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Daily Newsletter, Monday, 07/17/2000

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The Option Investor Newsletter                   Monday 07-17-2000
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MARKET WRAP  (view in courier font for table alignment)
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        07-17-2000        High      Low     Volume Advance/Decline
DJIA    10804.30 -  8.50 10847.40 10749.50  904 mln   1319/1518
NASDAQ   4274.67 + 28.49  4289.06  4215.86 1.57 bln   2195/1875
S&P 100   817.75 +  2.23   820.93   812.72   totals   3514/3393   
S&P 500  1510.49 +  0.51  1517.32  1505.26           50.9%/51.8%
RUS 2000  545.18 +  2.55   545.71   541.55
DJ TRANS 2900.27 - 18.77  2921.21  2888.60
VIX        22.06 -  0.55    23.34    21.66
Put/Call Ratio       .42
******************************************************************

Awaiting The CPI And An Earnings Barrage On Tuesday

The big story of the day today was...waiting for tomorrow.  
At least that is what most traders would have told you seeing 
how many "announcements" will come on Tuesday.  Before the 
open, we will get a major piece of economic data as the CPI 
will be released.  There isn't likely to be many surprises 
here, but we could always use more evidence that the Fed will 
be on hold once again in August.  The Street has seen no real 
evidence to command a move just yet and are hoping this report 
maintains that stance.  It has been nice not hearing the "I" 
as much lately (although you can never fully be rid of such 
murmuring).  Speaking of which, we have more good news on that 
front as OPEC announced this morning before the bell that they 
would be raising production.  That sent oil tumbling below $30 
a barrel, which is good news for our wallets when filling up 
at the gas station as well as the inflation outlook.  

Generally speaking, the market was relatively muted today.  The 
DJIA pulled back for the first time in over a week, albeit by 
only eight and half points.  It closed at 10804.27, holding 
above support at 10,800.  The volume was average at 904 mln., 
but it is likely to pick up over the next couple days.  The 
S&P 500 gained a half a point to 1510.50, while the Russell 2000 
gained 2.55 points to 545.18.  The overall action was not bad, 
just not inspiring.  We are going to need some very strong 
earnings in the next couple of days to keep this rally alive.  
The upside movers in the DJIA included INTC, IBM, JPM, JNJ, 
and GE, while the losers were MSFT, SBC, and DIS.


 

The Nasdaq was able to post gains though.  The Composite ended 
up 28.49 to 4274.67.  Volume was decent at 1.5 bln.  The story 
here is earnings.  We have dozens of companies reporting on 
Tuesday, big ones too.  INTC, MSFT, AAPL, SEBL, CMRC, DCLK, 
FDRY, IDPH, RMBS, TERN and ITWO, to name a few.  This is the 
biggest day of the quarter for earnings announcements amongst 
the tech group.  That is why volatility and volume should be 
expected in the coming days.  The Nasdaq looks strong on the 
daily chart listed below, but that doesn't jive with where the 
VIX and historical patterns are concerned.  The VIX is raising 
it's voice (although not yet screaming) to the overbought theory.  
And this week is typically the beginning of the downturn after 
earnings.  That makes me a little cautious about the Nasdaq.  
Not to mention, we are now up 40% off the May lows.  That is a 
big move in a short time frame.


 

We did have one big earnings story to talk about today.  It came 
from fiber-optics leader, Corning.  They reported earnings $0.14 
better than upwardly-revised expectations.  At $0.94 per share, 
they nearly doubled last year's second quarter.  The company said 
second-quarter profit rose 80 percent on strong demand for high-
data rate optical fiber and cable and LCD flat-panel display 
glass.  GLW tacked on over $12 to $279.25 and ignited the entire 
sector as SDLI was +24.50 and JDSU +4.31.  

In the merger arena, General Mills and Pillsbury announced they 
would merge in a deal valuing at $10.5 billion.  Last week the 
two announced they were in talks to join the two food operations, 
which will combine the Pillsbury range of ready-to-cook baking 
products and General Mills' Betty Crocker brand.  "The combination 
of Pillsbury and General Mills creates a major new force in the 
changing U.S. food industry," Diageo chief executive John McGrath 
said in a statement.  Well, it changed the price of the stocks 
anyway, but not by much.  GIS dropped $1.31 to $35 while London-
based Diageo (owner of Pillsbury) rose by 2.6%.  Also, Georgia
Pacific said it will buy Fort James in a stock-and-cash deal 
worth about $11 billion.  Under terms of its agreement, GP will 
acquire all outstanding shares of FJ for $29.60 per share in 
cash and 0.2644 shares of Georgia-Pacific Group stock.  FJ 
gained 34% on the news and GP dropped 8.8%.

