The Option Investor Newsletter Thursday 6-22-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 6-22-2000 High Low Volume Advance Decline DOW 10376.10 - 121.60 10496.00 10335.50 1,014,598k 996 1,861 Nasdaq 3936.94 - 127.07 4073.73 3936.92 1,628,759k 1,531 2,427 S&P-100 785.09 - 14.91 799.12 783.05 Totals 2,527 4,288 S&P-500 1452.18 - 26.95 1478.19 1448.03 37.1% 62.9% $RUT 515.02 - 12.59 530.41 515.02 $TRAN 2612.76 - 36.65 2659.05 2612.76 VIX 25.66 + 2.09 25.80 24.29 Put/Call Ratio .51 ****************************************************************** On the sixth day the Nasdaq rested! After a five day winning streak, four over 3900, the Nasdaq finally gave up some ground. Many analysts think it is simply profit taking after the +33% gains of the last four weeks. After rebounding from 3050 on May-24th to the high today of 4073 the +1000 point gain was due for a rest. The Dow however is still firmly mired in a pattern of lower highs and appears determined to retest 10300 and that could happen as early as Friday. The market internals were very bad with declines beating advances 2:1 AND on heavy volume. The NYSE traded almost 1 bln shares and over 1.6 bln traded on the Nasdaq. This is not a good sign. Volume is seen as a sign of conviction and traders have been hoping for strong volume on the upside but it never appeared. The selling was heavy across the board with almost all sectors losing ground. The main reason I feel the market was week is still the Fed meeting scheduled for next Tue/Wed. Even with most analysts expecting no rate increase there is still Fed dread ahead. Traders feel now that should the Fed raise rates one last time, even a slight +.25%, that it will be the straw that broke the back of the rally. With all signs showing the economy slowing they fear is the Fed has already gone too far. The result of too much tightening can be a recession. Even lawmakers got into the act today with sixteen sending Alan Greenspan a letter asking for no more hikes. Citing the rising unemployment and slowing inflation they feel the economy will fall even farther as the last several hikes filter down through the system. Not that I am complaining but did I mention this is an election year? The markets lost ground early in the day with a rumor that Alan Greenspan was involved in a traffic accident this morning but recovered midday after the Fed denied the report. That would be a really bad deal. As much heat as Alan gets, he is still credited with structuring the current bull market by keeping the economy on track and pushing the speed limit for many years. With the Dow closing at the low for the month, 10382, about -500 points off the high, we are still locked into a down trend that started back in April. The prospects that a slowing economy will impact earnings for old economy stocks has prompted flight back to the sidelines. Stocks like HON, GM, IP all set new 52-wk intraday lows today. GE, which is seen as a proxy for the Dow, is at the low point of a down trend that started in April and only a couple points from a breakout to the down side. There has been no bargain hunting on the NYSE and the advance decline line has taken a decided move downward. Summer rally, summer rally! This term keeps coming up in the analyst press. Don't hold your breath. We are one week from the start of the July earnings cycle and mid July the last two years has produced significant drops, not rallies. Summer rallies recently have been as hard to see as the Loch Ness monster or gas under $1. Profits are going to be squeezed as we get farther into the year and the optimistic +18% growth for the S&P has already started shrinking. Profits lead price and shrinking profits only have one result. Microsoft announced their long awaited MSFT.net program today and promptly tripped up their recent rally. The "bundling" of the browser and the operating system into web devices as the Internet generation goes forward was not what investors wanted to hear. While the concept is good and they are really behind the curve on this, the hue and cry from their competitors was immediate. "They just don't get it" one analyst said. The government is not going to let them shift out of the current operating system structure into one even more restrictive to other competition. It makes no difference if they had announced hammers, chisels and stone tablets, someone would complain. The end result is a range bound stock for years to come as the "expedited" supreme court effort gets under way. Texas Instruments announced an acquisition of Burr Brown last night and BBRC soared +27 today. The individual gain for BBRC was not material, unless of course you owned it. What was material is the continued broadening of the chip market into other than PC chips. TXN is already a leader in the DSP area and the BBRC acquisition will only help their lead. After the close today Rambus announced a settlement with Hitachi on a patent suit. The settlement includes a cash payment as well as future royalty payments on their technology. The Rambus technology is spreading into chips in many different devices other than computers. RMBS was up +$40 in after hours trading on this news. The chip sector was active today with Micron announcing blowout earnings after the close. Announcing $.47 vs estimates of $.34 on a +30% increase in sales on megabits of memory chips. This and the Rambus announcement could power the sector again tomorrow. Intel also announced today their dot.appliance which will use the Linux operating system instead of windows. OOPS! Is this a sign of things to come? Intel dropped over -$4 on the news. Not all news was good after the bell with TDFX pre-warning that earnings would not meet estimates due to a shortage of components. They make 3D graphics chips. The news was not as good for biotechs. The sector was up +60% during the recent rally but news that there would be a shuffle in the Russell-1000/2000 sent portfolio managers scrambling to adjust their holdings. Many lost double digits with AFFX -$21, CRA -16, ABGX -13, INCY -18, IDPH -14, MLNM -19. This type of drop is a prime example for stop losses. Once strong profits can turn into strong losses in just one trading day on no warning. Transports continued to slide with oil still over $31 a bbl. The transports have dropped to numbers not seen since March and continued high oil will keep the Dow theory traders negative on the market. Politicians galore are calling for new incentives to promote new drilling and conservation in the U.S. Gosh, I can't wait to drive 55 again. Financials are still leading the market, down. The hit today came on lowered estimates of trading volume and reduced brokerage fees. The bull market is turning into hamburger as far as brokerage profits are concerned. MER dropped -5, MWD -2.44, LEH -2.56, GS -2.38. Until the interest rate picture is clear the financial stocks will not be able to mount a rally and the broader market will suffer. As I write this tonight the futures are up slightly on the semiconductor news but with the Fed decision not until Wednesday of next week the market is not likely to make any major moves. Using the 3900 bench mark from last week you should have been long for the last three days. If the Nasdaq drops under 3900 or the Dow under 10300 I would consider closing open long positions. If the Dow bounces off 10300 again then we could see another range trade back to 10600 and lead to a pre-Fed rally. The two days before the last several Fed meetings have been positive even in the face of impending rate hikes. I would be careful in this market. I did not like the high volume and 2:1 declines today. Buyer beware! We had several hundred people attend our informational seminar with DTN-IQ and Preferred Trade this week in Los Angeles. We feel from the feedback it was a huge success and we will be doing them in other parts of the country soon. Watch for a schedule next week. The Technical Analysis, Stock and Option, 3 day seminar in LA in full swing tomorrow and Saturday with a sell out crowd. If you want to learn how to beat the market instead of the market beating you then you should check out the seminar schedule below and register for the one near you. 100% satisfaction guaranteed or your money back. Good luck and sell too soon. Jim Brown Editor Current long positions include: NOK, VOD, MSFT *********************** Regional Seminar Series *********************** Technical Analysis, Stock and Option Seminar Three days of indepth education. We guarantee you will not be disappointed. The class size is only 20 so you will get plenty of individual attention from Chris Verhaegh and the staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Future Seminars June 27-28 Washington DC 2 day July 13-15 New York 3 day July 21-23 Seattle 3 day July 27-29 Atlanta 3 Day Aug 11-12 Pittsburg PA 2 day Aug 17-19 Orlando 3 day Aug 24-26 Dallas 3 day Aug 28-29 Detroit 2 day http://www.OptionInvestor.com/seminar/seminar.asp **************** MARKET SENTIMENT **************** Thursday, June 22, 2000 It Was an Entertaining Day! The market ended in a sea of red today, as some investors took profits while others sold due to worries about the Fed meeting next week. Regardless, the Dow and NASDAQ both closed down triple digits on good volume, which is not a good indicator for the short term. Leading sectors on the recent run-up (Biotech, Semiconductors) were also the big losers today, as these two sectors closed down -7.69% and -4.65%. It was quite an entertaining day as well, as rumors of a Greenspan car accident was blamed for the selloff mid-day, which was followed by rumors of a Qualcomm buyout by Nokia. Add the insider trading/stock manipulation of Steve Madden (SHOO), throw in the organized crime busts from last week and we have a good recipe for Hollywood. Nothing like good gossip when the trading monitor is a bunch of flashing red symbols. Our sentiment here at Pinnacle Capital remains the same, that is, we believe the easier money to be made