The Option Investor Newsletter Wednesday 07-12-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/071200_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-12-2000 High Low Volume Advance/Decline DJIA 10783.80 + 56.60 10834.30 10722.20 999 mln 1742/1152 NASDAQ 4099.58 +143.16 4103.65 4001.73 1.77 bln 2480/1535 S&P 100 805.91 + 4.86 809.09 801.01 totals 4222/2687 S&P 500 1492.92 + 12.04 1497.69 1485.26 61.1%/38.9% RUS 2000 540.25 + 10.51 540.26 529.74 DJ TRANS 2882.02 + 64.92 2882.02 2826.97 VIX 23.08 + 0.69 23.32 22.56 Put/Call Ratio .39 ****************************************************************** Could It Be, Can It Really Be...A Summer Rally? After all the suffering of this boring, rangebound market, we finally had a day that we actually can call encouraging. Well, it looks like YHOO came through in the clutch to save the day. Overall market activity continues to heat up, as mega-merger after mega-merger is announced. Consolidation is creeping into the market. Interest rates concerns have subsided since last Friday's job report. Investors have their sights set on an upbeat second half of the year. But, it's still early. We're not out of the woods quite yet. I've said it once, and I'll say it again, we need to have follow-through tomorrow. Earnings season is certainly in full swing. YHOO was the victor today as investors rewarded the Internet giant for Tuesday night's better-than-expected earnings. Investors seemed to ignore concerns over future advertising revenue growth, and it appears that the markets are focusing on the good news rather than the bad. This says that people are looking for reasons to rally this market. YHOO's 18% gain today sparked the Internet sector, and the NASDAQ as well, into a well-sustained rally today. Looking at the NASDAQ intraday chart below, you can see how convincing the buying was today. Talk amongst NASDAQ traders is that today's pattern exemplifies a greater panic on the buy side. Now that's what we like to hear. After weeks and weeks of hearing "summer rally" echoes, we just might be seeing some action rather than simple talk. This bullish thinking coupled with volume of 1.7 bln shares on the NASDAQ is a very healthy signal that momentum may be returning to the market. For a summer trading session, 1.7 bln is considered strong volume. From here, it is essential that we build on 4100 in order to confirm a breakout. Technically, the NASDAQ made some very impressive accomplishments today. The aforementioned retest of 4000 support this morning helped give investor confidence in putting some of that sidelines money to work. It very well may have been this event that spurred the panic buying. Secondly, the NASDAQ broke through 4050 which acted as resistance during last Friday's employment rally. Going forward, it is key that the NASDAQ hold 4050 as support. Most importantly, today the NASDAQ broke through and closed above the elusive 100-dma at 4062. All throughout this rangebound trading since June, we have had our sights set on this technical as a benchmark for a bullish breakout. And with a sigh of relief, we finally got it. The significance is great, considering that the index has not traded above the 100-dma since breaking it all the way back on April 11th. It's been three months and a long lesson in rangebound trading. Believe me, it hurt. Today's triple digit gain of 143 points surpassed another key NASDAQ level, 4069: the starting point for the year 2000. That means that the tech index is out of the red. Now the question still remains whether we can sustain this rally with, yes, follow-through. The driving catalyst undoubtedly will be earnings. Tonight we had a handful of earnings reports in the tech sector. Advanced Micro Circuits(AMCC) chalked up a 4 cent better-than-expected profit, posting $0.21 per share, excluding special charges. With record operating margins and robust sales, this was a 250% increase from the year previous. After an $11.69, or 10%, gain in regular trading, AMCC traded up $4 in after-hours to $129.50. Another favorite NASDAQ stock beat the Street. B-2-B company Ariba(ARBA) came in with a 3 cent narrower-than-expected loss of $0.05 per share. Investors added another $12 after-hours onto the $12.38 gain during regular trading. ARBA is currently trading at $115.75. If these reports have a similar effect to YHOO's today, the NASDAQ very well could confirm its breakout. Internet networker JNPR reports tomorrow after the bell. On the NYSE, there were a handful of stock that traded at or near all-time highs. In particular, the Brokerage sector had a very strong day. This came on news that Swiss bank giant, UBS, will be buying PaineWebber(PWJ) in a $11 bln stock and cash deal that would help expand UBS' global underwriting reach into the U.S. PWJ, the #4 U.S. brokerage house, advanced 34% on the news, closing up $16.94 to $66.88. UBS lost 9% on the day, off $13.56 to $135.19. The news drove up other brokerage stocks in speculation of further consolidation in the sector. At or near new highs are the following: LEH(+5.19), AGE(+3.19), MER(+2.56), BSC(+2.06), and MWD(+0.63). We will be watching the financials closely to hold and continue their uptrends. They are an essential part of a broad market rally, especially with the economic data due out on Friday. Reporting tomorrow before the bell is JPM, which spiked $4.63 to $122.56 today in anticipation. Market internals have been very strong at the NYSE as advancers have beaten decliners for seven straight sessions. As a result, the INDU has made great strides at reversing the dominant downtrend that overtook it April 12th. The diamond pattern that Jim has mentioned in his Wraps had been narrowing, and at the point of reckoning, buyers picked up the beaten down index. You can see from the chart below that the INDU not only broke the downtrend line, but also had three days of follow-through. This breakout has turned around the technical health of the INDU. It did, however, encounter resistance at 