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Daily Newsletter, Monday, 07/31/2000

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The Option Investor Newsletter                  Monday  07-31-2000
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MARKET WRAP  (view in courier font for table alignment)
        07-31-2000        High      Low     Volume Advance/Decline
DJIA    10522.00 + 10.80 10603.30 10497.80   93 mln   1707/1158
NASDAQ   3766.99 +103.99  3767.89  3615.79 1.51 bln   2315/1747
S&P 100   782.64 +  6.46   786.65   776.07   totals   4022/2905
S&P 500  1430.83 + 10.95  1437.65  1418.71           58.1%/41.9%
RUS 2000  500.64 + 10.42   500.64   487.39
DJ TRANS 2858.09 + 88.56  2858.09  2768.63
VIX        23.44 -  0.86    24.32    23.09
Put/Call Ratio       .53

Did You Hear The Sigh?
By Eric Utley

The inevitable relief rally showed up right on cue Monday.
After suffering a 10.5% loss last week the oversold NASDAQ was
due for a bounce.  The magnitude with which the broader market
fell last week was a rare event.  Such precipitous declines
generally take place only three or four times a year.  Of course,
traders have discovered a new definition for the term 'anomaly'
this year.  This week's earnings calendar is filled with the
second-tier names that generally make for minimal impact on the
direction of the market.  And, the economic numbers scheduled
for release this week are also of secondary nature, with the
exception of the Jobs Report on Friday.  The eventless week will
most likely lead to range bound trading as Wall Street digests
last week's losses.  The search for market direction and answers
from the Fed will come to the forefront as the week progresses.

The DOW followed the NASDAQ higher this morning, but had trouble
clearing resistance at the 10,600 level.  The Industrials rolled
over in the final half hour of trading to erase nearly all of its
early-day gains.  The ongoing shift of capital from the blue
chips to the Tech sector - and back again - is creating enough
whipsaws to put a crick in your neck and your portfolio.  The
retailers that helped stabilize the DOW last week fell under
heavy selling pressure today.  The biggest drag on the
Industrials came from WMT, which shed -$4.00, and HD, which lost
-$0.94.  Other losers on the DOW today included PG -$2.44, MRK
-$1.25, and KO -$1.19.  However, the ebb and flow of capital
benefited the Tech and Financial components of the blue chip
index.  The Financials helped stabilize the DOW's late-day
rollover with JPM +$2.94, C +$1.56, and AXP +$0.56.  The Tech
winners included INTC +$2.00, HWP +$2.38, and IBM +$0.81.

Traders were calling for the Tech and Financial sectors to
reassert their leadership roles today.  Without a recovery in the
two sectors, the DOW is in danger of falling below support at
10,500, which might send us directly to the 10,400 level.  The
sharp sell-off late Monday afternoon will set the DOW to retest
support at 10,500 tomorrow morning.  The narrowing range of lower
highs and higher lows has got to give one way or another.
Without much of a catalyst for the bulls, the prospects of the
Industrials breaking its string of higher lows seems likely.
But, for the time being, the range bound trading of the blue
chips and the continuous shift back and forth to the NASDAQ can
lead to impatience, which can lead to losses.  The best bet right
now is to wait for the DOW to break one way or another and look
for a discernible trend to play.

The divergence we've come to love (or hate) this year returned
today.  The theory of sell the blue chips and buy the NASDAQ was
in full practice.  The Tech sector was boosted by a combination
of events Monday.  First, there were the bargain hunters who
stepped in to pick up the bruised and battered Chip stocks off
the floor.  The Philly Semi Index ($SOX) gained 3.8% in its
second straight session of recovery.  The Chip sector received
a big boost from INTC after the company said it had developed the
fastest microprocessor to date.  The 1.13 gigahertz chip was
clocked at 1.13 billion cycles per second.  I'm no tech wizard,
but that sounds pretty fast!  Second, a few analysts raised
their voices to boost morale in the beleaguered Tech sector.  DB
Alex Brown issued a research note early in the morning, calling
last week's sell-off in the wireless arena overdone.  The bullish
comments sent a ripple throughout the Wireless sector, which
prompted a bounce in ERICY +$1.50, KYO +$7.00, TKLC +$4.94, and
NOK +$0.56.  Apart from the Semi and Wireless sectors, the other
winners which contributed to the NASDAQ's bounce included VRTS
+$14.25, SEBL +$8.63, SCMR +$8.31 CIEN +$7.69, CMVT $+7.56,
ADBE +$3.13, and ORCL +$2.81.  Despite the broad rally on the
NASDAQ, the Biotech sector added to its recent losses.  The AMEX
Biotech Index shed 2.3% on the heels of the news from Cephalon
(CEPH).  The company announced disappointing results from trials
for a potential treatment for attention deficit disorder.  The
Biotech Bears took control and ripped -$22.44 from CEPH.  Other
losers in the sector included HGSI -$6.56, CRA -$3.63, MLNM
-$3.38, and BGEN -$1.44.