in the near term is on the short side. Granted, there have been some phenomenal movers to the upside recently (Rambus, Corning, SDLI), but in a perfect stock pickers market like we have had recently, and with the large amount of negative releases, we view this as the tip of the iceberg in terms of negative news. Now we view today's put/call ratio on the NASDAQ 100 (.11) to be quite bearish. We have discussed numerous times about how the put/call ratio on the NDX was always high during the big run-ups in the past. What this told us was that put speculators were trying to call a top on the NDX, which only gave support for the index over the longer haul and propelled it higher. Recently, the put/call ratio has been dropping, and today's put/call of .11 is one of the lowest we have seen in a long time, which is indicating that call speculators were expecting a breakout even in the face of a decline. This does not bode well for the NASDAQ in the short term, however; should Micron's earnings and the Rambus news propel the NASDAQ back over 4,000 tomorrow, all bets are off. If not, we are only getting confirmation of a failed rally. BULLISH Signs: Interest Rates (5.896): With the long bond breaking below the crucial 6% benchmark, fears of higher rates may finally be subsiding. NASDAQ Short Interest: As of May 15, the level of short sales not yet closed out, known as short interest, climbed 4.80% to 2,780,161,105 shares. Many individual equities will continue to show major (and quick) gains as stocks get squeezed. Mixed Signs: Volatility Index (23.65): The VIX has proved that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. Based solely on the VIX, we are getting close to a selling opportunity. BEARISH Signs: Slowing Economy: If the economy is truly slowing down, we will start feeling the effects once corporate earnings report over the next couple of quarters. This has just occurred as Circuit City, Electronics for Imaging, Proctor & Gamble, Lands End, H&R Block, McDonalds, Electronic Data Systems, Mylan Labs, Harmonic Lightwave, NBC Internet, Wachovia Bank, Perot Systems, Xerox, Gadzoox Networks, Honeywell, Computer Sciences Corp., Carnival Cruise Lines, and Qualcomm have all warned of poorer times ahead or have had earnings cut by analysts. Liquidity Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. IPO Dilution: $58.6 billion of stock was freed up for trading in March, $67.3 billion April, 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. ***************************************************************** 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 (6/16) (6/20) (6/22) ***************************************************************** Overhead Resistance (805-825) 10.47 11.29 12.20 Overhead Resistance (775-800) 1.38 1.07 1.01 OEX Close 788.74 797.56 785.09 Underlying Support (745-770) 1.32 1.44 1.48 Underlying Support (715-740) 4.53 5.56 7.40 What the Pinnacle Index is telling us: Overhead is still strong (805-825), indicating that the potential for a major rally in the short term is low. Support is light, so if any bad news comes into the market, we could easily retrace. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (6/16) (6/20) (6/22) ***************************************************************** CBOE Total P/C Ratio .53 .51 .51 Equity P/C Ratio .47 .48 .46 OEX Put/Call Ratio 1.23 .92 1.27 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (6/16) (6/20) (6/22) ***************************************************************** Puts 680 / 4,419 700 / 4,934 790 / 5,526 Calls 800 / 2,669 790 / 4,849 880 / 6,055 Put/Call Ratio 1.66 1.02 0.91 Market Volatility Index (VIX) ***************************************************************** 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 14, 2000 Bottom? 39.33 June 22, 2000 25.66 ************** MARKET POSTURE ************** As of Market Close - Thursday, June 22, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,200 11,400 10,376 Neutral 5.05 SPX S&P 500 1,350 1,500 1,452 Neutral 5.30 OEX S&P 100 725 800 785 Neutral 5.30 RUT Russell 2000 450 550 515 Neutral 5.05 NDX NASD 100 3,000 4,000 3,804 Neutral 5.30 MSH High Tech 800 1,050 1,015 Neutral 6.06 XCI Hardware 1,250 1,600 1,541 Neutral 5.30 CWX Software 1,050 1,300 1,252 Neutral 6.06 SOX Semiconductor 850 1,200 1,210 BULLISH 6.20 NWX Networking 900 1,100 1,187 BULLISH 6.02 INX Internet 500 800 583 Neutral 5.30 BIX Banking 520 640 534 Neutral 6.09 XBD Brokerage 450 515 493 Neutral 6.22 ** IUX Insurance 600 650 610 Neutral 6.20 RLX Retail 900 1,000 816 BEARISH 6.09 DRG Drug 355 400 394 Neutral 4.28 HCX Healthcare 710 800 805 BULLISH 6.15 XAL Airline 140 155 159 BULLISH 5.25 OIX Oil & Gas 265 300 308 BULLISH 5.11 Posture Alert Like we stated Tuesday, many sectors were reaching key moments, and based on today's action, it looks as if a failed rally is under way. Sectors leading today's beating include Semiconductors (-4.65%), Internet (-4.49%), and the NASDAQ 100 (-4.18%). With today's action, we have lowered Brokerage to Neutral from Bullish. ************* READERS WRITE ************* Concerning Credit Spreads Hello OIN: I have been interested in putting on bull put credit spreads. Can you share some strategies when the stock price move against you? Won't the option spread widen as the stock price approaches the option you sold? Thanks, BB ------ Regarding: Spread (exit) strategies... In the case of credit spreads, a favorable outcome is for the stock price to finish outside (OTM) of both positions. In this case, both options expire worthless and you are left with the original credit as the profit. "Bull-put" credit spreads are one of my favorite strategies and there are a few ways to limit potential losses or even capitalize on a reversal (or transition) to a new downward trend. There are three common methods to exit/cover a losing credit spread and the alternatives range from "legging-out" or rolling into a long-term spread to "shorting" the underlying issue. First, you can simply close the position at a debit and register the loss. There is also Jim's popular technique; covering the short position as the stock moves through the sold strike. This is a great method for "bailing out" on an issue that has reversed course but you must also be prepared to buy it back in the event of a recovery. Another option is to "roll-out" of the spread for profit (or at a least break-even basis). To roll-out of a credit spread, place an order to close the short option anytime the stock trades (and preferably closes) below technical support or a well-established trend line (moving average). Of course, a move on heavier than normal volume would be favorable and obviously, there are other more precise signals that can be used but the technique is based on the probability that the stock should continue to move in the new direction. After the sold position is repurchased, wait for the stock to lose momentum and sell the long position to close the entire play. It is a difficult technique to perform when emotion enters the formula but it works well once you become experienced at it. The key to success is using the method at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. The great thing about spreads; once you understand them, you can turn many losing plays into winning ones with the effective use of STOPS and by rolling out-of/into new positions when the stock moves against you. Even when a play fails, at least you have reduced your losses by leveraging against another position. Note: In all cases where an attempt to recover a losing position is made, you must have thorough knowledge of the strategy and be prepared for further draw-downs. As with any technique, it must also be evaluated for portfolio suitability and reviewed with regard to your experience level and trading style. Good Luck! ************* SECTOR TRADER ************* The Market is Like a Box of Chocolates. You Never Know What You Are Going to Get. By Buzz Lynn Contact Support Index Last Mon Tue Wed Thu Fri Week QQQ Nasdaq-100 94.94 3.81 -0.25 1.25 -3.94 0.88 HHH Internet 117.00 1.13 5.63 -2.50 -6.13 -1.88 BBH Biotech 175.00 9.75 3.44 7.50 -9.44 11.25 PPH Pharm 97.75 0.31 -1.94 1.88 -1.69 -1.44 TTH Telecom 77.44 1.56 -0.50 -0.50 -0.31 0.25 IAH I-net Arch 92.38 4.25 -1.00 -0.13 -2.25 0.88 IIH I-net Infr 59.88 3.00 2.88 0.19 -2.19 3.88 BHH B2B 39.50 0.87 1.13 1.81 -2.44 1.38 BDH Broadband 89.56 2.81 -0.63 1.44 -2.56 1.06 SMH Semicon 99.25 6.50 1.50 0.44 -5.19 3.25 ************** Updates ************** QQQ - NASDAQ 100 $94.94 -3.94 (+0.88) Optionable. QQQ continues to trade in the new range above its $95 breakout from Monday - that is between $95 and $100. While there was mild support $97.50, that gave way to test $95 into today's close. In fact, it closed slightly below $95, which would normally cause us to question QQQ's strength on a technical basis, and we do cast a cautious eye toward the technical violation. However, we can more easily dismiss it since it occurred on relatively light selling volume in the final two minutes, and the whole NASDAQ market remained above 3900. Looking at the daily QQQ chart, based on the fact that it bounced from, and closed over its 10-dma of $94.84, and similarly, held above its prior resistance at 95, this level could make an excellent entry. Still, don't back up the truck. With the FOMC meeting getting bigger in traders' windshields, there could be further decline from here. We need to wait and see what tomorrow morning brings us. If it bounces from here (after amateur hour) back above $95, it might make a good entry to go long or buy calls. Then look for resistance at $99 to $100. If it continues to fall and can't find its wings after amateur hour, look for an entry to go short or buy puts under $94. Just make sure the market favors your direction of travel at the time of your entry. At Support: BUY CALL JUL- 90 QVQ-GL OI= 2662 at $ 8.63 SL=6.00 BUY CALL JUL- 95 QVQ-GQ OI= 5156 at $ 5.50 SL=3.50 BUY CALL JUL- 97 QVQ-GS OI= 584 at $ 4.50 SL=2.75 SELL PUT