More earnings reports emerged after-hours with GNET and NVLS 
checking in.  Go2Net reported earnings of $0.22 per share vs. 
estimates of $0.15 from First Call.  Revenue checked in at 
$23 million compared to $5.7 for the same period a year ago.  
This report was good enough to see GNET surging after-hours.  
They had a regular close of $58, but I have seen them trade up 
as high as $65.  Novellus was also an earnings winner by posting 
a profit of $0.56 vs. estimates of $0.52.  Chairman and CEO, 
Richard Hill said, "This has been an eventful quarter for 
Novellus, with the addition of our company to the S&P 500, 
preparing for the launch of a new and revolutionary product, 
and another record quarter driven by robust capital spending 
by our customers."  The stock is waffling back and forth after-
hours, but is near the regular close of $68.44.

So with the CPI due out in the morning, Greenspan speaking on 
Thursday and the Nasdaq sitting less than 800 points from a 
new high, we have quite an interesting situation on the Street.  
Volume has picked up, but will it last?  I don't think we are 
really seeing the big buyers return just yet.  Otherwise, volume 
would really be cooking, closer to 2 billion or more on a regular 
basis.  Therefore, I am going to have to side with the VIX and 
say a turn around is inevitable.  The second half of July is 
typically slow for a reason.  Earnings are over and everyone is 
gone on vacation.  That is just the way it works.  But not all 
hope is lost.  The basing pattern on the Nasdaq shown in the 
chart above gives us hope.  If that basic uptrend line (in blue) 
will continue to hold, then we will be setting up for a whopper 
of a spring board to jump from this fall.  It is painful to wait 
for the action to return, but you can bet I won't be sitting 
here talking an 8-point down day on the DJIA and 28-point up 
move on the Nasdaq three months from now.  The buyers will come 
back with a fury, barring any major event.

But back to the short-term.  The CPI shouldn't tell us anything 
since it is somewhat of a lagging indicator and the preceding 
PPI, etc have been benign.  And the CPI will be the biggest 
report to contend with over the next week and a half until we 
get the second quarter GDP on July 28th.  So with the passing 
of the CPI, all eyes will turn to Fed Chief Greenspan on Thursday.  
With earnings winding down by then, we could be set-up for some 
profit-taking if he says the wrong thing.  And with the Nasdaq 
rallying like it is, he may be inclined to do so.

In all cases, don't fight the trend.  I have seen too many 
traders, itching to buy puts, jump the gun early.  Sometimes 
this market just wants to keep going for no reason.  Wait for 
a clear break in momentum first and always leave yourself an 
escape plan.


Ryan Nelson
OI Editor   


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

Oscillator Charts & Individual Stocks
By Austin Passamonte

Seems like many of us had some fun with last week’s project.
Personally, I’d hate to total all my hours spent pouring 
over 30 minute, hourly and daily charts for every symbol
under the sun. The fact that I’ve had recurring dreams about
reading charts indicates I may be a bit too involved. Don’t
worry, I always tell Wendy I’m  dreaming of us on an exotic
shopping trip. Nope, she doesn’t buy that one either.

I look at three time-length charts for different purposes.
Daily charts signal moderate to major trend reversals when 
all technical tools converge. Hourly charts identify high-odds
trades that might last a few sessions in duration. 30-min 
charts are very sensitive to price movement of course and are
best used for brief intraday trades.

We’ll talk more about that in Wednesday’s piece on exiting
with profit strategies. Let’s focus on stocks here today.

Personally, I trade the hourly or daily charts for stocks.
Shorter-term charts give too many false signals for me to 
interpret. As always it’s incredibly easy to look back at a 
chart and say “aha, I would have bought here, sold there and
stood aside elsewhere”. Doing so live with real money is another
story. 

