The Option Investor Newsletter Monday 06-05-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 6-05-2000 High Low Volume Advance Decline DOW 10815.30 + 20.50 10863.00 10752.30 837,241k 1,329 1,628 Nasdaq 3821.76 + 8.38 3875.66 3765.60 1,455,725k 2,235 1,826 S&P-100 790.75 - 1.94 794.76 788.00 Totals 3,564 3,454 S&P-500 1467.63 - 9.63 1477.28 1464.68 50.1% 49.9% $RUT 513.30 + 0.27 518.03 509.30 $TRAN 2800.34 - 29.02 2825.77 2780.60 VIX 24.90 + 0.79 25.67 24.63 Put/Call Ratio .48 ****************************************************************** A Little Giveback in Today's Markets? Not today. While we expected to see both the NASDAQ and the Dow give back some of their big point gains garnered last week, today's markets were marked by lack of direction and indecision. There are two ways to look at today's results. The first is to be pleased that there wasn't the big pullback that most investors had expected. Sellers did not appear, and those with open positions were content to let them ride. That's a bullish sign demonstrating investors' confidence that prices will not fall much, if at all. Conversely, there is now a growing murmur that the Fed isn't yet finished raising rates despite decreasing housing starts, auto sales, retail sales, and increasing unemployment, all which serve to demonstrate that the economy is slowing, making further rate hikes unnecessary. Which side of the coin do we favor? The latter. While we disagree with the Fed's analysis that inflation ever was a problem, it's become clear that the Great Alphonso (Greenspan) and company are intent on stealthily controlling the stock market, even if it means killing the proverbial goose that laid the golden egg - that is the U.S. economy. One thing's for sure - the average "buy the dip" mentality has been replaced by the "once bitten, twice shy" mindset. To that end, investors are going to wait before jumping in with both feet again, and that means waiting for the PPI numbers on Friday morning just to make sure the recent rally isn't a bear trap. The ensuing market results are thus going to reflect investor indecision, while this indecision could lead to greater fear as Friday nears. We all know what happens when fear sets in. Right - prices fall until the uncertainty clears. That doesn't mean the NASDAQ will retest 3100. However, there is simply no reason for the market to advance further, and we see any break over 4000 on the NASDAQ as highly unlikely until the next FOMC meeting on June 28th. Much as we'd love to see the fear subside and the rally continue, the media shows are parading "analysts de jour" (maybe it should be parrot de jour) who insist the Fed is finished hiking rates, but we'd rather listen to the Fed. Here's what the Atlanta Fed President Guynn argued today in an attempt to justify the 50 bp hike in May. "Inflationary pressures are emerging." Wages are rising and benefit costs are up "significantly", he noted. In temperance though, he added that "we may be beginning to see the economy approach a more sustainable level of growth". That isn't enough to convince us that the Fed is finished playing a nice round of "squash the equity" by hiking rates again. The point here is that indecision could remain through the next FOMC meeting on June 28th. So don't look for a move over 4000 on the NASDAQ or 11,000 on the Dow anytime soon. From a technical standpoint, it's looking dicey too. As 3850 is likely to provide solid resistance, that big gap up on the NASDAQ Friday will likely be backfilled and tested in the 3550-3650 range. It may not all happen in one day, but as uncertainty increases, we are likely to drift downward (not upward), which, as Jim pointed out Sunday, means your option values will drop too. Need more? The Dow too is bumping its head on 10,850 and is looking ready to retest support around 10,400 to 10,500. That's not all (sounds like a GinSu knife commercial, doesn't it?) The OEX has substantial resistance at 795, from which it fell intraday today. And it too has a gap, or island, to fill between 775 and 790. We could go on. But suffice it to say all three indices are technically topping out and still need to blow off steam from last week before developing a new meaningful upward trend out of the current trading range. If you weren't stopped out today, it might be a good idea to keep your stops tight so you don't give back those juicy profits. In corollary, we've written a lot of pages talking about good entries too, and these levels aren't where you want to try to make one. So what exactly happened? Let's cover some bullet pointed news. Just when you thought the worst was over, QCOM was hammered for a $5.44 loss on news that China's number two wireless company will NOT adopt the CDMA standard for its new wireless system for now. Nearly 30 mln shares traded today, exceeding the ADV by 50%. QCOM estimates that it will be three years before they eventually make the sale and bring it into the revenue