Conexant seems to be doing a good job all by itself. I'm referring to the announcement today that for an undisclosed amount Conexant is adding Applied Telecom, a leading supplier of telecommunications software and hardware products to its corporate family. While analyst Charles Boucher at Bear, Stearns, & Co cheered CNXT on with a Buy reiteration, the wrath of unhappy investors propelled the stock into the abyss. Its current position is now below an older support level ($60) and under the 200-dma ($58.97). On April 4th and 5th, CNXT did see this gutter level and in fact, rebounded. So with that in mind, wait for further downward confirmation. Look for intraday entries on descending bounces off $60. The company is reporting earnings next Wednesday on April 19th, after the bell, but we don't anticipate this event to trigger much excitement. BUY PUT MAY-60 QXN-QL OI=718 at $13.13 SL=9.75 BUY PUT MAY-55*QXN-QK OI=467 at $ 9.75 SL=6.75 BUY PUT MAY-50 QXN-QJ OI= 50 at $ 7.00 SL=5.00 Average Daily Volume = 6.8 mln /charts/charts.asp?symbol=CNXT MCLD - McLeodUSA Incorporated $58.44 -4.50 (-21.56 this week) McLeodUsa is a facilities-based CLEC (competitive local-exchange carrier). The company provides telecommunications services, including local and long-distance phone service and Internet access. It operates more than 616,000 local access lines, serving about 261,000 business and residential customers in 12 US states in the Midwest and Rocky Mountains. MCLD plans to add PCS wireless service to its offerings; it owns 27 PCS licenses. Founder and CEO Clark McLeod and his Wife, Mary, own 13% of the company. If you build it, they won't necessarily come. The landmark 1996 Telecommunications Act opened the way for so-called CLECs to challenge the Baby Bells, the local phone giants that held monopolies over their territories. Many of the new carriers figured they could build a small network and slice into the market of the incumbent Baby Bells. Although the telecom services sector holds great potential, many investors are are questioning the viability of some of the smaller firms. That pessimism has been expressed by traders recently in shares of MCLD. There are several reasons investors have evacuated MCLD recently. Most notably is the addition of $1 bln of debt to MCLD's balance sheet. Last January, MCLD announced plans to buy data communications provider Splitrock (SPLT) for $1.75 bln in stock. MCLD said Wednesday it received a $1 bln credit commitment that will help fund its plan to buy SPLT. The recent market weakness combined with the negative investor sentiment has pushed shares of MCLD sharply lower. Institutions appear to be liquidating large blocks of MCLD noting the heavy volume during the recent sell-off. MCLD formed a head-and-shoulders top in the last month and has recently fallen through the second shoulder. After Thursday's sell-off, MCLD fell through critical support at $60, and continues to look weak. From here, MCLD has resistance at $60, watch for the stock to bump against that level as a possible entry point. MCLD has support at $50, a conservative trader may wait for the stock to break that level before entering the play. With the breakdown today, MCLD fell below the $60 strike price. Wait for open interest to increase in the newly issued strikes before entering the play. One more interesting event for MCLD is the company's upcoming stock split. MCLD plans to split 3-for-1 on April 25th. Many investors are calling on management to cancel the split, citing the stock has already been split in half from its high reached just a month ago. BUY PUT MAY-65*QMD-QM OI= 22 at $10.38 SL=7.25 BUY PUT MAY-60 QMD-QL OI= 0 at $ 8.50 SL=6.00 Wait for OI! Average Daily Volume = 1.67 mln /charts/charts.asp?symbol=MCLD ********************** PLAY OF THE DAY - CALL ********************** NXTL - Nextel Communications $113.56 +2.88 (-28.88) Nextel communications provides digital and analog wireless communications services throughout the United States. Nextel's 4-in-1 business solution integrates guaranteed all-digital cellular service, text/numeric paging capabilities, digital two- way radio and wireless Internet services. Customers can now use the same phone number no matter where they are, whether it's across town, in another country, or around the world. With headquarters in Reston, Virginia, Nextel serves 96 of the top 100 markets in the United States. Most Recent Write-Up The research report from analysts at W.R. Hambrecht last week reiterated their Buy rating on NXTL. Analysts there projected a price target of $200, and said they believe the communications services company is poised for a strong first quarter. We'll find out about that later this month. They went on to say, they would use any weakness as a buying opportunity. Well folks we've had the weakness, and may have found another buying opportunity. No change in fundamentals just one of the many tech stocks that has followed the Nasdaq lower for most of the week. With NXTL losing another $14.69 in the past two days, why is it still on our play list? Maybe we're just stubborn, but the drop today to $104.63 marks a 26.5% loss for the week, and a 35% loss since its high in late March. $110 is an old support level and the fact NXTL was able to come up with a gain, albeit a small gain for the session, suggests that our play may have hit a near term bottom. NXTL did find buyers enter this morning and was trading +13.00 for the day going into the last two hours of the session. A bounce off $110 or a move back through $120 may be points to consider. Comments NXTL was up for the day even as the NASDAQ gave up at the end of the session. It was encouraging to see it trade as high as $124. This late session slide for NXTL is indicative of the NASDAQ's influence over individual stocks. Looking to tomorrow's trading, watch for the NASDAQ to lead. There is a good chance that it will truly retest last Tuesday's low of 3650, and even below. Good entry points will be when the NASDAQ capitulates with strong volume on the way down and on the bounce back. More aggressive traders may choose to buy on the dips. As usual, enter positions based on personal risk profiles. ***April contracts expire in one week*** BUY CALL APR-110 FQC-DB OI= 19 at $ 7.38 SL=5.50 BUY CALL APR-115*FZC-DC OI= 60 at $ 5.13 SL=3.25 BUY CALL APR-120 FZC-DD OI=341 at $ 3.25 SL=1.50 BUY CALL MAY-115 FZC-EC OI=111 at $11.50 SL=9.25 BUY CALL MAY-120 FZC-ED OI=585 at $ 9.50 SL=7.25 BUY CALL MAY-125 FZC-EE OI=249 at $ 7.75 SL=6.00 Picked on Apr 6th at $126.56 PE = N/A Change since picked -13.00 52 week high=$165.88 Analysts Ratings 12-7-3-1-0 52 week low =$ 33.00 Last earnings 02/00 est=-0.99 actual=-0.85 Next earnings 04-26 est=-0.81 versus=-1.37 Average daily volume = 4.39 mln /charts/charts.asp?symbol=NXTL ************************ COMBOS/SPREADS/STRADDLES ************************ There is no Combos section tonight, be sure to look for the extended version of the article in Sunday's newsletter. ************************Advertisement************************* Tired of waiting on trades to execute? 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