The Option Investor Newsletter Thursday 08-17-2000 Copyright 2000, All rights reserved. 1 of 2 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/081700_1.html Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-17-2000 High Low Volume Advance/Decline DJIA 11055.60 + 47.20 11091.50 10984.40 907 mln 1601/1222 NASDAQ 3940.87 + 79.67 3947.05 3857.75 1.44 bln 2143/1824 S&P 100 815.09 + 8.18 817.04 806.55 totals 3744/3046 S&P 500 1496.07 + 16.22 1499.32 1479.85 55.1%/44.9% RUS 2000 516.46 + 3.72 516.46 511.79 DJ TRANS 2847.91 - 27.90 2876.34 2835.65 VIX 20.04 - 0.63 21.25 19.81 Put/Call Ratio .59 ************************************************************* Not bad for a summer Thursday! By Jim Brown Wow! Today proves the old adage about "never short a dull market." After futures ended the morning session negative across the board there was some concern that the market would drop on the "not as good as first thought" HWP earnings. After opening mixed and trading on both sides of positive both the Dow and the Nasdaq moved up strongly and then held their gains into the close. That is the key point in the last sentence. "Held into the close." While neither index closed at the high of the day neither did they suffer serious selling as has been the case recently. The disaster of the day was Hewlett-Packard. After announcing what appeared to be blow out numbers after the close on Monday HWP was up +8.00 in after hours trading. Talking heads were glowing with praise about the incredible performance. OOPS! Once analysts got a chance to look behind the headline numbers the skeletons began appearing. The $.97 posted number already excluded a one-time gain on the sale of stock but failed to exclude four cents of other non-operating items. During the conference call CFO Robert Wayman finally agreed with hostile analysts that $.93 was closer to the real results. Analysts then subtracted -.04 for a lower than expected tax rate from a global sales mix and you are now left with only $.89 or an inline report for operating earnings. Sales only increased +14.5% and Unix sales only grew by +13% which was more than ten percentage points below analysts estimates and way below the +26% from last quarter. The revelations were met with downgrades and cautious words by analysts. HWP dropped -2.38 to $108.56 which in reality was not bad. The low was $107 and yesterday's high was $112.56. A big range but the feeling that HWP did have its act together going forward as well as a 2:1 stock split announcement helped hold it up. Other major news last night was Brocade which announced earnings which increased over 1000% and beat analysts estimates by +.02 cents. The earnings energized the infrastructure sector with BRCD adding +15, EXTR +17, SCMR +12, JNPR +6. If you own these there is a good possibility of profit taking on Friday. The fiber optic sector was also represented by Ciena which beat analyst estimates of $.17 by two cents and soared +16 in heavy trading. With fiber optics, networking and biotech again on the move the gains by the Nasdaq were broad based and strong. After the close today Agilent posted huge earnings numbers after warning in June that component shortages were going to hinder earnings. Agilent's revenue rose +28% to $2.67 billion. The $.18 to $.22 estimates for the quarter were beaten soundly with a $.33 announcement. The difference was new components coming available which enabled completion of pre- assembled equipment. It was just sitting waiting for a key component and when the parts came Agilent was able to fill a huge backlog of orders in a short period of time. "A" was up +12 during regular trading and rose another +9 in after hours. Do you see a pattern emerging here? All of a sudden earnings are being met with huge gains where over the last several weeks companies sold off instead. I view this as an expression of several things. One, would be fewer earnings announcements to capture investor attention. Two, fewer IPO releases to soak up the extra cash. Three, a return of investor optimism into the market place. The optimism is quickly replacing the cynicism which was so common recently. Fourth, the "Fed on hold" concept is finally taking hold. The short and simple description of all the above would be, "if the Fed is not going to raise rates next Tuesday then why wait till after Labor Day?" The Nasdaq closed just below its 200 DMA of 3945, how convenient! Dead on resistance. The Dow managed its first positive close in three days and back over 11000 again. If it was not for the VIX and the Tuesday Fed meeting I would be mortgaging the kids for capital. Heck, even Yahoo almost succeeded in shaking off a day of reckoning by Prudential Securities analyst Mark Rowen. Mark started YHOO with an accumulate and a 12-month target of only $155. He said his accumulate rating was based on a "lofty valuation, slowing growth and shrinking margins." OUCH! This got plenty of air time on CNBC as they calculated what the market cap should be based on earnings, over and over and over. Still YHOO only lost -2.88 on the news. That is a very positive event for the market. It may not be positive for YHOO going forward but the market shook it off and powered onward. Now, the negative side. The VIX hit 19.81 intraday and closed at 20.04, only .04 above panic mode and only +.58 above the 52 week low of 19.46. Hold that thought. Now everybody knows the Fed is on hold but until the announcement is made at 2:15 Tuesday afternoon it will still be a black cloud over the market. We have had a good run but it is entirely possible that we could see some profit taking between now and the Fed meeting. That leaves Friday and Monday for those without a calendar and I would bet on Friday as traders go flat before the weekend. Semiconductors have been up for five days and helped power the Nasdaq to similar gains. Investor sentiment is soaring. The Nasdaq and Dow were both up decent on the same day. Financials and techs are both setting new 52 week highs. (AXP, JPM, SUNW for example) Advances are beating declines in all markets. I can't, other than a rate increase out of the blue or Iraq launching missiles at Saudia Arabia shutting down oil production, think of a negative event that could trigger a broad market decline. No, that is not a challenge, threat or dare. Just a comment. Here we go with that "too good too be true" scenario again. I closed all my long positions this afternoon and I will be an observer not a participant on Friday. I can see the possibility of a strong upward spike at the open and I might speculate on some OEX/QQQ puts after that spike but other than that I have been burned by the VIX enough to be very cautious when warning signs are flashing two days before a Fed meeting. Good luck and sell too soon. Jim Brown 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 ************************************************************** **************** MARKET SENTIMENT **************** Last Day Of Option Roulette By Austin Passamonte We just love expiration week. A few days every month for the chance to buy cheap and sell very dear. Or watch them instantly wither & die. Reminds me of pending broad market direction. There are firm reasons to rally or tank and by God we're fixing to do one or the other. Which one is the question! How's that for riding the fence? We can hear bulls lining up for the gate like thoroughbreds at Pimlico. When that starting gun goes off we'll likely see markets trading near levels unfamiliar to us. Today's action in the NDX was encouraging. Tech leaders will lead the charge whichever way it goes. Plenty of old economy stocks breaking out near or above new highs as well. The other side of that equation is most of those issues are in the energy field. If anyone thinks letters of request from a lame-duck president will open OPEC spigots, would you like to buy some call options on the Tooth Fairy's hedge fund? We're about to pay some unbelievable energy prices going into this winter. A harsh one will impact our economy in many ways, few of them good for equity markets. Yes, you know what's coming next. The VIX. Today's close just a hair above 20 was a merciful bounce up from 19. Will it drop to 10? The last time it was lower than this was July 1998 at a Dow high of 9300. From there we plunged 20% lower to 7200 before the next bottom was in place. While it's doubtful such a correction is in store for us here today, we wonder just which times similar to this the masses expected such a plunge? I mean, every other instance (and there have been several) when VIX hit new lows the broad markets were at their peak. That's what caused this setup in the first place. How many traders & analysts were calling for caution and downside danger then? Food for thought. A day will arrive in our careers together when the VIX pushes 30 or beyond while the financial world thinks no bottom exists to the markets. We here in Market Sentiment will have pawned our last earthly possessions to buy call LEAPs there & then. We'll report that news to you if not too weak from selling our blood to raise every last possible dime. This however ain't one of those days. Remember, every other market-peak with a buried VIX seemed this same exact way. For today's raging bulls I hope it's different but that's not how we must lay our bets. Continue to trade the long side carefully! MARKET SENTIMENT INDICATORS --------------------------- VIX The CBOE Market Volatility Index measures