The Option Investor Newsletter Wednesday 08-02-2000 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/080200_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-02-2000 High Low Volume Advance/Decline DJIA 10687.50 + 80.60 10724.50 10587.50 990 mln 1582/1275 NASDAQ 3658.46 - 27.06 3753.95 3651.81 1.48 bln 1916/2058 S&P 100 783.02 - 0.99 790.94 781.51 totals 3498/3333 S&P 500 1438.70 + 0.60 1451.59 1433.49 51.2%/48.8% RUS 2000 500.22 + 2.45 501.95 496.41 DJ TRANS 2874.54 - 0.90 2876.34 2854.50 VIX 22.76 - 0.11 22.84 22.15 Put/Call Ratio .50 ****************************************************************** Sellers Ambush Yet Another Rally Hiding at every rally top are sellers that keep the NASDAQ's technical picture looking bleak. Today was the third spoiled rally attempt in the past four trading sessions as buyside conviction wanes. Choppiness continues to be the theme in the NASDAQ with fairly wide price swings. The onslaught that the sellers brought to the market late in the session was directed at many of the NASDAQ generals. CSCO traded down $2.25 to the critical $60 level. DELL gapped down on a downgrade and finished off $2.00 at $39.56. INTC felt the weakness also, losing $1.88 to $62.75. JDSU lost $4.25 to close below its 50-dma at $112.63. The theme: the big-cap leaders are feeling the selling heat as traders sell the rallies. If you haven't noticed yet, I am very tech oriented. The NASDAQ is the market to me. And the sentiment for this index is deteriorating with every downtick. This growing negative trend is, as Jim has pointed out, seasonal. I won't go on about the seasonal factors that attribute to the recent trading pattern, as they have been rehashed over and over in the Market Wraps. What is important though are the results of these factors. Thin, choppy trading, more exaggerated moves, and a lack of true buying conviction. Does this mean that the markets are doomed? Not at all. We are just experiencing typical summer trading. And as a trader, this provides plenty of opportunity, yet caution is necessary. Because of the lighter volume, market moves can occur much quicker and more dramatically so short-term psychology is essential. Take your profits when you have them and cut your losses before they get too steep. If short-term trading isn't viable right now, go to cash. The silver lining of summer trading is the tremendous bargains that come about after the selling, especially with the blue-chip tech stocks like those previously mentioned. Build your treasure chest and make that shopping list as buying opportunities will follow. Until then, prepare for a rough ride to the FOMC meeting on August 22nd. With earnings season all but over, the focus will be on interest rates and the Fed. Every piece of economic data is analyzed, digested, and questioned. Today was a perfect example of how investors and traders are indecisive at best when it comes to economic data. New Home Sales came in below market expectations at 829K vs. 868K, the lowest level in two years. The markets jumped up on the news released a half hour into today's session and the sailing appeared to be smooth. But this is just one piece of the puzzle. Waiting in the wings is Friday's Nonfarm Payrolls and the Unemployment Rate. The NASDAQ spent most of the day near 3750, a recent resistance level that sellers have held. It was in the last hour of trading that the sellers ambushed the tech index and dropped it to the lows of day. So what's happening here? Technical trading. Traders are staging calculated trades at key support and resistance levels. Most importantly, they are selling the rallies. This should be triggering red flags and caution lights. In the 30-minute NASDAQ chart below, since we have broken the 3850 last Friday, you can see that we have entered into a new range. Last Friday's attempted bounce failed on GDP concerns. Monday was a classic dead-cat bounce as the bears snatched back those gains on Tuesday. And today, we got both sides of the action all rolled into one session, closing off 27 points to 3657. The question for the rest of the week is: Can the NASDAQ hold 3650? I would be amazed to see the NASDAQ hang onto 3650 in August. On Monday, the morning dip took the NASDAQ to 3615. I mentioned last week that the NASDAQ probably had its sights set on the 3580 level, the June 1st close prior to the gap up. Many analysts on the Street forecast the NASDAQ to test support in the 3500 to 3550 range. Volume has been declining and tells us that these pseudo rallies aren't with conviction. Today the NASDAQ volume was only 1.46 bln, not very strong. Should we be hanging our heads in dismay? Heck no! We are option traders and must seize this chance. Trading in QQQ puts has been very profitable in this recent decline. Notice below how $90 on the QQQ's has provided very profitable intraday entries for quick trades. This is one of my favorite trades, if it goes my way, because not only do you benefit from the intrinsic value, but the volatility increases as the market sells off. As a result, in general, you are selling higher volatility on the exit side of the trade. It's a win-win situation, but timing entry and exit points is essential. The NDX.X, the NASDAQ 100 index, closed below the key psychological level of 3500, finishing at 3490. Watching some of the NASDAQ 100 companies is a good way to gauge the overall market sentiment, and to trade the QQQ's. As I mentioned earlier, CSCO is trading near its critical support of $60. Many consider its health as a bellwether for the tech outlook. INTC also fell to the hands of profit takers and closed right at the low of the day. However, the big news of the day was DELL. U.S. Bancorp Pipper Jaffrey downgraded the hardware heavyweight to a Buy from a Strong Buy, stating that a 30% forecasted revenue growth is "unsustainable." They also cited concerns about weakness in the desktop business. As the hardware stocks continue to stumble, DELL below the key $40 level, closing at $39.56, a level not seen since February. The Biotechs had a good day today, minimizing the overall losses on the NASDAQ. Leading the charge was PDLI(+15.19), MLNM(+5.56), and HGSI(+3.63). Yesterday, PDLI posted better-than-expected earnings of $0.23, beating the Street by 5 cents, buoyed by higher sales of