JUL- 90 QVQ-SL OI=14588 at $ 3.00 SL=5.00, Huge OI At Resistance: BUY PUT JUL-100 QVO-SV OI= 1230 at $ 7.88 SL=5.50 BUY PUT JUL- 96 QVQ-SR OI= 4131 at $ 5.75 SL=3.75 BUY PUT JUL- 94 QVQ-SP OI= 3179 at $ 4.75 SL=2.75 Average Daily Volume = 27.74 mln /charts/charts.asp?symbol=QQQ ----- TTH - Telecom $77.44 -0.31 (+0.25) Not optionable. As we suspected might be the case, the 50-dma is providing a major barrier to a breakout and TTH appears to be rolling over. There have been a series of lower highs since Monday's big move up. While it looks bad (which is good for going short), TTH still finds support at its 5, 10-dma of about $77.50. Keep in mind that the 50-dma is only $0.30 higher at $77.80. SBC, T, BEL, BLS and GTE, though few in number, are also the largest percentage of the index, which is keeping this whole index afloat despite the others mostly showing red ink. When these five give up the ghost (and we think they are getting tired), the index will likely fall with them. The stochastic, MACD and RSI have already rolled over, the price is now under $78, and thus this looks like an entry for a short position to us. TTH is now off probation. Just make sure you see the market and this index headed down following amateur hour tomorrow if you intend to take a position. Average Daily Volume = 83 K /charts/charts.asp?symbol=TTH ------ BBH - Biotech $176.94 +3.44 (+13.19) Optionable. Call it a nice round of profit taking. It was bound to happen after the big upside move to almost $187 per share, which exceeded our anticipated resistance level of $185. This normally would have made a great application for a trailing stop. However, this morning's gap down to $183 wouldn't have got you out since it skipped significantly under $185. Five of BBH's components suffered double digit losses. Even so, this has been a great run, and we think this pullback is only temporary, and mostly healthy. Here's why. Though BBH closed at its low of the day, the 5-dma ($174.75) technical support held up today (a positive sign) and the 10-dma isn't far back at $165. The good news is that BBH also closed above yesterday's opening price, thus demonstrating its relative strength. RSI bares that out. There is historical support too in the $170 area. That said, if you see $165 in the windshield, then see it become a splattered bug, you may want to step aside as that would be a big clue to sentimental and technical weakness. For now, support is at $175. If that fails following tomorrow's amateur hour, consider a bounce at $170, then $165 for an opportunity to take a position. The fact is BBH may need to blow off more steam, especially if the overall market stays weak in front of the FOMC meeting. One housekeeping note - in the put part of this play, we inadvertently published August strikes instead of July's on Tuesday night. Please note the correction. At support: BUY CALL JUL-170 BBH-GN OI=1254 at $15.63 SL=11.25 BUY CALL JUL-175 BBH-GO OI= 128 at $13.00 SL= 9.75 BUY CALL JUL-180 BBH-GP OI= 387 at $10.88 SL= 8.00 At resistance: BUY PUT JUL-180 BBH-SP OI= 28 at $14.50 SL=13.75 BUY PUT JUL-175 BBH-SO OI= 100 at $11.63 SL= 8.75 Average Daily Volume = 633 K /charts/charts.asp?symbol=BBH ------ IIH - Internet Infrastructure $59.88 -2.19 (+3.88) Not optionable. We noted Tuesday not to back up the truck, as we needed to see a retest of the breakout at $60, or maybe down at $57.50. Lots of red ink here today in the top five weighted components, EXDS, VRSN, AKAM, INSP, and BVSN. We are now just $0.13 below $60 support (close enough), and resting on the 5-dma of $59.76 (again, close enough). Is it going to bounce or continue down? We won't know until after tomorrow's amateur hour. So, it's the same story as Tuesday. Look for the bounce here at $60 or a retest of $57.50 followed by a bounce as a possible long entry. Also, while not likely to occur tomorrow, the more conservative may want to consider an entry if the price breaks back over $63. Otherwise a move under $57.50 would be a cue to consider a short position for a retest of $54 on the downside. Average Daily Volume = 266 K /charts/charts.asp?symbol=IIH ------ IAH - Internet Architecture $92.38 -2.25 (+0.88) Not optionable. Sadly, we got our wish, and then some. We noted Tuesday that IAH looked a bit overextended based on the stochastic. Accordingly, IAH backed up to what we thought would be good support at $94, but didn't hold and continued its descent down to the 10-dma of $91.81 where, lucky for us, it bounced. That was a good sign in our book. Unfortunately, the stochastic, RSI, and MACD are all now pointed south - that's bad unless you intend to go short (not suggested). That said, look for a bounce here at $92 if you're contemplating a long position, or target shoot $89, the next level of resistance for a possibly better entry. We want to point out though that thanks to strong earnings and forward outlook reported by MU tonight, that could rub off nicely on the whole semiconductor sector tomorrow (but that doesn't mean we're ready to play the SMH again). With SUNW, IBM, CPQ, HWP, CSCO, EMC and DELL making up the bulk of IAH, and also being the bulk of semiconductor purchasers, it must mean demand is strong from these OEM manufacturers too, right? Watch IAH components to confirm a possible sympathy move in this index. Average Daily Volume = 71 K /charts/charts.asp?symbol=IAH ------ BDH - Broadband $89.56 -2.56 (+1.06) Not optionable. AS suspected $92 provided the resistance over the last two days making a long position entry darn near impossible. The optical guys continue to blow off steam - JDSU, NT, GLW, and SCMR were down a few dollars each. But the worst was SDLI, down almost $26 on the day. Good thing it isn't a huge part of the index, but with a move like that, it doesn't need to be to have a strong effect. That said, $88.50 should make a strong support level, as it was previous resistance in the prior two weeks of consolidation. Not only that, but the saving grace here (despite today's loss) is that BDH's 10-dma at $88.71 hasn't been violated. A bounce from there could make an excellent target at which to shoot, as could a move back over the 5-dma of $90.50. A move under $88.50 though might signal enough weakness to even go short. However, with such a strong sentimental sector, that would present much more risk and likely be short lived. Keep a careful eye on support and resistance to determine your entry, and maintain a stop loss too no matter which direction you trade. We're more inclined to wait for the bounce and another opportunity to play this one long though. Average Daily Volume = 194 K /charts/charts.asp?symbol=BDH ************** No Play ************** BHH HHH PPH SMH ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10376.12 108.54 -122.68 62.58 -121.62 -73.18 Nasdaq 3936.84 129.27 23.53 50.65 -127.17 76.28 $OEX 785.09 14.17 -5.35 2.44 -14.91 -3.65 $SPX 1452.18 21.54 -10.05 3.18 -26.95 -12.28 $RUT 515.01 9.05 2.90 1.92 -12.60 1.27 $TRAN 2612.76 7.48 -17.95 -13.31 -36.65 -60.43 $VIX 25.66 -0.75 0.85 -0.08 2.09 2.11 Calls AETH 202.00 11.06 8.19 5.19 -8.38 16.06 Promise RBAK 132.25 17.31 1.25 -1.94 -3.38 13.25 Digesting BRCD 158.19 14.50 -0.13 4.19 -5.31 13.25 Entry LNUX 45.19 -1.37 3.87 3.00 6.94 12.44 New CIEN 157.19 10.75 -2.13 4.13 -0.81 11.94 Held strong ABGX 122.25 8.50 14.00 -1.00 -13.75 7.75 Watch it MSFT 79.88 1.13 1.25 5.75 -0.81 7.31 Internet AGIL 63.63 -0.31 0.37 4.56 1.81 6.44 New PMCS 190.31 8.94 6.13 4.25 -13.06 6.25 Profits JDSU 125.00 7.13 -2.44 4.06 -3.94 4.81 Give back PDLI 168.69 18.00 -9.00 11.00 -15.31 4.69 Sector sell MRVC 58.06 5.25 2.50 0.31 -5.38 2.69 Trend good HGSI 133.00 13.41 -2.91 7.84 -18.84 -0.50 Changing? NT 64.13 0.94 0.75 -1.69 -3.06 -3.06 Once more ADCT 77.63 -0.81 3.38 -2.81 -3.00 -3.25 Dropped VRSN 161.00 8.94 2.13 -7.75 -6.88 -3.56 At support LLTC 65.31 2.44 -1.13 1.56 -7.00 -4.13 Short leash SEBL 151.69 11.13 -3.16 -4.78 -8.56 -5.38 In the news GLW 240.00 7.25 -9.94 -1.38 -4.25 -8.31 Ouch NXTL 58.81 0.81 -4.38 -0.75 -4.50 -8.81 Dropped YHOO 131.69 -1.88 8.94 -5.19 -11.13 -9.25 Analysts SDLI 267.38 15.06 -19.38 -2.38 -25.81 -32.50 Dropped Puts HON 35.00 -8.00 -4.53 0.31 -2.00 -14.22 Dropped AMZN 42.00 -0.69 0.82 -0.07 -4.06 -4.00 New UTX 56.50 -1.50 -1.75 1.25 -0.38 -2.38 Trying NKE 35.19 -0.69 -0.88 -0.13 -0.38 -2.06 Hacked DCLK 40.63 -1.44 4.06 2.88 -3.38 2.13 Entry 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: ***** SDLI $267.38 -25.81 (-32.50) Apparently investors took Tuesday's downgrade from analysts at Wit SoundView to heart. If you'll remember, they downgraded SDLI and others from a Strong Buy to a Buy. They were quick to point out the downgrade was based on a price valuation, and nothing more. They simply thought the price was too high, saying SDLI and others in the sector were overextended and "will come back to earth" in coming months. If you had your stops in place, you should have been stopped out by now. So far this week traders have shaved about 15% off the price of SDLI stock since its high on Monday at $315.13. As we said Tuesday, bounces off support at $280 or $290 could be considered for new plays, but to be prepared to protect profits. Now you know why. Until the last two hours of today's session, it appeared as though the $284 area may hold up. By 4:00 pm ET, SDLI had lost another $16.00 closing near its low of the day. While SDLI is now oversold on an intraday basis, technical indicators on daily charts have the fiber company finally coming off the ceiling. Could SDL turn around from here? Possibly, but for now its time to stand back and take these gains from what was a great play. NXTL $58.81 -4.50 (-9.63) Swoosh! That's NXTL getting flushed. The $60 and $62 support that defined NXTL's strength this week was lost in today's late afternoon sell-off. The broad selling pressure, bad company press, and a mixed technology market was obviously too much of a strain. Yesterday ING Barings began new coverage on the stock with a Buy rating, but even this positive