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Daily Newsletter, Monday, 07/10/2000

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The Option Investor Newsletter                  Monday  07-10-2000
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MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        07-10-2000        High      Low     Volume Advance/Decline
DJIA    10646.60 + 10.60 10703.10 10604.90  822 mln   1598/1245
NASDAQ   3980.29 - 42.91  4028.54  3976.20 1.39 bln   1945/2103
S&P 100   799.59 -  3.41   805.84   798.73   totals   3543/3348   
S&P 500  1475.62 -  3.28  1486.56  1474.76           51.4%/48.6%
RUS 2000  530.83 +  2.61   532.18   527.75
DJ TRANS 2809.02 + 24.38  2820.54  2783.29
VIX        22.88 +  1.06    23.00    22.27
Put/Call Ratio       .45
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Blockbuster Merger Kicks Off The New Week

They wasted no time getting down to business Monday morning 
as two major optical networking players announced they would 
be joining forces.  JDSU announced they would be buying SDL 
Incorporated in a $41 billion dollar stock deal.  That would 
value SDLI shares at a 50% premium based on the Friday closing 
prices, somewhere near $440.  Both firms are in the red-hot 
optical networking market, making components that allow multiple 
light signals to travel over a single fiber.  The consolidation 
continues for the Fiber-optics sector, but let me be the first 
to say, we at OI will miss playing SDLI once the merger is 
complete.  That has been a great winner over the last 12 months.  
As expected, the stocks were mixed today with JDSU was down on 
the news to $101.00, down $15.19.  SDLI gained $25.38 to $320.69.

JDSU was the most active stock on the Nasdaq today which gave 
back some of the gains from Friday's breakout.  In fact, the 
composite traded right back down to the top of range it had 
been stuck in for over a week.  The Nasdaq finished at 3980, 
down 42.90.  Volume was a little on the light side at 1.4 bln.  
The techs traded down for most of the session, briefly entering 
positive territory in the afternoon before rolling over again.  
The chart below paints a vivid picture as the Nasdaq sits 
right on an important support line.  You know the theory, 
old resistance now becomes support.  Well, if that is to be 
the case, we need to see support hold here.  Otherwise, it is 
back to one of those horribly tight trading ranges that we are 
becoming familiar with.  The sad part of all of this is that 
traders were encouraged by Friday's action which took place 
on decent volume.  Some were hoping to see a follow through.  
If this is the best they could do, it doesn't bode well for 
the rest of the month.  But, then again, the second half of 
July is typically slow and smart traders are probably reluctant 
to buy ahead of a potential drop in the averages.


 

The DJIA was a different story.  The two major indices seem 
to be heading in opposite directions on a daily basis of late 
and Monday was no exception.  The Industrials traded up to 
10,703 before backing off in the afternoon.  It was likely 
buoyed by Alcoa's strong earnings.  At least we are seeing 
some signs that this index, which has been building a tight 
wedge, may be looking to breakout to the upside (see Jim's 
market wrap from Sunday for further analysis).  You can see 
from the chart listed below that the average is beginning to 
turn.  I wouldn't call it out of the woods just yet, but a 
close above 10,750 would help peak my interest.  Today's volume 
was also light at 820 mln.  NYSE advancing stocks led decliners 
by a 9 to 7 margin, while Nasdaq losers topped gainers by 13 
to 12.


 

The first Dow component to report earnings for the 2nd quarter 
did so this morning, before the bell.  Alcoa beat analysts 
estimates by reporting $0.47 cents per share.  That is $0.02 
cents better than expectations.  The company attributed the 
strong results to continued concentration on cost control and a 
focus on profitable growth, a 9 percent decline in aluminum 
prices and the temporary dilutive effect of acquisitions.  The 
stock rallied on the news, but is really an example of why the 
DJIA is range-bound.  Take a look at this chart.  This is an 
awful chart to try and trade and investors are leaving such 
companies, despite strong earnings, to invest in stocks with 
a more promising outlook.  Hopefully a DJIA breakout will help 
to bring buyers back to these fallen stocks.


 

Other news today included Veeco who saw its shares rise nearly 
10 percent after the company said orders rose 55 percent in 
the second quarter to $125 million.  They expect second quarter 
revenue to come in at $90 million, in line with expectations.  
Veeco also announced that its Ion Tech subsidiary booked over 
$35 million in second quarter orders for its SPECTOR(TM) optical 
coating ion beam deposition systems used by manufacturers of 
Dense Wavelength Division Multiplexing (DWDM) filters.  Veeco's 
other subsidiaries also received orders from optical telecom 
customers for process and metrology equipment, bringing their 
total second quarter orders from this market to over $40 mln.  