certain S&P 100 option pricing to determine investor sentiment. Historically, readings near 30 signal possible market bottoms while levels near 20 indicate possible market tops. Tues 8/15 close: 20.97 Thur 8/17 close: 20.04 CBOE Equity Put/Call Ratio The CBOE equity put/call ratio is a contrarian-sentiment indicator. Numbers above .75 are considered bullish, .75 to 40 neutral and bearish below .40 ************************************************************* Tues Thurs Sat Strike/Contracts (8/15) (8/17) (8/19) ************************************************************* CBOE Total P/C Ratio .55 .59 Equity P/C Ratio .46 .53 Peak Volume (OEX) CBOE index put/call ratio is a contrarian-sentiment indicator. Numbers above 1.5 are considered bullish, 1.5 to .75 neutral and bearish if below .75 ************************************************************** Tues Thurs Sat Strike/Contracts (8/15) (8/17) (8/19) ************************************************************** All index options .80 .95 OEX Put/Call Ratio 1.50 1.06 OEX Maximum Open Interest Strikes/Contracts: Puts 800/6,942 790/6,376 Calls 810/6,564 810/7,603 Put/Call Ratio 1.06 .84 OEX S/R (Support/Resistance) Ratio Index The OEX S/R ratio is a formula to gauge possible support or resistance based on open-interest disparity. Numeral listed for resistance is the ratio of calls to puts. Support is ratio of puts to calls. Values above "10" considered firm. Divergence of numbers may indicate future market direction. OEX Tues Thurs Sat Benchmark: (8/15) (8/17) (8/19) Overhead Resistance: (900-835) 1,064 2,072+ (830/810) 5.12 11.11 OEX close: 811 815 Underlying Support: (805-785) 1.56 1.07 (780-760) 10.21 8.97 What the S/R measure indicates: Net open-interest ratios are firm above 815 and ridiculous above 830. A large index move prior to expiration has clearance to the downside to 790 Market-makers would love to pin the OEX index between 810 & 805 for maximum expiration of worthless contracts. Let's see how good they are! We would consider a move testing the 790 range good call entry prior to Friday's option expiration. A failed test of 820could be an excellent short-term put entry. 30-yr Bond: 5.71% Light, Sweet Crude, Barrel: $31.90 200 Day Moving Average (as of 8/08) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW: 10,792 11,067 11,055 NASDAQ: 3,936 3,851 3,940 NDX: 3,672 3,722 3,830 SPX: 1434 1484 1496 OEX: 773 811 815 CBOT Commitment Of Traders Report: Friday 8/11 Biweekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DOW futures Net contracts; +116 (long) - 599 (short) Total Open Interest % 2% net-long 3% net-short NASDAQ 100 Net contracts; - 1,854 (short) + 1455 (long) Total Open Interest % 18% net-short 4% net-long S&P 500 Net contracts; + 44,924 (long) -51,720 (short) Total Open Interest % 24% net-long 9.5% net-short BULLISH SIGNALS Recent Rally Today's strength in the NASDAQ 100 is especially encouraging. 11,000 support level on the Dow has weathered several tests. Interest rates 5.71% on the 30-year Treasury Bond signal rate fears are nil. Fed-Fund futures are pricing no chance a near-term rate hike. Benign Government Reports Latest statistics hint the economy is cooling and no further rate hikes may be needed. COT Report - NASDAQ 100 Sentiment reversal with small speculators growing net-short while commercials increase accumulation may suggest expected strength in the sector over the next weeks or months. ****** BEARISH SIGNALS VIX Thursday's close near 20 sees us in the high danger zone. End Of Earnings Season Lack of positive news will direct market focus on August FOMC fears Tuesday should CPI prove bearish. Third-Quarter Earnings Warnings A number of companies pre-warning slowed earnings later in the year are being met with extreme selling pressure. Energy Prices Prices are soaring. This affects profit margins and inflation. Light, Sweet Crude closed $31.65 today. All petroleum expected to be very high this fall. Prices in low $20s would be welcome relief but may not arrive. COT Report - S&P 500 & DJX Latest updated figures show small spec traders remain heavily long S&P 500 contracts while commercial traders continue to hold ten-year extreme short position. DJX commercials added to net short while small specs added to net long holdings. Widened divergence strongly implores market turn in favor of commercials. The market's bottom may still lie ahead. ************** MARKET POSTURE ************** As of Market Close - Thursday, 08/17/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 11,055 10,600 11,200 SPX S&P 500 1,496 1,450 1,505 COMPX NASD Composite 3,940 3,500 4,000 OEX S&P 100 815 790 822 RUT Russell 2000 516 485 540 NDX NASD 100 3,830 3,500 3,900 ** MSH High Tech 1,062 975 1,075 BTK Biotech 672 570 700 XCI Hardware 1,552 1,450 1,580 ** GSO.X Software 446 385 455 SOX Semiconductor 1,111 880 1,120 NWX Networking 1,325 1,210 1,400 ** INX Internet 523 460 530 BIX Banking 589 550 610 XBD Brokerage 624 570 635 IUX Insurance 711 680 725 RLX Retail 824 810 910 ** DRG Drug 397 365 415 HCX Healthcare 817 795 855 XAL Airline 163 156 172 ** OIX Oil & Gas 311 280 320 ** The NDX, XCI, NWX and OIX all broke resistance levels over the past two sessions. The XAL and RLX broke support levels. The XAL and OIX have bucked a trend where both of these indexes had been moving in unison. Today, the OIX traded through resistance, while the XAL traded through support, but managed to close back above the 162 level. Raising support (NDX, NWX, OIX). Raising resistance (NDX, XCI, NWX, OIX) Lowering support (RLX, XAL) Lowering resistance (DOW, XAL). Snug up those stops, as things are looking suspiciously bullish. ************** TRADERS CORNER ************** Well Of Course My Emotions Are Under Control! This Is Just Me! By Molly Evans I figure that my job here in writing this column once a week is to be the voice of frustration or jubilation for the small options investor. Jim knew that I wasn't going to be the professional advice columnist when we met back in March. At least I hope he didn't have such grand designs for me right away. I'm a comrade for those of you who are still learning and are frustrated with educational "tuition" in trading. For you old pros, consider my stories as a walk down memory lane. Why is it that new traders can read everything they get their hands on but still have to make the mistakes to REALLY learn it? You can tell us your rules and stories but we don't "get it" until we do it ourselves, each at his own pace. When I began to put some thoughts on paper for this article Monday, I was pretty high. I was ready to tell you how I'm finally starting to "get" this game. Then, Tuesday and Wednesday escorted me right back to my seat in the last row. How about I take a rain check on my "I GET IT!" article for now? Granted, since clawing my way out of the bear's den a few weeks ago, I have managed to increase my portfolio size 17%. I've stopped trying to predict exactly when the sky is going to fall and have started throwing elbows with the best of them. 17% isn't too shabby I will admit. However, I hadn't intended to give any of it back. Just when you think you're getting "good", the market whacks you! Ouch! Here's the deal. I've been riding the NYSE train for a bit. By Monday, I figured with the VIX down so low, that the party was winding down there. So, fool that I am, I looked to the Nasdaq again. I had hoped that there would be profit taking in the non-tech issues and rotation back to the Nasdaq. Monday, at least to me, sort of seemed to confirm this thought. I distinctly remember hesitating as I clicked the mouse to buy calls in TIBX and MERQ. "Do I REALLY want to buy a 20 VIX? Sure I do! It's going to get to 18 or 19 before anybody does anything about it. If you can't beat em, join em! The Naz is ready to rumble. Oh! And there's ITWO on breakout over $150. I'll just pick up 5 calls there too!" Those deep ITMs were NOT cheap. Tuesday rolls around, Dow is down but the Nasdaq hangs on. Wednesday, "Nasdaq is still holding its own but gee, my stuff isn't looking so hot. OIN dropped my MERQ and my TIBX. Must review my 'uncle' point. Ok, there's still some room to breathe. I can't stand to watch. Take a walk and it'll all be better when I get back. Got to get these emotions in check girl." Come back but nope, TIBX is past my point. I will have discipline! I will take the loss and move on. Sure enough, I click "sell", and the market KNOWS I'm now out and rebounds strongly right there. I can't believe it. Sure enough, if I hadn't done that it would have tanked as fast and furious as can be done. I take this personally. I hate to lose. Let's make matters worse now. Look over at ITWO. "JEEZ! Another fire. If it breaks $145, I should go." Somewhere in the recesses of my mind I hear a wise, deep voice, "When in doubt, get out." I have no idea who said that. "Ok, ok! I have lots of doubt here. Wait. No! I'm not going to. It's going to be just like TIBX. Don't do it! Ugh. It's broke $145. I've got to do it! Hang on. Let's watch. There's a bounce. Yes! Oh! No! Ok, that's it! It can't hold the $145." Click. Gone. Gulp. Yep, sure enough here comes a nice buy on the close. Close at $146 1/2. Isn't that special? Thursday morning the market has firmed up and there's ITWO laughing at me. Along about 11:30 central time I come home and see this pattern: I was home for about 10 minutes, saw this setup and didn't even pause to consider what I was doing. It was going higher. This wasn't