acknowledgement didn't have the necessary impact to jump start the momentum again. Plus NXTL got nabbed for a 10-dma ($62.22) violation today. So we're hauling NXTL off to the slammer tonight and throwing away the key. ADCT $77.63 (-3.25) As the song says, "you've got know when to hold em, know when to fold em." We've got to fold and walk away from this pick. While we love a steady uphill climb on a chart, we can never fall in love with a stock. ADCT has stumbled. We charted the stock's entry point and support as falling on the 10-dma but today, it fell below that support and did so on higher volume than what contributed to yesterday's decline. There's been no news released by or about the company recently so it would appear that cautious investors are simply cashing in on the nice gains the stock has made in the past month. Our drop is from a technical standpoint and we may likewise return when conditions become more favorable again. PUTS: ***** HON $35.00 -2.00 (-4.50) HON squeezed out a bit more of a loss in the seller's market today. HON led the Dow Industrials into the gutter and takes the blue ribbon for top percentage decliner. The share price even hunkered down enough to set another 52-week low at $34.50. This marks the third time it's set a new low in just four sessions. Another analyst downgraded HON this week too. Quinten Nufer at UBS Warburg cut the stock from a Strong Buy to Hold as well as adjusted down the 2000 and 2001 profits estimates. Now all that is fine and dandy, but let's take a hard look at what could potentially unfold in the short-term. The huge losses HON experienced this week are very likely to attract bargain hunters. And honestly, we've really cleaned up on this put play. It's performed much better than expected. So open your pockets, stuff the profits safely inside, smile, and move on to other lucrative plays. ************************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. 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The Option Investor Newsletter Thursday 6-22-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ******************** PLAY UPDATES - CALLS ******************** RBAK $132.25 -3.38 (+13.25) On Sunday, we mentioned $120 as a difficult obstacle. So much for obstacles. Monday saw RBAK breaking up and out, gaining almost 15% or $17.32 on heavy volume. Since then the stock has been digesting its big one-day gain. Tuesday saw news of a strategic alliance with Internet infrastructure provider AsiaInfo in a broadband initiative in China. On Wednesday, analyst Bob Hirschfeld of Bear Stearns made positive comments about Internet infrastructure stocks, giving a thumbs up to RBAK, calling it the leader in DSL/cable aggregation. Considering the general market sell-off today, RBAK held up well, closing just above its 5-dma. During the drop, RBAK stopped dead at $129.25 and bounced. Bounces from the $130 level along with a strong NASDAQ could be a good entry. Look for support at this level as well as the 10-dma, currently at $124. This also happens to be the area from which RBAK broke out after consolidating all of last week. On the upside, $145 is formidable resistance considering the recent run-up. BRCD $158.19 -5.31 (+13.25) Nothing moves in a straight line, and profit taking hit BRCD along with the rest of the technology market today. Yesterday's strong move to $169 was looking like it would continue today. After some early morning weakness, the stock ran back up to yesterday's high before the NASDAQ weakness dragged BRCD lower, proving that the law of gravity has not been repealed. Adding strength to the move yesterday was AG Edwards. The firm initiated coverage of the stock with a Buy rating. Volume today was light, but the selling volume increased into the close with the stock ending right on its low of the day. Although support is sitting at $157 (also the site of the 5-dma), continuing market weakness could force a retest of support between $150-152, which is backed up by the 10-dma at $149.38. Consider new entries as BRCD bounces from support, and confirm the strength of the bounce with volume. This is a momentum-driven move and we need strong buying volume and a supportive market to sustain the momentum. LLTC $65.31 -7.00 (+4.13) Danger, Will Robinson! Market weakness and weakness in the Semiconductors today knocked LLTC off its pedestal, wiping out all of the stock's gains over the past week and a half. Volume was slightly below the daily average, but the selling accelerated throughout the afternoon and the stock closed just above the low of the day. Today's decline sliced right through the 10-dma ($68.44), which has provided support since last May. A bounce tomorrow from current levels looks buyable, but unless the NASDAQ and the Semiconductors head higher, LLTC could be in for further declines before returning to its winning ways. Mild support exists near $63, with strong support down at $60. After the large drop today, LLTC is on probation, and needs to prove itself by putting in a bounce tomorrow, or it will be headed for the drop list. Aggressive traders can consider buying a bounce from support, although we would feel more comfortable waiting for renewed buying interest to push the price back above resistance at $69 before initiating new positions. NT $64.13 -3.06 (+3.25) Is that an entry point I see? After moving to new highs early in the week, NT has succumbed to profit taking over the past 2 days. The first indication that a near-term top was approaching was the reduction in buying volume that accompanied the move up last week. The recent decline has come on volume just above the ADV, and it was a bit disconcerting to see the volume increase right up to the closing bell. Today's drop pushed the share price below the 10-dma ($65.25) for the first time since late May. Closing at the low of the day is not a good sign, but NT is rapidly approaching support at $63-64. Look for the selling to abate, and buying to resume before initiating new positions. If confirmed by strong volume, a bounce from support is buyable, but conservative investors will want to wait for strong buying volume to push the share price above the $65 resistance level before playing. VRSN $161.00 -6.88 (-3.56) The trading range is still alive... but just barely. After moving up to the top of its $160-180 range, VRSN fell victim to the NASDAQ weakness, and then fell back to the bottom of the range. If you are playing this trading range, then congratulations on the profits you have garnered over the past 2 weeks. For those of us waiting for a breakout, the past couple weeks have been a bit frustrating. JP Morgan initiated coverage of VRSN with a Buy rating yesterday, and that was enough to provide support near $168. Volume continues to bounce around the daily average, but intraday volume is a good indicator of the strength of VRSN's moves. Today, as the stock declined over the last 2 hours of the trading session, volume steadily increased right up to the close. Look for VRSN to find support between $158-160. A bounce from support is buyable, but use caution. This play is only a step away from the drop list if it violates support tomorrow, but a healthy bounce and we have an entry. The market direction is tenuous right now, so don't try to catch a falling knife. If the support fails to hold, you will want to stand aside and wait for a better play. Conservative players will wait for buying volume to push the price through resistance at $168-170 before initiating new positions. SEBL $151.69 -8.56 (-5.38) IBM announced Wednesday that it had formed an alliance with SEBL and two other tech concerns to provide companies with e-business services. SEBL will provide the infrastructure and CRM software to create the new alliance. The announcement didn't help SEBL's stock much as traders digested their earlier gains. IBM announced a second alliance Thursday, stating that it would use SEBL's customer service software in a new Internet voice venture. The announcement by IBM Thursday gave SEBL a lift in early trading, but the stock found resistance at $165, then fell into a trading range. Our play weakened towards the end of trading Thursday, following the Tech sector south. Despite the sell-off Thursday, SEBL's pattern of higher lows remains intact. If the profit taking persists Friday, watch for SEBL to find support at $150, and look for a bounce off that level for a possible entry. For readers looking for a more conservative entry point, wait for SEBL's momentum to return, and target shoot as the stock clears resistance at $160 or at $165. ABGX $122.25 -13.75 (+7.75) After its incredible five day rally, ABGX gave back much of its gains Thursday. There was no specific news to drag ABGX down. Instead, a broad bout of profit taking swept through the Biotech sector Thursday, taking ABGX down along the way. The AMEX Biotech Index ($BTK) was hammered by traders Thursday, losing nearly 8%. The heavy selling drove ABGX right past its major support level at $130 without any hesitation. And the sellers kept pouring it on into the close as ABGX finished the day near its lows. In light of the dramatic decline Thursday, we'll want to proceed with caution Friday. ABGX's next major support level is at $120. If the selling subsides Friday morning, watch for ABGX to stabilize, and consider a bounce off $120. For our more conservative readers, wait for momentum to return, and confirm direction in the sector before entering the play. We don't want to be too negative, because the Biotech sector can bounce back just as quick. But, if you have a gain in the play, don't forget to set your stops! JDSU $125.00 -3.94 (+4.56) JDSU rallied ahead of the company's analyst meeting Wednesday, clearing resistance at $128 along the way. The stock battled with resistance at $130 for much of the day Thursday, only to succumb to the falling Tech sector towards the end of trading. JDSU told analysts at its meeting Thursday that the company expects its merger with ETEK to close