stream. Ouch. Next, we have perma-short, David Tice questioning the solidity of DELL's earnings in a Baron's article this weekend. That put DELL into a tailspin this morning all the way to $41.94 before investors slowly dismissed it as the ramblings of a pessimist, and allowed DELL to finish down $0.56 at $42.75. INTC too came under some pressure as AMD announced new Athlon chips that operate in the 750 Mhz to 1 Ghz range. CPQ, GTW, IBM, HWP and Fujitsu-Siemens announced their support and intent to build machines around the platform. INTC was down $1.63 to $132.56, while AMD gained $1.00 to finish at $91.13 on increased volume of 7.3 mln shares. MSFT too made the news with its announcement that it will offer new software geared toward Web services. While that was good for almost $2 of gain in early trading, MSFT settled for a $0.56 gain on later news that the Justice Department in its filing today wasn't budging on its stance to break up the software giant. Microsoft has until next week to respond. By the way, Oracle founder, Larry Ellison is now a richer man than Bill Gates by $3 bln. From the rumors department, WCOM is spinning off UUNET? Don't bet on it. Bernie Ebbers, WCOM's chief visionary and good ol' boy said in a shareholders' meeting that's the stupidest thing he's ever heard (his words, not ours). WCOM finished up $0.25 at $40.94. In more telecom news, AT&T was given the green light by the antitrust department to complete the merger with Media One for $58 bln. But T must first dispose of some other cable properties so it does not exceed 30% market share of the nationwide cable business. T popped up $1.63 at $36.75. But HWP was the big news of the day, up $9.33 to $120.31 when you take out the A (Agilent) share distribution effective this morning. A was down $2.75 to $79. What did we miss? Oh yes, A.G. Edwards in a bullish move increased their equity allocation to 60% from 55%, while reducing their cash position to zero from 5%. Bond allocation remains flat at 40%. They believe the economy will slow and that the Fed is done raising rates. That's their position. We're not as optimistic on the "done raising rates" part. Finally, let's get to the indices before we wrap it up. The Dow tacked on 20 points today to finish at 10,815 in light trading of 837 mln shares. Of the 30 stocks in the index, only 11 were in the green. HWP (see above) and IBM were the big winners today. As noted above, we are not far from resistance of 10,850. Decliners outpaced advancers 1625 to 1329, while down volume beat out up volume by about 50%. Surprisingly, there were 51 new highs set and just 25 new lows. Despite the gain, this is not cause for euphoria. Same with the NASDAQ. There is still a major gap to fill around 3600. This is not the time to dive in. However, the NASDAQ did eke out a measly 8-point gain to close at 3821, once again above the 3800 level, on solid volume nearing 1.5 bln shares. Advancers actually beat decliners 2235 to 1830, and up volume outpaced down volume by 36%, while 68 new highs edged past 59 new lows. Frankly, it could have been worse. While we're grateful for any gain we can get, we think today just prolonged an inevitable pullback. Remember, the gain occurred in the overall NASDAQ market. However, the NASDAQ 100 finished down 25 points indicating that the big cap NASDAQ stocks were feeling a bit more pain today. One bright spot was the biotech and the B2B sectors of which many issues finished deep in the green. Watch those sectors for potential profit taking tomorrow. Speaking of tomorrow, what do we think? As outlined above, there is likely going to be more uneasiness and indecision before the PPI figures are out on Friday as investors try to analyze and anticipate the Fed's next move. To us, that means a pullback soon. We would strongly urge you to consider your current exposure and set stops according to how well you handle downside risk. Fortunately, the market appears to have calmed a bit and that may limit the wild 200 point per day volatility to lesser numbers. Still, for those of you just getting started in this business, it means your options lose value even when prices remain flat. Most of us on the staff are waiting for a retest of support on all indices before taking on new positions. We are not call buyers at these levels. A final note. Jim reverted back in the weekend wrap to "sell too soon". While that is always good advice, I'm sticking with "don't buy too soon" for a bit longer. Buzz Lynn Research Analyst ****************************Advertisement************************* Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered calls, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** *********** IN THE NEWS *********** Motorola Rings Up Deals with Sega and Adelphia By Cindy Christ Options in Motorola were hopping Monday after the communications equipment maker announced separate deals with Japan's Sega Enterprises and U.S.