10800, which is the most recent short-term top from early June. On the weaker side of the NYSE were the cyclicals. After two days of rallying, investor began the rotation again in favor of techs, financials, and even airlines. Just a month after the UAL bid for U.S. Airways, consolidation continues to be the theme. American Airlines(AMR), the #2 carrier, made an $3.7 bln bid for Northwest Airlines(NWAC), the #4 carrier. This deal would value NWAC at $44 per share, a value that Northwest feels is undervalued. Northwest wants upwards of $100 per share, according to industry analysts. These mega merger talks are clear signs of a growing health in the overall market, as companies see the necessity to say competitive. AMR closed up $1.19 at $30.63. NWAC tacked on almost 6%, or $2.13 to $37.88. Motorola(MOT) reported earnings tonight and analysts were keenly awaiting the results. MOT's earnings were in line with Street estimates of $0.23 per share. Yet, the silver lining was the company's margins. Wireless handset operating margins came in at 4%, convincingly higher than the 3 - 3.3% expected. Their chip production margins were also higher than expected. After closing up $2.69 in NY trading at $35.31, investor added $1 in after-hours trading. Looking forward, good ol' Uncle Alan is speaking this evening before the Council of Foreign Relations about Global Crises, but don't expect him to tip his hand. The markets will be digesting the numerous earnings reports from today and tomorrow, yet Friday's PPI and Retail Sales numbers certainly will be looming overhead. Tomorrow's trading should be a bit more subdued to the upside given Friday's data. We will be paying close attention to key technical levels for both the INDU and the NASDAQ to see if this building momentum continues to move the markets out of their recent ranges. Follow-through, follow-through, follow-through. That will be the key. Keep your stops tight in order to protect healthy profits from today's advance. Remember, a small profit is always better than no profit. Matt Russ Asst. Editor ****************************Advertisement************************* Trade Options Online with an Established Expert! Mr. Stock has put over 20 years of experience into a site specifically designed for the most important aspects of your options trading. Our recognized, easy-to-use interface allows you to trade spreads, straddles and covered calls with one-mouse-click. Visit Mr. Stock today! http://www.OptionInvestor.com/tracking.asp?co=OIMrStock682000 ****************************************************************** *************** ASK THE ANALYST *************** It Looks Like The Bull Is Back... By Eric Utley I just hope the beast stays for a while. It appears that the almighty bull has returned from its early summer retreat to Spain last week. Maybe the talking heads on CNBC will rest with the rally talk. At first glance, it would appear the market is ready for take-off into the fall. The school of Dow Theory got a bit of confirmation Wednesday. The technicians are pointing to the plethora of stocks breaking out of trading ranges along with the bullish advance/decline lines, and the new 52-week high list. The fundamentalists are arguing the fantastic profits that many companies have reported, with Yahoo epitomizing that fact. And, the money managers might finally get off the piles of cash they have been hording for the past two months and start putting money to work and carry this market higher. But wait, before the bulls get carried away, there are a few issues to delve into. The NASDAQ is nearing a 66% retracement of its sell-off last spring, which some might suggest is the prime profit taking point. Furthermore, the VIX is hovering near dangerous levels as many at OIN have been suggesting. The sheer amount of investor optimism is enough to give me pause, even though I'm elated to see all the green arrows on my quote sheet. Like I just mentioned, the current bullish sentiment is clearly evident in the low level of the VIX. We'll delve into that further below on one of the charts. But before we do that, just remember, it's always brightest just before dusk. Or wait, it's always darkest just before dawn. Oh, you get my point! The request list has been getting a little low lately, I'll be back next week at the same time and place, and I promise to review five stocks if you send them. Don't be shy, send your requests to: Contact Support Please put the symbol in the subject line of the e-mail. ---------------------------- CBOE Market Volatility Index - $VIX Since the VIX is such a great indicator of reversals, why wouldn't this be used as the most important indicator? Is there any chance that you could do an article on the VIX? Thank you. - Jim Jim, I think your request to review the VIX is very relevant given the current market conditions. You've probably heard Jim, Ryan, and Matt all warn OIN readers about the precariously low levels at which the VIX is currently trading. Before I delve into the analysis of the VIX, let me briefly explain what the index actually measures and its significance. The VIX is one of the most widely used measures in forecasting implied volatility when determining the price of an option. The index is calculated by taking the weighted average of the implied volatilities of eight OEX calls and puts with an average time to expiration of 30 days. Essentially, the VIX is a consensus forecast of future stock market volatility and measures how traders are reacting to the current market conditions. The VIX is used by savvy speculators in a contrarian fashion. If the market declines and the demand for puts increases, the VIX will rise, which signals fear in the market and a possible reversal. On the flip-side, if the market rallies and the VIX declines, it reveals bullish investor sentiment which may ultimately lead to a pull-back. Historically, the VIX trades between the 20 - 30 range. The reason for the range bound trading between those two levels is due to