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Daily Newsletter, Monday, 07/24/2000

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The Option Investor Newsletter                  Monday  07-24-2000
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MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        07-24-2000        High      Low     Volume Advance/Decline
DJIA    10684.80 - 48.80 10778.10 10678.40   88 mln   1104/1746
NASDAQ   3981.57 +112.88  4125.80  3976.51 1.50 bln   1386/2658
S&P 100   795.83 -  8.72   808.15   795.74   totals   2490/4404
S&P 500  1464.29 - 15.90  1485.88  1463.80           36.1%/63.9%
RUS 2000  514.25 -  8.45   524.11   513.01
DJ TRANS 2820.09 + 11.67  2835.35  2805.13
VIX        22.44 +  1.05    22.73    21.44
Put/Call Ratio       .46
******************************************************************

Look Out Below, Markets Down!

The slide continues.  Bottomline:  traders don't see any reason to
buy.  The selloff in the broader markets that began on double-
witching Friday accelerated today as a variety of news drove
trading.  Mega merger announcements brought up the question of
company valuations.  PC forecasts renewed concerns about future
sales growth.  Negative market internals clearly show a lack of
buying.  It appears that this trendless market only looks to be
drifting lower.

Well, the downward bias from Friday made itself crystal clear
today as investors took the NASDAQ screaming down through the
key psychological support level of 4000.  Today's 113 point
loss for the NASDAQ confirmed the classic rollover that we saw
last week.  After topping out near 4300 on July 17th, the tech
index just didn't have the fuel to keep moving higher.  Not even
strong earnings helped it last week.  Besides last Thursday's
one-day relief rally that began with Greenspan's Humphrey-Hawkins
testimony, each day gave up a little more.  So today, the
NASDAQ stands at 3981 after violating several key support levels.

After a quick dip in the morning, the NASDAQ moved back over
4100, only proving to be a headfake.  As soon as it encountered
the 10-dma at 4124, the NASDAQ rolled over and fastened its
seatbelt for the freefall to come.  This is technically
concerning for the bulls out there still doing the "Summer
Rally Dance."  A downward pressuring 10-dma just shows how weak
the buying interest is.  The second technical level that the
NASDAQ violated was the 100-dma at 4028.  There wasn't much of
a fight as the buyers were nowhere to be found.  After a brief
pause at this level, the index went for a test of 4000, where it
actually managed a bounce at 4004.  I wasn't convinced as the
NASDAQ Tick remained decidedly negative.  And with an hour to
go in the trading session, the NASDAQ didn't disappoint the
shorts out there, breaking 4000 on a quick downward spike.

This leaves the NASDAQ in a very precarious position.  Although
rather trendless during the past two months, the NASDAQ appears
to be on a down leg for the moment.  Looking at the daily NASDAQ
chart below, I have drawn a regression line that shows the
index right at the bottom of the channel.  Now, if the NASDAQ is
uptrending since the June 5th gap up, we would probably see a
bounce back.  Yet, given that there doesn't appear to be any real
positive catalysts for the market in the near future, one would
not expect enough buying interest to sustain such an uptrend.
Short term bearishness is growing.  NASDAQ decliners beat
advancers 2658 to 1386, an almost 2 to 1 ratio!  We may very
well get a relief bounce tomorrow, considering the NASDAQ gave
up 2.7% today, but it would be the type characteristic of a
drifting market.  To reiterate Eric's point from the Sunday
Wrap, buyers beware!  This leads me to the support line below at
3856, which is the 200-dma.  It is also the level at which the
NASDAQ teetered throughout late June and early July.  That's
only 125 points away.  Realistically, the NASDAQ could test this
level by the end of the week, especially with the nervousness
surrounding the Employment Cost Index and GDP due out on Friday.