a revenge play. I'd love to have that money back but I'm not one to lose my head and try to "get back at it." It was simply a good setup. I'm happy again. It's not the money for me. I just want to be a good trader. Do what you love and the money will follow. But here's another frustration with my being so disciplined now. About 10 days ago, I saw strength in ADI so bought calls at $13. Earnings were due on Tuesday. Ok, no can hold over earnings so I'm going to be a good little Molly and sell. I do so at $23, the high of the day (for the calls) and curtsy to myself in the mirror for being so smart. You all know how this story goes. I sold when ADI was $76. Then, of course, they have blow out earnings and ADI is $94 the next day, and the calls are just shy of $37. That hurt too. I love the "A" stocks but AMCC did the same darned thing to me. I sold the day of earnings and I watch it go through the roof the next day. I know, I know. You can't change midstream. You've got to stick to the plan. Plan the trade, trade the plan. Seven out of ten times, I think Jim has warned, stocks drop with earnings. The idea is to catch a piece of the trend, not the whole ride from the bottom to the top. But still, dang! Mutter, mutter, mutter! Agilent (A) has earnings tonight after the bell. Yes, I did sell BUT this time, I got out my capital and am letting a few ride. If they do well, there's plenty of upside room there. I'll take the chance on house money. I know that so much of this whipsawing around is because of the lighter summer volume and if you can't take the heat, you're supposed to get out of the kitchen. I refuse to let them get me. I know I've got to learn the ways and cultivate the discipline. I will get there. I have no doubt about it. In retrospect I know that I bought the ITWO for the breakout over $150 and when it failed to hold that, I should have bailed. That would have been trading the plan. Because I failed to follow the discipline, and made the $145 level an excuse for staying in, a financial hit is the punishment. That's trading for ya! But hey, I don't screw everything up! I took up a beautiful position in LEH puts and was rewarded handsomely. After today it looks like I might get to do it again! Agilent was nearly a double as of today. Dupont, stodgy ole Dupont, 50% gain on LEAPS in less than a month. Yes, indeed I have come a long way in the past year that I've been doing this. The markets are nothing other than fascinating for me. What mind games! What a study in human psychology and economics! It's all so very interesting. Whereas last summer I had no idea that the season had an impact on market moves, this summer I know it's an entire theme of trading. Before, I trusted. I just assumed that the people on TV giving buy recommends were looking out for our collective best interest. Ha! The other day my husband came into my office asking me if he should sell his AMAT because some guest on Maria's weekend show had said he's a seller of AMAT. Without even looking up, I told him "No, you just got your buy signal there darlin'." I had to laugh when I later looked at the AMAT chart. There it was sitting at the bottom of its Bollinger Band just waiting for an excuse to get up and go. Whatta rat! "Yes, all you little people out there, sell me your AMAT at this price!" Tomorrow is Options Expiration Day. There are events that occur in the market that are nothing less than freaky leading up to and on that day. I think that there is some heavy-duty manipulation of prices that occur between institutions and market makers. You know it, I know it, and the American people know it. I'm going to remember this week next month and vow to be very careful in trading the September OE week if I do any at all. But, of course I will! However, on that note, I would like to observe a moment of silence and somber reflection for all of our options that will be expiring worthless tomorrow. Maybe you don't have any but please hold me up while I dab at my eyes here for my own. See what happens when you don't get out of a trade that has gone against you? Happy OE everyone and get out to enjoy the weekend! 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 ************************************************************ ************* SECTOR TRADER ************* If Not Now, When? By Buzz Lynn Contact Support While there may be some volatility-increasing noise before the FOMC meeting next Tuesday, NASDAQ's return near its 200-dma of 3945 is a welcome site. Despite the low volume in the 1.3-1.4 bln shares lately and the possibility of a quick decline either before or after the FOMC decision, we think now is ultimately the time to get ready for a rally. Heck, it appears the markets are already willing - the Dow too! That both indices moved up in unison today is a good sign. As we've noted all this week, money managers and investors alike will be returning from summer vacations after Labor Day and will have plenty of cash on hand to throw into the hottest sectors. That's the fuel that should propel the market higher. To boot, the outcome of the FOMC meeting will likely be for no more rate hikes, which should spark talk of a rate CUT at the next meeting in 2001. That should ignite the liquidity fuel. In anticipation, financial stocks are leading the market higher, as is technology and oil. With the exception of oil, rising financials and tech stocks are what strong rallies are made of. Of course, the VIX is still historically low, which could indicate a more serious reversal in the near term. But nobody seems to care much about that indicator lately. It certainly hasn't been tradable for those of us that want to make money now. All we can suggest is to keep your eye on it for signs of life. Until then, keep preservation of capital and a good entry as your primary focus, and enjoy the ride! Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 95.69 1.94 0.00 1.00 1.75 0.00 4.69 HHH Internet 110.56 2.94 1.75 0.94 0.88 0.00 6.50 BBH Biotech. 176.88 -1.00 -3.44 -4.06 2.63 0.00 -5.88 PPH Pharm. 97.06 -0.81 0.00 0.75 0.25 0.00 0.19 TTH Telecom. 64.56 0.81 -0.19 -0.63 -0.44 0.00 -0.44 IAH I-net Arch. 98.56 0.94 -0.25 -0.13 2.44 0.00 3.00 IIH I-net Infr. 54.50 1.00 0.13 1.50 0.38 0.00 3.00 BHH B2B 46.19 0.69 0.25 -1.31 1.00 0.00 0.63 BDH Broadband 94.19 2.63 0.69 0.25 2.13 0.00 5.69 SMH Semicon. 95.06 5.06 2.88 2.63 1.81 0.00 12.38 RKH Reg. Banks 104.63 1.13 -0.69 -2.00 0.19 0.00 -1.38 UTH Utilities 103.63 1.69 0.81 -0.25 0.88 0.00 3.13 ************** Updates ************** QQQ - NASDAQ 100 $95.63 +1.75 (+4.69 this week) Technology, led by the semiconductor stocks have hogged the spotlight all this week, and rightfully so given all the analyst upgrades. It appears that rumors of its death last month were greatly exaggerated. Following last night's blowout earnings report and 2:1 split announcement by CIEN, not to mention the 3:1 announced by GLW, the optical issues joined the semis under the bright lights to light up the NASDAQ stage. And what is the QQQ made of? Right. Mostly tech stocks! Technically speaking (no pun intended), the NASDAQ is now perched right at its 200-dma of 3940, which also happens to be support and resistance - a pivotal point. On the other hand, QQQ has already blown through its 200-dma at $92.07 and it's 50- dma of $94. It's even poked its horns up through $95 resistance with the 5-dma ($93.20) acting as support. Given the outlook for the next few weeks, our educated guess is that the market will progress higher with a buying opportunity dip or two along the way. The next level of resistance appears to be about $98.50. While we think QQQ has a running streak in it now, you may be better served by waiting for a dip to the 10-dma currently at $92.44. Remember it would also find 200-dma support there too. Aggressive traders may want to target shoot at the 50-dma of $94. The biggest cap stocks were all positive today. Watch MSFT, CSCO, INTC, DELL, SUNW, WCOM, and ORCL for your clues to the sector. the second and third tier stocks (all those from #101 in market cap) are holding back the NASDAQ, but aren't part of QQQ. Calendar Spread: This was a tough one to enter as QQQ hit $94 and rolled over to $92.25 only to come back to $95 and stutter back to $94. From there, it got a bounce back through $95. The next level of resistance is at $98.50, which would be the next level to watch for a breakout or breakdown. If you are legging into the play and already have your long underlying position, a rollover from that level might make a great place to sell a call to complete the short leg and the spread position. If you don't want to have to worry about buying back a sold position and you are still comfortable with the idea that the NASDAQ will be higher by the new year, you can consider initiating an OTM position such as buying the DEC-100 call and selling the SEP-106 or 110 call. Get gamma (rate of change of delta) working in your favor. This won't look so hot if the QQQ falls back from these levels, so understand the trade and know your exit before getting in. BUY CALL DEC- 90 QVQ-LL OI= 2671 at $13.88 SELL CALL SEP- 95 QVQ-IQ OI=13202 at $ 5.38, ND = 8.50 or less SELL CALL SEP-100 QVO-IV OI= 7203 at $ 3.00, ND =10.88 or less OR BUY CALL DEC-100 QVO-LV OI= 4862 at $ 8.50 SELL CALL SEP-106 QVO-IB OI= 277 at $ 1.25, ND = 7.25 or less SELL CALL SEP-110 QVO-IF OI=12809 at $ 0.44, ND = 8.06 or less Long Calls This has been a great week for the QQQ so far. Target shooters