Option Investor

Daily Newsletter, Monday, 08/14/2000

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The Option Investor Newsletter                   Monday 08-14-2000
Copyright 2000, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        08-14-2000        High      Low     Volume Advance/Decline
DJIA    11176.10 +148.30 11177.60 11006.20  787 mln   1836/1036
NASDAQ   3849.69 + 60.22  3850.27  3767.37 1.23 bln   2107/1932
S&P 100   816.34 + 11.59   816.60   803.12   totals   3943/2968
S&P 500  1491.56 + 19.72  1491.64  1468.56           57.1%/42.9%
RUS 2000  514.48 +  4.21   514.63   509.64
DJ TRANS 2921.21 -  6.29  2926.90  2901.17
VIX        20.35 -  0.84    21.59    20.17
Put/Call Ratio       .51

What A Way To Start The Week...

It was an Old Economy rally today over at the NYSE as the INDU
soared another 148 points.  The NASDAQ caught the buying bug too,
following the INDU's cue and closing up 60 points.  The intraday
technical outlook was picture-perfect for both indices as they
steadily climbed to close at the highs of the day.  Too good to
be true?  I've always been told that if something's too good to
be true, it usually is.  Now, I'm not here to throw cold water
on the bulls in the crowd, but just issuing a word of warning
about summer trading.

It was a typical summer "no news is good news" trading day.
Both major indices had impressive gains today on very light
volume.  The NASDAQ only clocked in with 1.2 bln shares, the
sixth lowest volume day of the year.  The overall breadth on the
tech index was just about even, with advancers slightly edging
out decliners, 21-19.  Traders overtook the 3800 level this
afternoon and the NASDAQ rallied right up into the close at 3849.
This level has been a point of contention for the NASDAQ in the
month of August and really leaves us asking whether or not the
momentum will carry us through tomorrow.  Trader Talk on CNBC
has many short term traders(1-3 day positions) on the Street
calling the past two days a sucker's rally.  This wouldn't be
out of the question considering the choppiness that the past
month has brought us.  We'll have to see.  Let there be no
mistaking, the NASDAQ is a trader's market.  Up and down, back
and forth, getting whipped like this can make a trader dizzy.
Now, I'm not crying doomsday or market crash.  I am saying that
in the short-term, it's not easy to predict what each day will
bring.  Looking down the road into the Fall, things look good,
but being option traders, our outlook normally is myopic.

In the chart below, the NASDAQ is right at that point.  Will we
go higher and test 3900 or will the traders take some of their
profits once again?  Above 3850, technical resistance may be
encountered at the 100-dma of 3876.  With the prospects of any
action by the Fed at next Tuesday's FOMC meeting just about dead,
the fear appears to be out of the market.  So much so that I even
heard the words "rate cut" on CNBC last Friday.  Now let's not
get too far ahead of ourselves.  Sensationalism in the media?  Can
you believe it?  At any rate, no pun intended, the NASDAQ is going
to be controlled by technical trading as it poises itself for the
Fall rally.  Speaking of no fear, the Volatility Index, VIX.X
continues to be on red alert, closing at the low of the day at
20.25.  Being a contrarian indicator, this type of market
complacency normally results in somewhat of a sobering sell-off.

Salomon Smith Barney analyst Jonathan Joseph was talking again
today about the semis, in particular, MU.  He came out today and
raised MU's 4th quarter earnings estimate from $0.78 to $1.00.
After his bearish comments on the Semiconductor sector back in
July, he is now picking and choosing individual issues that appear
attractive.  As a result, the SOX.X jumped 7.7%.  Joseph also
reiterated his Buy rating and $125 price target on MU, sending the
stock to $80.50, up $4.88.  KLAC(+6.31), NVLS(+7.13), and
AMAT(+5.63) benefited from these comments as investors felt that
the sector may have been oversold.

Jim has been mentioning the convergence of the NASDAQ's moving
averages over 3900.  You can see below that the 50-dma and the
200-dma are looming overhead, further strengthening the already
established resistance at 3900.  Once we can get through the 3930
level and successfully test it as support, the NASDAQ will be
ready to get back to its old ways.

