The Option Investor Newsletter Wednesday 08-16-2000 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/081600_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-16-2000 High Low Volume Advance/Decline DJIA 11008.40 - 58.60 11089.00 10961.10 934 mln 1599/1239 NASDAQ 3861.20 + 9.54 3914.84 3844.17 1.40 bln 2028/1905 S&P 100 806.91 - 4.90 816.44 803.76 totals 3627/3144 S&P 500 1479.85 - 4.58 1496.09 1475.74 53.6%/46.4% RUS 2000 512.74 + 2.81 513.33 509.93 DJ TRANS 2875.81 - 8.60 2884.17 2866.46 VIX 20.67 - 0.30 20.86 20.22 Put/Call Ratio .55 ****************************************************************** Will There Be A Pre-Fed Rally Or Sell-off? The DJIA did its best to hold above the key support level of 11,000, but investors are beginning to wonder if it can hold. The blue chips had a tough day right from the open, steadily declining as the day went on. The day low was put in during the last hour of trading as the DJIA bounced off support near the 10-dma. This helped propel the recently resurgent Dow to a close of 11,008.39. Whew, support holds on a closing basis and the bulls have something to lean on. Nasdaq who? I have more to say about DJIA which has had only a minimal amount of focus this year relative to the Nasdaq. Not anymore though. Most traders are now watching this as the main index for determining market sentiment and direction. Most of the new found popularity is from the Financials and Utilities which have been hot sectors in July and August. Oil has also been on a steady run for nearly three weeks. Could it be that times are changing and that tech stocks are less important to investors? Maybe for now, but I wouldn't bet on that come mid- October when the techs usually bottom out. Still our focus is now in the options world and for now the action is in the aforementioned sectors. So if these three sectors are the main drivers, how do they look going forward? I have added charts of those indices for individual analysis. As you can see, the Financials worry me as this is the exact level and time they sold off before the last FOMC meeting. It just doesn't look like it has the gas to get over 900 any time soon. The Utilities, on the other hand, are looking pretty strong as it makes new highs almost daily. There is no resistance in sight and (as most Peter Lynch fans would tell you) stocks that are hitting new 52-week highs, usually continue to do so. Finally, the Oil sector is back from the dead. Just when we thought they had the production problems under control, oil has spiked back above $30. Up $0.13 to $31.80 today, to be exact. It's bad for our wallets at the gas station, but good for oil stocks. There was even word today that Pres. Clinton sent a letter to Saudi Arabia to help relieve conditions. Nevertheless, from natural gas to oil drillers, stocks have been climbing. Anyhow, this look at the three hottest sectors pushing blue chips higher could be concluded with saying that two are still looking strong (Oil and Utilities) and one looking lower (Banks). The downside is when Bank stocks fall they can affect the entire market sentiment. Back to today's action. The Nasdaq finished up 9.54 to 3861.20 while the DJIA lost 58.61 to 11008.39. Volume was average at 1.37 bln and 931 mln, respectively. Advancers beat Decliners by a 15-12 margin on the NYSE and 20-19 on the Nasdaq. The S&P 500 closed down 4.58 to 1479.85. The Russell 2000 was up 2.81 to 512.74. Banks, Biotechs and Retailers lead the way down while Semis, Oils, and Drugs held the averages up. The big news was the CPI that was released before the open this morning. It came in right in line with most expectations at a gain of 0.2%. This is the fourth straight month of 0.2% gains for the consumer price index. While this is an acceptable rate of growth according to most, any fluctuations upward from here will be met with hawkish comments from the Fed. Also, July housing starts fell 3.3% to a 1.512 million rate, lower than the expected 1.55 million. And building permits slipped by 2% to 1.497 million. At this point, traders are mostly waiting for the July employment report. "Inflation hawks may be eating crow today," said Oscar Gonzalez, an economist with John Hancock Financial Services. "Despite their fears of tight labor markets and a strong economy, inflation is only creeping higher, not accelerating." Hewlett-Packard was in the news today, after the close, with their earnings report. Adjusted earnings from operations jumped 37% to $1.05 billion, or $0.97 a share, an increase from $0.71 in the year-ago period. Analysts expected earnings of $0.85 according to First Call. The gain was mostly attributed to strong home computer and notebook sales. Carly Fiorina, HWP's CEO, commented that "last year at this time, we committed to becoming a more aggressive and focused H-P, delivering strong top and bottom line growth on a consistent basis. Today's results demonstrate the tremendous progress we're making in all of our businesses around the world." To add to the euphoria for HWP call buyers and put sellers was the announcement of a 2:1 stock split. This is the third major split announcement in two days as CIEN and GLW announced splits. HWP was trading up nearly $10 after-hours to $120.75. International Business Machines and Kana Communications said on Wednesday they had formed a global strategic alliance to provide systems that will allow businesses to manage interactions with customers and business partners over the Web. This helped to propel shares of KANA by 17.3% today to $38.13. This is the second major announcement by KANA this week too. On Monday, they announced that Cisco has chosen their eRM (enterprise relationship management) solution. As far as tomorrow goes, you would have to figure a rally for the DJIA given the plus 11,000 close and the after-hours HWP news. If HWP can hold a $10 gain tomorrow, that would be a nice head start for the index. It will be interesting to see if it can hold those gains. The Nasdaq will likely follow suit based on Hewlett's "tech" status. My concerns are two-fold. First, the Financials need to hold their current ground. A post-Fed collapse like we witnessed after the last FOMC meeting will curb the current bullish bias. Many of these stocks were heading into new 52-week highs and a reversal now could spell trouble. Second is the situation once again developing in the oil patch. We were never really able to kick the inflation fears before until oil dropped back below the $30 mark in mid-June. Now we are back near the high end of the range and it won't be long until economists start pointing to this and screaming the "I" word. Investors and analysts may start selling first and asking questions later on any minor uptick in economic data. It will hang over the markets like a dark cloud, just like we saw from March to June. But I may be getting