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Daily Newsletter, Monday, 08/07/2000

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The Option Investor Newsletter                   Monday 08-07-2000
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MARKET WRAP  (view in courier font for table alignment)
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        08-07-2000        High      Low     Volume Advance/Decline
DJIA    10867.00 + 99.20 10892.30 10737.00  856 mln   1709/1135
NASDAQ   3862.99 + 75.63  3870.26  3795.61 1.32 bln   2274/1710
S&P 100   803.72 +  7.87   805.51   794.87   totals   3983/2845
S&P 500  1479.32 + 16.39  1480.80  1460.72           58.3%/41.7%
RUS 2000  509.87 +  6.24   510.25   503.62
DJ TRANS 2894.21 +  7.40  2897.88  2877.83
VIX        21.55 +  0.01    22.08    21.23
Put/Call Ratio       .51
******************************************************************

Techs Stocks Put Life Into The Averages

Ahh, the sweet smell of a rally was in the air today, but
can volume of 1.3 billion really excite traders?  Not this one,
but even I can appreciate a rally in August.  We've now seen
three straight days of gains for the Nasdaq and five straight
winners for the Industrials.  Volume or not, the sentiment is
getting better.  You can thank the Financials too as the Banking
index continued to climb today.  This just proves the old adage
that when the Banks rally, so does the market.

In fact, I am adding a chart of the BKX.X to show just how
strong this move has been.  This is the second time in a row
that we have seen the Financials move up ahead of a Fed meeting.
You can see on the chart how this occurred in May, only to give
back most of the gains in June.  That last rally took the index
as high as 900 before running into a wall of resistance.  It
will face that same challenge again in another 33 points.  A
move above this level will be a strong bullish indicator.  Does
it have the strength for such a breakout?  Well, it hasn't made
it the past couple of attempts and, after all, it is August.
On the flip side though, traders are pointing to this rally
as the real deal since most expect that rate hikes have ended.
We will find out if that train of thought is for real on Aug.
22nd when the FOMC meets to decide the direction of interest
rates.




The DJIA traded up 99.26 points today on volume of 854 million.
That puts the blue chip index at a level of 10867.01 and right
at resistance.  Advancers beat decliners 17-11.  The S&P 500
closed at 1479.32, up 16.39.  The Nasdaq finished up 75.63 to
3862.99 on sub par volume of 1.3 billion.  The most interesting
chart of the three is the Dow Jones Industrials.  You can see
the resistance I am referring too.  In fact, it is starting
to peak its head above that level.  Again, thank the banks, but
if they stumble, the index is likely to follow.  A close above
10,900 would be bullish, but a move above 11,000 resistance
would be shocking.  You would really grab some institutional
investor's interest if that were to happen.

 


Bond prices dropped as the stocks rallied.  The 10-year was off
11/32 to a 5.95 yield.  The 30-year dropped 15/32 to 5.75.
Consumer Credit was the only economic report on tap for Monday
and it rose $12 billion in June, which was slightly larger than
the $9 billion that was expected by analysts.  While this could
have weighed on the market, traders were encouraged by the
smallest gain in credit card debt in months.  Most of the gains
came from vacations, cars and other expenditures.

Technology stocks were leading the rally, with Biotechs, Semis,
and Software as the standouts.  Financials and Utilities also
made gains.  One group that didn't fare as well was the Net
stocks.  Henry Boldget stirred things up by "resetting" his
ratings on a dozen Internet stocks.  This was part of a new,
"mature" phase for the sector, making valuations an even more
important factor.  "The tide is no longer rising fast enough
to lift all boats.  We continue to believe many sectors of the
industry are transitioning from hyper-growth to longer-term
growth and that this transition will continue to cause a shakeout
and consolidation," Blodget said.  Some of the names mentioned
for lowered revisions were EBAY, BNBN, DCLK, ETYS, SFE, and BUYX.
So there you have it, Internets are entering long-term growth
instead of hyper-growth.  Although, you aren't likely to stop
daytraders from playing this group just yet.