So going forward for the NASDAQ, we'll be looking for momentum to
come back with the volume as we approach Labor Day.  Until then,
don't expect a defined trend.  The tech index has been rangebound
since mid-April and appears that it will remain there until the
volume comes back to play.  Watch that time premium if you own
options!  The decay can be catastrophic in times like these.
Believe me!

Now, the INDU has been on a tear lately!  It finally came back to
life with the arrival of August and continued its run today,
closing 11176.  To put this level in perspective, the last time
the INDU traded this high was April 12th, the exact day the
correction began.  And there is good reason for the Old Economy
stocks to be on the move up.  The markets have essentially written
off the Fed on August 22nd.  With the odds of a rate hike next
week being slim to none, investors are breathing a sigh of relief
as pressure on future profits ease.  They threw money at the
Financials once again today as some of the Retailers.  Strong
performers on the day were:  HWP(+4.25), JPM(+4.06) to an all-time
high, HD(+3.69) ahead of tomorrow's earnings, INTC(+3.13),
IBM(+2.63), C(+1.56), and EK(+1.44).  As you can see, a broad
array of sectors benefited from today's buying spree.  Oil
service stocks also had a good day on concerns with the global
supply and increasing oil prices, closing just below $32 a barrel
at $31.94.

Last Friday, the INDU finally broke out of the narrow range
that was supported by 10900.  The April 12th high before the
correction was 11425, and the INDU could make a run for this
level.  The prospects look very good for the INDU, yet volume
today was extremely light on the NYSE, coming in at a mere 785 mln
shares.  There certainly appears to be momentum with the INDU,
especially with the Financials breaking out to new highs.  You
know what they say, "Never short a dull market."

Although there were really no broad market macro factors to move
the markets today, there was a slew of acquisition news.  Rupert
Murdoch's News Corp. outbid Viacom for Chris Craft in a $5.4 bln
cash and stock deal.  News Corp., which also owns Fox
Entertainment, will now have duopolies in New York, LA, Salt Lake
City, and Phoenix with the acquisition.

In the Fiber Optic sector, BRCM plans to buy privately-held
NewPort Communication, not to be confused with Newport Corp. that
trades publicly under NEWP.  NewPort Comm. is a maker of
technology in optical networking.  BRCM will issue 5.5 mln shares
of its class A common stock to the private company, valuing the
deal at $1.2 bln.  BRCM will get Ethernet products from NewPort as
well as the "world's highest speed" technology for optical
communications, according to the company.  Investors applauded the
acquisition as BRCM gained $15.69, or 7%, to close at $240.75.

Intel continued on the acquisition path as it has been doing
aggressively the past year.  They are buying private circuit board
manufacturer Ziatech Corp. for $240 mln in cash.  In a company
release, INTC said this deal will "enhance Intel's presence in the
rapidly growing market segment for communication infrastructure
products."  Ziatech will be a Intel subsidiary under their
Communication Product Group.  INTC was up almost 5% to $66.94.

Looking forward, the increasing acquisition activity is a very
good sign as company's foresee the advantages of consolidation
and increasing efficiency.  The INDU looks like it may have some
legs to sustain this move into the Fall, but volume will be the
key.  Tomorrow's HD earnings report before the bell will
likely direct the INDU.  The NASDAQ has literally turned into a
crap shoot in the near term, but Fall prospects look nice.  Thin
trading is still the main concern.  With thin trading, the big
money can move the markets whichever way they feel, depending on
what side of the bed they awoke.  Just be cautious, it has been
a difficult market to trade.  Once again, the VIX.X is at
extremely low levels, and if history means anything, some selling
should be right around the corner.  Stick with the strong stocks
and protect your positions with stop losses.  Financials look
great with the no hike bias in the market.  They will continue to
drive the INDU.  Remember, the trend is your friend.

Matt Russ
Asst. Editor

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Buy & Hold; Well, Not Quite
By Austin Passamonte

Let's spend this week finishing the topic of trade less,
keep more.  I know, I know: day-trading is fun & exciting.
Actually it's a blast.  Wouldn't life be nice if we always
had open plays in the market?  It's possible, you know.
Theoretically, we could make big money on something or
other every single day.