ahead of the markets in the short-term. Right now the Fed is expected to sit back and let the markets work. The VIX sits at 20.71 with very little movement. There is some word that professionals are selling into rallies, but you wouldn't be able to tell by looking at the Dow. That is still the area to focus on in this market. If you are playing the Nasdaq, continue to do it on a stock-by-stock basis. With the FOMC outcome already wildly anticipated, the volatility going into Tuesday should be less than normal. Trade wisely and stick to familiar roads. Ryan Nelson Editor ************************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 ************************************************************** *************** ASK THE ANALYST *************** It Has Been A Long Hot Summer By Eric Utley I'm ready for Fall to arrive! My patience is running thin as the market twists and turns its way through the Summer months. The bears have scorched one sector after another as innumerable warnings of slowing growth, rising inflation, a slowing economy, and interest rate worries have flooded the minds of Wall Street. Even the once beloved Chip stocks fell under the claws of the mighty Ursa. But, as the Semis recently stated, the worst appears to be over. As we approach the prosperous time of year I suggest you get ready to make money. New leading stocks have asserted themselves over the past three months, which will be the stocks that carry the next bull market higher. Professional traders and hedge fund managers will soon be returning from their retreats with pockets full of cash ready to deploy into the 'Next Big Thing'. It's our goal to find the winners before 'they' do. I apologize for my unexpected absence last week, but duty called me away. I'm back this week with a full docket of readers' requests. I chose to skip the review of a past winner this week in hopes to catch up on some of your requests. And it's those requests you need to keep sending so we can find the next winning stocks before the professionals do. Send your potential winning requests to asktheanalyst@OptionInvestor.com. Please put the symbol in the subject line of the e-mail. ---------------------------- Ibis Technology - IBIS Please review this fallen star. Looks to me like a low risk value bottom fishing play. Thanks - Bill IBIS is another one of the Chip stocks that has been tortured by the bears recently. However, the peculiar thing about IBIS is that its competitors have held up very well in spite of the dip in the Chip sector. PMCS, which I'll review below, BRCM, VTSS, and AMCC have all done relatively well recently. All the while, IBIS has fallen lower. For its part, IBIS has mastered a technology known as SIMOX-SOI. In essence, the technology creates an insulating barrier between the layers of a silicon wafer, which prevent electrical current leakage which hinders the performance of a semiconductor. IBIS's technology is used by manufacturers to produce chips used in servers, desktop computers, wireless communications devices, and automotive parts. Despite the recent boom in the Semiconductor business in the last few years, IBIS has an extremely volatile earnings history, which explains the stock's erratic movements. The company broke even last quarter, when it was expected to lose 6 cents per share. The losses are expected to mount next quarter with a loss of 14 cents per share. But, the reason I chose to review IBIS is that the company is expected to earn a full 30 cents per share next year. If IBIS delivers on its promises, the stock is trading at relatively discounted level right now. Furthermore, continued surprises to the upside will help put a little momentum into the stock. But, as I've said before, and I'll say again below, cheap stocks are usually cheap for a reason. IBIS needs to report two or more quarters of solid earnings growth before the stock moves substantially higher. The bounces between the red and black on the cash flow statement never pleases the Wall Street crowd. The stock has appeared to found bottom near its current levels, and might trade higher if the Semi sector regains its momentum. If the company gets back to executing and consistently earning money, it's worth considering. I think it would be wise to wait for IBIS to prove its worth, and deliver steady earnings growth. Otherwise, the only catalyst that might lift the stock would be a broad rally in the Chip sector. And, in that case, I think there are better alternatives such as PMCS or VTSS. Bottom fishing for stocks can be extremely profitable if you pick correctly. But, I feel that it is one of the hardest and most hazardous of trading strategies. ---------------------------- Metro One Telecommunications - MTON Please give me your thoughts on MTON? I enjoy your column very much, it is informative, educational, and enlightening. It always surprises me how much there is to know about the market. Thank you for trying to educate all of us. - Heidi I hate to get mushy on you Heidi, but your compliments are extremely thoughtful. I really appreciate your kind words. And now, onto your request. I normally shy away from stocks like MTON because of their extremely low prices and equally low ADVs. I follow the philosophy that low priced stocks are generally low for a good reason. I prefer to buy high and sell higher. But, in some cases, you can pick up good stock on sale. I think MTON might be a good example of such an instance. Let me provide a little background on the company, which will help to explain why I think the stock is attractively priced. MTON is the leading provider of Enhanced Directory Assistance (EDA). The company operates 28 calls centers, which it fills with representatives that perform such services as call completion, information searches, and connectivity. The company outsources its services to wholesale telecom providers and wireless carriers. What's compelling about MTON is the company's future earnings estimates. Get this, the company is expected to earn 51 cents this year and 72 cents next year. A profit of 72 cents next year would give MTON a forward-looking P/E of roughly 17. That is extremely cheap when you figure the company is expected to grow its earnings 40% over the next three years. And, although, MTON is not operating in an explosive high-tech market, the Telecom and Wireless sectors are still growing at a relatively healthy rate. Before sounding the bull horn on MTON, there are three distinct risks I see with the stock. First, the company missed EPS estimates by 1 penny last Fall, which sent the stock nearly 50% lower in one day. Second, the company's balance sheet is carrying some debt, with only a small amount in cash. Finally, the stock is thinly traded, which presents liquidity risk. The lack of buyers or sellers in a stock can cause severe problems in times of