Downward pressure on the NASDAQ came from everywhere today.  Not
only was there technical pressure, but earnings pressure in almost
every sector.  Priceline.com(PCLN) announced narrower-than-expected
losses of $0.01 per share, beating the Street by 2 cents.  Losing
just $4.4 mln in the second quarter, PCLN is nearing profitability.
Yet, many analysts chattered last week that PCLN might have gotten
out of the red with today's report.  There are also concerns about
the online-bidding service's revenue growth.  As a result,
investors hammered the stock for 22%, or $8.94, closing at $31.13
on very heavy volume.  The selling spilled over into other Internet
issues like YHOO(-5.69), EBAY(-3.63), and AMZN(-2.38).  EBAY
reports earnings tomorrow.

A report from the research firms IDC and Dataquest heated up the
selling in the Hardware stocks.  The report forecasted that
worldwide PC sales will be weak, as shipments for this past
quarter were just half of a year ago.  While some say that the
report is suspect in its forecasts, it still hurt many of the
box makers.  Leading the way was DELL(-5.91), AAPL(-4.88),
GTW(-4.25), and CPQ(-0.81).  Compaq is set to report earnings
tomorrow.

Investors were looking for a reason to sell today, and they found
some in the merger market.  Deutsche Telekom(DT) confirmed today
that they would indeed plan to buy Voicestream Wireless(VSTR) in
a deal valued at $50.7 bln.  Many investors and analysts have
been critical of DT for paying such a hefty premium in order to
gain access to the U.S. wireless market.  Yet, DT has been seeking
out a target for years and this premium reflects previously
unsuccessful takeover attempts with Telefone Italia and Quest.
In addition to this criticism, concerns have been raised about
whether the deal will receive regulatory approval.  The main
concern:  national security.  But, bickering of this sort could
lead to a much greater global-economic retaliation by Germany and
the EU:  a broader trade war.  This larger repercussion may quiet
the opposition in Congress as this deal progresses.  Shares of
DT lost $6.50, over 12%.  VSTR plunged 13%, or $19.75 on the
above concerns.

The Fiber Optic sector took a hard hit today on mega merger
speculation between Nortel(NT) and Corning(GLW).  In what appears
to be an oddly structured deal worth $100 bln, NT would sell its
optical-parts unit to GLW, throw in a stock swap and NT would own
50% of GLW, while GLW remains the acquirer.  Now, that's a heck
of a deal to hammer out!  This deal is not imminent as talks
continue.  Consolidation within this sector has been growing with
the JDSU-SDLI deal being the latest.  JDSU edged out GLW in a
bidding war for SDLI.  The entire sector, which has run-up
tremendously in the past two months, felt the heat:  GLW(-33.25),
SDLI(-33.00), and JDSU(-3.19).  NT bucked the trend and held at
$80.63, up $0.75 in regular trading.  After hours, NT is trading
at $82.

Over at the NYSE, the INDU attempted to rally mid-morning behind
stellar earning for MRK, but was overcome by the broader market
sentiment.  The INDU gave up 48 points on the day, after its run
toward 10800 came up short at 10778.  It continues to be
rangebound between 10650 and 10850, yet recently looks like it
might be rolling over for a test of the 100-dma at 10604.  The
story remains the same for the INDU as for the NASDAQ:  there is
little that is sparking any real buying interest.  Even a
surprisingly strong quarterly report from MRK couldn't keep the
INDU in positive territory.  MRK beat the Street by 4 cents,
posting a profit of $0.73 per share.  Shares of the pharmaceutical
company soared $5.81 to $69.56, a 9% gain.




Volume was light at the NYSE with 870 mln shares changing hands.
The INDU just drifted lower throughout the day as specialist
saw few institutional buy orders in their books.  This is a
telling sign as to the kind of trading we will most likely see in
the coming month, which is historically slow.  Decliners beat
advancers 1750 to 1100 and the INDU closed just off its lows at
10685.  Hardware stocks lost ground, in particular HWP, which
gave up another $5.19.  Oil services stocks also fell as oil
hit a two month low today.