aiming for a $92.25 entry nailed it on the nose yesterday as QQQ moved back up to current levels from there. While there could be some jitters before next week's FOMC meeting that could send QQQ back under $95 for a buying opportunity, the brave among you might even try for an entry at this level, but that isn't our suggestion. We would always like to wait for a pullback. . .in this case, to $92.50 to $93.35, the 10 and 5-dma, respectively. The more aggressive could look for an entry off a bounce from $94. BUY CALL SEP- 90 QVQ-IL OI=16636 at $ 8.38 SL=6.00 BUY CALL SEP- 95 QVQ-IQ OI=13202 at $ 5.38 SL=3.25 BUY CALL SEP-100 QVO-IV OI= 7203 at $ 3.00 SL=1.50 Average Daily Volume = 21.75 mln ----- SMH - Semiconductor $95.06 +1.81 (+12.38 this week) Wahoo! Party hats and horns! The semiconductors are on fire thanks to multiple upgrades this week. INTC, TXN, BRCM, MU, and AMAT all posted strong gains today. Technology is on most peoples' shopping list with semiconductors as their number one choice (OK, maybe optical issues too). The belief that the FOMC meeting will not result in any further hikes is getting investors to pull out their collective investment wallets. Technically, found predictable historical support at $88.50. Yesterday and today, it finally popped above and found support at the 50-dma of $92.20. Piercing congestion in the $94 to $94.50 range was the icing on the cake. Unfortunately, this is the fifth consecutive day of gains and nothing goes up in a straight line. Not only that, but volume is falling off a bit as the price continues to rise, which indicates that the sector may soon run out of buyers. SMH may need a break after such a strong run. Not only that, but it has hit the top of the Bollinger band suggesting it may bounce down from here. Not to say it can't go higher, but the chances grow slimmer with every new uptick. To that end, and with some congestion up to $97, we do not suggest taking a position at this level. Instead target shoot at the 50-dma of $92, then at another historical level of support at $90 for the best entry. BUY CALL SEP- 90 SMH-IR OI= 67 at $8.75 SL=6.25 BUY CALL SEP- 95 SMH-IS OI= 96 at $5.88 SL=3.75 BUY CALL SEP-100 SMH-IT OI=113 at $3.88 SL=2.00 BUY CALL NOV-100 SMH-KT OI= 82 at $8.25 SL=6.00 SELL PUT SEP- 90 SMH-UR OI= 35 at $3.13 SL=1.50 Average Daily Volume = 333K K ----- BBH - Biotech $176.88 +2.63 (-5.88 this week) Yesterday, this sector was looking pretty sick. However, once again, today's gain makes it hard to drop. DNA, SEPR, and AFFX take the cake for losing big today. Consequently as a result of its recent run, it may experience more consolidation around its 50-dma of $178.35. That it broke through its 50-dma yesterday and couldn't get back through it today is a definite sign of weakness. We keep it because it also isn't far off from its historical level of support at $171-$172. Only make an entry if you see a bounce north of that number. If it falls through, let it go. We sure will in the weekend edition if it doesn't get back over its 50-dma tomorrow. A positive NASDAQ (again) could be just the trick to bring it back to life. Confirm market direction before entering. BUY CALL SEP-175 BBH-IO OI= 21 at $12.63 SL= 9.50 BUY CALL SEP-180 BBH-IP OI=591 at $10.13 SL= 7.00 BUY CALL SEP-185 BBH-IQ OI= 93 at $ 8.13 SL= 5.75 Average Daily Volume = 638 K ----- IAH Internet Architecture $98.56 +2.44 (+3.00 this week) After warming up all week, IAH finally cowboyed up for the big event - a breakout of congestion in the $95-$96 range. Despite the incredibly low ADV (55 K shares) on this HOLDR, it is filled with some heavyweights and is a nice reflection of the market. It's almost a shame it doesn't get more attention. Anyway, on a technical basis, it broke out of the range today over its 5, 10, 30, and 50-dma. That's what we'd expect with SUNW, IBM, CSCO, EMC and SCMR in the mix today. Notice anything missing? HWP wore the concrete ankle weights today (-$12) on analyst downgrades following great earnings. That's a bit overdone and we think the current trend of IAH will continue stronger when HWP stops bleeding. The point of resistance is $99, then $101. It's pretty strong at the latter. After that, a break over $105 puts IAH in blue sky. Want a sympathy play? Take a look too at BDH, which contains many bandwidth developers, but not HWP. BUY CALL SEP- 90 IAZ-IR OI= 5 at $11.88 SL=9.00 BUY CALL SEP- 95 IAZ-IS OI=10 at $ 8.00 SL=5.75 BUY CALL SEP-100 IAZ-IZ OI= 2 at $ 5.13 SL=3.25 Average Daily Volume = 54 K ************** No Play ************** HHH PPH BHH IIH BDH TTH RKH UTH ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 11055.64 148.34 -109.14 -58.61 47.25 27.84 Nasdaq 3940.87 60.22 1.97 9.54 79.67 151.40 $OEX 815.09 11.59 -4.53 -4.90 8.18 10.34 $SPX 1496.07 19.72 -7.13 -4.58 16.22 24.23 $RUT 516.46 4.21 -4.55 2.81 3.72 6.19 $TRAN 2847.91 -6.29 -36.80 -8.60 -27.90 -79.59 $VIX 20.04 -0.84 0.66 -0.30 -0.63 -1.11 Calls EXTR 186.56 8.50 5.13 -3.69 16.88 26.81 Blast off SDLI 383.00 6.81 -1.25 7.82 7.75 21.13 New GSPN 129.38 -1.53 7.31 6.38 6.50 18.66 New JNPR 172.19 10.06 -0.25 -3.44 5.88 12.25 Very close PLXS 132.00 4.63 -2.50 3.00 6.50 11.63 New ITWO 157.63 7.69 -6.88 -1.19 11.06 10.69 Another pop DIGL 107.00 2.13 6.88 -1.69 -0.06 7.25 Digesting SUNW 119.44 1.88 3.31 -2.00 4.06 7.25 Momentum LSCC 63.63 3.38 2.44 -0.69 1.88 7.00 Get onboard TQNT 44.81 3.08 2.66 -1.56 1.75 5.92 On a tear IDTI 69.50 0.44 1.00 -0.13 2.75 4.06 Near highs EMC 93.13 0.19 -0.88 -0.69 5.13 3.75 Repeating EXDS 60.00 2.00 -1.13 0.75 2.13 3.75 Great close MER 141.56 3.38 -2.69 -3.50 5.06 2.25 Bounced COHR 70.13 -0.16 -0.72 3.94 -1.88 1.19 Clockwork JPM 145.00 4.06 -1.25 -4.25 2.56 1.13 Holding up CCU 83.06 -0.88 1.50 -0.69 0.06 0.00 FCC approval AFL 55.25 2.50 -1.13 -2.63 0.19 -1.06 Dropped DNA 162.00 3.06 -1.81 -1.75 -1.50 -2.00 Dropped Puts MLNM 113.00 -3.19 -2.31 1.38 2.63 -1.50 Drifting SYMC 46.94 -3.13 -1.31 4.38 -1.38 -1.44 Virus news LVLT 59.50 2.19 -0.13 -2.19 -0.13 -0.25 Going down SGP 41.88 -0.81 0.31 1.31 0.06 0.88 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** AFL $55.25 +0.19 (-1.06) Okay, here's the deal. The crazy duck is going to be on CNBC tomorrow with the CEO of AFLAC. Apparently, AFL is going to unveil its new commercial tomorrow on CNBC, so there very well may be some buying interest associated with this press coverage. Keep this in mind if you are looking for an exit tomorrow. We are dropping coverage tonight because of the recent round of profit taking that has brought AFL below its 10-dma, currently at $56.01. In Tuesday's Updates, we mentioned that we would be cautious with a move under the 10-dma. Although we are jumping out about where we got in, this was a successful play, especially considering it is an insurance stock. Tomorrow's AFL feature on CNBC may given the stock a nice little pop when looking for an exit. Perhaps, 10 minutes after the unveiling of the duck? DNA $162.00 -1.50 (-2.00) This past week has seen DNA test its key support level at $160 almost every day. Buying opportunities are nice, but when a trader is presented with one at the same level every day, you have to wonder. Even a trampoline that's stomped on too many times is likely to break. After last week's nice run to $177 resistance and a sharp move down, the volume has now dried up and while it may look like consolidation, certain red flags have popped up. The last couple of days has seen DNA violate its 10-dma (at $166.60) and its 5-dma (at $164.40). It is also having trouble with resistance at the $167-168 area. News today was mixed to negative as well. It was reported today that parent company Roche Holdings AG booked large gains in selling shares of DNA in order to boost its lackluster earnings report. Fear that Roche may sell more shares in the future would not be good for this call play so with that, we say goodbye. PUTS: ***** SGP $41.88 +0.06 (+0.88) Although the action has been choppy, SGP doesn't look like it is willing to head lower at this time. Assuaging investors' patent-related concerns, SGP received a 6-month extension of its Claritin patent. The stock continues to move up sharply in the morning and then decline throughout the remainder of the day, but both the highs and lows have been getting higher over the past week. Additionally, the closing price has been above the 10-dma the past 2 days, and MACD, RSI and Stochastics have turned up. With the market sentiment favoring the bulls and diminishing patent fears, this seems like a good time to get out of the way before we get trampled. INCY $88.81 +19.88 (+14.00) Don't you just love surprises? It seems as though good news always comes out after the market, when it is too late to get in on a hot deal. Today, INCY just couldn't wait, making such a fast climb, it was too late to move either direction without being impacted. INCY announced an agreement with Motorola, allowing them to be the first company to use Incyte's portfolio of patented genetic information to develop, manufacture and sell chips that can determine which genes make a specific protein or other building block of the human body. Pushing through all near-term support, as well as surpassing even the 50- and 100-dmas of $88.83 and $81.65, INCY rallied to a high of $89, and closed only a fraction below this level. Needless to say, due to this upside surprise, we will be dropping this as a put play. ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Thursday 08-17-2000 Copyright 2000, All rights reserved. 