humanized antibodies that are made using their technology. What about the INDU? I don't know, you tell me. Seriously, the INDU has put together two days of back-to-back gains that actually has made the chart a little bit attractive. After holding the key support level of 10500, minus the intraday candlesticks below, the INDU launched from there to stage what appears to be a decent rally. The index has received a nice boost from the financials, elevating it 200 points in just three days and poising it to challenge that difficult resistance at 10800. Yet, before heading to this point, the 200-dma lies at 10769 and may turn out to be a level of contention. If the buying interest continues in the financials, the INDU very well may take a shot at 10800. This would further drive the divergence between the NASDAQ and the INDU, which we haven't seen since the Spring. LEH lead the way, adding $5.75 to $118.50 after Bear Stearns raised its rating to a Buy from an Accumulate. Tagging along were: MER(+1.38), MWD(+1.25), and BSC, up $3.38 to a 52-week high of $58.63. Overall the INDU was very strong today with XOM(+2.88) on news that oil inventory levels were significantly lower than thought. Summing up the positive sentiment on the INDU is that INTC was the biggest loser on the day with a loss of $1.31. Not bad at all. Tomorrow, traders will be looking for follow through to confirm the INDU's strength. After the close today, Gap(GPS) warned that it will miss earnings estimates of $0.23 by 2 or 3 cents. GPS is down over $5 in after hours trading and may be a drag on the markets tomorrow. Looking forward, Initial Jobless Claims will be released at 8:30 am EDT tomorrow as a precursor to Friday's economic data. Given traders' recent indecision, they may or may not react, but with the lack of any clear catalysts and concern over interest rates, the markets will most likely gyrate as it digests the data. I expect volatility to increase with the lack of positive news to drive the markets. Technical trading will continue to be the trend. Buyers beware: opening any long positions should be done so with extreme caution. The sentiment here is short-term bearish and I certainly will stay close to my QQQ puts. If it doesn't feel right, then stay on the sidelines in this choppy market. Remember that this is typical summer trading and patience will pay off in the Fall. Take your profits quickly and when in doubt, stay out. 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.sungrp.com/tracking.asp?campaignid=164 ***************************************************************** *************** ASK THE ANALYST *************** Okay, we might be a little early. By Eric Utley But, let's review how to pin point a market bottom. I recall that we had a similar discussion several months ago after the spring bear wreaked havoc in the Tech sector. However, in light of last week's sell-off, and the current tug-of-war between the bears and bulls, I thought it might be pertinent to review how to spot the next big bull. I received a fantastic e-mail from Richard, who also requested ITWO below, which read as follows, "Now that the summer doldrums are here and the markets are potentially at the bottom or close to it what are some of the technical indicators and fundamentals we should be watching to figure out where the bottom is and hence when this whole thing will turn around?" Great question Richard! For a bottom to form, the market needs to wash out the weak hands. That 'cleansing' usually takes place with a capitulation in selling, which is marked by a big down day on heavy volume in one or several of the major market indices. The heavy selling generally induces more fear in market participants, which is measured by the VIX or the CBOE equity Put/Call ratio. I tend to agree with Jim, in that, I don't think we are quite there yet noting the relatively low levels of the two aforementioned indicators. Once the final sellers have been weeded out by the market, the next crucial step is to watch for an attempted rally. A major index needs to rally by 1 to 2% on increased volume. The most important step in pin pointing a market bottom is to watch for a follow-through day to the initial attempted rally. A follow-through rally should take place between 4 to 10 days after the initial rally attempt on increased volume. It is important for the market to hold its ground and not sell-off after the initial attempted rally. It's also important for the market not to run ahead of itself after the initial rally, otherwise you might get caught in a bear trap. To summarize, look for the last of the sellers to be removed on a big down day, watch for an initial attempt at a rally, and most importantly, look for the follow-through to the initial rally, which is signaled when a major index rallies 1 - 2% higher on heavy volume 4 to 10 days after the initial attempt. The preceding events took place when the NASDAQ rallied over 35% from its bear-market lows to its July peak. Be patient, and wait for the bottom! We have several great requests to go over tonight, which might include a few future winners. I have also continued our revisit of past successes with SANM below. If you have a favorite past winner from this column, or a future prospect send your request to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- I2 Technologies - ITWO Is this a viable play for a channeling stock? I see just above 110 as the current bottom looking to form by the end of next week and then turn back up. The trading channel seems to be narrowing...what does this indicate? Thanks. - Richard Two more great questions Richard! Let me address the former inquiry first. But, before we delve into a strategy discussion, let's review ITWO's fundamentals, which will help us to better game the stock. ITWO is one of the premier players in the B-2-B arena; I might add a very profitable player too! The company has a history of surpassing EPS estimates by a wide margin, and is expected to grow its earnings at a healthy 43% clip over the next five years. ITWO's stellar earnings history and expected growth makes the stock an attractive candidate for a long-term investor who believes in the viability of the Internet, especially B-2-B services. The company recorded its highest revenue growth rate to date