distress. That's why I first said that I'm sometimes wary of stocks like MTON. But, the company's prospects are extremely promising if MTON can deliver the earnings that are projected for the company. ---------------------------- PMC Sierra - PMCS The stock has been on uptrend for some time now. Can you please give your view on this stock. Regards - Sunil Certain Chip stocks have done phenomenally well over the past month despite the dip in the broader sector. PMCS is one such stock. The reason PMCS has not suffered from the sell-off in the broader Semi sector is because the company has a proprietary technology that manufactures chips for telecommunications applications. The company has a steady flow of orders coming from the likes of CSCO, LU, and NT for chips used in the buildout of high-speed broadband networks. There are still a lot of people who want high-speed Internet access (myself included) and cannot receive. The growth of broadband networks shows few signs of slowing, which means the builders like CSCO need the chips that PMCS makes to power the networks. PMCS, and its peers, including BRCM and AMCC, are trading at or near their all-time highs. PMCS's high price does present some risk in the form of volatility. But, for those aggressive investors out there, PMCS should provide handsome rewards over the next 3 - 5 years. The company is expected to grow its bottom-line between 40 - 50% over the next three years. PMCS's recent price action, in spite of the weakness in the Chip sector, reveals just how strong of a stock it is. That level of relative strength might help soothe investors' nerves over the long haul. If the volatility is too much for you to handle, PMCS is an excellent trading stock. By that I mean momentum investors can really get behind PMCS during the stock's extended runs. Case in point: PMCS traced a double bottom around $165 in early August, and quickly charged past the $200 level. PMCS's profits were reported in mid-July, so we don't have an earnings run to look forward to until October. But, a driver in the near-term is the potential for a stock split. PMCS is trading well into split territory above $200. Momentum investors love splits! PMCS is a solid company with a strong stock, that should do well over the next several years. ---------------------------- EMC Corporation - EMC Can you please comment on EMC. I have seen this stock always moving in a steady fashion. I wonder why this stock in not OI favorite list. Thanks - Sunil Sunil has sent in a myriad of exquisite requests recently, so if you don't mind, I thought I would review two requests from him today. Thank you, Sunil. I reviewed EMC about two months, but I thought it would be relevant to take a look at the stock again given the fact it made its way onto the OI call list. When we first reviewed EMC in early July, I talked about the company's strong fundamentals, excellent earnings growth, and impeccable management team. Well, nothing has changed. The stock is still loved by Wall Street, and has benefited recently from the shift back into high-quality growth stocks. The data storage market, which EMC conquers, is growing faster than ever, with no signs of slowing. EMC continues to operate with lethal efficiency. The company has funneled billions into research and development recently, which has produced a host of new revenue-generating products. Analysts project that EMC has the opportunity to rake in nearly $78 bln in revenues over the next 3 - 5 years. The company has a knack for turning its sales into big profits, with its high operating margins. As long as the company continues to innovate and execute, EMC is a stock you could buy and forget about. Despite the bear market last spring, EMC is trading near all-time highs. The stock is up 200% in the last year! The steady fashion, like you mentioned Sunil, with which EMC advances makes the stock a compelling idea for the long-term investor, along with my argument above. But, EMC can be traded for short-term profits as well. Why else would it be on the OI call list! The stock broke from an extended consolidation in early June, and has been rolling higher ever since. The key to trading EMC is to watch for a breakout after a week or two of consolidation. You can see on the chart over the past two months that EMC bases for several days, then breaks to new highs in its ascending channel. The stock is currently hovering above its 20-dma, which has been the launching pad for EMC's last two runs. ---------------------------- Puma Technology - PUMA Like PUMA quite a bit. Think its found its bottom and has much upside. Will be introducing new wireless platform software during Q3 which may be a catalyst to the upside. If you could review this stock for the trading family, would be greatly appreciative. Sincerely - Ariel Ariel, I wish I had better news for the trading family. PUMA has definitely seen better days. The company went from a money making concern to a money losing firm when it reported its second-quarter results in May. PUMA had a string of four profitable quarters running until it fell into the red. What's more, the losses from operations are expected to greatly increase over the next year. I think PUMA picked a poor time to shift its business strategy, which resulted in losing money. Like I have said before, market sentiment has shifted back to the stocks of companies that make money. PUMA provides a novel service, which delivers personalized Internet information to customers through various mediums, including e-mail, pagers, and cell phones. I just don't know if they can make money? Most of PUMA's business currently comes from Japan, where the company has a relationship with NTT-Dokomo, the Japanese Wireless Corporation. The agreement with NTT includes access to over 10 mln customers. And, like you said Ariel, PUMA is introducing a new version of its Mobile Application Platform (MAP), which will allow more users to access the Internet through wireless means. PUMA operates in a growing sector of Technology, but it remains to be seen how many people will actually be accessing the Internet through their cell phones, and if any companies can make money by providing the necessary services. PUMA is scheduled to report its third-quarter results early next week. I believe the report is set for release on August 22nd, although I have not confirmed that date. PUMA's CEO recently said he was comfortable with the -ll cent estimate. A smaller-than-expected loss combined with upbeat guidance might be the catalyst to reverse PUMA's dreadful course. A breakout above the 10-dma might provide an opportunity for a quick trade. But, be careful. When I go wading in rivers chasing fish I like to see the bottom before jumping in. I don't see the bottom in PUMA. ---------------------------- MatrixOne - MONE I bought 100 of each IPO (MONE & HAND) at the offering price. Would you please provide your analysis of these securities. Thanks - Ashok Thanks for writing in, Ashok. Of your two requests, I chose to review MONE because of the recent renaissance in the B-2-B and Internet Infrastructure sectors. Though, this time around investors are much more particular with their picks within the two sectors. If the selective buying of quality B-2-B and Infrastructure stocks continues, I think MONE is positioned well for a Fall rally. The company provides a plethora of Internet services to businesses, including establishing trading communities and hosting applications for service providers. So, with MONE, you get exposure to both the Infrastructure and B-2-B sectors. MONE's two largest competitors are EXDS and ARBA, which are both formidable opponents within their respective sectors. However, MONE has partnered with ARBA on several projects, which, I think, falls towards MONE's favor. Furthermore, of its competition, MONE is the only company making money. MONE burst into profitability several quarters ahead of schedule with an upside EPS report in late July. The company is expected to earn 24 cents next year, which gives the stock a P/E, something EXDS and ARBA are both lacking! MONE's five-year earnings growth is estimated at 70%, again, better than both ARBA and EXDS. Now, don't get me wrong, EXDS and ARBA are both great companies, and both stocks have done very well recently (that's why EXDS is on the OI call list). But, MONE has some of the best fundamentals among its peers, and has under performed in the last month. MONE might have been overlooked by Wall Street during the recent rebirth of B-2-B and Infrastructure, which might make the stock undervalued at its current levels. That's why I like the stock going into the Fall if the current, and selective, Tech rally is sustained. Unfortunately, MONE is not yet optionable. For the life of me, I can't find a legitimate reason for MONE's 25% sell-off over the last two weeks. In fact, USB Piper Jaffray initiated coverage on MONE with a Strong Buy rating last week, and set a $77 price target. You can see the spike in volume on the chart when MONE hit bottom on Monday. It has since rebounded, but that big dip last week throws up a cautionary flag. It's uncertain what spurred the sell-off. And where there's uncertainty, there's risk! I think it would be prudent to wait for the stock to regain its momentum before jumping into new positions. ---------------------------- 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 *********** Reevaluate The Risk By David Popper If you jumped off of the Empire State Building, would you be injured? The answer is entirely dependent on whether you jumped from the threshold on the ground floor, or whether you chose to jump out of a window on the 100th floor. Gravity is a truth that we all recognize, except when it comes to the stock market. Isn’t it amazing that the same people that clamor for a stock that is quickly advancing, treat that same stock like a leper when it tumbles. Indeed, every greedy fiber of my being wants to jump on a hot stock, whose major move may be behind it. Every fearful fiber of my being wants to dump that same stock if it falters. The funny thing is that often the stock’s story has not changed. It is just that for some reason the emotional tide of the crowd has turned against that particular stock, sector, or perhaps the market as a whole for a short time. How many times has CSCO, SUNW, ORCL and others gone through a free fall only to come roaring back? On the other hand, when KTEL fell, who was there to catch it, certainly not the institutions. In a nutshell, that is why quality matters. When you trade quality, corrections are buying opportunities. Corrections help you identify support and provide you with an entry point. The only real danger when you are buying quality is when you buy quality that is technically extended. You see, sometimes the enthusiasm for a stock develops into unrealistic short term price acceleration. Buying into that madness almost always guarantees you a short term loss because institutions will not pass up the opportunity to lock in a profit and buy the quality back cheaper. The money managers know that when a price becomes too extended, people get nervous, especially people on margin. (This is why I never use margin. I want my trades to be governed by logic, not emotion) The money managers know that when they sell, it will impact the price, because they sell a sizable amount. They also recognize that often when the price declines even slightly, nervous people pull the trigger and the momentum reverses. Just about the time that all the nervous traders sell, the price stabilizes, institutions buy, and the whole process begins again. You see, stock prices are very seldom based on true value. Remember the market is an auction, and often emotions effect prices at auctions. Institutions make a lot of money recognizing the value of a stock, and simply by trading against the emotions of the crowd. They have the advantage because their actions directly impact a stock’s direction. This is precisely why it is critical to trade unemotionally, using at least basic technical analysis. This is also why you never put too much money in one play. This is also why you use proper money management. Failing to take these precautions exposes you to short term institution induced market fluctuations which can harm you. How much technical analysis do you need? It depends on your time parameters. A daytrader may need every oscillator and short term signal available. Since I do not daytrade, and since oscillators often give contradictory signals, I prefer to keep it simple. And when I doubt, I get out. If I had more time, I would love to learn all of the fine nuances that undoubtedly have benefited so many. My schedule requires me to acquaint myself with a stripped down version. I typically like to buy a stock after a correction only when it begins to move up off its newly formed base. The base should develop for at least a couple of weeks. I take this precaution because often after a fall, there may be additional aftershocks. I may make an exception if the stock is compelling and I plan to use it to write a covered call. When I hold a stock, I typically use trend lines and moving averages as my guide. If the trend line becomes too steep, I will place stops because stocks that go up hard, will come down hard. Further, if a stock advances more than 20% over its 10 day moving average, I set stops because it is advancing too fast and profit taking will happen. (Again, these are my own rules, and I would gladly defer to those writers who are more experienced) Sometimes as a stock advances, I will take partial profits along the way, so that when the music ends I won’t be hurt too badly. Another