2 of 2 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/081700_2.html ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** EXTR $186.56 +16.88 (+26.81) What a great day for our beautiful play! Yesterday was a day of rest for our little rocket, but today the stock blasted off into yet another new all-time high. The minor resistance at $175 was easily cleared (and then some). Aggressive traders who bought EXTR this morning when it bounced above its 5-dma had much to cheer about, as did anyone who has played this one since we've added EXTR as a call play. There's not much to say about this play except "Hooray!" In the news yesterday, EXTR was ranked number one for overall Layer 3 port shipments for the quarter ended June 2000 by the Dell'Oro Group. With 28% of the market, and more being taken from competitors like FDRY, the future looks great. While there was no reaction yesterday, today the buyers came in large volume to confirm the up-move. Support is way below at $175 and then the 5-dma at $171.35. There may be some resistance at $190. With such "extreme" gains recently, those who have profits may want to clip them just in case the profit takers step in. DIGL $107.00 -0.06 (+7.25) Since the large move up on Tuesday, DIGL has been digesting its breakout. In the process, it may be giving traders an excellent entry point as it heads closer to test its $105 support and the 5-dma at $104.88. Today was more digestion as stock traded only 33% of its ADV in a narrow range, finishing only fractionally lower. In fact, the last two days have been pretty much sideways to down movement on decreasing volume. This suggests that the move down is just normal profit taking and nothing more. Support for DIGL can be found at $105 and then just below its 10-dma, at the psychological $100. Below that, there is support near its 50-dma at $95. Looking ahead, there is light resistance at the $108-109 area with stronger resistance at $110. For aggressive traders, a bounce off the 5-dma would be a great entry point but confirm with volume. With the rest of the optical sector moving up, there is little reason for DIGL not to tag along for the ride. IDTI $69.50 +2.75 (+4.06) The Philly Semi Index ($SOX) tacked on another 3.5% today, which carried our IDTI one step closer to its all-time high. The stock spent Wednesday fighting off the profit takers and falling back down to its 5-dma, currently at $66.88, on relatively light trade. The sector-wide rebirth of leading chips stocks has our play positioned to retest its 52-week high, which was traced less than a month ago. But, before breaking to new highs, IDTI must first hurdle resistance at $70. The stock churned around the $69 level during the latter half of trading Thursday, after staging an impressive rally earlier in the day. We'll want to watch for another early morning rally to lift IDTI past its next resistance level. Look for an entry on a strong move above $70 early Friday morning on healthy volume. Make sure to confirm strength in the broader Chip sector before entering the play. If the Chip bears return from their sabbatical, IDTI has support at its current levels, and below at $68, and the 5-dma. The stock's pattern of higher lows might warrant an aggressive trader to consider buying the dips. EXDS $60.00 +2.13 (+3.75) EXDS announced today that it had teamed with Network Associates (NETA) to improve and enhance the performance of its high-speed networks. Along with help from the announcement, EXDS rallied early this morning on the heels of the upbeat profit report issued by BRCD. EXDS broke away from resistance at $59 in the latter half of trading to steadily rise into the close and finish at its day high of $60. The $60 level is a significant hurdle for our play. A strong rally above that level would signal a breakout from a nearly four-month long consolidation for EXDS. Needless to say, we'll be on breakout watch early Friday morning. Watch for the bold move above $60 and confirm any attempt at a breakout with strong volume. A healthy Tech sector tomorrow morning might be enough to take our play to the next level. If the profit takers show up before week's end, EXDS has help below at $59, and major support at $58 and again near the 5-dma at $57.88. An aggressive trader might target shoot for an entry on a bounce off support if any light selling subsides. SUNW $119.44 +4.06 (+7.25) Chase H&Q started coverage on SUNW with a Buy rating yesterday, based upon the company's business momentum and increasing earnings. Despite the positive press, SUNW pulled back to support around $116 to consolidate its recent gains. In a twisted way, the HWP earnings report last night gave our play a little boost this morning. HWP reported flat sales of its Unix servers, because of the stiff competition from SUNW. The news from HWP combined with the resurgent Tech sector propelled our play to yet another new high today. SUNW's leadership role in the recent Tech rally positions our play well if the NASDAQ continues to climb. SUNW finished right near its day high Thursday, which might warrant consideration to enter the play at its current levels if the Tech sector shows signs of strength again Friday. Watch for a strong rally above the $120 level. If SUNW pulls back to consolidate again, look for a bounce off support at $118, lower near $116, or around the 5-dma, which has moved up to $115.75. By the way, SUNW announced a 2-1 split at 7:15pm EDT last night. Look for a gap in the morning. ITWO $158.00 +11.44 (+11.06) After consolidating for two consecutive days, ITWO charged back Thursday to trace a near-term high in its ascending channel. Our play received a boost from two separate announcements today. First, ITWO, IBM, and ARBA announced they were launching a $90 mln advertising campaign to promote the threesome's B-2-B projects. And second, Gruntal & Co initiated coverage on ITWO with an Outperform rating and set a short-term price target of $170. ITWO bounced off its 5-dma early this morning, and charged past several key resistance levels to finish strongly on a surge of buying in the final hour of trading. ITWO is now positioned to breakout from a nearly five-month consolidation, with $160 marking the pivot point. Look for entry on a strong move above $160, and make sure to confirm a breakout with heavy volume as was the case during Thursday's trading. Strong support at $155, and again near the 5-dma at $150, might provide an aggressive trader with an entry point if ITWO pulls back on profit taking. COHR $70.13 -1.88 (+1.19) Like clockwork, COHR bolted out of congestion quickly Wednesday morning above resistance at $70. COHR's rally was spurred by the news that the company had won a contract to supply hair removal lasers to one of Britain's largest health and beauty store operators. COHR is expected to supply lasers to some 200 stores over the next several years. Traders took advantage of Wednesday's rally by locking in profits Thursday. COHR fell on light selling pressure and consolidated down around its 5-dma, near $69.58. However, the stock's uptrend is still very much intact, with a pattern of higher highs developing. Going forward, we'll want to watch for bounces off support levels at $70, $69, or the 5-dma. Aggressive traders might target shoot for entry points during COHR's pullbacks. More conservative traders might look for an entry if COHR bolts back above the $72 level, or rallies past $73, its near-term high. Trading activity has been a good indicator of price action, with more buyers on the up days than sellers on the down days. Make sure to confirm advances with above average volume. CCU $83.06 +0.06 (+0.00) CCU came out strong Wednesday morning to challenge the intraday resistance at $86. The news that the FCC approved its $23.5 bln acquisition of AMFM later in the session did however change the flow. The commission is requiring Clear Channel to sell 122 stations in 37 markets to meet certain ownership restrictions. As it turned out though, the press release resulted in minor damage and effectively offered traders entries into this media-sector play. The commanding volume took CCU down to a daily low of $81.50 before the stock rallied into a powerful finish smack on the 5-dma line at $83. Today's session was also tradable. The sluggish broader market brought CCU down a few notches, but once again there was a solid recovery. The high-volume moves through the rising near-term support levels (now at $82-$83) further reinforced our position that CCU is getting geared up to make another run. Take a look at a daily chart. Firm support is attractive at the 10-dma line (currently $81.43) and is serving as a reliable launching pad on pullbacks. Use stops for protection. JNPR $172.19 +5.88 (+12.25) We're very close to encountering a full-blown breakout. If only a bit more volume would materialize to substantiate the climb. Yet, today's trading activity showed some promise at 6.26 mln shares exchanged, which is a smidgen over the ADV. Pullbacks to the supportive 5-dma at $167.64 would provide a champion entry. Even more attractive would be entries off the rising 10-dma ($162.16), assuming this technical line demonstrates strength in troubled times. If we're not afforded such deep dips and the NASDAQ is still in rally mode, then jump into this momentum play on strong volume moves off $173. Before committing, know your portfolio's tolerance. This is a HIGH-RISK INTERNET play. Expect upper