by the end of this month. Once the merger is completed, the arbitrageurs will step away, which may provide a lift to the stock. There have even been rumors circulating that after the ETEK acquisition is completed JDSU will be added to the S&P 500. While only rumors, the talk may provide a boost to our play. Despite Thursday's tech wreck, JDSU remains in its ascending channel. An aggressive trader might watch for the stock to bounce from support at $125 Friday morning for a possible entry point. A more conservative entry might be found if JDSU can clear resistance at $130. CIEN $157.19 -0.81 (+11.94) After the downgrade last Tuesday, CIEN smartly bounced from support at $150 Wednesday morning, and rallied throughout the course of the day. The stock extended its rally Thursday by cruising past resistance at $160, nearly eclipsing $165. CIEN struggled mightily to hold onto its gains during the second half of trading Thursday, but couldn't combat the weakness in the Telecom sector. CIEN held up relatively well Thursday despite the triple digit loss for the NASDAQ, which bodes well for our play. In light of CIEN's impressive relative strength Thursday, consider an entry at current levels if the stock rallies Friday morning. But, make sure to confirm direction in the Telecom sector before doing so. However, if the profit taking in the Tech sector continues Friday, watch for CIEN to find support at $155, and consider entry if the stock bounces. For our more conservative traders, wait for CIEN to move back above resistance at $160 before considering entry into the play. GLW $240.00 -4.25 (-6.00) The fallout from last Tuesday's downgrade of fiber optic stocks has plagued our GLW play. GLW managed to tack on a small gain Wednesday, as the Tech sector edged higher. But, the stock continued its slide lower Thursday following the rest of the Tech sector lower. GLW has settled into a trading range between $240 - $248 over the past three sessions. Now with Thursday's sell-off, GLW is hovering just above the lower end of that range. Going forward, we'll want to watch closely Friday morning to see if support at $240 holds. After $240, GLW doesn't have major support until $230. If the Tech sector decides to resume its climb higher Friday, you might look for GLW to break away from its range bound trading. Look for an entry point if GLW clears resistance at $248, or wait for the stock to penetrate its gap at $250 for a more conservative entry. Since the stock is hovering above crucial technical levels, be cautious, and remember, it's okay to sell too soon! YHOO $131.69 -11.13 (-9.25) Well, it seems when a broker initiates coverage of company with a Neutral rating, it sure can let the air out of a perfectly good play. On Wednesday, Holly Becker of Lehman Brothers did just that. This morning Henry Blodget, came out again saying he expects a "strong but slightly less robust" second quarter profit compared with the first quarter. We'll know for sure about the second quarter July 11th after the close. For the past two days, traders have lightened their load of shares in Yahoo!. Support near the $135 area held-up well until the last hour of trading, when the Internet company fell to $131.63 The volume the past two days has been less than average, but the $18 decline since Tuesday's high has been painful for anyone without stop losses or those trying to buy bounces off support. How do we approach this one? Support is still seen near $130 and the 50-dma at $128.41. We would look at buying bounces off support, but would really want to see strong volume to help help filter out the possibility of a head-fake. Conservative traders may prefer to see a move back through $140 accompanied by solid volume prior to entering new plays. HGSI $133.00 -18.84 (-0.50) Is the trend changing? Even though our play is only down $0.50 for the week, if you bought near yesterday's high at $157.25, you're probably feeling like you've been hit by a truck. Several TV commentators suggest the pullback is simply profit taking after the huge run-up. We are going to suggest traders use a bit more caution when considering new plays in HGSI. The close under the 10-dma at $136.13 is not a good sign. Volume today came in near 1.6 mln shares, which isn't huge, but is certainly worth noting. Technically, HGSI has minor support near $130 and again at $128. If investors continue to click on the sell button, it may not take much to drive the price back to another support level seen between $115 and $117. There was little in the way of news the past two days, however HGSI and others in the genomics field will move from the Russell 2000 index to the Russell 1000 index next week. Some analysts suggest that could once again light a fire underneath stocks in the industry. For now, we will stick with our play, but suggest traders treat any moves higher with caution unless the volume returns in a big way. MRVC $58.06 -5.38 (+2.69) There can be a fine line between profit taking and a change of trend. At this point, we believe the retracement seen today is just profit taking. MRVC began to run out of gas early Tuesday morning. That's not necessarily a bad thing as stocks need to have some consolidation to strengthen a trend. Once a support area is reached, we believe traders that bought shares of MRVC somewhere on the way up will once again return to the table. In watching this one trade, it seemed to begrudgingly move lower. It didn't have the "get me out at any price" kind of personality. Now for the $64 question. Where will the buyers begin to strong-arm the sellers? MRVC closed near a minor support level at $58. There is better support near $55 and don't forget the gap back at $48. We don't believe a filling of the gap is in sight just yet, but it still must be kept in mind. The 10-dma sits tonight at $54.52 and bounces of that area could be considered as an entry for new plays. Part of the recent strength came on speculation of an IPO of the company's Luminent division, so any news confirming the speculation could get our play back on track. For now, be patient and wait for a bounce, accompanied by solid volume. MSFT $79.88 -0.81 (+7.31) The effect of the surprise Restrictions Stay by Judge Jackson on Tuesday became immediately evident. From the start on Wednesday, MSFT opened up $2 and then tacked on $5.75, or 7.7% by the finish. Volume was heavy at 80.2 mln shares being exchanged compared to the ADV of 39.2 mln. The clean break through the $80 level was also an added bonus. Today CIBC World Markets upgraded MSFT to a Buy from a Hold and issued an $89 price target. Analyst Melissa Eisenstat shares our sentiment saying that investor focus is shifting away from the ongoing antitrust trial with the Justice Department. A resurgence in MSFT shares is beginning to really blossom. The price has drastically improved from a 52-week low of $60.38 set in late May. We believe the worst is over. And the company's product improvements just keep rolling out. Today Microsoft unveiled its blueprint for developing software to connect PCs, the Internet and smaller devices such as cell phones and handheld computers. Their ".net" strategy faces competition from the likes of Sun MicroSystems and Oracle who also want to control the standards for this leading-edge technology. The share price continued to hold the higher levels set in yesterday's market, which is definitely a bullish indication considering many stocks were selling off. The pattern of higher-lows and higher-highs also give promise that MSFT can rise to the occasion. Near-term support is now at $79 and $80. The new resistance to watch is at $82.19. Look for a move through this mark if you're concerned about some back-filling following the past two days of gains. PDLI $168.69 -15.31 (-13.31) Oh yes, you need to shorten the leash. The impressive run up of late is feeling some resistance. The whole biotech sector began to slump in today's action. The Amex Biotechnology index ($BTK) reflected the negative disposition. After a fantastic peak at $191.75 yesterday afternoon, PDLI crash landed today. The slide through near-term support at $173-$176 and the 5-dma ($174.34) is unnerving. Be patient for upward confirmation before adding positions. Conservatively look for PDLI to move back through $180 and make a charge for overhead resistance. Even so, be aware Celera Genomics (CRA) is planning to announce a major breakthrough in DNA sequencing next week, which could send others in the sector on a downward spiral. PMCS $190.31 -13.06 (-2.69) A back-fill to firmer support at $190 offers a nice entry level if your interested in playing a potential splitter as it approaches earnings next month. Of course an intraday bottom at $195 today, which is what should be evolving as near-term support, would have dispensed better confirmation overall. But the selling pressure did bring down many other high-flyers so let's not panic. Be patient and wait for a bounce off the current level at the 10-dma ($190.59) before jumping into any more positions. Better yet, look for a definitive move through the 5-dma ($194.05) if you're more the conservative type. AETH $202 -8.38 (+16.06) Hey, nobody promised it would go up in a straight line. We're pleased to see that AETH held its upward trendline in the wake of tech stock selling this afternoon. Yesterday's activity saw the stock open on the low of the day, trade within an 18 point range and then close keeping 16 of those points. Today, we weren't so fortunate. With the broader market selling, AETH suffered a ten point drop in the closing hours to set us back a step, stopping right on its 5-dma. This guy has momentum and that is all well and good in an advancing market but we'd be remiss if we didn't caution that AETH has now advanced 184% since its April 17th close. Yes, that's right. 