when it reported its second-quarter results two weeks ago. ITWO's CFO told analysts that he expected their record growth to accelerate into the end of the year. If those remarks hold true, ITWO is a viable play at its current levels. After all, earnings are the main driver of stock prices! However, although ITWO has an excellent earnings history and an exquisite expected growth rate, there is no hiding the fact that the stock is expensive. At its current levels ITWO trades with a forward looking P/E north of 280. That lofty valuation makes the stock highly subject to fluctuations in the NASDAQ. Proof of my postulate came today when the NASDAQ rolled over in the final hour of trading. ITWO was doing quite well this morning when the NASDAQ was trading higher, but, when the Tech-heavy index rolled, ITWO was the first to fall. My point is the NASDAQ needs to cooperate if ITWO is going trace a new high in its ascending channel. Now let's tackle your second question Richard. The narrowing channel that is evident on the chart reflects an increasingly tense battle between the ITWO bulls and bears. The compressed trading, commonly referred to as a 'coiled spring', weeds out the week hands on either side of the market. By that I mean the weak longs and weak shorts are shaken out before a big move in either direction. That 'big move' will most likely be dictated by the direction of the NASDAQ. If the index continues to stumble, ITWO could break its string of higher lows, which might present a trading opportunity on the short-side. An extended rally in the NASDAQ might boost ITWO into breakout mode, which might present opportunity from the long-side. Either way, it's crucial to confirm either a breakout or failure with heavy volume, which would suggest the move has conviction. Otherwise, you run the risk of becoming a 'weak hand'. ---------------------------- Artesyn Technologies - ATSN Please provide your outlook on ATSN, FBCE, CYBE. Thanks. - Vishal Welcome back Vishal! For our new readers, Vishal has requested two stocks in the past - PWER and TRMB - which went on to be big winners after we reviewed them. The pressure is on Vishal, let's see if you can make it three-for-three. Of your three requests, I chose ATSN because of its impressive relative strength, and because of the industry it operates in, which is coincidently very similar to PWER. ATSN is a leading supplier of power conversion products and communication subsystems. At the heart of ATSN's operations is the manufacturing of power conversion systems. ATSN's systems convert electrical power to the right 'level' for file servers and network switches to operate. To put it in laymen's terms (my terms), ATSN provides the juice for the Internet to run. The company has an all-star list of customers, which include HWP, JNPR, NT, ERICY, and IBM. Its fundamentals look great; low level of debt and a healthy cash position on the balance sheet. EPS should grow around 22% over the next 3 - 5 years, and the stock is still relatively cheap with a PEG around 1.50. The company does have a choppy earnings history with two misses in its last three quarters. However, the recent earnings shortfalls were a result of ATSN's restructuring to focus on higher growth markets, which increased research and development costs and sliced into earnings. If the company can get back to delivering steady earnings growth, ATSN will be a stock to watch. The real risk I see with ATSN right now is trying to pick a good entry point. Turning to the technicals, you can see the stock doubled from its lows in late May. It has since sold-off to consolidate its recent gains. I'd like to see the stock consolidate between $30 and $40 for a couple of weeks, and then watch for a breakout on heavy volume to new highs. The decreasing volume is indicative of consolidation, and should continue to fall as ATSN churns. Be patient and wait for the breakout above $40! ---------------------------- VerticalNet - VERT I would like to read your analysis about VERT. - Richard VERT operates and owns 57 Web sites that cover a broad spectrum of industries. The company builds and manages Internet communities in an attempt to deliver specific business needs. Including industry-specific information and a platform to complete transactions. There is no doubt that VERT has developed and implemented very novel and useful solutions for businesses across a wide variety of industries. However, they have yet to turn a profit. In fact, their losses are increasing from quarter-to-quarter. The B-2-B sector, similar to the humbled B-2-C sector, is built on the promises of future profits. And, although the company reported a 95% sequential jump in revenue last week when it reported its second-quarter numbers, the sales figures fell under heavy scrutiny, hence the recent 20% drop. The debate centered around the fact that VERT derived 54% of its Q2 revenues from NECX.com, which is actually an offline exchange where people trade orders for semiconductors. Ironically, VERT - supposedly a B-2-B - derives half its revenues from a real world operation, which makes it hard to justify its 22 times revenue valuation. The other half of VERT's revenues comes from online advertising, which is shaky to begin with. The current quandary that VERT is mired in, combined with the fact that the company is still losing money from operations, gives me reason to pause. If the NASDAQ weakens into the fall, it is very likely that VERT could revisit its spring lows near $30. I think a prudent plan of attack would be to wait for the current controversy to clear, and listen for upside revenue guidance from VERT. If the company's business model is accepted by Wall Street, the stock could rebound very quickly. VERT is, after all, a favorite among momentum investors. Another item I find very interesting is the wide margin in VERT's earnings estimates for 2001. The consensus estimate is for VERT to lose a penny next year. Yet, the high estimate is +0.13 and the low estimate is -0.80. That wide margin leaves plenty of room for a surprise one way or another. Wait for some guidance from VERT and listen to what the market has to say about the current debate surrounding the company's business model. The four-month consolidation might provide a good entry point if VERT gains