resistance at $180 and the $181.25, the 52-week high. TQNT $44.81 +1.75 (+5.94) Rebounding from a mild slide in the previous session, the semiconductors were on a tear today. The Philadelphia Stock Exchange's semiconductor index rose 3.51%. It was led higher by the likes of TQNT and INTC, the world's largest computer chip maker. We're anticipating that the strong sector momentum will spark additional gains over the short-term. More specifically, TQNT's 4.2% gain fortified its intraday strength at the 200-dma ($41.41). A push through the 50-dma ($48.56) would provide the more cautious traders with conclusive confirmation that TQNT can rise to the occasion. Although, it's very reasonable to enter after TQNT penetrates the 100-dma ($46.08) with good volume. Remember to watch the sector activity as this play is based on that upward momentum. EMC $93.13 +5.13 (+3.56) Patience is rewarded as EMC repeats its familiar pattern. The stock has a habit of moving sharply higher and then consolidating for several days before repeating the process. After charging to new highs by the middle of last week, EMC spent 5 days meandering between $87-90 as we waited for some sign of the next breakout. Declining all day yesterday, things were not looking too great as the price drop was coming on increasing volume. This morning was an entirely different picture as the stock finally got through the $90 resistance level. The upward move was looking a little tenuous until 1pm EST as the volume kicked up and the price surged. This looks like the beginning of the next big move as buyers jumped aboard, helping to propel the price within striking distance of the highs from last week. With volume ticking up again today, our play tacked on more than $5 to post a new all-time closing high of $93.13. Intraday dips to the $90 support level are still buyable, but if the upward momentum continues, you may have to content yourself with buying the breakout over the $94 resistance level. LSCC $63.63 +1.88 (+7.00) Could that be our entry point? After the strong move earlier in the week, LSCC was kind enough to have a down day allowing us to get onboard. Profit taking dragged shares of LSCC lower yesterday morning, but there was no conviction in the selling. Volume almost completely dried up as the price fell below $60 to bounce right on the 200-dma (now at $60.19). Then the bulls had their turn as buying volume increased throughout the day and right up to the noon hour today. This took the stock up to resistance at $64.50, which is right at the 100-dma, and just like clockwork, the move ran out of gas. It was encouraging to see LSCC hang on to most of its gains today, as the stock closed above the 30-dma (currently at $63.13) for the first time in over a month. Renewed bounces from the 200-dma are buyable, as long as volume confirms the bounce, but a more conservative approach would be to wait for buying volume to push the stock through resistance before pulling the trigger. MER $141.56 +5.06 (+2.25) Now that is a beautiful chart. MER has a pattern of moving higher and then pulling back to retest the previous high. After tagging a new all-time high earlier this week, the stock pulled back with the rest of the Financial sector only to surge higher today. Look at the bounce that took place this morning. Tuesday and Wednesday were tough on the bulls as the stock fell all the way to $135 (prior resistance in mid-July), but the bounce this morning came with conviction, as buyers bid the price higher by more than $5, for a close back above $141. Today's surge just fell short of Monday's closing high, but continued market and sector strength will likely boost our play to new highs again in the coming days. Now that it is only 2 weeks away, the split on September 1st is likely to fuel even more gains. Intraday support still sits at $140, $139, and $137.50. Continue shooting for new entries on bounces at these levels or at the $135 support level. More conservatively, wait for continued buying momentum to push the price through resistance at $143 before adding new positions. JPM $145.00 +2.56 (+1.13) Trading in a narrow $3 range today, JPM was still unable to break resistance of $147.94, set by Monday's 52-week high. Hitting a low of $144.06 today, the stock violated support of $145 offered by the 5-dma. Recovering from this morning's low, JPM was determined not to flirt with support below this level at the 10-dma of $143.77. Stalling between $144 and $145 for most of the afternoon, the stock found enthusiasm in the last two hours of trading. JPM climbed to the day high of $147.38, but then dropped off on a strong volume move, closing the day at $145. Still trading well above all technical supports, JPM is still looking great for our call play. If you are feeling bullish, continue to look for entry points to the play on bounces off the lows. Otherwise, a strong volume move to the upside, breaking though resistance of Monday's established 52-week high would also give a solidly convincing entry point to the play. A few indicators to watch for direction on this stock are interest rate sentiment, the Dow, and the Banking Index, BKX.X. Financials have had quite a run lately, and with Mr. Greenspan's meeting next Tuesday, range trading may be the way of this sector until they find solid ground. Use stop losses. ******************* PLAY UPDATES - PUTS ******************* MLNM $113.00 +2.63 (-1.50) Ho hum. So far it's been very boring for our put play, but it has provided for some great entry points. With MLNM having difficulty with its 10-dma (currently at $115.85), failures to breach that level have provided many opportunities to enter this play. What is heartening to see though is that with the market moving up the last couple of days, MLNM has been drifting up on low volume. Speaking of volume, it is continuing to ease back so a move one way or another may be imminent. One thing to note, however, is that today MLNM closed above its 5-dma for the first time in over a week. As well, it managed to close above the $110 mark. However, resistance at $115 continues to hold strong with additional resistance at $120. Conservative investors looking for confirmation before entering may want to wait until MLNM breaks below $110 before entering. With no news in the past week, movements in stock price will likely be based on technicals and sector sympathy so confirm both before making a play. LVLT $59.50 -0.13 (-0.25) It has been more of the same for LVLT over the past two days. Namely, lower prices. After enjoying a brief reprieve earlier this week, it would appear the institutions are back to sell LVLT lower, noting the rising volume on the down days. Despite the sweeping rally in the broader markets today, the Telecom sector resumed its laggard role. Along with the weakness in its sector, LVLT has fallen under scrutiny for its lofty valuations. Investors are having a hard time justifying LVLT's high price relative to its projected sales figures. LVLT's recent sell-off has provided several entry points as the stock has fallen below key support levels, including $60 today. Another entry into the play might be found if the heavy selling drags LVLT below major support at $59. A more conservative trader might wait for LVLT's losses to accelerate and consider entering the play if the stock falls below $58. Confirm continued weakness in the broader Telecom sector before initiating new positions. SYMC $46.94 -1.38 (-1.44) Was that an entry point or a reversal? After bottoming at $42.75 on Tuesday, SYMC bounced sharply yesterday, running right through the $47 resistance level and moving as high as $49.13 before running out of steam at the close. The stock opened lower today, and then gradually drifted below the $47 level by the close. So the pivotal question is whether this level will act as support or resistance going forward. Could the price jump yesterday just be a knee-jerk response to the "I Love You" virus raising its ugly head yesterday in Europe? Only time will tell, but it is encouraging to see that the impact of the virus this time around has been well contained. Be careful not to jump in to the play before the market tells you which way it wants to go next. Look for the price to drop from current levels, confirmed by increasing volume before opening new positions. The 10-dma ($49.66) continues to provide overhead resistance and another failure to break through this level can be used as an opportunity to buy puts. The stock will likely have solid support near $43, so tighten up your stops as it drops near this level. ***********************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 ************************************************************ ************** NEW CALL PLAYS ************** SDLI - SDL, Inc. $383.00 +7.75 (+21.13 this week) SDL's products power the transmission of data, voice, video and Internet information over fiber optic networks to meet the needs of telecommunications, cable television and satellite communications applications. They enable customers to meet the bandwidth needs of increasing Internet, data, video and voice traffic by expanding their fiber optic communications networks much more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL's optical products also serve a variety of non-communications applications, including materials processing and printing. Faster than a speeding bullet, able to leap prior closes in a single bound. It's SDLI! Can you say momentum? On