investors' expectation for the overall market to fluctuate between 10% and 15% in any given year. The VIX, along with most averages in the mathematical universe, usually reverts back to its mean. That's important to remember when the VIX reaches extremes at either end of its range. For example, when the VIX hit 41.53 on April 9th, market participants were expecting the end of the financial world. Savvy traders interpreted the extreme reading as a telling sign of a reversal which ultimately lead to a profitable rally in many leading stocks. The VIX has been trending downward ever since hitting its April high and is approaching the lower end of its trading range. Some traders might start taking profits off the table given the VIX's current low levels. Yet, with the internals of the market increasingly improving, the VIX is somewhat of a contradiction right now. Although, the VIX did advance Wednesday in light of the broad rally in the market. That suggests traders are expecting a sell-off in the coming days. When viewed contrarily, the VIX's advance bodes well for the health of the current rally for the next few days. But its relatively low level gives reason to pause. Investor psychology is probably the most powerful force behind the market's movements. The VIX gives you quantifiable data to read current market sentiment. If you wait for the few times each year that VIX reaches extremes and act accordingly, you can make a ton of money using the index! To answer your question Jim, I think one of the reasons that the VIX is not as widely followed on Wall Street is because it is relatively new. The CBOE created the volatility index in 1993. ---------------------------- Go2Net - GNET What do you think of GNET? - Richard GNET is one of those rare Internet companies that is profitable. Very profitable I might add! The company has established itself as one of the premier content providers on the Web. The company operates several popular Web sites including Go2Net, Silicon Investor, and MetaCrawler among others. Along with providing content to consumers, the company provides business and enabling services. So, in an indirect way, GNET is also a B-2-B play. The Internet research firm Media Metrix consistently ranks GNET among the top destinations of Web viewers. The company has a superb management team and very strong fundamentals. GNET's balance sheet is next to pristine. The company has zero debt and about $240 mln in cash. As you well know Richard, GNET executives told analysts last Monday that the company is "Super Comfortable" with its third quarter estimates scheduled to be reported on July 17th. The hint of better-than-expected earnings is always a welcome sign! GNET is expected to grow its bottom-line at a 67% clip over the next five years, giving the stock an amazingly low PEG of around 0.40. What's more, the company has surpassed analysts' estimates by an average of 114% over its last five quarters. To be perfectly honest, I think the selling of GNET was a bit overdone this spring. The stock was dragged down along with the rest of the Internet sector. Upon examining the company's fundamentals, GNET was unfairly punished for being in what is predominately a money-losing sector. However, for those of you who are believers in the long-term viability of the Internet, GNET might be worth considering for a long-term investment given its current discount. GNET's chart is shaping up nicely after its spring sell-off. The stock established solid support at $40 and has since rebounded to test resistance at $50. The eight week consolidation bodes well for GNET's next major rally. Volume is returning to the stock which makes the chart look all the more attractive. A breakout above $50 on about 1 mln shares might provide the entry point for new long positions. ---------------------------- Williams Communication Group - WCG I am curious of your outlook on WCG. I bought some of the stock for a longer term core holding as I think the long-term outlook is very good considering their foothold in the fiber optic arena. There have been rumors of buyouts that may move the stock short term. What is your opinion? Thanks. - Ralph WCG owns, leases, and operates a nationwide fiber optic network that voice, data, Internet, and video services to communications providers. The company operates in three distinct divisions, Network, Solutions, and Strategic Investments. The Network division offers Internet services to communications companies such as long-distance carriers, local phone companies, and Internet service providers. The solutions division distributes And integrates equipment for networks. And finally, the Investments division infuses capital into businesses that are creating demand on WCG's networks such as Concentric, UniDial, and UtiliCom. The roll-out of high-speed Internet services is reshaping the telecom landscape. We're in the early stages of the build-out of fiber optic networks which makes companies like WCG an attractive investment. However, the networks which WCG is building requires huge amounts of capital. The hope by investors is that WCG can build these networks and, obviously, profit off them in the future. If WCG can execute properly, the stock should do quite well over the next five years. But, it's been WCG's incredible spending that has continues to plague the stock. About two weeks ago, WCG told analysts that it was going to spend an additional $1 bln more than initially expected to build fiber optic networks over the next several years. The additional $1 bln will require WCG to tap into the capital markets, which means the company will have to take on more debt and/or dilute stockholders' stake in the company. Needless to say, the announcement didn't go well with investors last month. When you consider that WCG is already mired in losses with no sign of profitability for the next several years, the prospects of more debt on its balance sheet doesn't sound good. Like I said before, the intense investment and