When trading the OEX or Qs I’m frequently guilty of jumping
the gun on trade setups. Some have happy endings, others
don’t. “Discipline Austin, wait for the setup to mature”.
I’m sure you’ve never had such pep-talks with yourself. 

I anticipate because I’ve followed these indexes long enough 
to give an idea how they might react based on overall market 
activity. Stock players who intimately know their favorite
issues are probably more accurate at theirs than I am on the
indexes. Considering I don’t enjoy that relationship with many
stocks I wait for clear confirmation from all four technical 
signals on hourly or daily charts before pulling the trigger.

When I bridle myself back long enough for this to transpire,
good things frequently happen. Leave the starting gate too 
soon and my stop-loss order is usually found. If you decide 
to test this model on equities unfamiliar to you I can’t stress 
patience and caution enough. Especially to myself.

Let’s persue a few charts from last week’s action and elaborate
from there.

(hourly chart, YHOO)

 


This recent hourly chart of YHOO identifies three points since
June 30th where all four indicators aligned pretty close. Which
of these trades ended up losing money? That’s right, none of them.
Lest you think it’s a fluke on July 11th my trading partner Russ
frantically called me three times while our incoming phone line 
was out (long story) to say YHOO was a screaming buy setup going
into the close before earnings.

Had he reached me I would’ve concurred but given Yahoo’s history
would have never bought those July 120 calls for 3 points ask at 
3:55pm. The signals can’t be right... we all know how YHOO tanks 
after earnings. Of course they’ve sold for much higher than 10 
points since then.

Strict technicians believe that all news & information is priced
into chart action. The charts were doing their dead-level best to
reflect the pre-earnings sell off based on analyst reports. Charts
don’t care about historical fundamentals, they portend recent price
action and sentiment. It shouted out a price bounce might be 
shaping up but I refused to listen.

As a matter of fact I’m so smart I bought July 105 puts as 
prices failed near 120 and dropped to 118 the day after earnings.
Do you see any strong sell signals on this chart near the 120 
level? Me neither, but I just “felt” that had to be the top. 
Sell signals failed from the 128 range where a put-entry there 
would have let me back out near even money. We’ll see what 
happens from here as further upside is possible. Sometimes you 
have to get up pretty early in the afternoon to pull one over 
on me.

(hourly chart, ARBA)

 

Ariba took it’s time breaking out of this $15 channel. Traders
entering on call/put signals had chances for small profits or
loss as it rolled before the big move last week. Of course any
back-month call position might have lasted the entire time to
capture the eventual move. Back-month puts would have been 
painfully stopped on the gap up if one were bearish this issue.

We can only hope that uptrend since first of June together with
pre-earnings run would have influenced us to go long. A clear
short signal has now formed near 125 level save for price release
from Bollinger Bands was a bit early. Interesting to see if it
confirms or fails on Monday but I’d probably take a stab at some
puts if it looks to fail near the open.
     
(daily chart, AMCC)

 

I think we can see a few places here where back-month options or 
LEAPs could have paid huge returns if we’re patient and enter on 
cue. 

(hourly chart, ALTR)

 


Again, there are three clear call buys and two confirmed put 
buys in this hourly chart of ALTR. Can you see when the four 
signals fail to converge we usually suffer false signals? By 
the same token, waiting for all to align gives us very high 
odds of a profitable trade or minimal loss, worst-case scenario. 

We could go on and on pouring through charts to prove the same
point. These indicators work when discipline is used. Have I
mentioned that yet? There are two inherent weaknesses here and
I’ll disclose them now.

First of all this setup is more likely to complete alignment
intraday, especially during the first and last hour of trading.
This means many setups will be almost ripe when scanning the 
charts during market close. Others will have begun the first
part of a screaming move. Being the greedy little buggers that 
we are, it’s natural to overlook those barely in progress to 
jump on ones that seem ready to pop. Our compulsion to be early 
gets us into false moves trying to squeeze every eighth out of
the developing play.

Meanwhile, the one just getting started is a no-brainer that 
becomes profitable and more so right from the open. We pass 
that one up because we missed the first tip of what becomes 
a colossal iceberg. Don’t think you could fall prey to that?
I admire your level of personal fortitude.

The other weakness is we might scan endless stocks before 
finding one ready to pop four days out of five. This is when 
we start pushing trades just to force some action. Free of 
that vice? Congratulations - how’d you do it?