safety feature that I find helpful when trading is to research the splits calendar and upcoming trade shows and analyst meetings. Often these provide a good emotional spike to a stock, though recent times have not necessarily backed up this proposition. Again, this is all relatively simple stuff. It does not always work, but more often than not, it keeps me out of too much trouble. Contact Support ************** TRADERS CORNER ************** Candlestick Formations By Austin Passamonte A wave of recent email suggests I should backtrack a little bit. Chart examples last week & this Monday past in my section brought plenty of questions as to how these signals are read. As always, OIN archives hold articles in the "Traders Corner" link under the "Education" heading, left-margin of OIN's front page. Those who wish to research this discussion can find all the details & tons more from other contributors within. In a nutshell, we look for Bollinger Band, MACD, Stochastic and Candlestick signals to converge between different time-session charts for entry confirmation. I missed covering basic candle signals previous, so let's visit that now. This will allow us to completely wrap up the rolling stock subject next week. Candlestick charting offers a three-dimensional view of the market action. This visual perspective helps better predict future market action. Each candle-line body begins at the market open and ends at close. If the close was higher than its open, a clear or green candle is formed. A lower closing price than open creates a red candle instead. Prices that move outside the open/close range form thin lines or "shadows" above and/or below the candle’s actual body. There are numerous signals and formations with different versions of each but we'll focus on a few basic patterns that warn of market reversals. They are as follows: Bullish signals: Tweezer Top Morning Star *Hammer *Doji *Engulfing white candle Bearish Signals: Tweezer Bottom Evening Star Shooting Star *Hanging Man (hammer) *Doji *Engulfing red candle *Denotes formations that are bullish or bearish depending upon where they form within price action (Daily chart of NASDAQ) http://www.OptionInvestor.com/playimages/index.asp?image=tc73 Within this chart of NASDAQ numerous formations show but we’ll focus on those outlined above. First you’ll see clear "Shooting Star" candles near the market tops of March 13 and again on the 27th This lone-candle signal is formed when prices open at one point, rally up for the day and fall back to close near the open once again. When formed at a price peak on the chart it suggests buying has waned and the market may be nearing a correction. Around April 12th we see a long red candle that exceeds or "engulfs" the clear bullish candle of the previous day. This suggests any bullish sentiment the day before was completely erased and then some by today’s "Engulfing Candle" formation. A further move in the direction of the longer candle is expected, in this case to the downside following the bearish red candle. April 24th shows a lone-day "hammer" pattern. This formed as prices fell from the open only to rally back and close near the day’s open. This shows buyers rallied the market up after sellers took it to an intraday low. The lone candle at the bottom of this pattern resembles a hammer, hence the name. It suggests the market may have found a bottom and will advance from there. The same "hammer" style candle found near the top of a price range is called a "hanging man" formation instead. This is a bearish signal that indicates new buying above the open has exhausted and a move down is likely. On May 29th we observe a candle formation called a "doji" or stalemate. It's formed by a complete shadow line with little if any real body in the middle. Daily prices opened, rose/fell and then returned to close almost unchanged. When found near a market high or low extreme it suggests a point of equality and indecision between buyers and sellers. Such indecision could mean the current price direction may be nearing a reverse. (Daily chart of DOW) This chart of the Dow is rife with clear candle formations. Extreme volatility created numerous reversals in short order. Around March 15th we note a large white engulfing candle near support of a long decline. This indicates buyers have erased all the prior session’s losses to drive prices higher. As indicated, the market indeed moved up from there in record fashion with a 499 point gain the very next day. After this major rally we witness a pair of doji candles near 3/23 and 4/3 that warn of possible weakness in bullish sentiment. The doji near 4/3 spans an exceptionally large range one session after a long, engulfing white candle. This combination suggests extreme indecision after the big price rise and possibly a move down in the near term. The "Tweezer Top" April 12th should have been confirmation that this market was on shaky ground. Those who moved to protect profits and/or played the downside with shorts or put options fared incredibly well. Several dominant bearish patterns warned of the massive decline days in advance. In true volatile fashion, the Dow hit bottom three sessions later as a clear "Tweezer Bottom" complete with shadow line pinchers emerged. Again, fair warning that the bulls were now in charge of near-term price movement. Late in May we notice a three-day pattern form called a "Morning Star" The first full session formed a bearish candle, the next day ended in a "doji" stalemate while the third day formed a new bullish candle. As you can guess, this suggests the sentiment has turned from bearish to neutral and finally bullish over three trading periods. Prices should advance from there. Likewise the opposite of this, an "Evening Star" three-day pattern of sorts warned a pending market drop. A bullish white candle was followed by a doji, then met with a bearish red candle. This was matched with an equal white candle as bulls struggled to wrest control but were finally overwhelmed as proven with a longer red candle that sealed the new move down. (Daily chart of Dow, 8/16) Ready for a fearless forecast on the Dow? Well I'm not will you settle for a fearful forecast instead? We may very well be seeing yet another Tweezer Top formation in the making here. Oh I know, this time it's different; the Fed is done raising rates, the fall rally is just ahead, let's buy calls with blind abandon, yadda-yadda-yadda. And just what may I ask was the market sentiment at each of the other four top formations we've outlined? You think anyone was bearish after the other first long candles emerged? Certainly not, at least until the next session or two erased that price action & then some. Time will certainly tell how this one ends. With the VIX at 20.71, a few hundred points upside over the last three weeks and no volume to