Online bookseller Barnesandnoble.com is teaming up with Microsoft
to open the first major Internet store selling digital books.
A Barnes and Noble spokesman, Gus Carlson, said the books would
be available for downloading and reading on a screen or in single
paperback copies printed on demand.  Microsoft, the world's
biggest maker of personal computer software, is launching the
latest version of its free software for reading on screens as
part of the deal.  Financial terms were not disclosed.  MSFT
gained $0.88 to $70 while BNBN gained $1.44 to $5.19.

Computer Associates said Monday its president and COO will take
over as chief executive, replacing founder Charles Wang.  CA also
announced it will spin off its software and services businesses
and later, its desktop accounting business and some other
technology operations.  The first spinoff will be a new company
called iCan-ASP.  They also said promoting Sanjay Kumar to
president and CEO was part of a corporate restructuring aimed at
allowing "the company to focus on its core businesses, support
stronger growth markets, enhance client services and boost
efficiency."  CA finished down $0.06 to $26.88.

Although there were many other news stories of minor importance
today, let's focus on what you will hear a billion times on
CNBC tomorrow.  That is Cisco earnings, which will be released
after the close on Tuesday.  You have to figure a solid number
is in the works for this industry leader, but will it be enough
to sustain the entire tech sector?  I would guess no.  I think
we still need a another short-term breather in the Nasdaq.
With the volume at 1.3 billion shares, it is hard to get too
excited about the gains.  I know that is the third time I have
mentioned Nasdaq volume, but it is the classic August bear
trap...a rally with no volume.  I am more content to wait for
signs of a true rally, which could begin again later this month
after the Fed meeting.

There are some economic reports due before the open, but most
expect the data to be market friendly.  Productivity and Unit
Labor costs will be the focus of traders at 8:30am EST on Tuesday.
Productivity gains will likely be strong and thus continue to
curb inflation.  Economists expect to the gains to be around
three to four percent.  With these kind of numbers, it is more
likely that Greenspan will stand pat instead of raising rates.
After tomorrow's reports, all eyes will be on the PPI due out
Friday.  This may keep the market somewhat subdued, barring
any major developments.

The VIX continues down at the bottom of the barrel, closing
at 21.40 today.  This would normally send me headed for the
hills, but it has been stuck in the low 20s for so long that
it doesn't play a major factor in my trading at this level.
A break below 20 would have me thinking short-term top though.
In all cases, play light and have your escape route mapped
before you enter a trade.


Ryan Nelson
Editor


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

Rolling Options
By Austin Passamonte

Most often I write about active trader's strategies. Make
that hyper-active in many cases! Certainly I fall somewhere in
this category. We could safely say this is option speculating,
not investing. Don't get me wrong, I'm having the time of my
life in the process but to be honest we could probably make as
much money or more in a safer manner with less effort. I'd like
to spend this week exploring a couple such ideas.

My interest in the financial world was peaked at an early age
by my uncle Tom. Now 75 years of age, he retired young after
building a personal fortune mostly by trading stocks and
antique china & glass before either became in vogue. No doubt
he took plenty of heat from peers needling him to buy & hold
each value item for long-term gains. Always the contrarian,
uncle Tom chose to buy low and sell high over and over again.

The end result was an early retirement and life of leisure
long before most conservative "investors" around him were
able to enjoy the same. This very day if you want to rile up
a feisty senior trader, mention the concept of  buy & hold to
my uncle and prepare yourself for a lecture.

Keep in mind uncle Tom did all this long before days of tech
and the NASDAQ. The only thing he had to work with are the
stodgy old issues with fewer than four call symbols. You
know the ones, "old economy" issues we discarded when tech
symbols began the roller-coaster ride traders preferred to
tame - if such a thing is possible.

Does that mean the only way to make money in trading takes
tunnel vision towards volatile tech issues? Certainly not.

Plenty of Dow and NYSE companies quietly offer excellent
mid-term trading opportunities that don't require one to
remain semi-attached to a broker. Wouldn't it be nice
if simple strategies existed that allowed small traders
to make solid returns with a bit of personal freedom as well?
Read on.