On the downside, Biogen shares slumped ahead of their earnings 
release tomorrow as Salomon Smith Barney downgraded the Biotech 
company to a Hold from an Accumulate.  Let's hope this isn't a 
precursor to their earnings report.  SSB said the move was based 
on valuation and they are maintaining a $70 price target.

After-hours earnings news was active today as well.  Aspect said 
they would miss estimates for the second quarter.  The company 
which is a provider of customer relationship portals blamed 
the shortfall on the level of business in one of the company's 
North American regions, a delay in the awarding of multi-million 
dollar contracts in its Federal government region and a faster-
than-expected decline in the company's hardware platform business.  
ASPT was down significantly in after-hours trading to $22.63 
from a regular session close of $43.88.  On the flip side though, 
Alteon Websystems said they would beat estimates for their 4th 
quarter.  They announced that revenues for the quarter were 
approximately $51 million, which is an 80 percent sequential 
increase over revenues for the previous quarter.  Plus, the 
company also announced that it achieved operating profitability 
in the fourth quarter, three quarters ahead of expectations.  
ATON was trading higher to $114 from a $100.81 regular close.

So the earnings season is just about to kick off into full swing 
with Yahoo reporting tomorrow.  It is already entering the post 
earnings, sell-off phase by dropping another $6.50 today to a 
new short-term low on stronger volume.  Hopefully it is just 
the Internet sector suffering woes, but it wouldn't surprise me 
to see others join in.  Just scanning through some charts makes 
me somewhat hesitant as many are trending lower or looking top 
heavy.  The backdrop for stocks still looks the same...boring.  
You have to be careful in this market not to get sucked in 
without a solid trading plan.  This range-bound market can 
seriously alter the look of your trading account.  

The VIX closed at 22.87 today, up 1.05.  I would call this the 
low end since we haven't been able to break 22 in awhile.  Keep 
this in mind while you trade.  It is telling us to watch out for 
the bears right now.  4075 is the magic level that I am still 
waiting for the Nasdaq to close over to re-awaken my bullish 
interest.  Otherwise, trade only when the plan looks rock solid.  
In this environment, that usually translates to a fair return.  
Anything less than perfect somehow finds its way into the loss 
column.  Enjoy the summer since the market is giving us less 
than ideal conditions at the moment, but always keep your eyes 
open as it could change in a heart beat!  


Ryan Nelson
Editor


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TRADERS CORNER 
**************

Let’s Perfect A Trading Model!
By Austin Passamonte

Here’s a little project we can have some fun with, learn
from, and possibly make us a bunch of money to boot. Are
you game?

The idea began back when I talked about using stochastics
to trade with. My inbox was awash with emails on the topic.
Many of them were instructional, not the least of which was
sent from Mike Morrison talking about smoother settings that
I shared with you in the June 12th OIN chat.

The core of my timing tools since trading commodities has
always been stochastics. I would pick a market to trade
based on activity of commercial sentiment vs small traders
(more on that last week). Once a trade setup seemed likely
I’d enter via open interest and stochastic signals. Moving
averages offering support/resistance were also key. This 
simple system worked quite well and still does today.

I guess I’ve been using stochastics much the same without
really thinking about it in depth. After the articles I 
toyed around with Mike M’s setting of 10 (3) 5 to spot
crossover signals. A big improvement over standard settings 
of 14 (1) 3 in my opinion. Thanks Mike!

Around this time Lynda Schuepp had a great piece on her
trading methods for the OEX in the May 7th edition of OIN. I 
printed that out and read it a dozen times or so, carefully 
studying her charts. I’d suggest you might do the same; this 
can be found in the OIN archives in the Traders Corner link
within the Education section in the left column, front page.
Click on "Looking for more?" at the bottom of that page and 
you’ll find the title:  "When The Moon Is In The Seventh 
House..." Very good information in there!

So I took what worked for me, added Mike’s smooth settings, 
borrowed Lynda’s work on MACD and sat down with my trading
partner Russ Moore to run some historical tests. Thankfully
Russ enjoys charting, drawing & doodling which eased the 
tedium from this project. We came up with a basic trading
model that works real well especially for all indexes and 
also stocks & commodities to a lesser extent.