confirm these moves I for one wouldn't ignore that potential reversal pattern. ******* For further study on this fascinating subject and powerful trading tool let me refer you to the website bookstore in the top margin of OIN's home page. Enter "candlestick charting" in the topic search box and you’ll find several excellent books that cover the subject in complete detail. Those by Nison are are great place for complete coverage from start to finish. Next week I expect to finish the "rolling stock" concept and where & how to find a PHD course in option trading you don't want to miss. Trade wisely and prosper! Contact Support ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. Select from the largest range of accessories and products you use every day including Cellular and PCS phones, batteries, chargers, hands-free kits, wireless data products and more. http://www.everythingwireless.com\wireless\homepage?id=1601002 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** JNPR - Juniper Networks Inc $166.31 -3.44 (+6.38 this week) Juniper Networks develops and provides next-generation Internet infrastructure systems that are designed to meet the scalability, performance, density, and compatibility requirements of IP networking systems. The company's M40 and M20 Internet backbone router use JUNOS network traffic management software, ASICs. Its clients include some of the world's leading service providers such as Ericsson and MCIWorldcom. Most Recent Write-Up Give JNPR a good market environment and watch it explode! Juniper Networks is once again on the move and we want a piece of the action. As the NASDAQ made its way above the 3800 level this week, JNPR shot upwards with a fervor. There's a momentum run in our midst or so it seems. Let's retrace for a moment. Last week JNPR traded above the former resistance of $160, but didn't demonstrate any strength at the higher price level. This week JNPR is not only holding the lofty gains, but also shot through technical resistance at the 5-dma ($165.51) without a backslide. Entries off the current level may be somewhat aggressive in this topsy-turvy market. If you are looking for more confirmation, then wait for high-volume moves through the first line of opposition at $175. Upper resistance is at $180 and $181.25, the 52-week high. We're anticipating the respectable volume to sustain the upward momentum in the short-term. However, you will want to monitor the market's direction. Remember, the NASDAQ is currently at a precarious level and could pullback with profit taking. Stop losses may be useful, but remember, this is an Internet play and is subject to wide intraday swings. Comments Thanks to strong earnings from HWP, we expect tech stocks to bounce tomorrow. JNPR looks in good shape as the selling never fully materialized and it is close to a breakout. A move over $173 on strong volume would be the confirmation. Support from the 10-dma at $159 would be attractive on a pullback. BUY CALL SEP-160 JUD-IL OI=3823 at $17.50 SL=12.25 BUY CALL SEP-170*JUD-IN OI=3743 at $12.88 SL= 9.25 BUY CALL SEP-180 JUD-IP OI= 340 at $ 9.00 SL= 6.75 BUY CALL OCT-170 JUD-JN OI= 345 at $21.38 SL=17.50 BUY CALL OCT-180 JUD-JP OI= 956 at $17.50 SL=12.25 Picked on August 15th at $169.75 P/E = 1882 Change since picked -3.44 52-week high=$181.25 Analysts Ratings 15-3-0-0-0 52-week low =$ 28.25 Last earnings 06/00 est= 0.04 actual= 0.08 Next earnings 10-12 est= 0.08 versus=-0.01 Average Daily Volume = 6.21 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The DOW retreats in the face of the Oil sector's strength... Concerns about future earnings, along with the potential for higher interest rates and oil prices, are making it difficult to sustain any rally. Rather than discuss another day of lackluster trading, we thought it might be more productive to publish some recent correspondence with one of our readers. Dear OIN, I have been reading your big cap covered calls and conservative naked puts articles recently. I like them very much. I am an options trader (for about a year now) and I have studied options strategies extensively. The one thing I have not done is sell naked options. I have recently been approved by my broker to do so, but I am still trying to figure out a couple of things. How do you calculate the amount of money being tied up by a naked option. Do you recommend any guidelines for closing a profitable position early or do you normally let them expire. Any other thoughts you might have would be appreciated. Thanks, SC Regarding Naked Puts... Selling naked-puts offers an attractive method of generating small profits on portfolio collateral. A premium is received for the obligation to buy the underlying security at a specific price. A successful outcome is achieved if the stock remains above the sold strike at expiration. It is also one of the best ways to achieve a technically correct entry position for owning a stock. As far as equity requirements, every broker has different formulas for collateral with naked options. The following explanation will illustrate the basic conditions for trading the strategy. It will also demonstrate the small mathematical advantage of using this technique when compared to covered-call writing. Return On Investment (ROI) = Profit / Collateral Requirement. In this strategy, profit is the initial premium received for the sold option. The collateral requirement is simply the amount of cash or equity that must be in your account to open the position. Note: You must have a margin account to participate in this type of trading. To establish and maintain a margin account, a broker requires a minimum of $2,000-$5,000 in any combination of cash or marginable securities to be on deposit at your brokerage. For an account to carry uncovered options and/or spreads there is also a maintenance requirement of $5,000-$10,000. Most online brokers use the following formulas to determine the collateral requirement for naked puts. The margin maintenance per contract is the greater of: The premium received plus 40% of the underlying issue price, minus the out-of-the-money amount; (0.40 * Stock Price + Premium - ( Price Picked - Strike)) - or - The premium received plus 20% of the underlying issue price; (0.20 * Stock Price + Premium) The second formula generally applies when the strike price sold is significantly below the underlying stock price. In the monthly summary, the ROI calculation is based on a 30 day time period. The original collateral requirement is always used regardless of the eventual change in stock price. The final price of the stock determines the actual profit when that price is below the sold strike but above the cost-basis. In any case, the total profit can never be greater than the initial premium for the sold option. As you can see, there is a slight mathematical edge with this strategy