July 10th, JDS Uniphase proclaimed its intent to acquire SDLI in a stock-for-stock transaction worth $41 bln. Ever since then, the stock has had the power of a locomotive, climbing to a 52-week high of $460.50 on July 24th. Clearly, the profit takers took their cue at that point, sending the stock as low as $315 a week later. Since bottoming on July 31st, a day after losing over $50 in a single session, SDLI has been on a roll, regaining some $70 points. That about sums up this play: volatile and risky, but it can be very rewarding. The nearest support for the stock lies at the 5-dma of $371.26. Hitting a low of $373.75 today, the stock has managed to outpace all technicals, trading as high as $384. With the close only $0.69 below the day high, SDLI seems to have its sights on a replay of July's boom. Granted, the fiber optic sector is hot right now, but the stock still seems well-positioned to shoot higher before calling it quits. Look for entry points to the play on dips towards the 5-dma, but remain aware that the day lows are higher every day. Likewise, if the stock trades below today's close, a bounce back through $380 will also bode well for a move to higher ground, as this level has continued to offer resistance in the pre- and post-July runs. While there has been no news as of late, SDLI has been running on momentum. The red-hot fiber optic sector is here to stay, and has been performing well. Corning(GLW) just announced a 3-1 split yesterday after the close. Watch the sector for clues of profit taking. As always, a strong NASDAQ and strong volume in the stock will be indicative of favorable conditions. BUY CALL SEP-370 OSL-IN OI= 434 at $38.63 SL=30.00 BUY CALL SEP-380 OSL-IP OI= 265 at $34.38 SL=26.75 BUY CALL SEP-390*OSL-IR OI=3247 at $28.88 SL=22.50 BUY CALL DEC-400 OSL-LT OI=2509 at $60.00 SL=46.00 SELL PUT SEP-350 OSL-UJ OI= 503 at $14.38 SL=18.25 (See risks of selling puts in play legend) Picked on August 17th at $383.33 P/E = 500.33 Change since picked +0.00 52-week high=$460.50 Analysts Ratings 12-8-0-0-0 52-week low =$ 30.83 Last earnings 07/20 est= 0.30 actual= 0.33 Next earnings 10-26 est= 0.37 versus= 0.10 Average Daily Volume = 5.8 mln GSPN - GlobeSpan, Inc. $129.38 +6.50 (+18.64 this week) GlobeSpan, Inc. is a leading provider of integrated circuit, software, and system designs for digital subscriber line (DSL) applications which enable high-speed data transmission over existing copper wire telephone lines at rates over 100 times faster than today's 56 Kilobit modems. Globespan's business is accelerating communications through high-speed solutions based on DSL technologies. The company's innovations make it possible to do the things that technology companies have been promising for years - real-time video conferencing, telecommuting, high-speed Internet surfing, and video-on-demand. Unlike cable, wireless, and direct broadcast satellite transmission services, DSL operates over the "local loop", the vast network of over 800 million copper telephone lines that connect end users to central office switching centers. After a quick post-earnings sell-off to start the month, it's been a great August so far for GSPN. Reporting earnings on July 31st, the stock sold off sharply the following day. For the second quarter, GSPN reported net revenues of $75.9 mln for an increase of 705% over last year's net revenues of $9.5 mln. Quarter over quarter, this was an increase of 144.4% from the net revenues of $32 mln for the previous quarter. This was good enough to come in at 11 cents per share, easily crushing Street estimates of 4 cents per share. Selling off sharply, the stock found bottom at the $95 level. This was just below the 100-dma, which has been at $100 for quite some time. Since then, it's been smooth sailing for GSPN, with only a minor wrinkle. After failing to break through resistance at $125, the stock regrouped at $105 before finally powering through the $125 mark today on about 116% of ADV. The past couple of days have also seen GSPN move above its 50-dma (now at $113). Support for the stock can be found at $125, $120, and then its 5- and 10-dma in the $116-117 area. Looking ahead, resistance can be found in increments of $5 at $130, $135 and $140. Conservative investors looking to play this one will want to wait for GSPN to clear $130 with conviction before entering. This past month has seen GSPN trade in tight, steep channels. Connecting the lows of GSPN for the past four days, the bottom of the channel currently rests at $117.88 and is moving up fast. Be advised though that a channel this steep is usually not sustainable for long periods of time. That being said, aggressive traders may want to target shoot a bounce off the bottom of that channel. There has been lots of good news for GSPN lately. This week saw UBS Warburg analyst Gregory Mischou initiate coverage with a buy rating and a 12-month price target of $175. According to Mischou, "GlobeSpan is a leader in DSL technology with a strong portfolio of integrated products that allow service providers to enhance the performance of their offering and realize deployment and provisioning efficiencies." Prudential also initiated coverage with a strong buy rating. Continued strength in the semiconductor sector and good news such as this means momentum for GSPN. BUY CALL SEP-125*GHY-IE OI= 26 at $16.75 SL=12.00 BUY CALL SEP-130 GHY-IF OI= 33 at $14.25 SL=10.50 BUY CALL SEP-135 GHY-IG OI= 3 at $12.00 SL= 9.00 BUY CALL NOV-135 GHY-KG OI= 11 at $25.25 SL=21.25 BUY CALL NOV-140 GRX-KH OI=266 at $23.13 SL=19.50 SELL PUT SEP-120 GHY-UD OI= 51 at $ 7.88 SL=10.50 (See risks of selling puts in play legend) Picked on August 17th at $129.38 P/E = N/A Change since picked +0.00 52-week high=$167.00 Analysts Ratings 3-6-0-0-0 52-week low =$ 16.31 Last earnings 07/31 est= 0.04 actual= 0.11 Next earnings N/A est= 0.09 versus= 0.00 Average Daily Volume = 1.22 mln PLXS - Plexus Corp $132.00 +6.50 (+12.13) Plexus provides product realization services to original equipment manufacturers (OEMs) in the telecommunications, medical, industrial, computer, and transportation electronics industries. Its Plexus Technology and SeaMED subsidiaries provide the product design and engineering, while its Plexus Electronic Assembly subsidiary handles manufacturing. Lucent and GE account for over 25% of sales. Pump up the volume! That's just what happened after the BoD announced a 2:1 stock split. The share price catapulted off its summer low of $86.75 (seen on August 3rd) and is now set to challenge the 52-week record as it runs towards the split date. The stock dividend is payable in just a couple weeks on August 31st. It will go ex-div on September 1st. The company currently has 60 mln shares authorized with 18.2 mln outstanding. Upon completion of the stock split, the number of shares outstanding will be approximately 37 mln. Following the announcement, Peter Strandwitz, Plexus' Chairman and CEO, added his two-cents stating that the stock split "reflects Plexus' record of strong operating results and continued growth prospects in the electronic manufacturing services market." Investors liked what they heard and began bidding up the share price. At first PLXS' upward propulsion stopped short at a ceiling just under the $120 mark. But, this week was a different market and PLXS is once again on a tear. As the techs came back into particular fashion today, PLXS responded with a $6.50, or 5.2% advance. The bounce pushed it through the $130 level! The ultimate objective is to move through $140 and $141.50 and eliminate any upper resistance. But for now, look for dips back to near-term support at $123 and the 5-dma (currently at $124.78) for an entry. If there's no pullback and PLXS continues to rage on, then be watchful for intraday support to develop around $128 and $130 before jumping into this split play. After Plexus reported record sales and earnings for its 3Q and nine-month period ended June 30th, two analyst firms reiterated positive recommendations for the stock. On July 21st, Prudential Securities maintained a Strong Buy and raised its 12-month price target to $160 from $130. A few days later, Stephens Inc. reiterated a Buy and upped their price target to $178 from $126. The earnings report was impressive. Net sales for the 3Q were at a record $193.2 mln, representing a 60% increase from $120.4 mln in the same quarter a year ago. Net income easily beat the consensus estimate of $0.52 and came in at $11.1 mln, or $0.57 p/s as compared to $5.5 mln, or $0.30 p/s for the 3Q of 1999. BUY CALL SEP-125 QUA-IE OI=14 at $17.13 SL=13.25 BUY CALL SEP-130*QUA-IF OI=30 at $14.50 SL=11.25 BUY CALL SEP-135 QUA-IG OI= 4 at $12.25 SL= 9.50 BUY CALL SEP-140 QUA-IH OI=10 at $10.13 SL= 7.50 BUY CALL SEP-145 QUA-II OI=43 at $ 8.38 SL= 6.25 Picked on August 17th at $132.00 P/E = 88 Change since picked +0.00 52-week high=$141.50 Analysts Ratings 7-7-1-0-0 52-week low =$ 24.44 Last earnings 06/00 est= 0.52 actual= 0.57 Next earnings 10-27 est= 0.59 versus= 0.41 Average Daily Volume = 371 K ************* NEW PUT PLAYS ************* No new puts today. ********************** PLAY OF THE DAY - CALL ********************** EXDS - Exodus Communications $60.00 +2.13 (+3.75 this week) Exodus provides Internet system and network management solutions for companies with mission-critical Internet operations. The company offers sophisticated systems along with technology professional services to provide optimal performance for