Trouble is theory doesn't result in dollars.  Execution does.
Maybe you have, but I've yet to prosper from over-trading
my accounts.  We've heard the logic stated many different ways
but none better than Chris Verhaegh put it at OIN's Option
Expo this March in Denver.  Chris said, "Capital at play is
capital at risk, period".  Think about that.  Every time we
click those precious dollars into cyber-never land we risk
the chance of not seeing them again.  Yikes!

Trader's trade - that's what we do.  It's no fun sitting on
cash and I hate it as much or more than you.  Interestingly
enough, that's often what it takes to win really big in this

A project I'm working on has led me to investigate numerous
online trading sites over the past several weeks and months.
I've learned a tremendous amount from them, mostly about what
not to do.

First let me remind you I'm not an employee of OIN, merely a
freelance contributor and home-based trader.  That being said,
it's my highly-biased opinion OIN offers the most complete
trading info in one site by a wide margin compared to any
other I've seen.  The next-best isn't even a close second in
the race.  There is literally a trader's PHD contained in here
but that's subject matter for another article.

Numerous sites I've scoured charge $125 - $300 monthly for live
trades every day.  Lots of them.  The results are pretty much the
same; a bunch of wins, a bunch of losses and small gains when
the dust is settled.  Plenty of fun and the brokers are thrilled
but in the end, what was accomplished?

If we want to amuse ourselves that's fine, but if we wish to
make all the money possible, I truly believe there is a better

Don't get me wrong, I've churned accounts with the best of 'em.
Over-traded my futures account, over-traded stocks and over-
traded options when getting started to boot.  If they can think
up anything else to trade, I'll probably churn that too.

Considering I've never in my life been to Vegas, the first trip
there will likely find Wendy wresting me away from blackjack
tables long after I should have left.  That is if she hasn't
already jack-potted and left my sorry butt to lose more while she
shops the day away.  Do they have ATM machines in those casinos?
I wonder if anyone's thought of that convenience yet?

Back on topic.  If we patiently wait (yuck) for lead-pipe lock
winning trades to develop and more importantly show themselves
beforehand, wouldn't that make our wait worthwhile?  Such trades
are available most every week if we just stealthily watch.

Most have seen some of the chart tools we use to screen stock
and index option plays. There are other factors involved to
decide on actually pulling the trigger but let's take a peek
at what a patient approach does allow:

JDSU Daily Chart

From the end of April to present time, JDSU has triggered six big
moves on our daily chart template.  That's just over the three
months or an average of one good trade every two weeks.  Boring,
right?  Look at the size of those moves!  $20 - $40 up or down on
essentially a $100 basis-stock.

Could we sit patiently for two trades per month average like this?
Of the signals outlined how many were losses?  Zip, none, nada.
There were numerous micro-moves of $5 to $10+ dollars swing traders
could amuse themselves with and that's just great.  However, when
it's time to visit the bank I want to jump in on those daily chart
setups with back-month options and hunker down until the trend

OEX Daily Chart

You didn't honestly think you'd escape looking at an OEX chart,
did you?  Ten clear moves from late March to mid-August would
have netted 50% to 300% gains depending on option selection and
exit strategies.  Ten trades, five months = one nice pop every
other week.  How patient can you afford to be?

Remember the stodgy old stocks we charted last week?  Exact same
thing.  Knowing where they commonly "roll" and entering calls
or puts as signals dictate amass solid gains with the least
downside risk possible.

Has Austin done-gone gave up short-term trading?  Certainly not.
I fully expect to buy & sell a bunch of stuff this week especially.
Gotta love expiration week for the chance to buy cheap and sell
for several hundred percent more soon.  Or watch them turn to ash
as markets move against.  Either way it's over in a flash.

I break my trading down into two distinct categories: Level I and
Level II trades.

Level I trades are signaled by technicals aligning on 30-minute
and 60-minute charts side by side.  For example, if a trade signals
long calls on the 30-minute chart as the hourly chart is about
to rally as well, we jump into front-month options with intent
to exit quickly.  This is my version of one to three-session
trade setups.

Level II trades come from converging signals on 60-min hourly
charts and daily charts.  Daily charts identify pending trend
changes while hourly chart suggests when that begins.