when compared to covered-calls because of the lower margin maintenance or collateral requirement. However, the true risk is the same in both techniques; the underlying stock can always fall to $0. As far as techniques, rather than try to explain our strategic outlook in an E-mail, it might be easier for you to simply review some of the older articles in the "Covered-Calls" and "Naked-Puts" sections, on the web site. In addition, read Jim's "Top Ten" rules for option trading, now referred to as "Winning Axioms," which apply to almost every strategy available. I would also recommend that you simply read the newsletter including the back issues, especially Jim's commentary. Study any other "worthy" trading publications and read all you can about option trading. Explore the current bibles: "Options as a Strategic Investment", "Option Volatility and Pricing Techniques", and "Trading for a Living." Learn the rules (and live by them) and repeat whatever you do successfully. Don't bother with exotic strategies that you don't like or do well with and always avoid any position in which you are not completely comfortable with the potential loss, the necessary adjustments and the most common entry-exit techniques. Good Luck! 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 PROX AUG 75 73.43 91.38 $1.57 7.2% GMST AUG 60 56.06 65.63 $3.94 7.1% EXTR AUG 140 137.31 169.69 $2.69 6.6% CALP AUG 50 47.84 55.50 $2.16 6.0% CALP AUG 50 48.50 55.50 $1.50 5.9% TUTS AUG 90 88.50 100.63 $1.50 5.7% ITWO AUG 115 109.00 146.56 $6.00 5.6% ENE AUG 75 72.88 84.03 $2.12 5.5% IDPH AUG 120 116.94 125.75 $3.06 5.0% VRTA AUG 55 52.18 67.38 $2.82 4.4% NTAP AUG 90 85.44 88.31 $2.87 3.4% VSTR AUG 135 127.25 126.88 -$0.37 0.0% Buyout candidate PHCM SEP 85 78.25 84.94 $6.69 7.0% ARTG Closed (Now Profitable - Murphy's Law) AWRE Closed ( Ditto - ho hum) AETH Closed Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return PROX AUG 75 73.75 91.38 $1.25 17.1% SAPE AUG 95 93.12 129.69 $1.88 13.7% TUTS AUG 85 84.12 100.63 $0.88 11.8% ENE AUG 75 73.12 84.03 $1.88 11.8% TUTS AUG 70 68.81 100.63 $1.19 11.8% CALP AUG 45 43.88 55.50 $1.13 10.9% CALP AUG 45 44.31 55.50 $0.69 10.4% VRTA AUG 55 53.81 67.38 $1.19 9.6% IDPH AUG 110 108.50 125.75 $1.50 9.2% NTAP AUG 80 78.12 88.31 $1.88 8.7% VRTA AUG 50 48.38 67.38 $1.62 8.4% EXTR AUG 130 129.12 169.69 $0.88 8.1% 2-1 split 8/25 GMST AUG 50 48.87 65.63 $1.13 7.7% TIBX AUG 90 87.63 95.88 $2.37 7.5% AMCC AUG 120 118.31 164.63 $1.69 6.5% SEBL AUG 115 113.94 169.06 $1.06 6.5% 2-1 split 9/11 MACR AUG 75 73.32 76.13 $1.68 6.2% ITWO AUG 95 93.31 146.56 $1.69 6.1% MERQ AUG 85 83.32 98.94 $1.68 5.8% SAPE AUG 85 83.56 129.69 $1.44 5.7% 2-1 split 8/29 VSTR AUG 110 108.31 126.88 $1.69 5.6% Buyout candidate MERQ AUG 80 78.87 98.94 $1.13 5.2% PHCM SEP 65 63.50 84.94 $1.50 6.2% ARTG Closed (Now Profitable - Murphy's Law) AWRE Closed (Ditto - darn Murphy anyway) CLRN Closed (Ditto again - sigh) AETH Closed Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MRVC AUG 100 102.44 64.88 $2.44 19.4% IMCL AUG 90 90.69 83.00 $0.69 15.8% VRSN AUG 175 176.00 155.13 $1.00 11.2% RBAK AUG 155 156.13 146.13 $1.13 8.7% ADBE AUG 135 135.69 115.94 $0.69 8.2% MUSE AUG 195 196.31 129.31 $1.31 5.9% HWP AUG 150 151.00 120.75 $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 *************** EMLX - Emulex $73.50 *** Own This One *** Emulex is a designer, developer, and supplier of a broad line of fibre channel host adapters, hubs, ASICs and software products that enhance access to, and storage of, electronic data and applications. Their products are based on internally developed ASIC technology and are deployable across a variety of network configurations and operating systems. These products support increasing volumes of stored data. Emulex is also a supplier of some traditional networking products that include printer servers and network access products. Shares of data network company Emulex have recovered in recent sessions after the company reported better-than-expected results for the quarter. Analysts for Robertson Stephens reported that EMLX posted fixed fourth quarter results well above consensus expectations and based on the bullish announcement, they have raised their estimates to reflect higher revenues and a future increase in profitability amid new confidence in the company's business model. Investors appear to share the positive outlook and with the move above recent technical resistance near $70, this issue is poised for further upside activity. EMLX - Emulex $73.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 55 UMQ UK 28 1.25 53.75 7.9% *** Sell Put SEP 60 UMQ UL 82 2.13 57.87 12.0% Sell Put SEP 65 UMQ UM 99 3.25 61.75 13.6% Chart = ****** METHA - Methode Electronics $50.88 *** Entry Point *** Methode Electronics is engaged in the manufacture of electronic components and devices that connect, control and convey electrical energy, pulse and signal including connectors, automotive components, printed circuits, and current carrying distribution systems. Components and devices manufactured by Methode Electronics are used in the production of electronic equipment and other products in the automotive, computer, voice and data communications equipment, industrial, military and aerospace, and consumer electronics industries. Their products are sold primarily to original equipment manufacturers and also to independent distributors. METHA rarely gets any attention but investors have taken notice since the company spun-off shares of Stratos Lightwave (STLW), a company which develops, manufactures and sells optical subsystems and components for high data rate networking, data storage, and telecommunications applications. STLW is also a market leader in high data rate optical subsystems, offering superior optical transmission line performance with top state of the art EMI characteristics. In addition, they market optical components and cable assemblies for use in these networks and currently, that's one of the most popular "high growth" industries. Whether you like one company or the other, it appears that both issues have a reasonable expectation of increased share value in the coming months. METHA - Methode Electronics $50.