184%. We're on the train but watching closely for any jumping of the tracks. The 10-dma currently sits at $191. Today's decline was not done on higher volume than the advancing days so we remain cautiously optimistic. ******************* PLAY UPDATES - PUTS ******************* DCLK $40.63 -3.38 (+2.13) Pushing it right to the limit, DCLK gave us a great entry point this morning. Remember our cautionary statement from Tuesday, where we said to stand aside of shares of the Internet ad company traded through the $45 resistance level? The recovery continued yesterday right up to the close. Hitting a high of $44.88 this morning, DCLK began drifting lower as the Internet sector came under pressure, and the selling accelerated into the close. The daily volume is light, which is to be expected as DCLK approaches the $40 support level once again. If the market weakness continues, the stock could take another run at Monday's lows near $35. Use volume for confirmation of the strength of a further decline. If it picks up as the price drops through support, consider initiating new positions. Otherwise, wait for another rollover at the $43 resistance level before jumping aboard. NKE $35.19 -0.38 (-2.06) NKE's Web site was overcome by hackers Wednesday. An activist group known as S-11 took over NKE's homepage in protest of the upcoming World Economic Forum. The cyber sabotage is an extension of human rights organizations' protest over conditions at NKE factories in Asia and Latin America. The news didn't have a major impact on the stock, though NKE did slide lower Wednesday. The stock mustered a minor rally Wednesday morning, but after running into resistance at $36, it weakened into the close of trading. NKE dipped at the open Thursday, and slid lower through the course of trading. It did manage to find support at $35 Thursday, and bounced slightly higher from that level. Watch closely Friday morning to see if support at $35 holds. Consider an entry if the $35 level fails. Additionally, if the Retail sector rallies, watch for NKE to run into resistance at $36 again, and consider an entry if the stock drifts lower from that level. UTX $56.50 -0.38 (-2.38) Is our play in UTX trying to find a bottom? It could be, but we really believe it needs to look further south for its bottom. As we've said, UTX doesn't move at the speed of light, like many at the NASDAQ. It appears as though the trend is still intact, and our play is getting ready for its next trip down. We mentioned Tuesday UTX may find some support near the $55 level and it has the past two days. Our play kicked into gear earlier on the news from Honeywell. Analysts this week have attempted to come to the rescue saying that HON's problems are their own, and investors shouldn't be selling shares of others in the same industry. We won't know about that for sure until UTX reports quarterly results in the middle of July. There hasn't been any other news for UTX this week. With the major indices falling today, we would like to have seen more participation from UTX. However, that may not come until the tech stocks pick up and investors move back into the exciting tech plays, selling shares of UTX to fund their investments. ************** NEW CALL PLAYS ************** LNUX - VA Linux Systems Inc. $45.19 +6.94 (+12.44 this week) Linux is poised to become more than just a fringe player in corporate computing. Firms employing Linux for print-n-file, e-mail, and Web services are offering encouraging reports of the operating system's high reliability, performance, and scalability. There are also firms using clustered Linux systems for intensive tasks on large data sets. Within the Global 2000, Linux is picking up speed, moving forward as a legitimate alternative OS for both server and desktop. Certainly not hurting its chances of deployment is the fact that information systems departments can significantly cut budgets in the per-server and per-client licensing fees arena by electing this Unix-like OS. An 18% gain on a day that the major indices stubbed their toe? So what got investors to focus their attention towards Linux? It could have been the announcement this morning from Intel. INTC unveiled a limited-function computer for e-mail and surfing the Internet. It was Intel's bid to break into the consumer market for Web appliances. The Intel Dot.Station Web appliance comes with a bunch of goodies like a built-in telephone, calendar, address book, and e-mail. So what got investors so excited? It uses the Linux operating system and will be distributed and sold to consumers by Internet Service Providers. Investors expect demand for these so-called Web appliances to be huge. International Data Corp said they expect the market to grow to 55.7 mln units and about $15.3 bln in sales by the year 2002. Since mid-April our new play has been putting in a bottom between $30 and $40. The move up today could put LNUX back in the spotlight after its fall from $320 in early December. You may have noticed there are only four major brokerages firms following the software company, and all of those only have LNUX rated as a Buy. With today's announcement we would look either more reiterations or possibly firms initiating coverage of Linux in the coming days. Technically, our new play gapped up through resistance at $38 this morning at the open, and never looked back. As the major indices were deteriorating late today, LNUX moved $2 higher, with over 250K changing hands in the last 15 minutes of the session. Intraday support shows up at $43, $40 and back at $38. Should we see any profit taking, a bounce off those levels could be considered as an entry for a new play. Linux stocks began the week in a rally mode after Red Hat said it would expand its relationship with Dell Computer. Mission Critical Linux, also announced on Monday, that General Atlantic Partners had invested $20 mln in the Linux start-up. BUY CALL JUL-35 NUU-GG OI=120 at $12.00 SL= 9.00 BUY CALL JUL-40*NUU-GH OI=130 at $ 8.75 SL= 6.50 BUY CALL JUL-45 NUU-GI OI= 0 at $ 6.13 SL= 4.00 BUY CALL AUG-40 NUU-HH OI= 36 at $10.75 SL= 8.00 SELL PUT JUL-40 NUU-SH OI= 1 at $3.25 SL= 5.25 (See risks of selling puts in play legend) Picked on Jun 22nd at $45.19 P/E = N/A Change since picked +0.00 52-week high=$320.00 Analysts Ratings 0-4-0-0-0 52-week low =$ 26.88 Last earnings 05/00 est=-0.23 actual=-0.13 Next earnings 08-22 est=-0.13 versus= n/a Average Daily Volume = 601 K /charts/charts.asp?symbol=LNUX AGIL - Agile Software Co $63.63 +1.81 (+6.44 this week) Agile develops and markets product content management software, which is software that enables companies to collaborate over the Internet by interactively exchanging information about the manufacture and supply of products and components. Agile's collaborative suite of software products is designed to improve the ability of all members of the manufacturing supply chain. Since their start in 1996, they have licensed their products to approximately 300 customers including Gateway, Texas Instruments, Philips Mobile Computing, Lucent Technologies, Solectron, GE Marquette Medical Systems and FSI International. About 40% of sales come from additional material procurement applications, consulting, implementation, support, and training services. AGIL's month long recovery took on new life yesterday with promises of more to come. While waiting in desperation for a break through that ever-elusive 200-dma (currently at $61), Southwest Securities stepped in with a new Buy rating. The timing was right and AGIL jumped out of the tight trading range of $56 and $59. Analyst Bradley Whitt initiated the coverage citing "the stock deserves a premium valuation due to its accelerating software growth, high gross margins, leadership status, exceptional execution, scalable business model, and financial security". He also issued an $86 12-month price target. Last week another analyst, Michael Micciche at DLJ, reiterated a Buy recommendation for the stock and issued a $100 price target. However, AGIL remained trapped under that formidable resistance at the $60 mark. The boost of adrenaline propelled AGIL even higher in today's session. The share price peaked at $66.19 and volume remained robust at more than twice the norm. Essentially this is a simple momentum play. Don't look for an earnings announcement to generate any excitement. The company isn't due to report until late August. So for now play the trend for what it is - a technical rebound. Dips followed by definitive bounces off the 200-dma technical can be used for entries. If you're more on the cautious side, wait for the trend to develop with more positive moves off the current level. In the news today, Agile Software announced an alliance Symix Systems (SYMC) to provide its mid-market manufacturing customers with extended supply chain collaboration capabilities. BUY CALL JUL-60 AUG-GL OI=211 at $9.25 SL=6.25 BUY CALL JUL-65*AUG-GM OI= 83 at $7.00 SL=5.00 BUY CALL JUL-70 AUG-GN OI= 71 at $4.63 SL=2.75 BUY CALL AUG-60 AUG-HL OI= 0 at $8.38 SL=5.75 BUY CALL AUG-65 AUG-HM OI= 0 at $7.50 SL=5.25 Picked on June 22nd at $63.63 P/E = N/A Change since picked +0.00 52-week high=$112.50 Analysts Ratings 2-6-0-0-0 52-week low =$ 17.13 Last earnings 03/00 est=-0.06 actual=-0.02 Next earnings 08-26 est=-0.04 versus=-0.09 Average Daily Volume = 692 K /charts/charts.asp?symbol=AGIL ************* NEW PUT PLAYS ************* AMZN - Amazon.com $42.00 -4.06 (-4.00 this week) Amazon.com opened its virtual doors in July 1995 with a mission to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible. Today, Amazon.com is the place to find and discover anything you want to buy online. Over 17 million people in more than 160 countries have made them the leading online shopping site. Earth's Biggest Selection of products, including free electronic greeting cards, online auctions, and millions of books, CDs, videos, DVDs, toys and games, and electronics. In addition to its US Web site, the Company currently has two internationally focused Web sites located at www.amazon.co.uk and www.amazon.de. The Company also has invested in and developed strategic commercial relationships with a number of selected e-commerce