spending now is expected to lead to profits down the road. And, if WCG is successful, the stock is worth holding onto. But, in the near-term, given the current investor demand for profits, I don't see WCG moving substantially higher, unless of course the company is taken over like you suggested Ralph. The chart is not a pretty picture, but at least the stock has appeared to stabilize at its current levels. I don't like the increase in volume over the past two weeks as the stock has slipped lower. I hope I don't sound too pessimistic Ralph, but I just don't see a major catalyst for WCG over the next 3-6 months. However, you're patience as a long-term investor may be rewarded in the next five years. As I have mentioned before, I'm still waiting for high- speed Internet access, and I live in a densely populated area! The demand for WCG's services is there, the company just needs to turn that demand into profits. The sooner the better! ---------------------------- Electro Scientific Industries - ESIO Great stock if people catch on - institutions playing games with the price? Be interested in your opinion of the stock. Thanks. - Todd ESIO is a company that makes products used in electronics manufacturing, commonly referred to as a chip equipment manufacturer. The company supplies chip makers in the wireless, computer, and automotive areas with fabrication equipment. The company is one of the leading providers of laser systems used to make chips store more memory and ramp-up production. The big news early this week, for obvious reasons, was that ESIO blew away analysts' profit prediction of 56 cents by earning an impressive 61 cents per share. The better-than-expected earnings came in part from the growing demand of chip makers for ESIO's products, and from the companies ability to capture market share from competitors. ESIO's profits are expected to continue to grow at a healthy rate for the remainder of this year, and for several years to come. The risk with the chip-related stocks right now is whether or not the infamous semi cycle is peaking or not. The downgrade of the entire Chip sector by Jonathan Joseph of Salomon sent a warning shot throughout the group last week. But, if the chip companies exceed estimates like ESIO did, the group should continue to advance into the end of the year. On the buy-side of Wall Street analysts, Brett Hodess of Merrill Lynch initiated coverage on ESIO last week with a Buy rating and set a $62 price target. On a quick tangent, the practice of setting price targets has to be one of the most inexact sciences in the world. From the looks of it, ESIO will reach Hodess' target price by week's end. Sorry about that, back on track now. ESIO has made an incredible advance so far this week, making the stock a little hot to game right now. With such a stellar profit report earlier this week, I could see ESIO breaking out to new highs in the coming week. However, a hint of a slowdown in the demand for chips could send this high-flyer back down very quickly. The uncertainty revolving around the chip cycle right now has created vast amounts of volatility in the sector. You might want to wait to see the stock consolidates a bit before jumping in. Of course, the long-term prospects for ESIO also rely heavily on the continued viability of the Semi sector. If the company's earnings report is a sign of things to come, ESIO should continue to climb into next year. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. *********** OPTIONS 101 *********** Wisdom and Discipline By David Popper In the New International Version, Proverbs 1:2 describes the purpose of proverbs is to obtain wisdom and discipline. Wisdom and discipline, what a combination. Wisdom is the ability to use knowledge (facts) in a situation. It is the ability to formulate a plan. Discipline is a self determination to execute that plan under fire. Websites, financial articles, books and seminars will, over time, give you the ability to gain knowledge and eventually wisdom. They cannot give you discipline. Discipline is easy when the trade moves with you. It is difficult when the trade does not move your way. When a trade moves against you, self doubt emerges. One begins to question the reason for the trade. One begins to feel like a fool. The world will end. You end the pain by closing a position and the pain subsides, until the stock turns on a dime and shoots for the moon. The pain is now worse than before. Before, you questioned your plan. Now you question your nerve. Trading can have psychological implications. Can you insulate yourself from this damage? Yes, with discipline and experience, over time. Let's discuss some possible remedies: 1. ONLY TRADE TOP STOCKS IN TOP INDUSTRIES. I operate from the premise that technology is here to stay. I look for companies that are on the cutting edge areas of technology, where it is acknowledged that there is room to grow. In fiber optics for example, the battle is not a fight over an increasingly smaller piece of the pie (like the paper industry), the competition is more akin to the Oklahoma Land Rush. There is plenty of growth room for everyone. The fight is between the companies acquiring the best piece of land. In short, the market is not mature. Within these hot sectors, I look for the acknowledged leaders using the criteria established by Investors Business Daily. (Earnings per share 90% plus, relative strength 90% plus.) I try to trade at a technically favorable time. 2. DECIDE THE METHOD OF TRADE. Once I have selected the stocks I wish to trade, it is now necessary to choose the method of trading. As I have stated many times, I cannot watch the computer all day, therefore, I usually am more comfortable selling long term calls (four to six months) in exchange for a 20% to 25% return. However, during earning seasons or just before a split, I may hold the stock for the run, but afterwards, I will usually sell it or sell a long term call. Finally, I may periodically channel trade 100 shares of a stock if it is in a well defined channel. All of these methods together, involve less risk and provide a healthy return. 