-based Adelphia Communications. In concert with Japanese game maker Sega, which sells the popular Dreamcast video game system, Motorola will develop new Internet-ready cell phones that can download games and video images as well as other data from the Web. The two also will collaborate on new software allowing wireless phones, pagers and handheld computers to access a wide range of games and entertainment software based on Java programming technology. "By demonstrating compelling entertainment content on the J2ME platform, Sega and Motorola are making a significant statement about the direction they are taking as leaders in the exploding wireless entertainment market," the companies said in a statement. Developed by Sun Microsystems and Motorola, Java's J2ME technology will open the door for wireless device users to tap into software written by more than two million technology developers, the company said. Motorola and Sega will unveil the new phone today in San Francisco at a Sun Microsystem's conference for software developers. Schaumberg, IL-based Motorola, the world's No. 2 cell phone maker, expects to ship up to 100 million Web-enabled handsets in 2001. The phones, which eventually will double as video phones delivering real-time images, are set for release in Japan in 2001 and in the U.S. and Europe in 2002. Separately, Motorola said it landed a second deal in as many months from cable TV operator Adelphia Communications valued at more than $535 million. Under the contract, Motorola's broadband communications sector will provide digital cable technology allowing TV viewers to browse and shop on the Web, access email, order videos-on- demand and other enhanced video and audio services. Between now and 2001, Adelphia will buy more than 1.6 million digital set-top boxes, 100 digital headends and 300,000 cable modems. The company said Adelphia would use the products to expand interactive TV services to about four million subscribers in Los Angeles and southern California and other cities in the western United States, Ohio, Maine, West Virginia and Kentucky. Following the completion of its recent acquisition of TV set- top box maker General Instrument Corp., Motorola is the world's No. 1 provider of digital cable technology with more than 7 million set-tops in use in about 47 million homes in North America. In May, the communications giant announced a $33 million order for hybrid fiber coax components from Adelphia. Coudersport, Pa.-based Aldelphia is one of the nation's first cable TV systems and the sixth largest domestic cable TV operator with more than five million subscribers. According to Deutsche Banc Alex Brown, there soon will be more than 150 million enhanced TV sets in use in the United States alone, with television-commerce, called t-commerce, outpacing electronic commerce revenues by 2004. Shares in Motorola (MOT) added $1.19, or 3.2 percent, to $38 on the news. Volume in Motorola's June 40 calls on the American Stock Exchange (MOTFH-A), which added 1/4 to 13/16, was active with turnover of 1,682 contracts and open interest of 9291 at the close. Adelphia Communications (ADLAC) was up $1.19, or 2.6 percent, to $46.69. Shares in Sega Enterprises (SENGY) surged 18.9 percent, or 300 yen, to 1,890 in Tokyo. ************** TRADERS CORNER ************** Trend-Turning Indicators By Austin Passamonte I've been asked recently to share some technical indicators and timing tools I use to trade options with - specifically for the OEX. To be honest, there are many, but last week's events happen to provide a perfect example of my favorite trend-reversal indications. Here's hoping this may help provide another tool for your war chest. Jim Brown said it best last week when he stated things are always darkest before dawn. Haven't we been told to death that major tops and bottoms are formed during times of extreme market sentiment in the opposite direction? Well, hearing and internalizing the fact are three different things, let me tell you. It can be incredibly difficult to pull the trigger on bullish plays just when the entire media world is pumping doom and gloom. Yet, that's precisely when we need to ignore the rhetoric and trust what our charts reveal. After all, isn't that why we track data in the first place? If we're anxiously looking for turning points, it is important to act upon them when they appear! More on that later. I rely heavily on candlestick charting and stochastics in DAILY charts to foretell market turns. These tools combine to provide reliable signals rather early in the market's move. For those who may not be 100% familiar with candle formations, you can order some excellent works from the book search icon in the "Bookstore" section of OIN website. After using candles instead of bar charts for quite some time, I couldn't imagine trading again without them. Stochastics are a moving-average tool, highly accurate during sideways or choppy markets and next to worthless in trending ones. Knowing