Uncle Tom and many others like him made their fortunes by
finding and trading rolling stocks. What are those, you ask?
Why, these are issues that remain trapped in distinct, side-
ways trading ranges over a period of time.

Ever seen stocks moving sideways? More equities than not behave
this way. A number of symbols form horizontal channels of
support/resistance and bounce within this zone for months and
even years. Find a few of these and trade them accordingly
as an excellent opportunity for traders with limited time.




Here's a daily chart of Citibank over the last few months. One
of those boring stocks, right? Well, it moved up from the $40s
to roll between $57 and $63 for three months before moving on
once again. What could that mean to us?

If this setup were spotted as it began near early to mid-April
we could elect to buy calls near support @ $57 and sell them
to buy puts at resistance around $63. I can feel your collective
yawns from here, but think about it; those are 10+% moves you
played both sides of several times within two months. Option
prices  on these sleepy issues are pretty cheap compared to
the high-volatility thrill riders we commonly focus on.




Stock traders in the past were mostly relegated to buying the
rally and selling near resistance only to wait for the next
roll back to support. We have a great advantage ourselves in
being able to play both sides of these predictable moves.

Not only that, we can be sure that this range-bound stock won't
remain there forever. Buying calls near support and riding them
up with trailed stops allows us to capture breakouts when they
occur. By the same token, puts bought as rallies fail held until
the next significant turn lets us ride it down when the stock falls
out of bed.

JP Morgan puts bought in June when prices stalled near rolling
support could have been followed down with trailed stops until
it bottomed a few weeks later for a 20+% stock's price move.




Even some tech issues can be found forming horizontal zones of
support and resistance although they are usually a bit more
erratic. Still, if we traded ITWO between $100 and $130 there
would be several good call & put entries as the stock turned
repeatedly.

Can we make money on stock price moves of 10% to 30+%? I'd say
so, especially on the big-cap issues where a few dollars up or
down really pushes the value of it's options.

Trading rolling stocks is best done with distant-month options.
Buy all the time you can afford; back-month contracts with at
least 90 days to expiration. LEAPs are especially good for
capturing growing intrinsic-value without it being offset by
time decay. This doesn't mean stop-loss protection is optional.
LEAPs will go down in price easily as they go up, just slower
in speed.

How can we find such rolling stocks to trade? Well, simply
scroll through a number of daily charts for non-volatile
issues and you'll turn up some candidates just entering or
moving within a new trading channel. Once we learn to spot such
moves they jump right out at us. These "boring" plays look like
EKG charts from a healthy heart patient; up and down, up and
down methodically.

Many times it will stick within support & resistance from the
past that was broken and later returned to. Others were trapped
within a specific zone before and are now in the process of
forming a new one. Such stocks tend to trade like this most of
the time - stair-stepping their way up or down over time within
semi-defined rolls.

Also, if a stock was previously trading within a 10% channel
and it recently broke higher the first 10% pullback from the
next high price will likely be a good call-entry as it attempts
to form the next roll. Curiously, these types of stocks often
keep to a traditional trading range. If they were a $50 stock
and traded from $45 to $50 for awhile before moving up to $70,
they will probably enter a $7 swing from here. The $100 range
can be guessed to trade within a $10 swing, etc.

Why would anyone want to hunt out these tortoises when there
are numerous stocks in play that move 10% weekly, daily or even
intraday? Simple. Time availability plays a big part. Speed-demon
stocks require the time to watch for proper entries and exits
with little room for error. Slower developing plays are much
better suited for end-of-day analysis and more leeway for proper
entry.

I completely understand why every option trader secretly or
outwardly wishes to buy calls at the open today and sell them
after lunch for significant gains. Right or right? Why would
anyone want to do otherwise? Other than the action involved
isn't our main goal massive profits? Reality is this can be
a bit tougher to achieve than basic books and info on the
subject usually admit.