3. KEEP CASH. I will keep a sizable amount of cash. With cash position and long term calls, you become enabled to take advantage of downside moves as well as upside moves. When I was fully invested and margined, I shuttered whenever an economic report was coming. I was upset when the report was bad and I rejoiced when the report was good. In short, I was emotional. Armed with cash allows you to buy on dips for quick profits. Long term calls on great stocks allows you to ride out the stormy seasons of the market. Being armed with these two friends allows you to roll with the market instead of hoping the market moves your way. When you are postured to be flexible, the volatility can be fun and profitable. You get a feeling of confidence and being in control - because you are. No, this is not fool proof. Nothing in the market is fool proof. Nothing in life is fool proof. Your odds are better though. Is that not what a trading system is all about? Contact Support ************** TRADERS CORNER ************** In And Out, Etc. By Austin Passamonte When you want advice, ask the experts. Considering they read OIN, that's precisely what I did on Monday. Plenty of good advice & suggestions continue to roll in. I think we can do some tinkering to the tools already. Tripp Adams writes in to suggest we try MACD settings of 8(18)6, instead of the default 12(26)9 I was using. This seems to be more crisp and responsive for faster signals, less lag. Thanks a bunch Tripp, the change has been made. A number of readers asked which chart service I use. Qcharts has been my choice mainly because they supply the live applet in OIN, so it was an easy link for me. I'm sure other chart services also offer similar features. This allows me to arrange technical studies any way I want, and drawing tools provided are important as well. My historical research is also done by dragging these charts back in time to months and years past. Certainly a great help when testing different theories on past price action of stocks and specific option contracts. For those who asked if the live applet within this website can be used, the answer is yes. We can't overlap the technical studies and it's stochastic settings aren't quite as effective but to be honest, I made more money trading the OEX from that free chart than I do with my $80 monthly setup. Intraday moves from 20 to 50+ points will improve any chart service, for sure! Stochastic settings can be switched to 10,5 on the live chart applet but this leaves them erratic. I'd suggest playing around with them a bit (when available) to mimic price action effectively. Such charting services really are invaluable to active traders. For example, I have several hot lists customized for specific study. One is a trading chart set up just like you see in this series. I have entered a key list of all the various index sectors that options are currently available for. The new "Sector Trader" section on OIN is quickly becoming my favorite. Buzz Lynn and the rest do a superb job ferreting out all the index setups while I stay busy splashing around in our new pool. When dusk arrives we towel off, stroll inside and see what's cooking next. Any potential plays get clicked into my chart and screened for pending call or put entry. It may be the worst-kept secret that I prefer trading index options to specific stocks. Not that I haven't made good money doing so, but stock picking offers the added dimension of news breaks that affect the action sharply. SDLI comes to mind as we'll review it next Monday. No doubt during selective rallies it is vital to be proficient at picking specific stocks. There's nothing wrong with that approach. The advantage to trading entire sectors is the smooth, blended behavior they exhibit. Maybe the action isn't fast & furious but trading signals via this system are much more reliable, and the bottom line is picking a majority of winners. Keep an eye on those "Sector Trader" index plays and judge results for yourself. As for me, Christmas came real early this year! Of course, it's easy to slap together a trading model like we did and "optimize" it looking back in history when signals and moves are completed. One can justify why we would or wouldn't have bought, sold or stood aside to make the results seem foolproof. I try to think I'm not such a fool but the jury's out on that one. First, we should begin at the parameters of trade entry signals. If we can wait for all indicators to signal, chances for a par- stop or profitable trade seem to be roughly 80% on the 30 minute chart or better on the daily chart. Trouble is the daily charts generate sure-thing trades once or twice a month, too seldom for most active traders. Some of the movement that occurs before the trigger confirms on 30 min charts is lost, which could make the difference between slight gains or none on brief moves. We need to identify what personality a trader has and go from there. If you're content to trade only when the planets align but enjoy big wins and profits hauled in wheelbarrows, consider using daily charts and entering only when all signals converge. If you start developing nervous ticks because your last trade was at yesterday's close and withdrawals are setting in, I'd say 30 minute charts are probably for you. May I suggest using both? Watch daily charts for high-odds plays and enter LEAPs, spreads or back-month long option trades to give yourself breathing room. Trade small positions of front-month options relative to your risk level for quick swings in the 30 min charts to keep you "busy" until the next big move shapes up. The sequence of development remains the same. Let's dissect a bullish call-play. The setup occurs when prices move into the lower Bollinger Band and pushes or at least touches the extreme zone. This gets our attention. Stochastic bars should both be at or preferably