Wall Street's approval. ---------------------------- TriQuint Semiconductor - TQNT Please give your analysis of this stock. Thank you. - Anonymous I have to hand it to Jonathan Joseph of Salomon Smith Barney when he downgraded the entire Semiconductor sector in early July. Although I didn't like the call at the time, he was pretty accurate in forecasting a downturn in the Chip stocks. Since Joseph's call, the Philadelphia Semiconductor Index ($SOX) has shed 10%! Almost every chip-related stock moves in unison with the broader sector because their respective businesses are so dependent on one another. Only time will tell whether Joseph was correct in calling the top in the Chip stocks. But, it is evident that uncertainty looms in the Semi sector. We need look no further than the recent action in TQNT to prove that point. TQNT absolutely blew past estimates when the company reported its second quarter results two weeks ago. TQNT reported 19 cents a share, the consensus estimate was 13 cents! The day TQNT reported its numbers the stock closed around $53. It has fallen over 30% since surpassing estimates by 46%. What a reward! Not! So what gives? Many on Wall Street have suggested that the blowout numbers reported by the Chip companies were already factored into the stock prices. When you combine those high expectations with the prospects of a slowdown, and several high profile warnings, you have the recipe for a sell-off. Additionally, the Chip stocks actually peak 6 to 9 months before demand for chips actually slows. So, the slightest hint of a slowdown can send the Semi sector south. Now, it's not all gloom and doom in the Chip sector. For starters, the summer season is typically a very slow time for the Semi business. As for TQNT, the company is somewhat insulated from the cyclicality of the industry because it manufactures highly specialized communication chips that are made from a material known as gallium aresenide, which differs from the typical silicon chips. TQNT's recent sell-off gives the stock a relatively low 2000 PEG of 0.34. And, earnings are expected to grow by another 33% next year. The recent dip might prove to be the entry point of the year, if and only if, the outlook for the Chip sector improves. I can only suggest to wait for TQNT to stabilize and wait for the Chip bulls to return. ---------------------------- Sanmina - SANM We picked up on SANM in late May, just after the spring bears were finishing up their "work" in the Tech sector. The stock had held its own relatively well, despite the sweeping damage in the rest of the Tech sector. On May 31st, I wrote, "There are a few bullish items for SANM going forward. The company is steadily growing earnings and selling at a reasonable valuation." At the time, SANM had a 2000 PEG of 0.80. To reiterate, a PEG below 1.0 is generally considered cheap. The company surpassed estimates by 8% when it reported later in July, which kept its string of better-than-expected earnings announcements going. As with many of our past winners in this column, the recurring themes with SANM were increasing earnings and a modest valuation. The third component which makes for a winning stock is a strong technical position. Looking back on the chart, you can see how SANM cleared two resistance levels in two consecutive days on increased volume, ultimately climbing as high as $102, 62% higher from our initial review point! The old axiom of 'buy high and sell higher' comes to mind when looking back on SANM. By revisiting our past reviews I'm not trying to 'toot' my horn, so to speak. I'm simply trying to pin point what lead to the success of winning stocks. SANM marks the second winner we have revisited, with the first being PWER last week. Both stocks had similar fundamental and technical characteristics which led to their respective rallies. Next week I'll dig up a winner with a somewhat different path to success. ---------------------------- 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 *********** Get In Sync By David Popper These are times that try a trader's soul. Many positions are underwater. People are leveraged and anxiously await every economic number that comes down the pike. Do I buy before the next report or do I sell? Is the market ready to collapse or do I buy the dip? How can I make sense of this crazy market and how can I profit? Welcome to the world of trading. You see, long term investors do not have any of these worries. They figure that holding for 20 years will sort out the short term mess. And do you know what- they are for the most part correct. Am I advocating a buy and hold strategy? Of course not. There are some things that long term investors do that are worth emulating. If we can take the good things that they do and use short term techniques to maximize returns, we may be able to make trading less time consuming, more profitable and more enjoyable. Again, if you have hours to spend on trading, there are endless strategies which would be more profitable. I need techniques that fit into an otherwise full schedule. 1. Successful long term investors only buy stocks which should be viable over the long term. If the stocks that you trade are leaders in a fast growing segment of the economy, they should survive short term downturns. As stated before, I limit my purchases to stocks with an EPS of 80 and an RS of 80. 2. Successful long term investors only invest money that they do not need for at least a year or longer. Stocks go up and stocks go down. There will be months where things just do not work out as planned. You do not want to be in the position of being required to liquidate positions that are down merely because you do not have enough reserve. 