Although the NASDAQ posted triple digit gains Monday, the volume
on the bounce was significantly lighter than the volume on last
week's declines.  Traders exchanged 1.48 bln shares today; that's
compared to last Thursday's and Friday's robust trading of 1.79
bln and 1.77 bln, respectively.  However, on a positive note,
the NASDAQ loosely formed an inverse head-and-shoulders over the
course of Friday's and Monday's trading.  The somewhat strong
technical position of the NASDAQ might lead to more upside in the
near-term.  After last week's sharp sell-off there's not much
resistance above current levels.  Another triple digit gain by
the NASDAQ would position the index to test resistance at its

The higher prices posted in the Tech and Financial sectors were
nice to see today after last week's rampant red on the quote
sheet.  However, there are plenty of hurdles the broader market
needs to clear before moving substantially higher.  We mentioned
last week that the slew of IPO's scheduled for release presented
a potential threat to the health of the overall market.  The
heavy offerings of new stock last week could have very well
contributed to the steep losses in the Tech sector.  However, the
number of new issues last week is thin compared to the offerings
on the table this week.  A full 52 issues are scheduled for
offering this week, of which 38 are IPOs and 14 secondary
offerings.  Of course many of those won't be issued for various
reasons just as several of last week's IPOs didn't make it.  But,
the potential for billions of dollars of new stock hitting the
market is not what the bulls need right now.  For instance,
Goldman Sachs (GS) is slated to release 40 mln shares in a
secondary offering.  That stock needs to be absorbed by
institutions and brokers, which might lead to the liquidation of
other securities to raise the necessary proceeds to pay for the
transaction.  Supply and demand reign supreme on the stock
market.  The oversupply of stock scheduled to be released this
week is unhealthy for the overall market.

Furthermore, despite the 10.5% on the NASDAQ last week, many of
the sentiment and speculative indicators are still waving
warning flags.  The VIX is still trading at dangerously low
levels.  The investor fear gauged dropped to 23.32 today.
Although it did spike up during last week's decline.  The CBOE
equity Put/Call ratio is hovering around 0.50, which is
relatively low in light of last week's drubbing.  And finally,
the Investment Advisors Sentiment Indicator is still rising into
bullish territory.  When viewed in context, the lack of fear in
the market bodes poorly for the prospects of a rally anytime
soon.  In fact, the current levels of the aforementioned
indicators has prompted several talking heads to call for a
retest of the spring-bear market lows.  With the lack of a bull
catalyst and the ever-looming Fed not far off in the distance,
it would seem the market's path of least resistance is down.

The remainder of the week will most likely be a tug of war
between the bulls and bears.  As the week grinds on, traders will
turn to the Jobs Report Friday for clues of future FOMC interest
rate policy.  The lack of events this week will cause traders to
hang onto every last word from the analyst crowd.  The various
upgrades and downgrades we'll encounter might present trading
opportunities for those quick day traders and swing traders.
However, the battle between the bulls and bears will probably
churn the major indices for the time being.  Range bound trading
can create impatience, which generally leads to forced trades
and losses.  The name of this game is survival, which means
preserving capital.  The current market is difficult to game with
no clear direction, which warrants the practice of patience for
a discernible trend to show itself.

The beginning of August marks the official welcoming of the
summer doldrums.  The big institutions and money managers will
tie up loose ends this week before heading to the beaches for the
remainder of the summer, hence the heavy offering of IPOs this
week.  The lack of big money will make trading all the more
difficult for the next month.  Don't get me wrong, there is still
opportunity to take money out of the market, it's just a lot
harder to do so.  Be patient, trade with your head, and preserve
your hard earned money for only good opportunities.

"There are times when one should [trade], and just as surely
there are times when one should not [trade]." - Jesse Livermore

Words to trade by from a master!

Eric Utley
Research Analyst

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Support & Resistance Revisited
By Austin Passamonte

Last week's topic on open interest option readings of S/R
touched off a considerable amount of discussion. Seems like
more questions were raised than addressed, so let's give it
one more go here to see if we can't clarify some things.

First of all, support/resistance areas of price congestion
are easily spotted on bar charts at first glance. We can
visually see where price action over the past days, weeks
and months have opened or closed repeatedly at specific
price levels. Why do you think that occurs?

At some point in time, buyers and sellers in a market reached
a stalemate. Regardless the underlying, market action is a
continual struggle of buyers and sellers vying to drive
prices higher or harvest profits already gained, respectively.
Clear battlefields are drawn as recorded on charts where the
frontline trenches develop where the two groups meet.