On the fifth day every other stock is poised to rally or
plummet. We are now awash in potential plays. My gosh, what
do we buy first? Believe me, that can be nearly as tough. 
The process of elimination after waiting so long for plays to
emerge is like shopping for groceries while skipping lunch; 
better push two shopping carts instead of one!

Seriously, that is the time to get real picky and whittle out
the best high-odds plays you can find. Just prepare yourself 
for one you passed on to hit new heights within days. Murphy’s 
Law remains alive & well.

Lord knows I’ve scanned enough charts set up like this over 
the past several weeks to learn one thing; when all indicators
align the chance for profitable entry is very high. In almost 
every case hypothetical and actual trades in my accounts are
immediately profitable with proper entry. No need to take my
word for it - flip through pile of symbols yourself. Seeing is
believing and I think you’ll like what you see.

There are times when the move’s too small and a trade is 
stopped for no gain or slight loss, especially trading the 
30 min chart. By the same token one can be a session or two 
early on the hourly and daily charts as well. Proper money-
management and stop loss usage is the most vital part of any
strategy. Are you surprised at that? We’ll cover this subject
some more on Wednesday.

I charted enough stocks, indexes and commodity markets to 
satisfy myself on what to do for directional trading from here.
I must add that participation and advice from each of you was
priceless for the process. I for one am greatly indebted to 
your help and cannot thank the many who wrote to me enough. 
May this simple project help us all meet our goals in the 
trading arena!

See you Wednesday!

Contact Support


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

GSPN - GlobeSpan, Inc. $145.75 -0.25 (-0.25 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

Momentum is the name of the game.  The current buying euphoria in
the markets brings back memories of the first quarter of the year.
This circuit-provider for DSL applications has been no stranger to
the twists and turns of the market.  GSPN had a incredible day on
Thursday, posting a $19.00 gain and lifting the stock to heights
not seen since early March.  The catalyst driving GSPN is the 
massive tech buying and an early earnings run, which are due out
on July 31st.  Friday's trading was bit more subdued after we 
got favorable economic data.  Investors and traders tested GSPN
on the downside, tanking the stock in the first half hour of the
day.  It was a fast and furious $15 drop before GSPN found support
at $131.13.  This pattern mirrors what the NASDAQ and other tech
issues did on the opening bell.  An entry at this point would have 
been ideal as GSPN spread its wings and soared to a $1.38 gain on
the session.  Volume has been increasing throughout the week for
GSPN and we look to see a continuation of this trend as GSPN 
approaches earnings.  Given the support test on Friday, GSPN looks
good going forward.  Yet, we would caution that with such stellar
gains in the past three sessions that profit-takers just might be
lurking.  Also, watch the NASDAQ sentiment next week as we near
Expiration Friday.  Resistance may be encountered at $150.  A 
move through that level with heavy volume would establish a 
formidable run at its 52-wk high of $167.  This would also provide
a conservative entry.  More aggressively, targetshoot off bounces
at support, currently $140 and then down $5 increments from there.
The trend is your friend and these kind of entries can provide
handsome profits.

Comments

Ahh, the beauty of the ascending wedge!  GSPN appears to be 
in such a pattern and it may be positioning itself for a move 
over resistance at $149 (ok, let's call it $150 to be safe).  
It can be tough to recommend a stock that had a $20 move last 
week, but the retracement to $130 and subsequent building 
pattern are all very healthy signs.  Therefore, we are looking 
for a breakout to catch the next big move.  As always, use 
volume to confirm the move.

BUY CALL AUG-140*GRX-HH OI=72 at $21.13 SL=17.00
BUY CALL AUG-145 GRX-HI OI= 1 at $19.25 SL=15.00 low OI
BUY CALL AUG-150 GRX-HJ OI=91 at $17.00 SL=13.25
BUY CALL AUG-155 GRX-HK OI= 3 at $15.00 SL=11.50 low OI
BUY CALL NOV-145 GRX-KI OI= 7 at $36.75 SL=27.50 low OI

Picked on July 2nd at   $122.06     P/E = N/A
Change since picked      +23.69     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 
Next earnings 07-31   est= 0.04     versus=-0.14
Average Daily Volume = 1.14 mln



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