Experienced traders with busy schedules and especially new
traders trying to learn the game are in my opinion best
suited to trade issues that move more methodically than the
flashy, sexy ones that can theoretically make us rich or
poor within days or even hours. All too often we learn the
odds remain much better for achieving poor than rich with
highly volatile stocks despite what we care to painfully
admit.

I suggest you take a peek at some of these charts yourself
and decide if this might become part of your approach. No
question it works; uncle Tom is living proof as he whiles
away his hours enjoying life in a manner that's the envy of
most his peers.

More on this subject and others Wednesday - be prosperous
until then!

Best Trading Wishes.

Contact Support


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

DNA - Genentech, Inc. $165.75 +1.63

Using human genetic information to discover, develop,
manufacture and market human pharmaceuticals for significant
unmet medical needs is DNA,s quest.  Thirteen of the currently
approved Biotechnology products came as a direct result of
the company,s science.  DNA markets and manufactures 7 of
these with the eighth just getting ready to go into production.
The products include Rituxan, Activase, Nutropin, NutropinAQ,
Nutropin Depot, Protropin, Pulmozyme, and Actimmune.  The firm
is developing other cancer drugs with ImmunoGen and earns
royalties for hepatitis B vaccines, bovine growth hormones,
and Humulin (human insulin).

Most Recent Write-Up

Who wants to be a Millionaire when you could be a Billionaire?
The Holy Grail of biotechnology companies is The Billion Dollar
Drug.  A yearly income stream of a billion dollars discounted is
the stuff that dreams are made of for scientists, accountants and
investors alike.  Many times we have seen some small unknown
biotechnology company bid up over 100% in a day on the slight
glimmer of hope that maybe, just maybe, that new treatment still
in Phase I could be The One.  Market cap leader Amgen has just
two of them.  Biogen has only one.  All it takes is just one
Billion Dollar Drug.  That's all that separates the leaders from
the unknowns.  With what is agreed by many analysts to be the
strongest pipeline of the biotech sector, Genentech is considered
a favorite in this elusive quest.  The early part of July was a
difficult one.  After a stellar month in June, the stock found
resistance at the $180 level before engaging in a pre-earnings
sell-off.  Finding support above the $140 level near its 50- and
100-dma (now $145 and $142, respectively), the stock has since
formed a 3-week base which it now appears to be breaking out of.
This past week has seen DNA move above its 5- and 10-dma ($157.75
and $153.89, respectively), turning resistance into support.  On
Friday, DNA gapped up at open to $160 and from there, moved
steadily up to close at its high of the day.  A move above $165
with conviction would be a comfortable entry for the conservative,
with bounces off its 5- and 10-dma as an entry for the more
aggressive.  Resistance ahead can be found in increments of $5 at
$165, $170 and $175.

Comments

This is one of those trends that we love to see on the chart,
steady gains every day.  This makes it a good time for a Play
of the Day.  We want to ride this current wave of momentum
until the trend breaks.  Short-term support is at $162.50, but
a continuation of higher-highs and lows would be more convincing
than a pullback.  Watch the sector for weakness as a sign to
abandon the play.

***August contracts expire in two weeks***

BUY CALL AUG-160 DNA-HL OI= 575 at $10.38 SL=7.00
BUY CALL AUG-165*DNA-HM OI= 138 at $ 7.63 SL=5.25
BUY CALL AUG-170 DNA-HZ OI=1115 at $ 5.00 SL=3.00
BUY CALL SEP-170 DNA-IZ OI= 299 at $13.63 SL=9.75
BUY CALL SEP-175 DWN-IO OI= 156 at $11.75 SL=8.25

SELL PUT AUG-155 DNA-TL OI=  30 at $ 4.38 SL=6.00
(See risks of selling puts in play legend)

Picked on August 6th at $164.13     P/E = N/A
Change since picked       +1.63     52-week high=$245.00
Analysts Ratings      6-8-3-0-0     52-week low =$ 66.88
Last earnings 07/17   est= 0.29     actual= 0.29
Next earnings N/A     est= 0.31     versus= 0.25
Average Daily Volume = 1.09 mln



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