customers' Web sites. Exodus has a long list of customers, including: EBAY, YHOO, SUNW, and AMAT. The company continues to expand its business through acquisitions and expansion overseas. Most Recent Write-Up EXDS announced today that it had teamed with Network Associates (NETA) to improve and enhance the performance of its high-speed networks. Along with help from the announcement, EXDS rallied early this morning on the heels of the upbeat profit report issued by BRCD. EXDS broke away from resistance at $59 in the latter half of trading to steadily rise into the close and finish at its day high of $60. The $60 level is a significant hurdle for our play. A strong rally above thatlevel would signal a breakout from a nearly four-month long consolidation for EXDS. Needless to say, we'll be on breakout watch early Friday morning. Watch for the bold move above $60 and confirm any attempt at a breakout with strong volume. A healthy Tech sector tomorrow morning might be enough to take our play to the next level. If the profit takers show up before week's end, EXDS has help below at $59, and major support at $58 and again near the 5-dma at $57.88. An aggressive trader might target shoot for an entry on a bounce off support if any light selling subsides. Comments Closing right at the recent resistance at $60, EXDS saw some good buying at the end of the session. Yesterday gave a great opportunity to enter the play and today's NASDAQ action was very encouraging for the beleaguered techs. If the NASDAQ remains strong, EXDS should make that attempt to close over $60. Pullbacks to intraday support at $59 would be a good entry. A strong convincing move above $60 that can be sustained after amateur hour would also offer an entry point. Watch the NASDAQ carefully for direction and signs of profit taking. BUY CALL SEP-55 DUB-IK OI=4991 at $8.38 SL=6.50 BUY CALL SEP-60*QED-IL OI=5895 at $5.38 SL=3.75 BUY CALL SEP-65 QED-IM OI=4285 at $3.50 SL=1.75 BUY CALL DEC-65 QED-LM OI=1545 at $9.63 SL=7.25 SELL PUT SEP-55 DUB-UK OI= 637 at $2.75 SL=3.75 (See risks of selling puts in play legend) Picked on August 15th at $57.13 P/E = N/A Change since picked +2.88 52-week high=$89.81 Analysts Ratings 26-5-1-0-0 52-week low =$15.06 Last earnings 06/00 est= -0.12 actual= -0.10 Next earnings 10-23 est= -0.17 versus= -0.07 Average Daily Volume = 8.30 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Success Basics: Managing for Profit - Protecting Against Loss Developing a reliable and effective trading system is the first step in becoming successful in the stock market. Note: The Spreads/Combos editor is travelling to Chicago and the Chicago Board of Options Exchange (CBOE), where he will review a number of new features for retail option traders developed by our friends at Preferred Trade. Managing for Profit... Developing a reliable and effective trading system is the first step in becoming successful in the stock market. One of our most popular writers often discussed his trading techniques with regard to military tactics. He would start by saying something like, "Each trade you make is similar to the beginning of a battle. To be successful in the long run, you may have to make temporary, tactical retreats." Indeed, many of his analyses were right on the mark. A general's goal is to exploit troops and munitions efficiently. As an option trader, your goal is to maximize profits and preserve capital. Both campaigns are similar in this respect; combat casualties are a certainty and some battles must be sacrificed to win the war. A trading system is the easiest way to a become a General in the stock market. A well-defined plan of attack helps new traders learn proper money management and the correct use of technical analysis in identifying precise entry and exit points. Trading in a systematic manner is far more likely to produce consistent profits than a scheme based on intuition, emotion or the trend of the day. The benefits to this approach are many but most importantly, you can eliminate the guesswork that comes from trying to manage an active position without realistic goals or loss limits. The targets and exit strategies are predefined, leaving no doubt as to when and how to get out of a position if the market moves against you. Potential risk is identified prior to beginning the trade, with a fixed limit on maximum losses and a formula for taking profits. There are no positions initiated without a complete assessment of the capitalization necessary to carry out the entire strategy, even in the worst case scenario. A thorough study of the underlying issue's historical data is used to provide objective goals for future movement, based on expected volatility and technical indications. With all of these elements properly evaluated and arranged, you can develop an effective plan that contains a suitable risk-reward outlook based on appropriate strategies that are compatible with your personal trading style. The first step in developing a practical method for participating in the market is to determine your comfort threshold and stress level. Think about the unique emotional effects of your trading activities and managing an investment portfolio. Are you usually a cautious person or do you feel comfortable traveling at warp speed? How will a specific type of trading affect you mentally? Can you handle the volatility of day-trading options or are you happier with conservative, longer-term plays. After you identify the appropriate trading attitude, it is important to decide what type of market activity is most favorable to your personal style. Some traders prefer strategies that profit from trending markets such as those characterized by a sustained advance or decline. Techniques that benefit from this type of movement include Put or Call buying and high potential spreads or combinations. Another tactic might be to focus on changes in volatility. Traders using this approach buy or sell premium in an attempt to profit from transitions in market character. Some utilize neutral positions such as calendar or ratio spreads when the technical outlook for the underlying issue is range-bound or static. Regardless of the method you prefer, each category of price action demands a unique type of trading system. The key to success is to specialize in a specific kind of market activity and utilize trading strategies that perform well in that particular environment. One of the most important steps in developing a profitable system is identifying the appropriate level of complexity when selecting trading techniques. The simplest approach is most often the best but every strategy has risk and it is impossible to classify any particular technique as the absolute perfect method. In most cases, there is more than one favorable technique and even though each strategy has different attributes, they can all be useful in a trader's arsenal at the proper time. The easiest way to become successful is to completely understand the mechanics of any technique that you are using and try to construct a group of diverse positions based on the correct market outlook. Of course you must remember that the individual investment objectives are far more important than the merits of the technique itself. If a specific strategy is not suitable for you or your trading style then it should not be used, no matter how attractive it appears. In addition to selecting the proper trading techniques, you must also identify the appropriate time frame in which to participate in the market. Most investors are suited to longer-term plays as they require less attention and are easy to manage for those who have full-time commitments to work or family. Traders who have the temperament and resources to follow the markets at all hours should consider short term techniques based on intraday data and momentum-based trends. Using the appropriate strategy when the markets dictates action is the fundamental step in developing the ability to trade in a disciplined manner. After you have identified the characteristics of the market and selected the correct technique to profit from future trends, the next task is to determine specific entry and exit points for the underlying instrument. In most cases, technical analysis should be used to ascertain the correct parameters for risk and reward. With this approach, a simple mechanism for money management is built into the initial position. Entry timing can be based on a number of different indicators and the criteria used to identify a trading opportunity is a personal choice. The great thing is, you don't have to open any position until you are satisfied with the probability of a profitable outcome. You can search through charts for the perfect pattern, perform extensive due-diligence, and wait for the best combination of technical indicators and favorable market conditions. In short, you can forego any trade until the number of reasons to participate becomes overwhelming. Remember, the market does not care whether you play along or sit on the sidelines. In addition, when you trade without a system, it's amazing how confusing the situation can become. Once you are committed, you are playing by the market's rules, not your own. Note: In part two, we will continue today's discussion of trading systems and examine the techniques professionals utilize to manage their positions. Good Luck! ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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