the overall state of any market is the first step towards using them. They are also a lagging indicator, meaning that the trend reversal will have already begun by the time they flash buy or sell. That's fine with me, I'm happy to take chunks of profit from the middle of rallies and slides. Because they're a lagging indicator, stochastics work best to confirm or enforce other leading indicators we might use, in this case candlestick reversal patterns. Let's see how each coincides to help forecast the near-term future. Considering we've been trading such volatile indexes lately, signals given by stochastics have been very sound. I use them to indicate entry & exit points for day-trading 60 and 10 minute charts, but let's focus here on reading market direction from daily and weekly charts. The longer time-frame segments smooth out stochastic action and give us less "noise" with clear indications of probable market direction. Stochastics seem to offer the highest probability readings once both fast AND slow bars have touched or entered the 80% overbought or 20% oversold zones. The deeper both lines move into extreme zones, the better our signal should be. However, anytime both slow and fast bars have made a solid move in one direction towards these 20% - 80% benchmarks and then sharply reverse, a trend reversal may be imminent. Keep in mind it's easy to look back on a chart's history and say, "oh I would have spotted that move in a heartbeat!" Would you? It's much more difficult when the lines have yet to form than it is once they finish, believe me. Such developments don't come along very often, but when they do, the move will be swift and soon. These are the mini-trends we all wait for to hop on board and ride into financial bliss. I watch for both stochastic lines to reach these extreme zones and then turn to reverse course before loading up on plays. Of the two, the slow bar line is much more important. The fast bar usually proceeds big moves and gives numerous false signals as well. Once the slow bar has committed to leave an extreme zone and follow the new path, a sizable trend change is probably taking place. Now let's take a look at daily and weekly charts for the OEX and see if we can't spot some signals that would have offered an early glimpse into the market's future. Daily Chart Weekly Chart As you can see, I have marked off the major turning points for stochastic on these two charts. The green lines signal new- bottom buying opportunities that the index should rally from and red lines mark new tops signaling pullbacks are imminent. Do you notice any tradable patterns here? Can you see how clear these indications are on the daily chart for index moves over the next several sessions? By the same token weekly charts show us how much room the overall trend may have left before the next direction change occurs. We should also note that some major market moves occurred without the extreme overbought/oversold zones being violated. Hey, we never said stochastics were perfect! That's why it pays to have several tools at hand in order to cross-compare. By studying the charts carefully you will note several false signals given by stochastics, especially during prolonged trending moves. Plenty of back-testing computer models have proven that traders could be profitable by purely trading moving average crossovers, but I feel it's a poor way to go. There needs to be a filter to help screen out those false signals we would otherwise buy heavily and regret. A few candlestick patterns serve this purpose with perfection! Combining stochastics with trend-reversal candles can up our performance significantly. It seems clear that stochastic turns confirmed by tweezer tops or bottoms, engulfing patterns, dojis or morning/evening star formations give the best readings. Times when the fast/slow bars seem to signal without the candles showing strong pattern formations are probably best ignored or closely watched at most in my opinion. I'm looking for dual confirmation of leading and lagging indicators before buying into the new market direction. Not only can we see when to enter new plays, these turning points also warn us when to close or protect current ones. When both bars are in an extreme zone and begin to turn I'm looking to get in front of the action or at least protect any gains still on the table from the last move. If you are holding medium to long-term plays or using trailing stops to ride a move up, you might foresee that the time to exit draws nigh. I'm sure you've read or will hear that stochastics clearly signal a change only when the bulk of that move is over. This is true if you wait for the whole thing to develop, but our mission is to read the action NEAR the beginning of such turns. We can review any historical charts and have the signals jump out at us: the question is can we tell with reasonable accuracy from the beginning? I think so. Looking at the daily chart above, can you