Before turning in last night I spent an hour skimming a technical-
analysis magazine I subscribe to. The NASA-level math some of 
those trading signals or systems are based on totally confounds 
me. I’m almost embarrassed to share what I use here with you 
except that it does work and is profitable.

This is no earth-shattering revelation we have here. I’d bet
a good number of readers use something very near it already. 
That’s why we’d like your help! I’ll throw up a couple of 
charts with our basic studies in place and ask that you’d add
to it if you wish. 

(daily chart of OEX)


 

I marked off four moves during the past few months where all of
our favorite signals lined up for calls or puts. 

1.	Bollinger bands are pushed to extreme levels above or below
   fair value. Candle patterns confirm with reversal formations.

2.	Stochastics bars both at or beyond 20% or 80% extreme levels
and fast bar is crossing over to reverse the move. Both bars 
turning is preferable.

3.	MACD graph moves from one side of zero line to the other.

4.	MACD moving average bars cross and turn in direction of new
move as well.

  
As we can see, when all four indicators converge there is an
incredible trade signal to take. Position traders using futures 
or back-month option contracts would have cashed in big-time on 
all of those. As a matter of fact, anyone with volume positions 
who rode the OEX down from 850 in March to 722 in April could 
take the rest of this year off after banking those gains.

Still, daily charts do not signal clear enough for front-month
option trades in my opinion. The search was on for cleaner signals.
Even hourly charts were getting me in too early and stopped out 
on spikes as I reported earlier before heading into the profit 
zone.

(30 min chart, OEX)

 


30 minute charts are now my favorites for picking precise entry
points to the pending play. This was discovered purely by watching
the action unfold. In the chart above you’ll note four strong entry 
signals in less than two weeks of range-bound action. All were 
profitable.

(daily chart, QQQ)

 

This chart of the QQQ identifies five solid trades where all 
four major signals converge. Each move would have been worth
25% to 100%+ returns. Position traders who shorted the NDX or
held back-month QQQ puts from 120 in March down below 80 in 
April fared quite well indeed.

Of course the best trades and largest directional moves occur
when daily and intraday charts converge. More often we see a
divergence between the two. I pick trades based on 30 min chart
signals expecting to be in and out rather quickly if in contrast
to daily direction. These are classic "swing trades", picking
off smaller moves within the larger overall move.

(30 min chart, QQQ)

 


Again, six clear points of convergence over two week’s time.
Most were small moves during tight-range trading but all had
a chance for at least small profits or stopped at entry on a
trailing stop. The move from July 6th at 90 through 8th high
of 98 saw the QQQ July 90 call rise from 3 1/2 ask to top
sale of 8 3/8 two sessions later. Not bad.   

Late Friday’s retreat on the NDX triggered a pretty clean put
signal except for prices leaving the top Bollinger prior to the
others lining up. No time to be picky - let’s buy! At the moment
of convergence July QQQ 90 put were at 1 point ask. They closed
the session at 1.50 ask still very early in the move. This chart
was captured and article written Sunday night for posterity. 

You now know where the Qs ended today. Let’s say we were able 
to fill for less than 2 points ask on the July 90 puts. Did this 
move get stopped out if we protect at 1, or should we buy just a 
handful and let them either swell or bust? Let’s see what happens 
over the next few days on this one! 

Short-term trades offer 25 - 50% profits on winning trades
in one or two sessions before the move against daily trend
is over. Of course they occur much more often than the big
moves do.

Trading through these tight, range-bound periods has been a
challenge to any directional call/put strategy. The folks
selling time with complex spreads fared much better for
sure. For those without time, capital or ability to implement
such strategies I think swing-trading the intraday moves for
small gains or par losses might be the answer until movement
occurs once again.

Like most moving-average crossover systems this one works
best taking signals following strong trends. If a market is
enjoying a solid uptrend we should only take long signals while
ignoring shorts. The opposite is true during downtrends.
Good news is it works quite well in sideways markets for trade
signals in either direction.

The important thing here is tuning out CNBC and other media
sentiment while entering the trade. They’ll most often be
100% opposite of the direction now indicated when we need to
pull the trigger. Unless you’re an incurably-ornery contrarian
it can be very tough to place the trade while emotion raises
that little voice of doubt. Trust in the signals, click it in
there and set your stop loss according to the written game plan
you formed before the market opened and “noise” began.  