Open interest of actual stocks, futures contracts or options
can measure degrees of strength in these zones of congestion
at any point in time. I'm not aware of any way to quickly
measure outstanding shares at certain price levels of individual
stocks by fundamental basis. In other words, we can readily
learn how many shares are in the market for a company and what
number of them are sold short. However, I personally don't
know of a way to see exactly where those shares were purchased
along the price scale.

The same thing is true for futures contracts. We can easily
track open interest volume on any market daily or hourly, but
who knows where the entry points were for those contracts?
Options offer us one more dimension of measure these other
financial instruments don't.

We can pull up a delayed or real-time option chain and see
exactly where the volume has built in relation to specific
price levels. This gives us ability to judge where potential
support and resistance lies and how firm it might be.

My favorite option chain for this study is the free info site
provided by the Chicago Board of Options Exchange @ www.cboe.com
This informative resource should be book-marked in every option
trader's computer. The front page either offers us the option
chain feature or a subject link to "delayed option pricing"
depending on your browser used.

For those yet to visit this site, we simply enter our chosen
equity symbol in the search box and select the choice of all
option LEAPs and symbols listed. A complete download will
reveal all listed strike prices for our subject with both calls
and puts shown on either side of the listed strike. Right there
in front of us shows the total open interest for every option we
care to compare.

Most of the time large volume of open interest is found at
all the expected price levels for the underlying. Near whole
or round numbers, recent highs, lows, moving average marks,
50% and 62% retracement levels, etc. Why do you think that is?

Simple. Most long option contracts expire worthless and these
are no exception. They indicate a direct and indirect effect
on future price action if we learn to interpret their meaning.

Can we use the OEX here as our example? Each "Market Sentiment"
piece in OIN clearly shows two near-money strike prices with
highest put and call option open-interest. This can indicate
price magnet areas of congestion during normal market behavior.

By Thursday last week the two levels of highest open interest
were 805 for calls and 790 for puts. Big mystery why the index
remained trapped between them for days, isn't it? Horizontal
trend lines of support/resistance could be found there on the
charts along with others. What we gleaned from this data is
the fact that once either of these congested areas were broken
significant follow through is able to occur.

Additional market data told us the downside was by far more
than likely this time. Our entry signal came long before we
broke through 790 but once it did that level now becomes
resistance. If selling pressure was strong enough to drive
prices below such solid support this move has oomph behind
it. Intra-day traders could buy puts with both hands once
790 was violated and further tests of that level this week
may just offer excellent put entries once again as the former
underlying strength becomes dense overhead.

That's how we determine the strongest levels of support/resistance
for any given market based on it's option levels. With stocks
we can assume there are comparable ratios of actual shares
purchased near the high-level strikes as well. Human nature
being what it is, call options and shares themselves are
usually bought & sold at the same times for similar reasons.

Picking a stock at random, if you notice open interest levels
to be comparatively high at points above & below current price
levels you can assume there was buying/selling congestion for
the underlying there as well. In most cases this is evident on
bar charts but not always nor to the same degree.

Reading bar charts for this info requires one to draw trend
lines and compare points of congestion with daily volume to
guess at relative strength of price levels. Obviously, the
more times that price range stopped the trading action recently,
the stronger it's effect is.

Looking at the option chain shows us the comparative volume
of open interest between various price levels. In the OEX
example, total open interest for August calls between the
strike prices of 825 - 900 is a whopping 28,422 contracts
versus total put open interest of 127 contracts! This creates
a call-to-put ratio of 224 to 1. Would you say that's disparity?

Remember, the OEX hasn't traded at or above 825 in months. These
are all OTM contracts either purchased for some type of hedging
(?) or are the epitome of irrational exuberance amidst recent
talk of the summer rally and new record index highs. I'm guessing
the latter is how they came to be bought.

These lottery plays have zero chance of ever coming into the
money before expiration barring the mother of all surprise
rallies. Can you imagine the downside pressure they would
exert if most of them gained significant value and were dumped
on market makers en masse as the price levels were reached?
It could happen, but such an incredible "long squeeze" on the
market would make this highly unlikely. Our chances of finding
Sasquatch camped out in the backyard pool are infinitely higher.

Now, keep in mind the OEX has never traded to most of these
levels in it's history. Bar charts couldn't reveal all the
massive resistance currently overhead from 850 to 900 levels.
How could they? We've never been there before. Had the summer
rally actually lived to prosper and OEX prices hit 855 you
could be sure media pundits would project all's clear and no
visible resistance exists at these new historic levels.