picture watching these lines creep ever so slowly during the day while candles morph to form the day's end pattern? If you see both of them emerging into clear signals that complement each other, I'd say it's time to pull the trigger. Purchase light positions on the plays you've been waiting for entries into and add to them as the market move confirms your guess if tentative. Shall we peek into the crystal ball & have some fun? Look at the daily charts for OEX, DOW, NASDAQ and S&P 500. Where are stochastics tonight? What are the candles doing? If this entire market continues to trend higher into the next several weeks, what can we expect from today's signals based on past behavior? Should there be further volatility ahead, what can we look for from these indicators next? Enjoy your simple charting research and we'll follow up on the action tomorrow! See you then. Contact Support ********************** PLAY OF THE DAY - CALL ********************** RMBS - Rambus Inc. $214.00 -3.38 (-3.38 this week) Rambus Inc. develops and licenses high bandwidth chip connection technologies to enhance the performance of computers, consumer electronics and communications products. Current Rambus-based computers supported by Intel chipsets include Dell, Compaq, Hewlett-Packard, and IBM PCs and workstations. Sony's PlayStation video game system uses Rambus memory. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC and PC controller manufacturers. Currently, eight of the world's top-10 semiconductor companies license Rambus technology. Most Recent Write-Up By now you know the buying that began late Thursday afternoon carried over into Friday, as Rambus and others opened sharply higher on the better-than-expected economic data. Up until this week, it appeared that investors were really just testing the waters in RMBS, with most bounces finding sellers ready and waiting to push the stock back down. The 33% move this week came on better volume and it is beginning to look like folks were serious about owning shares of the tech company. While there was little in the way of company news, chip related issues seemed to be a favorite as investors began to dump money back into the markets. Most of the momentum seen this week was probably in sympathy with either the sector or the broader markets. However, our play does have something a little special up its sleeve. If you'll remember, RMBS will split 4-for-1 on June 15, which could keep this one on traders' radar screens in the coming days. Obviously, the chip company can't make the trip up the chart on its own. If investors return next week prepared to take some money off the table, then more than likely RMBS will follow along. To give you an idea of just how impressive last week's move was, the 5 and 10-dma are sitting back at $188.43 and $175.96 respectively. That's one reason why we would look for a bit of profit taking early in the week. Our play did close well above its 100-dma at $201.74. A pullback next week to either its 50-dma at $212.65 or more likely, the $200 area of support could provide a good starting point for new plays. If you have open positions in this play, move your stops up to protect profits. If investors return next week in the buying mood, feel free to join in, however, keep your stops in place. Some investors are sitting on positions entered on May 24th when RMBS bounced off $144. A profit of better than $73 in 10 days may be too much for some folks to resist. Comments Today, the NASDAQ held up reasonably well considering last week's record gains. With many expecting some profit-taking, today's stability has investors scratching their heads. If the NASDAQ continues to amaze investors with its resilience, look for RMBS to move with it, particularly as we near its 4-1 split on June 15th. If profit-takers step in, watch for a pullback. The calmness of today's trading makes tomorrow that much more unpredictable. RMBS managed to hold its head above the 50-dma of $210, yet a broad market pullback could bring it back near the $200 range. Its 200-dma lies at $203. Rambus bumped into $222 the last two sessions, only to retreat. Remember that RMBS is on a split run and will most likely move with the NASDAQ. ***June contracts expire in 2 weeks*** BUY CALL JUN-210 BYQ-FB OI= 664 at $22.88 SL=17.75 BUY CALL JUN-220*BYQ-FD OI=1117 at $18.25 SL=14.25 BUY CALL JUN-230 BYQ-FF OI= 553 at $14.38 SL=11.25 BUY CALL AUG-230 BYQ-HF OI= 159 at $37.25 SL=29.00 SELL PUT JUN-220 BYQ-RD OI= 418 at $21.00 SL=29.00 (See risks of selling puts in play legend) Picked on May 28th at $163.00 PE = N/A Change since picked +51.00 52 week high=$471.00 Analysts Ratings 1-1-2-0-0 52 week low =$ 58.50 Last earnings 04/00 est= 0.14 actual= 0.15 Next earnings 07-12 est= 0.16 versus= 0.08 Average daily volume = 3.94 mln /charts/charts.asp?symbol=RMBS ************************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. 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