below the 20% oversold measure with fast bar or both beginning to clearly turn up. The MACD histogram MUST have been on the negative side of it's zero line and is now moving toward even or turning positive. The MACD moving average lines should be crossing fast above slow and we'd love it if both lines were moving from the negative side of zero line up into positive range. At this point the candlestick price bars will have moved off the lower B-band and form one of several bullish reversal patterns (learn to identify the basic formations). That's the anatomy of a solid entry point, but many traders would have entered before now. I'd likely lead the pack. Every developing trade looks like the next big winner to me, one of them incurable trigger-happy types. Seen any of those on your side of this screen lately? I've learned over time that it's O.K. to jump short-term, 30 min chart trades when stochastic bars BOTH turn away from extreme readings as candlestick price bars release from the B-Band IF a reversal pattern forms. We'll worry about MACD later. More false signals occur but my positions are small and stops keep me from losing my shirt. These days, moves are tight and a bit of anticipation on entry won't kill me using few contracts. As the move develops or breaks down I use MACD signals to confirm follow-through and stick with the trade. Of course, my stop-loss point was chosen before entry and placed when filled in case I got faked out on this one. Daily trades are another story. I patiently (ugh) wait for ALL signals to clearly converge before entering planned trades. We don't need to get stopped out of last-gasp swings just before a major move runs as I painfully described before. If our signals are accurate, we can concede the beginning of large moves to safely harvest solid chunks from the middle. Trust me, when the OEX moves 50 points or the QQQ moves 20 you can make ends meet by catching 30 and 14 of those, respectively. Especially when you do that on 80% of the big moves traded. The key is to enter a trade once the move has committed itself and your play begins to profit immediately. Entry rules are simple. Fine-tune your chart signals and wait for as many to converge as sanity allows before jumping in. When to take profits is another matter. Sell too soon rings a bell from somewhere, doesn't it? If you wait until the next reversal signal appears on the chart, some profits may be lost. Picking price targets and selling when they hit is always a good idea. Why don't we exhaust the subject of entry & exit next Wednesday? Monday we'll finish the topic by profiling individual stocks with these charts and see what happens. So much to cover, so little space. A few more trade examples to keep an eye on this week follow below: (30 min chart, IIH) (30 min chart, QQQ) (30 min chart, OEX) You make the calls (or puts, pun intended). Would you have bought & sold these brief swings for a profit, breakeven, loss or stood aside? What do we look for from here heading into Thursday's action? See you next Monday! Contact Support **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZ0JES ***************************************************************** ********************** PLAY OF THE DAY - CALL ********************** CREE - Cree Research $147.31 +6.56 (+16.81 this week) Cree makes silicon carbide (SiC) diodes and wafers. Its blue and green light-emitting diodes (LEDs), which account for about half of sales, are used by companies such as Siemens to make dashboard lights, market tickers, and other products. Cree also provides SiC wafers, which work at higher temperatures and voltages than standard silicon wafers, primarily to research labs. U.S. government research contracts account for 10% of Cree's sales. Most Recent Write-Up CREE's second-quarter earnings announcement is just around the corner. Noting the company's propensity to beat estimates, investors will be expecting a surprise. The anticipation of better-than-expected profits may already be building, noting CREE's impressive relative strength Tuesday in light of an overall weak Semiconductor sector. The semis have come under pressure recently after the downgrade of the entire sector from the now-famous Jonathan Joseph of Salomon Smith Barney. CREE has smartly rebounded in the past four trading days, returning to its levels prior to the group downgrade a week ago. While several semis are still languishing in the wake of the Salomon call, CREE has positioned itself for an earnings run. And it's no wonder, CREE has carved out a lucrative niche in the Semi sector with its proprietary SiC technology. The company has a stronghold of the market for blue and green LEDs and is expected to increase its earnings by nearly 100% this year in part from selling those little light emitting chips. CREE has surpassed analysts' profit predictions by an average of about 11% in its last four quarters and could eclipse estimates again noting the surge in demand for its products this year. CREE's technical picture is shaping up nicely for an earnings run. A glance over CREE's daily chart reveals a loosely-formed inverse head-and-shoulders which might provide the base to propel our play higher. The stock has been on a steady uptrend since last week and will need to clear resistance at $145 before moving higher. CREE moved back above its 10-dma Tuesday, located at $136.31, which may provide support during an intra-day pullback going forward. Look for an entry Wednesday morning if CREE can breakout above $145 and confirm a rally with volume. Comments CREE rallied with the rest of the market on Wednesday and conquered its 100-dma of $142.73. During the day, CREE was steady and found intraday support at $144. Below that lies support at $140. We would look for entries off of any bounces from these levels. Overhead, the stock will encounter resistance at $150. Yet, a strong move through that level with good volume and positive NASDAQ, and CREE could be off to the races toward $160. ***July