Looking forward, there isn't a lot of news that investors and
traders are finding positive.  Not enough to drive the market to
higher highs right now.  Earnings are still going to be the focus
this week, yet today, traders were selling the news.  Tomorrow,
Fed Chairman Greenspan will speak once again, which usually is an
instant replay of the Humphrey-Hawkins testimony, but traders will
be listening carefully for any variations or clarifications.  It
should be a non-event.  Even though it's only Monday, Friday's ECI
and GDP numbers are already being talked about as investors can't
really find any real reason to buy.  It's almost like they are
looking for excuses to NOT buy.  Once again, buyers beware.  There
isn't any strong conviction so watch for continued trendlessness
and technical trading.  Expect increasing volatility this week.
The VIX.X was up 1.05 today to 22.44, still relatively low.  Short
term trading is the way to go, taking your profits quickly in this
drifting market.  Remember, take them when you have them and be
short term focused.

Matt Russ
Asst. Editor



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

Support/Resistance Benchmark Values
By Austin Passamonte

I receive a number of great email questions each week that
offer good material for topics in this forum. Sadly, there
are more potential subjects by a wide margin than space
permits. I'd like to profile one such inquiry tonight
and use Wednesday to clean up some housekeeping questions.

Here's a note from Fernando Ramos on the use of our S/R
ratio as listed in "Market Sentiment". Shame on you, Fernando!
That was my super-secret, proprietary information. Now I have
to go back to reading all those used textbooks from M.I.T.
again. Sorry, just kidding!

This simple equation is based on open interest ratios for
futures contracts that helped me enter directional trades in
that field. I've imported such to the OEX options market as
noted in recent "Sentiment" sections. It probably can be used
for individual stocks but volume plays a significant role.
I would only place value on this measure for highly liquid
issues. With that in mind, let's explore Fernando's effort:

Austin: I have calculated the open interest ratio of calls 
and puts for different strike
prices.   (CRA - Celera Genomics)

 Strike Month Open Interest 
Calls Puts C/P Ratio
120 AUG 143 18 7.94
115 AUG 247 250 0.99
110 AUG 253 121 2.09
105 AUG 120   2 60.00  (.02)
100 AUG 96 379 0.25  (3.95)
 95 AUG 80 145 0.55  (1.81) 

For instance I picked CRA with strike prices for August options. 
Is this the proper formula (Calls/Puts Open Interest) to calculate 
the S/R Ratio Index and if this is correct can we state that there 
is a firm support at 105 and a somewhat lighter resistance at
120?

Thanks.
Fernando Ramos

Fernando, you're to be commended for the effort! Just one
minor twist in the math here and we're all set.

Friday's close on CRA was near $110. Therefore, all strikes
below that serve as support while those above are resistance.
Strong support would mean more puts than calls of open interest
at the lower strikes but this is seldom the case. By the same
token we'd like to see more puts than calls above the current
strike when we're bullish. The exact opposite is true for
bearish sentiment.

A normal put/call ratio would be considered 2/1 across these
strikes but is seldom if ever found to be near that equation
at each. Formulating a percentage figure at each strike can
indicate possible market direction in the near-term.

In CRA's example, overhead resistance is calculated by
dividing open interest of call options by the open interest
of put options. If we're bullish we'd like to see a low
number of five or less, indicating that the call to put
ratio is evenly matched. In this case we see there are 125
more call options open than puts, suggesting sentiment
is quite bullish above us, a contrarian negative.

There is the fundamental factor of market-maker arbitrage
at work here as well. When call options are sold market
makers who buy them are now long the option and must go
short the underlying to stay safely hedged, which is their
primary concern. This selling puts downside pressure on the
stock if high levels of call options enter the marketplace
without balance. See how high levels of call option O/I
above our play could have negative effects on price?