companies. Since hitting its all-time high of $113 on December 9, 1999, it's been all downhill for the Poster Child of High Cash Burn Rate Stocks. While AMZN is beloved to its customers for their low prices, ease-of-use and excellent service, its investors have been treated to an experience more closely resembling a root canal - down down down - slowly and deeply. Connecting the local highs since its December top, a clear downtrend line can be drawn from which AMZN has not broken out of. This can also be found in its Business to Consumer (B2C) peers such as EBAY and YHOO, but to a far lesser extent. Once the darling of tech investors, B2C Internet stocks gave way to B2B Internet stocks and now the flavor of the moment seems to be the Internet Infrastructure stocks. So where does that leave AMZN? Over 60% off its high is one way to answer the question. With negative momentum in the Internet B2C sector, summer being a traditionally slow season for B2C Internet stocks, and little in the way of fundamentals to support the stock (even at its current price AMZN could hardly be called a value play), there is little incentive to buy. With little incentive to buy, we are adding AMZN as a put play and going with the direction of the trend. After trading in a range from $40-$45 for the last week, the stock finally chose a direction. Losing almost 9% today on almost twice the average daily volume, the direction is decidedly down, riding the 5-dma currently at $45. Resistance can also be found at its 10-dma, currently $46.72 and its 20-dma, currently $48.75. Be aware of support that can be found at $40.50 for the stock. A break through that level on good volume will lead to more downside with little resistance. BUY PUT JUL-45 QZN-SI OI=2191 at $6.13 SL=4.25 BUY PUT JUL-40*QZN-SH OI=6970 at $3.50 SL=1.75 Average Daily Volume = 6.67 mln /charts/charts.asp?symbol=AMZN ********************** PLAY OF THE DAY - CALL ********************** RBAK - Redback Networks $132.25 -3.38 (+13.25 this week) Founded in 1996 and headquartered in Sunnyvale, Calif., Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable operators, and service providers to rapidly deploy broadband access and services. The company's market-leading Subscriber Management Systems (SMSs) connect and manage large numbers of subscribers using any of the major broadband access technologies such as Digital Subscriber Line (DSL), cable, and wireless. To deliver integrated transport solutions for metropolitan optical networks, Redback's SmartEdge multi-service platforms leverage powerful advances in application-specific integrated circuit (ASIC), IP, and optical technology. With this product portfolio, Redback Networks is the first equipment supplier focused exclusively on developing integrated solutions for the New Access Network. Most Recent Write-Up On Sunday, we mentioned $120 as a difficult obstacle. So much for obstacles. Monday saw RBAK breaking up and out, gaining almost 15% or $17.32 on heavy volume. Since then the stock has been digesting its big one-day gain. Tuesday saw news of a strategic alliance with Internet infrastructure provider AsiaInfo in a broadband initiative in China. On Wednesday, analyst Bob Hirschfeld of Bear Stearns made positive comments about Internet infrastructure stocks, giving a thumbs up to RBAK, calling it the leader in DSL/cable aggregation. Considering the general market sell-off today, RBAK held up well, closing just above its 5-dma. During the drop, RBAK stopped dead at $129.25 and bounced. Bounces from the $130 level along with a strong NASDAQ could be a good entry. Look for support at this level as well as the 10-dma, currently at $124. This also happens to be the area from which RBAK broke out after consolidating all of last week. On the upside, $145 is formidable resistance considering the recent run-up. Comments RBAK spent part of the day over $140 but slipped with the broader NASDAQ sell-off. It did bounce at $130 though. You can be certain that if the NASDAQ runs for 4100 again, RBAK will be right there. Support lies at $130 and $124, the 10-dma. Bounces from there would provide strong entries. Keep a close on the NASDAQ, especially key levels at 3950, 4000, 4050, and that elusive 4100. BUY CALL JUL-125 BKK-GE OI= 282 at $20.38 SL=15.75 BUY CALL JUL-130 BKK-GF OI= 335 at $17.88 SL=14.00 BUY CALL JUL-135*BKK-GG OI=1159 at $16.13 SL=12.50 BUY CALL JUL-140 BKK-GH OI=1397 at $13.75 SL=11.00 BUY CALL AUG-140 BKK-HH OI= 11 at $20.25 SL=15.75 SELL PUT JUL-120 BKK-SD OI= 444 at $ 8.63 SL=11.00 (See risks of selling puts in play legend) Picked on May 28th at $72.06 P/E = N/A Change since picked +60.19 52-week high=$198.50 Analysts Ratings 9-3-1-0-0 52-week low =$ 20.00 Last earnings 04/00 est= 0.03 actual= 0.05 surprise = 33% Next earnings 07-12 est=-0.06 versus=-0.05 Average Daily Volume = 2.7 mln /charts/charts.asp?symbol=RBAK ************************ COMBOS/SPREADS/STRADDLES ************************ Wall Street Bears Retaliate! Wednesday, June 21 Equity markets moved higher today amid strength in technology issues. The Dow Jones Industrial Average rebounded 62 points to end at 10,497 and the Nasdaq composite index added 50 points to finish at 4063. The S&P 500 Index ended slightly higher at 1479. Trading volume on the NYSE reached 1.01 billion shares, with declines beating advances 1,603 to 1,264. There were 55 stocks at new highs and 75 at new lows. Activity on the Nasdaq was moderate with 1.5 billion shares traded. Declines edged advances 1,996 to 1,975. In the bond market, the U.S. 30-year Treasury was down a full point, pushing its yield up to 5.96%. Tuesday's new plays (positions/opening prices/strategy): Cytogen CYTO AUG7C/JUL10C $1.56 debit diagonal Gen. Magic GMGC NOV7C/JUL7C $1.25 debit calendar Unisys UIS JUL35C/J20P $1.38 credit strangle All of our new positions offered favorable entry opportunities. Portfolio plays: The Nasdaq rallied again today, boosted by gains in the price of Microsoft (MSFT). Shares of the world's leading software company climbed above $80 after a trial judge unexpectedly froze a set of restrictions implemented as a result of the federal government's antitrust lawsuit. The decision essentially granted the company a year-long stay of execution and for investors, the news sparked a wave of optimism. Analysts were also expecting Microsoft to reveal details this week of plans to deliver its software products and services over the Internet. The software giant's gains helped both indices move higher but the effect was most pronounced in the Nasdaq, which ended just a few points short of positive territory for the year. The Dow recovered from Tuesday's slump on strength in Minnesota Mining and Manufacturing (MMM), which ended $4 higher after a bullish analyst's meeting. Unfortunately, the advance in industrial issues was tempered by concerns over interest rates and future earnings. Some analysts said the market is being weighed down by worries that the FOMC may not be through raising interest rates. One expert commented on the Wall Street Journal's report, which said that economists remain skeptical that the current signs of slowing growth will be enough to restrain inflation. Overall, the market performed quite well considering the recent interest-rate uncertainty and a number of groups excelled during the session. Oil stocks moved higher after the Organization of Petroleum Exporting Countries opted to raise crude production by an amount more modest than analysts anticipated. Equipment and drilling companies were among the industry leaders and our long- term position in Texaco (TX) benefited from the upside activity. Shares of biotechnology stocks joined in the bullish movement and our leaders in that group were Immunex (IMNX) and Sepracor (SEPR). In the broader market, electronic instrument and gaming stocks advanced while household products, aluminum and healthcare issues slumped. Internet stocks also came under pressure but business software and semiconductor companies offset those losses. Our top performers in those categories were Active Software (ASWX), which added $3.75 to close at a recent high near $77 and Red Hat (RHAT) with a $1.75 gain to $32. Integrated Silicon Solutions (ISSI) finished just short of an all-time high near $41. Thursday, June 22 The technology rally came to a halt today amid concerns over the impending Federal Reserve meeting. The Nasdaq ended down 127 points at 3936. The anticipation of lower corporate earnings drove the Dow 121 points lower to 10,376. The S&P 500 Index was also down 26 points at 1452. Trading volume on the NYSE hit 1.02 billion shares, with declines beating advances 1,866 to 1,001. On the Nasdaq, trading in biotech, chip and Internet shares all contributed to an active session where 1.64 billion shares were exchanged. Technology declines beat advances 2,434 to 1,539. In the bond market, the 30-year Treasury was flat with its yield steady at 5.96%. Portfolio plays: The majority of issues in our portfolio moved lower today along with virtually all the market sectors. Industrial and technology stocks succumbed to selling pressure as new concerns over next week's Federal Open Market Committee meeting weighed on investors. The Dow aptly displayed analyst's worries over the current state of the economy with blue-chip cyclical and retail issues falling precipitously. Profit-taking in biotech and semiconductor stocks hammered the Nasdaq and in the broader market, drug, oil service, and brokerages endured the biggest declines. Many of the issues in our portfolio had achieved substantial gains in the past few session and thus most of the positions were little affected by today's sell-off. The were a number of surprises in the small-cap section. Cytogen (CYTO) jumped $1.50 to close at $10, even as profit-taking in the biotechs helped drag the Nasdaq lower. There was no announcement in conjunction with the move but the trading volume suggests the rally will continue. Our new position is profitable after just tow days and we