3. Successful long term investors do not allow any one position to grow to the extent that its demise will capsize the portfolio. Any one position can suffer horrendous short term losses even if it is a quality stock. Remember QCOM? Too much QCOM would have been great in 1999, but not so good in 2000. I believe that if the above long term paradigm were employed combined with short term techniques of understanding basic chart patterns, support/resistance, and basic options techniques like covered calls, naked puts, and LEAPs, much of the pressure that short term traders face would be relieved. The short term techniques would enhance the return, while the long term perspective would only allow the trader to trade solid issues, which normally survive downturns. When trading solid issues, dips become buyable and the next economic number is not as critical. Speaking of dips, it appears that opportunity is beginning to knock. Some stocks are beginning to show some signs of basing. Many great stocks are on sale. Remember last November and December when you read that a particular issue had run 50% since it bottomed? Remember thinking that it would have been nice to have the opportunity to buy in at those levels? We may be getting near that time. Yes, stocks could still go down, you can't guess the bottom. We may even have a wash out, but it is not too early to have a buy list ready to go. Don't worry if you buy too early. If you are buying quality, it will rise and maybe to some excellent gains. As Winter gives way to Spring, so will a seasonal downturn give way to a decent rally. I'm not saying to purchase tomorrow. I am saying that opportunity for a great purchase in market leaders may be quickly approaching. A purchase of quality on sale can lead to magnificent gains. These times are the whole reason that I keep cash in reserve. Welcome a significant downturn as a buying opportunity. This will keep you in sync with the market. Contact Support ************** TRADERS CORNER ************** Questions Answered By Austin Passamonte Let's wrap up the week answering a few of the most common questions I receive and a few other tidbits as well. First, a note from Kathy Black directs us to an alternate option chain from cboe.com: Try using "Yahoo Finance" for options. They now offer options and it is so much more user friendly than the CBOE site which I had used for years before this one became available just a short time ago. Faster download and you don't have to page forward for more options. Each month (LEAPs, also) is displayed separately and you choose which one. Thank you Kathy. We'll take a peek over there and see the difference ourselves! Austin, In Monday's (7-31) newsletter column you referenced a recent call to put ratio of 224.1:1 at the OEX 825-900 level. You said that this would exert downward pressure should the OEX trade that high (a "long squeeze"). My question is why. Is it because market makers purchased stock to hedge these positions and would sell the stock as those calls were sold? Thanks, Vernon M. This topic has generated more e-mail volume than I've received in quite some time. Can we surmise there isn't much written about the topic to date? It's a complex, involved subject beyond the scope of this format or me to fully explain. However, a key point to keep in mind is the difference between option contracts versus stocks or futures is the Greeks impact on options. When a market-maker for stocks goes long at the bid or short at the ask his delta to be offset is a factor of one. That's because stocks move at a one-to-one ratio as a "cash market". On the other hand, when market makers go long or short options in order to pocket bid/ask spreads the range of deltas can be from almost one to the tiniest fraction depending on how far in or out of the money that option is, time remaining until expiration, etc. A market-maker's primary objective is to create a delta-neutral hedge position on every trade he takes, thereby locking in a guaranteed profit of the bid/ask spread. Simple as that. This means that market makers wishing to hedge a stock position with options may need to buy more than one option contract per round lot of stock, depending on Greek factors. By the same token more than one option can be offset with one round lot of stock in the opposite scenario. Clear as mud? There are delta-neutral strategies in the option world we traders can implement to essentially achieve the same thing. Chris Verhaegh's "Aztec" trades are one of those. By the time that baby's complete he's just about locked into sure- fire profits. This does take some advanced skills and Chris sure has them. I saw him whip off numbers of complex math equations faster than this AMD 700 processor is capable of! Folks, I'm on the other end of that mathematical ability. I realize many people in this world are much more analytical than myself. There is plenty more to this topic by a wide margin than I understand or care to discover. Just like my Dodge Intrepid, I have no clue what the engine's firing sequence is or any other details about the drive train's inner workings (cause). Nor will I delve into a mechanic's manual to find out. When I turn the key and hear the motor purr the results of that (effect) are all I care to know. So sums up my coverage of open-interest resistance and support. We know what to look for and how it might operate, that's all it takes for us to use it while trading. Further study for knowledge' sake has my blessings and have at it if you will! *********** (edited for brevity) Responding to the request for follow ups in your July 24 column, using your trading model with daily charts I waited until Tues July 25 when I thought the MACD crossover and histogram signals were stronger and bought OEX Aug 790 puts @ 11and QQQ Aug 93 puts @ 4.25. Sold the OEX puts for 18.75 and the QQQs for 7 on Friday July 28! Thank you OIN for making this possible. My plan is to paper trade some stocks with 60 minute charts for a while and initiate trades when I feel confident with this shorter time frame. Thanks again for the great advice. I sincerely appreciate the high quality content and trading information conveyed regularly at OIN. Ed Urovitz We've received a bunch of testimonials from traders trying the oscillator models portrayed in recent articles. Most have been glowing reports and I'm thrilled to hear that. Of course we do welcome all tales of false signals and woe if they exist also. Here's a very common question I receive: Dear Austin: First I really enjoy your writings, but I find myself even more confused than before. I really studied your article on 7/10 "Lets Perfect A Trading Model". It was very informative and I thought I understood it. But I'm having trouble with the analysis of a number of stocks that give different signals depending on the time frame I use. Example: Thursday July 27 