Option Investor

Daily Newsletter, Monday, 06/05/2000

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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- the average "buy the dip" mentality has been replaced by the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

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

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

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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

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

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

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

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

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.


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


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

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.


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

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