The charts couldn't reveal it but a quick peek at option chain
positions would show in a heartbeat just how many open calls
there were sitting up there just waiting to step on the index
as it rose. I believe this is the most valuable indication we
can derive from such study - the ability to see in a dimension
not clear to the untrained eye just how weak or strong the next
levels of price congestion may be.

As plotted in "Market Sentiment", overhead and underneath
strength for the OEX can give us a hint at nearby price
action. Currently as I write this (Sunday night) the open
interest between 780 - 800 for August calls is 8,322 while
puts number 18,261. That's a call to put ratio of .46 to 1,
clearly indicating little resistance lies directly overhead
should a relief rally ensue.

By the same token there are 7,656 puts vs a mere 414 calls
from 780 to 765. This gives a put to call ratio of 18.49 to
1 respectively. That is firm support but can easily give
way to enough further selling pressure. What we can surmise
from sitting here prior to Monday's open is that a sharp
move in either direction presently favors the upside until
further buying action skews these ratios further.

This does not mean a bottom is in place with little danger
of further index decline. Not by any means! It's simply one
more tool that helps short-term traders judge the possibility
of a market moving far enough in either direction to allow
for profitable plays. Used in the proper context & harmony
with other technical tools, judging open-interest disparity
gives us an inside glimpse to help determine or daily plan
of action for entries, stop-loss locations and exits.

I hope this sheds further light on the specific subject, and
look forward to our next visit on Wednesday. Trade wisely
and we'll see you then!

Best Trading Wishes.

Contact Support

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NTAP - Network Appliance $86.19 (+1.19 this week)

As indicated by its name, NTAP pioneered the concept of the
network appliance, an extension of the industry trend toward
specialized devices that perform a specific function in the
network.  NTAP designs, manufactures, markets and supports
high performance network-attached data storage and access
devices.  These products, including the company's NetApp file
servers provide fast, simple, reliable and cost-effective file
service for data-intensive network environments.  The company
is also embracing online business through its NetCache Web
caching appliances, which are designed to ease Internet
bandwidth demands by storing information physically closer to

Most Recent Write-Up

Jumping on the selloff bandwagon that pulled into town last
week, NTAP had a rough ride.  With earnings season effectively
over, there is very little to hold up the tech sector as
investors and fund managers alike head off for their summer
vacations.  Throw in a few revenue warnings and bearish analyst
comments and you have all the ingredients for an ugly day in
the markets.  NTAP had just run up nearly 40% in the prior 2
weeks and was primed for some profit taking anyways, but the
magnitude of the selloff looks like it was overdone.  With the
decline on Friday, NTAP is within spitting distance of its
50-dma (currently at $82.47) and just above the June
consolidation between $76-83.  Unless things are about to get
really ugly, this looks like a prime candidate to bounce in the
days ahead.  On the other side of the argument, it does concern
us that NTAP closed right on the low of the day on heavy volume
on Friday, so play this one with caution.  Trying to catch an
oversold bounce is a higher risk play than jumping into an
established trend, so wait for an indication from the market
before jumping in.  Trying to catch this knife before it hits
the ground could leave your hand fingerless, and that will make
it much tougher to type in that next order on your computer.
A bounce from support (preferably the 50-dma) will make for your
best entry, but make sure that volume is confirming the
reversal.  Although NTAP has earnings scheduled for the middle
of August, this play may turn out to be short-lived.  Accordingly,
if you get a good entry and have a profit, don't hold on for the
home run.  This will be a good candidate for taking profits
quickly, so you don't get caught in the next decline.  This play
is a prime example of how stop losses can save a trade.


How about that volume?  Today NTAP saw a surge in volume as it
appears a floor is being built by buyers.  This is encouraging
as we are more than ready for a bounce.  A move over $90 would
be a bullish sign for a quick rebound play.  Just remember to
keep it quick as another rollover in the stock we be lingering
in the coming weeks.

BUY CALL AUG- 85*NUL-HQ OI= 307 at $ 8.50 SL= 6.00
BUY CALL AUG- 90 ULM-HR OI= 737 at $ 6.13 SL= 4.25
BUY CALL AUG- 95 ULM-HS OI=1450 at $ 4.50 SL= 2.75
BUY CALL SEP- 90 ULM-IR OI=   0 at $10.50 SL= 7.25
BUY CALL DEC-100 ULM-LT OI= 805 at $14.63 SL=10.75

SELL PUT AUG- 80 NUL-TQ OI= 401 at $ 6.63 SL= 9.00
(See risks of selling puts in play legend)

Picked on July 25th at  $106.19     P/E = 447
Change since picked      -20.00     52-week high=$124.00
Analysts Ratings     16-4-0-0-0     52-week low =$ 12.44
Last earnings 05/00   est= 0.06     actual= 0.07
Next earnings 08-17   est= 0.07     versus= 0.04
Average Daily Volume = 5.09 mln

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