contracts expire next week*** BUY CALL JUL-135 RNC-GG OI= 35 at $16.63 SL=13.00 BUY CALL JUL-140*RNC-GH OI=251 at $12.00 SL= 9.25 BUY CALL JUL-145 RNC-GI OI=112 at $10.00 SL= 7.75 BUY CALL AUG-150 RNC-HJ OI= 46 at $17.50 SL=13.75 SELL PUT JUL-135 RNC-SG OI= 48 at $ 5.25 SL= 6.75 (See risks of selling puts in play legend) Picked on July 11th at $140.75 P/E = 185 Change since picked +6.56 52-week high=$202.00 Analysts Ratings 6-2-0-0-0 52-week low =$ 23.50 Last earnings 03/00 est= 0.21 actual= 0.26 Next earnings 07-27 est= 0.27 versus= 0.26 Average Daily Volume = 832 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Yahoo! A General leads the Way! A huge buying spree in Internet stocks drove the Nasdaq to its highest level in months. New interest in financial stocks also boosted the industrial segment. The chip sector enjoyed healthy gains and the broad market saw upside activity in brokerage and transportation issues. Good news on the earnings front offset investor concerns that industry fundamentals are becoming less positive. A number of reporting companies suggested they will be able to accelerate growth earnings going forward into the third quarter. The big surprises were Yahoo! (YHOO), which climbed almost $20 in response to an impressive earnings report, and Paine Webber (PWJ), with a $17 rally after Switzerland's UBS said it will pay more than $10 billion to acquire the company. The Yahoo! earnings report demonstrated that advertising dollars on the Internet are strong and the Paine Webber buyout stimulated recent rumors of consolidation in the financial group. What more could we ask for! Of course the upside activity makes it very difficult to initiate bullish plays so this week we will focus on positions with a high probability of achieving a favorable monthly return. Remember, our approach is based on consistent portfolio profits, regardless of market conditions. In the current period of earnings-related volatility, we are not interested in stock ownership, just steady growth in the value of our brokerage account. Editor's Note: Due to the sudden illness of one of our lead researchers, the "Big Cap" section of today's newsletter will be smaller than normal. We apologize in advance for this inconvenience and hope that you will all wish Mark Wnetrzak a speedy recovery. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** ARTG - Art Technology $122.00 *** A New High! *** Art Technology Group offers an integrated suite of Internet customer relationship management and electronic commerce applications. Their solution enables businesses to manage and build online customer relationships in order to market and support products and services over the Internet more effectively. They also provides a variety of consulting, design, application development,and training and support services through its Innovation Solutions and Express Services offerings. American Airlines announced last Thursday that it had chosen Art Technology to handle American's Web site to enhance its future personalization, publishing and marketing capabilities. American said it had made the choice after it commissioned an extensive platform evaluation that resulted in the selection of (Art Technology group's product) ATG Dynamo. The bullish news helped the issue rally almost $30 in four days and now it appears the stock is well established in a new trading range. ARTG - Art Technology $122.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 120 ARY HT 4330 26.75 95.25 4.0% Sell Put AUG 95 ARY TS 0 3.25 91.75 9.4% Sell Put AUG-92 ARY TZ 0 2.88 89.62 8.5% Sell Put AUG-90 ARY TR 30 2.25 87.75 6.8% Sell Put AUG 87 ARY TY 5 1.88 85.62 5.7% *** Chart = ****** AWRE - Aware $57.75 *** Own This One! *** Aware is a provider of Digital Subscriber Line (DSL) technology to semiconductor and equipment companies that make products to enable simultaneous high-speed data and voice transmissions over copper telephone lines. They also sell software-based compression products, including WSQ by Aware, AccuPress for Radiology, and several others. Aware is one of the leading companies in the development of ADSL, which it has proven can carry 8 Mbps signals over copper for more than four miles, enough to overcome most of the switching-distance problems in the existing U.S. phone system. The company also has great technology with its G.Lite version of ADSL and they have a number of other products to provide the vast array of broadband data services available over the current "leading-edge" methods of transmission to the public. Earnings are due later this month and that may be one reason for the recent rally. From a technical viewpoint, the issue has favorable support near our cost basis and the over-priced option premiums will allow us to open the position at a reasonable entry point. AWRE - Aware $57.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 50 WUQ-HJ 215 10.75 47.00 5.1% Sell Put AUG 50 WUQ TJ 11 2.62 47.38 11.7% Sell Put AUG 45 WUQ TK 40 1.25 43.75 7.8% *** Chart = ****** MACR - Macromedia $103.31 *** Ready To Go! *** Macromedia develops and distributes original technologies and innovative software tools, servers and services to a range of customers including developers, consumers and large corporate accounts. Macromedia focuses on three key areas: Web Publishing, Web Learning, and Shockwave.com. Its Web Publishing products works together as a complete solution to make online work flow more efficiently at all stages of development, from concept to production. Macromedia's Attain Enterprise Learning System is an integrated solution for managing the online learning. Its new consumer business, shockwave.com, will release various products that form the basis of this business in the near future. Macromedia announced yesterday that Timex, IBM and Lexus are among the brand name companies using the powerful new Macromedia Director 8 Shockwave Studio to deliver entertainment, advertising and online education content. Macromedia has been successful in selling to other companies and integrating new products with the Shockwave and Flash Players on the Internet. Microsoft and MACR recently announced the most comprehensive integration between the Macromedia Flash Player and Microsoft's Internet Explorer 5.5, which was just released. The company has also entered into other collaborative endeavors with companies such as Lotus, Nokia, Oracle, and Apple. Macromedia is one of the Internet's most advanced presentation specialists and new developments in their product line should certainly produce a winner. Our basis for the position is in a favorable technical support range near $80-$85. MACR - Macromedia $103.