These days, I personally run two different options accounts:
one with less money for Level I trades and the other with
more money waiting for Level II trades.  This keeps me honest
not over-betting the riskier Level I's with too much money, a
lesson I've learned several times the hard way.

No chance at all I will stay away from short-term, riskier
trades.  Too much time to spend watching the markets assures
that.  Nevertheless, I do fully expect to lay much heavier
bets on the long-term, lower risk plays from this point
forward.  Perhaps I won't be alone.

Wednesday we'll wrap up the week identifying a few more "old
economy" rolling stocks to see how that fits into this mold.
Trade wisely this week and profit wildly!

Best Trading Wishes,

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ITWO - I2 Technologies $154.63 +7.69 (+7.69 this week)

I2's RHYTHM supply chain management software helps manufacturers
plan and schedule production and related operations such as raw
materials procurement and product delivery.  Companies that use
RHYTHM include:  3M, Dell, Ford, and Motorola.  Maintenance,
training, and other services account for more than a third of
sales.  I2 is using acquisitions of complementary technologies
and companies to position itself as a leader in the market for
Internet-based production process applications.

Most Recent Write-Up

We're picking up ITWO where we last left it.  Only this time, the
company has the wind of earnings blowing in its sails.  ITWO
sailed past consensus estimates by 25% when it reported its
second quarter results a little more than two weeks ago.  The
strong EPS report kept ITWO's string of highly profitable
quarters rolling, along with its stock for that matter.  While
Wall Street sorts through the rubble known as the B-2-B sector,
ITWO is emerging as a clear winner.  And, although the B-2-B
marketplace is flooded with competing companies and technologies,
few can match the products and services that ITWO provides.
Also, ITWO just completed its merger with Aspect Development
(ASDV), which will only add to its stronghold of software
offerings.  The company captured Wall Street's attention with its
blowout quarter as a string of positive analyst comments have hit
the wires recently.  Just last week, Goldman Sachs reiterated
ITWO to its Recommended List, based on the closing of the ASDV
acquisition.  Jeffries & Co. initiated coverage with a $163 price
target, citing the company's rapid growth prospects and strong
partnerships with ARBA and IBM.  And finally, DLJ reiterated its
Buy rating after the company's bullish presentation at the E-day
2000 conference last week.  The love from Wall Street last week
vaulted ITWO to the top of its ascending channel to position the
stock on the brink of a breakout.  Watch closely Monday morning
for a rally with healthy volume above resistance at $148.50,
which would mark a near-term high in ITWO's channel.  A more
conservative trader might wait for momentum to build and look for
an entry if ITWO moves above $150.  A bounce off the 5-dma,
currently at $143, might provide a solid entry after any profit
taking, but make sure to wait for an ensuing rally.


What a great breakout today!  Not only that, ITWO gave us a perfect
entry point this morning on a dip back to support at $145.  It
gathered steam throughout the session, and then at 2:10pm EDT,
buyers piled in, driving the stock convincingly through $150.
The high volume remained steady into the close as ITWO finished
just off its highs.  ITWO has been struggling with this resistance
level for the past month and finally has made the move.  Look to
enter on any strong bounces from $150.  Below that, buyers have
been showing up at $147 and $145.  With a momentum stock like this,
$160 isn't too far off.  Confirm market direction in the NASDAQ
before initiating a position.

BUY CALL SEP-145 QYI-II OI= 18 at $20.13 SL=15.75
BUY CALL SEP-150 QYI-IJ OI=666 at $17.13 SL=13.25
BUY CALL SEP-155*QYI-IK OI=131 at $14.75 SL=11.50
BUY CALL SEP-160 QYI-IL OI=109 at $12.50 SL=10.00
BUY CALL NOV-160 QYI-KL OI=171 at $22.25 SL=17.25

SELL PUT SEP-140 QYI-UH OI= 26 at $ 7.13 SL= 9.25
(See risks of selling puts in play legend)

Picked on August 13th   $146.94    P/E = 459
Change since picked       +7.69    52-week high=$223.50
Analysts Ratings     8-19-3-0-0    52-week low =$ 14.06
Last earnings 06/00   est= 0.08    actual= 0.10
Next earnings 10-20   est= 0.10    versus= 0.06
Average Daily Volume = 3.59 mln

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