Our invitation is this: take these ideas and twist them around 
a bit. Apply your favorite technical tools instead. Try to find
examples in stocks or indexes where these simple rules may not
hold true. Pick it apart or build it up...all input is welcome!
We’ll revisit the results in future discussions here, hopefully
offering a better tool for all to use in our favorite markets. 
 
****

Wednesday I’ll feature some examples of individual stock charts
and the guesswork of entry & exit using these signals.

austinp@OptionInvestor.com


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**********************
PLAY OF THE DAY - CALL
**********************

GSPN - GlobeSpan, Inc. $115.25 -4.13 (-4.31 this week)

GlobeSpan, Inc. is a leading provider of integrated circuit,
software, and system designs for digital subscriber line (DSL)
applications which enable high-speed data transmission over
existing copper wire telephone lines at rates over 100 times
faster than today's 56 Kilobit modems.  Globespan's business is
accelerating communications through high-speed solutions based 
on DSL technologies.  The company's innovations make possible 
real-time video conferencing, telecommuting, high-speed Internet 
surfing, and video-on-demand.  

Most Recent Write-Up

This may have been a week of sideways movement for GSPN, but it
was far from boring.  After encountering strong resistance at
$128 on a quiet and shortened Monday, the stock set off a
fireworks display of its own on Wednesday.  GSPN sold off $15.38,
or 12.56%, on news of the company detailing plans for a secondary
stock offering.  GlobeSpan registered with the SEC to sell 8 mln
shares, 1.5 mln from the company and 6.5 mln from shareholders,
which set of a wave of selling due to worries of dilution.  On
Thursday, GSPN tested the psychological support level of $100
early in the day, bouncing strongly to close above its 10-dma. 
Friday was a continuation of that recovery finding a temporary
base in the $116-117 area and closing above its 5-dma and 10-dma,
currently at $116.87 and $110.69.  So after a week of action with
GSPN swinging up to $128, then down to $100 and back up again, we
find ourselves about where we were last week when we started this
play.  To be fair to GSPN, the Wednesday sell-off occurred on a
strong market downdraft so a portion of it can be attributed to
general market weakness.  It is encouraging though to see the
stock recover strongly when the general market moved up.  Looking
ahead, the $113 level is an important barometer to GSPN's health.
Closes below that level will find support for the stock at the
10-dma, currently $110.69, but those looking for confirmation will
want to wait until the stock moves above $113 before entering. 
Intraday, GSPN has a range of 13-14 points so aggressive traders
can profit from the bounces off support and resistance levels. 
There is overhead resistance at $122.50.  Breaking through this
level on strong volume will find the stock challenging the 
resistance at $128.  A break through $128 can find the stock
moving up quickly to the $135 level with ease.

Comments

GSPN traded down to the 10-dma at $113 today and found decent 
support from which to bounce.  This is encouraging as the stock 
continues to build a tighter wedge up to resistance at $120.  
This is the breakout we are looking for.  Aggressive investors 
can buy those dips down to the 10-dma or be more cautious and 
wait for the move over $120 on good volume.  In all cases, be 
smart while the markets waffle.  A breakdown below support at 
today's lows is the signal to call on your stops.

***July contracts expire in two weeks***

BUY CALL JUL-110*GHY-GB OI=434 at $12.13 SL= 9.25
BUY CALL JUL-115 GHY-GC OI=767 at $ 9.13 SL= 6.50
BUY CALL JUL-120 GHY-GD OI= 27 at $ 6.88 SL= 4.50
BUY CALL AUG-120 GHY-HD OI=121 at $15.00 SL=11.50
BUY CALL AUG-125 GHY-HE OI= 49 at $15.63 SL=11.25

SELL PUT JUL-110 GHY-SB OI= 26 at $ 4.63 SL= 6.50
(See risks of selling puts in play legend)

Picked on July 2nd at   $122.06     P/E = N/A
Change since picked       -6.81     52-week high=$167.00
Analysts Ratings      2-4-0-0-0     52-week low =$ 11.25
Last earnings 03/00   est= 0.01     actual= 0.03 surprise=200%
Next earnings 07-31   est= 0.04     versus=-0.14
Average Daily Volume = 1.14 mln



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This newsletter is a publication dedicated to the education 
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