By the same token, large levels of put options being sold
to market makers force them to go long the underlying in
order to remain market neutral. One-sided action such as
this could give the stock upward pressure or support for
prices. Make sense? Large levels of puts mean a bias on the
upside while large numbers of calls indicate downside bias
as they appreciate in value.

With that in mind, we need to view the call/put ratios in
reverse beneath our current strike. Open interest on the
put options should be high in relation to call options in
order to prop prices up should the stock fall and those
put options gain value. Remember what happens if a bunch
of puts get dumped on the market? Market makers must go
long the stock and buying pressure offers support.

Therefore, when figuring overhead resistance we divide
calls by puts but for underlying support we reverse that
and divide puts by calls. We hope to end up with whole
numbers above five if we're bullish, and that happens when
puts outnumber calls by a fair margin.

We've done that for Celera above with numbers in parenthesis
beside the figures Fernando arrived at. We see that 2 puts
divided by 120 calls gives a factor of 0.02, practically no
support at all. That reflects 118 more call options open
than puts, keeping in mind contrarian-sentiment and market
maker arbitrage factors as well. This doesn't mean 105 is
not a level of support as depicted by some other tech study,
but it shows the majority of CRA traders aren't betting on
prices to stop falling near there if they move down. Those
best are reserved for lower strike prices as voted for with
real money.

There you are, the secret is out for all to use! In the
fairness of disclosure I must admit to learning this somewhere
over a decade ago in written works pertaining to futures
contracts. However, the basis remains the same; we try to
identify disparity in sentiment near certain points in a
given market relative to it's usual levels of measure.

A strong caveat here is not to rely on this data for much
more than one additional forecast tool. I would hesitate to
put much weight in this on anything less than the heavily-traded
stocks, which is subjective. Follow the action on your favorites
for awhile and learn first hand how it behaves.

I think there are two very important situations this equation
can help us with; market events and key turning points.

Prior to earnings announcement or after a sharp run-up on news
we could make a quick analysis and see how our targeted stock
is positioned. Is there room on the upside for it to go or will
it bang heads on considerable resistance? Nice to know when
playing straddles or straight options around earnings or splits.
I'd be inclined to buy calls when overhead is light and puts
when overhead is heavy around market-moving events.

On expiration Friday-eve I made a fearless forecast in Thursday's
"Market Sentiment" that the OEX wouldn't likely reach or break
the 820 level. I was 99.44% sure that wouldn't happen because
there were 33,076 open July OEX calls between 820 - 840, with
a meager 196 puts to offset them. A whopping 168.76 reading at
this mark. Any idea how the market makers would handle that many
calls being dumped on them the day of expiration? Whew!

I was very tempted to secretly tap Wendy's coveted "Christmas
shopping in NYC fund" to bet it all on OEX puts but one thing
stopped me short. There is always the possibility Greenspan
could come on live TV and announce how the Fed just decided
they've been too aggressive with interest rates and fear it's
had an adverse affect on short-term equity traders. In light
of this they're cutting interest rates by one full basis point,
effective now. Al hopes this can help daytraders get back on
their margined feet.

I don't care if the open-interest reading was 1.5 gazillion
above 820, that baby's going through the roof! The result
might mean I'd have to liquidate my personal toy collection
in order to cover Wendy's ill-advised (and unbeknownst)loss
on the subsequent rally to the moon.

This is a very simple contrarian tool that can give insight
into the markets. We lack the space or resources to cover more
than the OEX in "Market Sentiment" but will try to include a few
individual stocks near the next earnings run. Meanwhile forget
the fish, we just put some fresh line on your fishing pole.
feel free to test the water on your favorite lunkers right now!

**********

For the record, our chart setup as depicted over the last few
visits were giving solid hints to buy puts on the OEX and QQQ
last Friday. Prudent traders might have waited until today for
confirmation (and better entries) but I went long OEX August 790
puts @ 8.5 and QQQ August 93 puts @ 2.75 Friday last. Today's
open gave question to the charts and doubt certainly entered
my mind. I set my stops and walked away from the screen to enjoy
a 20-mile ride on my touring bike. Still stiff after two days of
18 holes back to back, I was no threat to Lance Armstrong!