Network Appliance (NTAP)30 minute chart screams buy a call.... via the Bollinger band, MACD, Stochastics and RSI. (These are the three major indicators I have found most effective) The 60 minute chart also is very close to a call, but the daily chart reads like should be looking at puts. What kind of indication do these three charts give me? Please let me know if I'm misunderstanding many of the points you made in the article. Thank you, Rich R. Well Rich, you clearly have a handle on things. My look at these charts show where NTAP rose from $80 to near $90 via it's hourly chart signal before pulling back a bit. Meanwhile the daily chart continues to warn of a sell. What gives? These different time frames depict waves of price action within waves as Gann theory implies. To put it in plain language, the daily chart shows us what stage the overall move is in while hourly and intraday charts signal corrections within that overall trend. For example, NTAP remains in descent from oversold and will likely post lower-lows before forming it's next bottom to rally from. Meanwhile, there are and will probably be more short-term bounces we can trade. Position traders keying off daily charts can take the clear signals, buy distant-month options and wait for the trend to reverse. This will result in big winners from the limited amount of signals issued. Such trend moves can easily take weeks to go from top to bottom or bottom to top. Staying power is imperative, patience are a must but massive profits with lowest risk of all directional trading is the reward. On the other hand, active traders can play each bounce within the overall move by trading hourly charts. Expect to be in these plays no more than four-five sessions if not fewer. We must remain cognizant of the daily chart trend and be prepared to exit with careful stop usage. Hyper-active traders can use 30 minute charts to scalp a few points from intraday moves with quick, nimble entries and greedless, pre-determined exits. Be happy with small gains, keep stops tight and enjoy the action. On the rare occasions all charts align you have what I consider a lead-pipe lock to win in front of you. Be careful not to use x-ray vision on these charts, the kind that let's you see trade setups that aren't actually there yet. I have finally thrown my pair of x-ray glasses away for good after discovering them to be the most expensive eyewear I've ever sported, bar none! ******* Two great books every trader should have can be found right here in the OIN "bookstore" link. "Tricks Of The Floor Trader" by Neal T. Weintraub and "The Trader's Edge: Cashing In On Winning Strategies Of Floor Traders, Commercials & Market Insiders" are must-read books. They depict and explain tactics and mindset of Market Makers and Commercial traders, the most successful groups in the game. Enter these in the title search box and order your copies today. I've found each to be invaluable trading resources worth many times the discount price found within this site. Enjoy your market study and we'll see you next Monday! Best Trading Wishes, austinp@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** FRX - Forest Laboratories $113.06 +0.88 (+3.00 this week) Forest Laboratories develops, manufactures and sells both branded and generic forms of ethical products which require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter, which are used for the treatment of a wide range of illnesses. Forest products are marketed principally in the United States and western and eastern Europe. Marketing is conducted by Forest and through independent distributors. Most Recent Write-Up FRX has been somewhat of a roller coaster ride yesterday and today, setting a low of $105.75. With that said, the stock still has its sights set on Thursday's intraday high of $114.50, breaking through resistance at the 10-dma of $108.16 and the 5-dma, currently $110.58. FRX found its feet and rallied to $111 on a strong volume move shortly after the open. The stock encountered intraday resistance at this level until a break through later in the afternoon. With a $2.00 rally in the last 40 minutes today that pushed FRX to its day high, the play is still intact as FRX continues to show bullish signs. For conservative traders, look for a move that convincingly drives the stock through today's high of $112.94. For those who are feeling more aggressive, look for bounces off of the 5-dma of $110. With three key economic indicators coming out at the end of the week which could re-ignite interest rate fears, make sure the buyers are present to continue this uptrend with strong volume. Comments Bucking the market trend once again, FRX continues to attract buyers as investors flee the tech sector. On Wednesday, FRX trended steadily higher, finding intraday support at $112 on three different occasions. Entry into this play can be obtained by watching to see if the stock can hold this short term support level at $112. Any strong volume bounces from there would be good entry points. A further pullback could take FRX to the $109 - $110 level, near the 10-dma at $109.19. Bounces from here would be attractive entries. More conservatively, a renewed, high volume move through $113.50 to $114 would allow entry. BUY CALL AUG-105 FRX-HA OI= 51 at $10.63 SL=8.25 BUY CALL AUG-110*FRX-HB OI= 57 at $ 7.13 SL=5.50 BUY CALL AUG-115 FRX-HC OI=340 at $ 4.38 SL=3.25 BUY CALL SEP-110 FRX-IB OI= 3 at $10.63 SL=8.25 SELL PUT AUG-105 FRX-TA OI= 39 at $ 1.88 SL=2.75 (See risks of selling puts in play legend) Picked on July 27th at $113.50 P/E = 84.30 Change since picked -0.44 52-week high=$114.25 Analysts Ratings 7-7-5-0-0 52-week low =$ 41.75 Last earnings 07/19 est= 0.27 actual= 0.31 Next earnings 10-19 est= 0.50 versus= 0.32 Average Daily Volume = 695 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The Market Rotation Continues... Industrial stocks rallied again today as investors transitioned to a defensive posture amid fears of a slowdown in the economy. A favorable housing report provided the market with a positive outlook. New home sales fell last month by 3.7% to 829,000, a figure much lower than consensus estimates. The slowing housing demand surprised analysts by falling to its lowest level in more than two years. A recovery in bellwether issues helped the Dow achieve recent highs with IBM and Hewlett-Packard leading the blue-chip rally. Today's bullish activity spilled over to the slumping technology group with new buying interest emerging in the Internet and semiconductor sectors. The broader equity market experienced heavy trading in oil and oil service shares in the wake of an unexpected plunge in crude inventories, which boosted oil prices. Brokerage stocks moved higher along with major drug and biotechnology issues. Paper, Computer software and banking stocks were generally lower. While the stock market outlook is difficult to assess, most analysts are very optimistic about the future of the technology sector. With the prices of many of the leading issues approaching bargain levels, it may be time to begin speculating on the companies that will dominate the "new economy" in the coming years. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CALP AUG 50 47.84 59.75 $2.16 6.0% ITWO AUG 115 109.00 119.56 $6.00 5.6% VRTA AUG 55 52.18 57.69 $2.82 4.4% Nearing support AETH AUG 155 149.25 152.28 $3.03 2.7% At support GMST AUG 60 56.06 55.50 -$0.56 0.0% At support VSTR AUG 135 127.25 123.06 -$4.19 0.0% Range bound NTAP AUG 90 85.44 76.94 -$8.50 0.0% Close? AWRE AUG 50 47.00 38.13 -$8.87 0.0% Close on rally? ARTG AUG 100 95.25 83.56 -$11.69 0.0% Ouch! Note: ARTG's move through its 50 dma on Monday was a logical exit signal. AWRE's move through its 150 dma last Friday is another example. Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CALP AUG 45 43.88 59.75 $1.13 10.9% VRTA AUG 55 53.81 57.69 $1.19 9.6% VRTA AUG 50 48.38 57.69 $1.62 8.4% GMST AUG 50 48.87 55.50 $1.13 7.7% TIBX AUG 90 87.63 100.50 $2.37 7.5% AMCC AUG 120 118.31 128.88 $1.69 6.5% Filling the gap? AETH AUG 135 133.19 152.28 $1.81 6.3% MACR AUG 75 73.32 78.50 $1.68 6.2% Scary... ITWO AUG 95 93.31 119.56 $1.69 6.1% MERQ AUG 85 83.32 93.38 $1.68 5.8% SAPE AUG 85 83.56 120.81 $1.44 5.7% VSTR AUG 110 108.31 123.06 $1.69 5.6% MERQ AUG 80 78.87 93.38 $1.13 5.2% NTAP AUG 80 78.12 76.94 -$1.18 0.0% Time to exit? ARTG AUG 88 85.62 83.56 -$2.06 0.0% Free fall... CLRN AUG 45 43.50 40.00 -$3.50 0.0% Close? AWRE AUG 45 43.75 38.13 -$5.62 0.0% Close on rally? Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MRVC AUG 100 102.44 53.38 $2.44 19.4% MUSE AUG 195 196.31 120.75 $1.31 5.9% HWP AUG 150 151.00 112.50 $1.00 5.7% 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 *************** CALP - Caliper Technologies $59.75 *** Favorable Judgment! *** Caliper Technologies is engaged in the field of "lab-on-a-chip" development. They believe their Lab-Chip systems can assemble the power and reduce the size of entire laboratories filled with equipment and people. Their high throughput systems perform experiments in a serial, continuous flow fashion at a rate of 5,000 to 10,000 experiments per channel per day. Shares of Caliper Technologies rallied in July after a federal court accepted Caliper's interpretation of key terms in a patent suit filed by Aclara. The court ruled in favor of Caliper on the meaning of the most critical terms of Aclara's patent claims and based on the ruling, the company expects to file a motion for summary judgment in an effort to bring an early resolution to patent suit. The companies are currently involved in a number of lawsuits. Aclara initiated this patent suit in April 1999, and Caliper has filed two suits against Aclara, one in March of 1999 alleging trade secret misappropriation and another this year alleging infringement of five patents. Technology patents are a major portion of the company's value and they have added substantially to their portfolio with four new additional patents this quarter. These patents expand the breadth and utility of chips for their personal laboratory system and high throughput systems, cover manufacturing processes as well as novel chip designs and architecture. Currently, the company has 59 U.S. patents issued, another 16 allowed, and 150 in the pipeline. Based on the recent bullish activity in the issue, investors must believe the company is one track to deliver future profitability and our position offers an excellent reward potential at the risk of owning this unique issue at a favorable cost basis. CALP - Caliper Technologies $59.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 50 DQQ HJ 153 11.25 48.50 5.9% *** Sell Put AUG 45 DQQ TI 109 0.69 44.31 10.4% *** Sell Put AUG 50 DQQ TJ 106 1.69 48.31 20.3% Chart = ****** ENE - Enron Corporation $77.63 *** A Unique Company! *** Enron Corp is an energy and communications company. Enron is engaged in the transportation of natural gas via pipeline to U.S. markets, as well as the generation, transmission and distribution of electricity to markets in the northwestern U.S.. Enron also markets natural gas, electricity and other commodities and related risk management and finance services worldwide. Enron additionally deals in the construction and operation of power plants, pipelines and other energy related assets worldwide, as well as the the development of an intelligent network platform to provide bandwidth management services and deliver high bandwidth applications. Enron is a unique company, positioning itself as a broadband network operator, a broker of bandwidth and a service provider. Using its network of natural gas pipelines as a guide, Enron has installed fiber lines for what it calls an "intelligent network platform," that can provide bandwidth management services and deliver high-bandwidth applications. The company is on target to have its initial network backbone platforms in place by the end of the year. The move into broadband networking and service delivery is the new foundation for Enron's long-term approach to success in the "new economy." From a trend and momentum viewpoint, today's move suggests there may be additional upside potential in the future of this issue and a cost basis near technical support will suit us just fine. ENE - Enron Corporation $77.