will look for any favorable exit opportunities. General Magic (GMGC) rallied $2 today after officials of the company announced they have secured a contract to integrate its Voice XML-based magicTalk communications software with IBM's DirectTalk and WebSphere Voice Server with ViaVoice Technology. The deal calls for the companies to jointly deliver and host end-to-end voice products. General Magic also secured a deal with Global Services Network to deliver unified communications services to the enterprise and mobile professional markets. The terms of the agreement were not disclosed but investors believe it will boost GMGC's revenues substantially. Our new calendar spread position traded at a small profit during the session and closed near break-even. Of course the decision must be made to remain at the "in-the-money" strike ($7.50) or roll up-and-out to a (NOV7C/AUG10C) diagonal spread. The additional debit for the new position is approximately $0.50 and the potential return on investment is slightly above 40%. There was an unexpected announcement concerning our bullish, diagonal position in PSS World Medical (PSSI). Fisher Scientific International (FSH), the world leader serving science, announced that their board of directors has agreed to acquire PSS World Medical in a tax-free, stock exchange. Under the terms of the agreement, 0.31 of a share of FSH common stock will be exchanged for each outstanding PSS World Medical share. Based on Fisher's June 21, 2000 closing price of $38 per share, the value of the transaction is approximately $11.86 per PSS share. Unfortunately, the price of Fisher's stock dropped $10 today and the deal does not have a collar on the lower limit for PSSI shareholders. With our position at $12.50 in November, the alternatives were limited. We chose simply to roll to the AUG-$12.50 calls on the short side and hope that Fisher's share value eventually recovers. Our new cost basis in the position is now $0.50 and there is a reasonable possibility that FSH will rebound in the next few months. In the straddles section, Jones Apparel (JNY) continued to slump with the retail sector and today, the overall credit for the (AUG30C/AUG30P) position reached $8.12; a $1.00 profit on $7.12 invested. The Lennox International (LII) debit-strangle also enjoyed a small boost during the session as the issue rallied to a midday high near $12.62. The overall credit for the position hit $1.50; an 80% return in just over one week. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRATEGIES - ****************************************************************** DEBIT STRADDLES... This neutral, low risk strategy works well when the underlying issue is expected to make a large movement in either direction. Before we can begin a discussion on the proper techniques for purchasing straddles, there are a few definitions that must be fully understood. Debit straddle: A neutral option trading strategy, which consists of the purchase a put and a call, generally with the same strike and the same expiration month. The position will benefit from a large move in one direction or the other and based on the size and timeliness of the move, it can generate large profits. The risk, (if little or no movement occurs) is limited to the initial amount paid for the straddle. By carefully selecting undervalued options and making reasonable assumptions about future movements in the underlying security, this can be a profitable strategy with very limited risk. Option Pricing: The primary influence on an option's price is the movement of the underlying security. The next important factor is time value. An option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. There are other, less important factors that affect the price of an option including interest and dividend rates. Volatility: The volatility component of option pricing is a measure of the range the underlying security is expected to change over a given period of time. The actual measurement is the standard deviation of the daily price changes in the issue. Historical (statistical) Volatility: A measure of how quickly the underlying security has moved in the past. It is a mathematical definition based on historical prices. In most cases, the higher the statistical volatility, the more an option is worth. Implied Volatility: The market's estimate of future volatility of the underlying security. Implied volatility calculators begin with the current option price and extrapolate the theoretical value of volatility. Even though it is a computed value, it is still just an estimate and is subject to errors or irregularities when the market performs unexpectedly. In general terms, implied volatility is the volatility value that makes an option's fair value equal to its actual market price. There are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. The first step is to determine how fairly the options are priced. This may be done with sophisticated pricing software or by simply comparing the current levels of implied volatility to past levels of implied volatility. When the relative implied volatility is low, options are effectively under priced. After identifying a series of inexpensive options, the trader must determine if the underlying stock has the ability to move to a profitable position in the required amount of time. Three months is generally the shortest recommended period for debit straddles; shorter-term positions suffer from time decay too quickly. With a simple probability calculator, it is easy to estimate the chance of the underlying stock finishing outside the break-even points at expiration. One thing you must understand when using these tools is that historical volatility measures are generally based on 10, 20, 50 and 100 day statistics and thus it is important to make a conservative estimate so as to not to artificially inflate the probability of profit. The next step is to look at a price chart of the stock to see if it has a history of moving the required distance in the allotted time frame. The important thing to examine is how often the issue moves through the necessary profit range in each of the past four or five (target) periods. Once again, simple option analysis software will do this automatically and more importantly, it will forecast the probability of actually profiting from the position. One thing to be aware of when buying any option is that time decay becomes greatest during the last month before expiration. A three month debit straddle will have lost approximately 50% of its value before the beginning of the worst erosion period even if the stock remains exactly at the original price when the position was opened. This makes it very important to use a mental loss limit near one- half the cost of the initial straddle purchase to preserve capital in the event the underlying issue does not perform as expected. After the position is open and the underlying stock begins to make a move, it is necessary to decide whether to "ride the trend" to the break-even point or trade against the straddle. One technique is to hold the straddle until the value of either option pays for the entire position, then the remaining option is risk-free with unlimited profit potential. A similar method bases the target exit on the sum total of both positions. When one position is worth the total initial debit, both positions are closed and the premium from the lower priced option is profit. The latter strategy works well when there is still ample time until the options expire. "Riding the trend" is considered the more profitable technique for directional traders but it involves additional risk and requires knowledge of basic technical analysis. The most common approach to this strategy is to monitor the underlying issue for a breakout or key reversal through a technical support or resistance level. When the new trend has been positively identified, the lower priced options (losing side) are sold along with one-half of the higher priced options (profitable side). The remaining position is held until a reasonable profit target is met and downside protection is maintained with a trailing stop. Advanced traders favor this follow-up technique because it is based on known technical trends and the action generally occurs near the position's break-even points. When one of these points is reached, two simple trades lower the overall cost basis while retaining a high probability of eventual profit. Determining how and when to exit a play is a matter of personal preference but in most cases, if the underlying issue performs poorly, the play should be liquidated before time value decay erodes the entire position significantly. As the last month of option life approaches, you should begin to plan an exit. Study the daily movement of the underlying issue and use it to your advantage to exit the position; selling each option for whatever you can, when instincts (not emotion!) tell you it's right. It's very difficult to learn to close out losing plays early but the simple fact is; there is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept your losses, learn from your mistakes, (and evaluate each one critically) then move on! Favorable debit straddles are relatively simple to uncover. The basic requirements are inexpensive options on issues that have proven historical volatility. The strategy is very simple and perfect for the novice trader providing he or she understands option pricing basics and follows a few simple guidelines. This type of strategy can generate excellent returns because losses are limited to the initial investment and profits are limited only by time and volatility in the underlying issue. More information on this and other spread/combination strategies can be found in Larry McMillan's book, "Options As A Strategic Investment", available in the OIN bookstore. Good Luck! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ See Disclaimer in section one ************
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