My return showed all's well with the trades. Stops have been
moved from below entry to well above and I can't lose money
short from suffering the mother of all gap moves against my
positions. If you had any trades win, lose or draw using this
system, feel free to drop me a line. I can't promise a response
to all but I'd sure enjoy sharing all your results!

Best Trading Wishes,

Contact Support



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

CRA - Celera Genomics $110.00 -2.00 (-2.00 this week)

Celera's mission is to become the definitive source of genomic,
proteomic and related biological and medical information.  Celera
uses this information for an integrated information and discovery
system available to researchers in pharmaceutical, biotechnology,
and academic institutions on a subscription basis.  The discovery
and information system includes software tools that provide the
ability to view, browse and analyze this information in an
integrated way to facilitate discovery.  Celera also offers a
variety of services to customers to assist in the analysis and
interpretation of the data.

Most Recent Write-Up

Ever since the biotech sell-off this past March, many of the
genomics issues have recovered nicely.  Stocks such as HGSI,
MYGN, and PDLI have moved strongly off those March lows and the
biotech index has almost doubled since then.  No longer do they
have to beware the Ides of March.  With the genomics sector hot
again, one would think that Celera would be a prime beneficiary
of the move.  After all, Celera's middle name is "Human Genome",
after accomplishing the landmark achievement of completing the
map of the human genome much sooner than expected, the stock
moved lower as traders celebrated with a sell-on-the-news party.
Building a base and finding strong support at $90 (currently its
200-dma) for the greater part of this month, the stock now looks
poised to move on up, bouncing off its 50-dma, currently at $92.
Breaking through resistance at $110, CRA also broke out above its
100-dma, currently at $105.  The $105 point has been a thorn in
the side of CRA.  Testing it unsuccessfully numerous times this
past month, it is heartening to see it finally break through on
strong volume.  Support levels abound for the stock, with the
5-dma currently at $103.75 and 10-dma at the psychological level
of $100.  An ensuing rally for the stock will find the 5- and
10-dma to provide support and bounces off these levels can be
bought by aggressive traders.  Looking ahead, the next level of
resistance for the stock is $120.  A break through $120 will
leave a clear path to $130.  With so many support levels below
the stock and little resistance, any positive news from the
company could move the stock up, and fast, if Thursday serves as
an example.

Comments

After an initial rising trend on Monday morning, CRA fell with
the rest of the market.  The Biotechs actually held up well 
versus the tech stocks, which have received the brunt of the
selling.  Look for entries on any bounces off the $110 area with
positive market sentiment.  With any further selling in the
morning, watch the 100-dma at $104.88 for support.  More
conservative traders may want to wait for a resumed uptrend with
a move through $115.

BUY CALL AUG-105 CZA-HA OI=118 at $16.13 SL=12.50
BUY CALL AUG-110 CZA-HB OI=300 at $13.75 SL=10.75
BUY CALL AUG-115*CZA-HC OI=246 at $11.25 SL= 8.75
BUY CALL AUG-120 CZA-HD OI=245 at $ 9.50 SL= 7.25
BUY CALL SEP-120 CZA-ID OI=355 at $15.13 SL=11.75

SELL PUT AUG-100 CZA-TT OI=382 at $ 6.38 SL= 9.00
(See risks of selling puts in play legend)

Picked on July 23rd at  $112.00     P/E = N/A
Change since picked       -2.00     52-week high=$276.00
Analysts Ratings      5-3-0-0-0     52-week low =$ 10.25
Last earnings 04/26   est=-0.51     actual=-0.44
Next earnings 08-03   est=-0.35     versus=-0.32
Average Daily Volume = 1.88 mln





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