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 45 QME II 10 9.38 41.50 8.6% *** Sell Put SEP 40 QME UH 10 1.63 38.37 14.0% *** Sell Put SEP 45 QME UI 0 3.25 41.75 18.6% Chart = ****** MIPS - Mips Technologies $52.13 *** Bracing For Upside? *** MIPS Technologies is one of the leading designers of high performance processors, cores and related intellectual property for use in a wide variety of increasingly sophisticated consumer devices and business equipment. Its designs are based on its reduced instruction set computing (RISC) architectures. Its 64-bit RISC architecture is the volume leading architecture for 64-bit processors. MIPS licenses its designs and related intellectual property to semiconductor companies and system original equipment manufacturers. Its licensees currently offer over 60 standard processors based on its RISC architecture, which have a cumulative installed base of over 120 million units. Earnings are one of the primary movers of stock prices and last month, MIPS reported stellar results for the quarter. Revenue for fiscal year 2000 grew 25% to a record $89 million and when the royalties from Nintendo were excluded, revenues increased over 100% compared to fiscal 1999. Contract revenue jumped 176% and accounted for 38% of the total revenue. Quite simply, MIPS Technologies completed its strongest quarter and fiscal year since their IPO and future growth in the fundamental business is forecast to be excellent. If you favor the bullish outlook for the issue, this conservative position offers an excellent entry point, considering the current market volatility. MIPS - Mips Technologies $52.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 45 MUP II 24 9.25 42.88 5.0% *** Sell Put SEP 40 MUP UH 57 1.13 38.87 9.9% *** Sell Put SEP 45 MUP UI 40 2.13 42.87 13.6% Chart = ****** MMCN - MMC Networks $75.00 *** On The Move! *** MMC Networks is a developer and supplier of Network Processing Platforms that allow network equipment vendors to more rapidly develop high-performance, feature-rich, products supporting a broad range of networking functions. MMC Networks also offers and markets nP Design Services, which provides hardware and software design consulting as well as training and traditional support services. MMC Networks recently reported outstanding financial results for the second quarter. Revenues were $17 million, up 35% from the $12 million reported in the first quarter of 2000. The numbers represent a strong sequential growth based on a shift in their business toward Internet-driven, higher growth, higher margin service provider equipment. After the announcement, Mmc Networks was reiterated a "buy" rating by analysts at Frost Securities and earlier this month, the company was raised to a "strong buy" by by analysts at Adams, Harkness & Hill. The 6-to-12 month target price is $80 per share and it appears that investors are intent on helping the issue reach that goal much sooner. MMCN - MMC Networks $75.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 55 CMQ UK 0 1.06 53.94 6.7% *** Sell Put SEP 60 CMQ UL 23 2.00 58.00 11.9% Sell Put SEP 65 CMQ UM 0 3.38 61.62 14.7% Chart = ****** MXIM - Maxim Integrated $78.50 *** New Trading Range? *** Maxim Integrated Products is a worldwide leader in design, development, and manufacture of linear and mixed-signal integrated circuits. Maxim circuits provide an interface between the real world and the digital world by detecting, measuring, amplifying, and converting real-world signals, such as temperature, pressure, or sound, into the digital signals necessary for computer processing. Maxim's products are used in a wide range of microprocessor-based electronics equipment, including personal computers and peripherals, test equipment, hand-held devices, wireless communicators, and video displays. Semiconductor stocks have been in a slump recently but in the past few sessions, a few of the leading issues have begun to show signs of an impending recovery. Maxim is one of the top companies in the group, having vastly outperformed the Nasdaq and the overall market in recent years. Last Friday, ABN AMRO raised its rating on the analog chip maker to a "buy," with a 12-month price target of $100, citing better than expected orders in the fourth quarter. In his commentary, ABN AMRO analyst David Wu said Maxim's bookings grew at a 19% rate year-over-year, while order backlog expanded by 22%. He also pointed out that the company's current demand is geographically broad-based, suggesting revenues will reach at least $1.45 billion in the coming year. MXIM - Maxim Integrated $78.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 65 XIQ UM 36 1.25 63.75 6.6% *** Sell Put SEP 70 XIQ UN 63 2.13 67.87 8.6% Sell Put SEP 75 XIQ UO 70 4.00 71.00 12.7% Chart = ****** NAVI - Navisite $52.00 *** Basing Pattern *** NaviSite is a provider of outsourced Web hosting and application services for companies conducting mission-critical business on the Internet. They help customers focus on their actual business operations by outsourcing the management and hosting of critical Web sites and applications that support those operations. NaviSite is a majority-owned operating company of CMGI, Inc. with minority investment from Microsoft. NaviSite's SiteHarbor solutions provide secure, reliable co-location and high performance hosting services, including high performance Internet access and high-availability server management. There is little news to report on this unique company but a recent comment from a popular analyst sums up their market niche. First Albany's software expert Ullas Naik remarked that, "Navisite is an applications service provider that manages applications and hosts them on an outsource basis for corporate customers, so that the in-house information technology staff doesn't have to do it." In one regard, managed application host services is a very important industry and it will certainly experience growth as the Internet infrastructure expands. Most recently, NAVI was rated a near-term "buy" in new coverage by Merrill Lynch and that recommendation may be the reason for the recovery in late July. In any case, we see this position as a relatively conservative entry point for traders who are bullish on the Internet Application Services industry. NAVI - Navisite $52.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 45 UAV II 21 9.13 42.87 5.0% *** Sell Put SEP 40 UAV UH 14 1.00 39.00 8.9% *** Sell Put SEP 45 UAV UI 0 2.06 42.94 13.2% Chart = ****** SMTC - Semtech $94.06 *** Chip Sector Play *** Semtech is a supplier of analog and mixed-signal semiconductors. Semtech designs, manufactures, and markets a range of products for commercial applications, the majority of which are sold to the communications, industrial and computer markets. Their semiconductors enable power management, testing, protection and a range of other functions in products that require analog or mixed-signal processing. Semtech is another popular company in the Semiconductor industry and we simply favor its fundamental outlook and the bullish chart pattern. Based on this week’s upside 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. SMTC - Semtech $94.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 80 QTU IP 71 18.63 75.43 6.1% *** Sell Put SEP 70 QTU UN 8 1.38 68.62 6.9% *** Sell Put SEP 75 QTU UO 3 2.38 72.62 11.4% Sell Put SEP 80 QTU UP 5 3.75 76.25 13.9% Chart = ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. 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