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 75 ENE HO 7250 4.75 72.88 5.5% *** Sell Put AUG 75 ENE TO 3118 1.88 73.12 11.8% *** Chart = ****** IDPH - Idec Pharma $134.44 *** New Trading Range? *** IDEC Pharmaceuticals is a biopharmaceutical company engaged in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. Their initial commercial product, Rituxan, and its most advanced product candidate, Zevalin are used in the treatment of certain B-cell non-Hodgkin's lymphomas. They are also researching drugs for the treatment of various other diseases (such as psoriasis, rheumatoid arthritis and lupus). Idec is one of the leading companies in this volatile industry and among institutional Bio-tech investors, it is also one of the top portfolio holdings. Technically, the issue is showing increasingly bullish strength and today's move above the July (and late March) high on good volume suggests a new trading range is being established. We favor the support provided by the recent consolidation near $120 and the bullish technical outlook. IDPH - Idec Pharma $134.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 120 IDK HD 380 17.50 116.94 5.0% *** Sell Call AUG 125 IDK HE 704 14.38 120.06 7.8% Sell Put AUG 110 IDK TB 55 1.50 108.50 9.2% *** Sell Put AUG 115 IDK TC 183 2.06 112.94 10.8% Sell Put AUG 120 IDK TD 47 3.25 116.75 14.5% Sell Put AUG 125 IDK TE 101 4.88 120.12 18.8% Chart = ****** SAPE - Sapient Corporation $120.81 *** Big Rally! *** Sapient is an e-services consultancy providing Internet strategy consulting and sophisticated Internet-based solutions to Global 1000 companies and startup businesses. They helps their clients define Internet strategies to improve their competitive position. Sapient designs, develops and implements solutions to execute those strategies. Their services include digital business strategy development; experience modeling; creative design; technology development and systems integration. Analysts are bullish on Sapient and today shares of the volatile issue surged $16 after the company reported better-than-expected quarterly results and set a two-for-one stock split. Officials said the company earned $0.23 per share. Wall Street analysts had expected the company to earn only $0.20 per share. Deutsche Banc Alex. Brown analyst Mark D'Annolfo reiterated his "strong buy" rating on the stock and raised his 2000 revenue estimates. PaineWebber analyst Andrew Burns suggested that the sequential growth acceleration in e-services indicates enormous demand for the company's products. SAPE officials also set a two-for-one split of its common stock, payable August 28 to shareholders of record August 14, 2000. 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. SAPE - Sapient $120.81 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 95 SUJ TS 83 1.88 93.12 13.7% *** Sell Put AUG 100 SUJ TT 345 2.38 97.62 15.1% Chart = ****** SEBL - Siebel Systems $150.13 *** On The Rebound! *** Siebel Systems is a provider of eBusiness applications. Siebel eBusiness Applications enable organizations to market to and service their customers across multiple channels, including the Internet, resellers, retail, and dealer networks. They are available in industry-specific versions designed for the pharmaceutical, healthcare, consumer goods, telecommunications, insurance, energy, and many other markets. Siebel has received considerable attention from analysts in the past few months, with several initiations of coverage at the "Strong Buy" level in May and June, and a mid-July initiation at a "Buy" rating by Robinson Humphrey. The bullish reports came after Siebel's second quarter earnings announcements, showing a revenue increase from $319 million during the first half of last year, to just under $700 million for the comparable period this year. The increase in revenues bodes well for the future of the company and we agree with the optimistic outlook. SEBL - Siebel Systems $150.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 115 SGW TC 618 1.06 113.94 6.5% *** Sell Put AUG 120 SGW TD 897 1.56 118.44 9.4% Chart = ****** TUTS - Tuts Systems $86.63 *** Own This One! *** Tut Systems develops and markets advanced communications products that enable high-speed data access over the copper infrastructure of telephone companies, as well as the copper telephone wires in homes and businesses. Their products incorporate high-bandwidth access multiplexers, associated modems and routers, Ethernet extension products and integrated network management software. This company is one of our favorites for long-term portfolios and the recent demand for communications equipment providers has boosted this bullish issue out of a previous trading range. The sector trend is 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 $60-$65. TUTS - Tuts Systems $86.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 65 QSS TM 5 0.50 64.50 5.3% Sell Put AUG 70 QSS TN 42 1.19 68.81 11.8% *** Sell Put AUG 75 QSS TO 66 2.31 72.69 17.3% Chart = *************** BEARISH PLAYS - Naked Calls *************** RBAK - Redback Networks $117.88 *** Technicals Only! *** Redback Networks is a provider of advanced networking systems that enable carriers, cable operators and service providers to rapidly deploy high-speed access to the Internet and corporate networks. Their Subscriber Management System (SMS) connects and manages large numbers of subscribers using any of the major high speed access technologies including digital subscriber line, cable and wireless. Redback sells its products through a direct sales force,resellers and distribution partners. Since the recent sell-off in the technology group began, this company's share value has fallen substantially. Based on the negative short-term outlook, we are going to pursue a bearish position with a conservative risk/reward perspective. We will use the current consolidation period to benefit from overpriced option premiums. The probability of the share value reaching our sold strikes appears rather low but there is always the possibility of a recovery rally so monitor the position daily for changes in technical character. RBAK - Redback Networks $117.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 150 BKK HJ 1138 1.56 151.56 11.8% Sell Call AUG 155 BKK HK 168 1.13 156.13 8.7% *** Sell Call AUG 160 BKK HL 328 0.81 160.81 6.3% Chart = ************* ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=176 ***************************************************************** ******************* 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. 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