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 85 MRQ TQ 40 4.00 81.00 11.9% Sell Put AUG 80 MRQ TP 27 2.75 77.25 9.4% Sell Put AUG 75 MRQ TO 17 1.68 73.32 6.0% *** Chart = ****** MERQ - Mercury Interactive $109.88 *** Entry Point! *** Mercury Interactive is a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications. Their software and hosted services help e-businesses improve the user experience by enhancing the performance, availability, and reliability of their Web sites. By using Mercury Interactive's solutions to identify and assess performance problems, e-businesses can increase their ability to attract and retain customers, and improve their competitive advantage. A wide range of businesses use their products, including America Online, Jobs.com, Ariba, Cisco Systems, Ford Motor Co. and Walmart. This company is one of our favorites for long-term portfolios and the recent feeding frenzy for Internet Software stocks has boosted this bullish issue out of an old trading range. The sector trend is extremely favorable and we offer this position as a method of entry for the slightly over-extended stock price. A reasonable cost basis exists near the previous resistance area at $90-$95. MERQ - Mercury Interactive $109.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 95 RBF TS 5 4.00 91.00 9.7% Sell Put AUG 90 RQB TR 15 2.62 87.38 7.9% Sell Put AUG 85 RQB TQ 58 1.68 83.32 5.7% *** Chart = ****** TIBX - Tibco Software $117.31 *** An OIN Favorite! *** Tibco Software produces e-Business infrastructure software products that enable business-to-business, business-to-consumer and business-to-employee solutions. Tibco's software products enable businesses to link internal operations, business partners and customer channels in real-time. Their software allows multiple distinct applications, Web sites, databases and other content sources to be integrated and managed within a common framework. Their products also enable enterprises to extend their information technology infrastructures and business processes across the Internet to conduct all forms of electronic business using the Internet. Tibco's recent success is well known and the company continues to relentlessly add to its customer base. The REALM, the first business-to-business e-commerce hub for the commercial real estate industry, announced today it has selected TIBCO for its B2B infrastructure platform. This follows Novopoint's selection of the company for its food/beverage marketplace infrastructure. The market has responded positively to these successes, with the stock closing $4 higher today on moderately strong volume. As noted in recent OIN narratives, the company has achieved its profitability while remaining debt free, building a significant cash position. The issue is viewed favorably by analysts and investors have confirmed this confidence as the stock continues to trend upward. TIBX - Tibco Software $117.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 95 PIW TS 24 3.62 91.38 10.3% Sell Put AUG 90 PIW TR 47 2.37 87.63 7.3% *** Sell Put AUG-85 PIW TQ 36 1.56 83.44 5.0% Chart = ****** VRTA - Virata $71.06 *** On The Move! *** Virata sells communications processors combined with integrated software modules to manufacturers of equipment utilizing digital subscriber line (DSL) technologies. These integrated product solutions enable its customers to develop a diverse range of DSL equipment, including modems, gateways and routers targeted at the voice and high-speed data network access market. Virata focuses its resources on the development and marketing of its products, while outsourcing the actual manufacturing of its semiconductors. Virata announced today that its Helium communications processor has been selected by ARESCOM for use in four of the company's new NetDSL products. In addition, ARESCOM has selected Virata's Magnesium voice processor incorporating their vCore software to be used in conjunction with Helium in the next generation of ARESCOM's DSL equipment. ARESCOM is a leading provider of DSL router and modem solutions for telecommunication carriers, ISPs and SOHO markets. Their selection of Virata's primary products suggests the company is designing components that meets the needs of today's fast paced communications industry. Unfortunately, when a stock like VRTA climbs $20 in three days, there's room for profit-taking. In this case, we think today's move suggests there is additional upside potential in the future and a cost basis near technical support will suit us just fine. VRTA - Virata $71.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 55 UFA HK 79 18.88 52.18 4.3% *** Sell Call AUG 60 UFA HL 425 15.50 55.56 6.4% Sell Put AUG 55 UFA TK 15 2.75 52.25 13.0% Sell Put AUG 50 UFA TJ 20 1.62 48.38 8.2% *** Chart = ********************************Advertisement******************** Looking to buy or sell a new or used vehicle? Autobytel.com has been ranked #1 in J.D. Power and Associates Dealer Satisfaction with Online Buying Services study three years in a row. Autobytel.com has revolutionized the way vehicles are bought and sold, with a no-haggle, no-hassle buying experience. http://www.OptionInvestor.com/tracking.asp?co=OIAutobytel7102000 ***************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 *********** DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc