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Daily Newsletter, Monday, 08/28/2000

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The Option Investor Newsletter                   Monday 08-28-2000
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        08-28-2000        High      Low     Volume Advance/Decline
DJIA    11252.80 + 60.20 11319.10 11188.90  821 mln   1374/1430
NASDAQ   4070.59 + 27.91  4097.33  4048.01 1.37 bln   2123/1893
S&P 100   829.19 +  5.64   834.94   823.80   totals   3497/3323
S&P 500  1514.09 +  7.63  1523.93  1506.72           51.3%/48.7%
RUS 2000  526.48 +  1.37   528.83   525.11
DJ TRANS 2786.68 -  3.49  2822.42  2786.68
VIX        18.23 -  0.87    19.34    18.06
Put/Call Ratio       .50
******************************************************************

The Dawn of Decimalization

Many market stalwarts climbed to new all-time highs today, penny
by penny.  Well, maybe not by the penny, but by teenies.  Today
marked the first day that a handful of selected test stocks,
including GTW and FDX, would trade in decimals, with the smallest
increment being one cent.  Although they still trade in sixteenths,
GE(+0.75), INTC(+0.94), C(+1.94), and GLW(+10.00) all made new
all-time highs.  This proved to help the INDU immensely as it
continues climbing its recent trendline.  And with the SEC
initiatives in place for a full decimalization of the markets by
April 2001, we wonder, will this help the average retail investor?

I do want to briefly mention this because I think that it will be
very interesting to watch how this development unfolds in our
fast-paced, high-flying markets.  While at first glance it would
appear that us retail customers will benefit in that we will see
narrower markets, further thought has raised some concerns.  The
one major concern is the market-makers/specialists' ability to
move the market by only a penny to stay in front of a public bid
or ask.  By moving the market by only a penny, these market-makers
can manipulate the market much easier, and with less financial
risk.  The reason being that if they want to get out in front of
the public under the current fractional system, they must better
the market by an eighth or sixteenth, 0.125 or 0.0625 cents.  On
a larger order, that can result in a significant amount of risk.
Many market-watchers believe that this could be a disadvantage to
retail customers for this exact reason.  Yet, like any other game,
if you learn the new rules and adapt, it certainly can be used to
your advantage.  I can't wait to see it in the option markets!
That will greatly help in narrowing the markets, and create more
opportunity for the option trader.  Anything to cut out the
market-maker!  At the very least, it may broaden the public
interest, and possibly investment, in the stock market since it
can be understood easier than 11/16.  Should be interesting.

Let the games begin!  Today's market action was another day of
impressive gains for both major indices, albeit on light volume.
No sellers to be found.  Well, none with conviction at least.
At the NYSE, volume was a measly 727K shares as the INDU managed
to tack on 60.21 points.  Monday's volume action was the 3rd
lightest day of 2000 and brought the INDU well above the 11200
intraday resistance that it experienced toward the end of last
week.  Yet, the INDU lost some of its steam later in the day as
buying interest dried up.  After hitting 11319, the index just
drifted lower throughout the afternoon.  This resistance level
coincides with the vicinity of the most recent top on April 11th
and 12th, just before the Spring correction.

Financials continue to be a leader in the market with Fed fear on
hold;  many are at or near all-time highs.  As mentioned above,
Citigroup(C) managed to do just that, even as it traded ex-div
today from a 4-3 split.  American Express(AXP) also helped boost
the INDU to its highest levels since early April with a $3.31
gain.  Another INDU component, GM, appreciated by almost 5%,
tacking on $3.31.  The index's tech standout IBM has been
attracting buyers and closed the day at $131.50, up $2.50, its
highest levels in almost a year.  CSFB lifted its price target for
IBM to $150 from $125, believing the company is on track to meet
or beat 3rd quarter estimates.  Looking ahead, the 11320 area will
be a point of contention as the INDU sets its sights on the
all-time high of 11425.  Its closest technical support is the
10-dma at 11116, with intraday support near 11200.  Keep in mind
that while new all-time highs are good to see, they can't continue
skyward in a straight line forever.




Economic data released this morning was shrugged off as investors
seemed unfazed by the report.  Personal Income rose 0.3%, in line
with expectations, but Personal Spending increased 0.6% versus
estimates of 0.5%.  This 0.6% increase is the largest since
February, yet analysts attribute the move to higher energy costs
for households, in particular, gas prices.  The big number that
investors will be watching is the Employment Report due on Friday,
at least those that aren't on vacation.

While the light volume action in the market has been subdued and
lacking real excitement, the NASDAQ is beginning to broaden out
as investors seek value in neglected issues.  The hot-shot tech
favorites continue to climb to astronomical levels such as
CIEN(+11.75), SEBL(+9.94), and JNPR(+8.06).  The NASDAQ traded as
high as 4097 before backing off the 4100 resistance level.
Closing today at 4070, the NASDAQ is once again back in the black
by one point, after beginning the year at 4069.  With volume
coming in at 1.34 bln shares, intraday volatility has continued to
shrink on lower liquidity.  The NASDAQ traded in a 50 point range,
which seems unheard of for the high flying tech index.  But,
light volume or not, the NASDAQ is poised to have its first
positive August since 1996.  Month-to-date, the NASDAQ is up 8%.







Trader Talk on CNBC is that a rally from current levels might be
harder than thought for the NASDAQ given the recent gains and the
idea that the NASDAQ is not the same market as 1999.  Market
internals on the NASDAQ were slightly in favor of advancers by a
margin of 21-19.  Pretty much a dead heat.  What has been
encouraging for the NASDAQ during the past month is the
participation of "the generals," i.e. SUNW(+3.06), ORCL(+2.13),
CIEN(+11.75), and INTC(+0.94).  This has helped drive the NDX.X
higher.  Today, the NASDAQ 100 ran into resistance at the 4000
level, which coincides with the COMPX resistance of 4100 at this
time.  With this in mind, I will be cautious going forward, given
that so many techs have been trading at all-time highs, light
volume, and current resistance levels.  Acting as a catalyst this
week for the Fiber Optics, not that they need it as investors are
buying them with abandon, will be the National Fiber Optic
Conference in Denver.  Any good news out of this hot sector could
trigger some analyst comments, resulting in a buying euphoria.
We will be watching GLW, JDSU, SDLI and others closely.  On a
closing note, as we often mention, the VIX.X closed today at 18.23.
The last time it was this low was July 16th, 1999, Expiration
Friday.  We will be watching the markets carefully throughout the
week for any clues to the post-Labor Day action.  With the markets
at key inflection points, we all will be waiting for the next sign
to move on.  Look for the volume to come back and remember, when in
doubt, stay out.

Good luck!

Matt Russ
Asst. Editor


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TRADERS CORNER
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Position Trading Options
By Austin Passamonte

Recent discussion about position-trading options garnered
quite a response.  Hey, where's all the trigger-happy folks?
Seriously, trade less, make more is an adage I adhere to
stronger each day.  Well, stronger after each losing trade
but that's splitting hairs.

Yesterday's letter from a fellow reader of ours brings to
light many excellent points on both fronts.  Shall we all
learn together?  As follows:

Austin,
I've been reading your column on trading stochastics and MACD,
and have found it to be EXTREMELY helpful in timing my trades.
To the extent that it enabled to start salvaging some busted
LEAP positions (of course, with my luck, my brokerage firm only
allows STOPS to be placed with the CBOE on a day basis only, and
so of course, the days I was out with clients prices dropped and
blew right past my stops when I was even able to place them !!!)

Anyhow, I am now charting these busted plays, and writing two
month-out calls on those LEAPS when the candlesticks, stochastics
and MACD lineup on a daily chart, while simultaneously buying
ATM current month puts on a 30-minute chart. I have been riding
the 30 minute charts down to its crossover signals, then buying
the ATM front end calls. I have also been buying back the covered
calls on the daily charts at the appropriate crossover signals.

I have been able to do this at an 80% or so success rate on these
plays for the past month, and have been able to reduce my cost
basis by about 25% so far. Thanks again for the great series of
articles.

Here's my question. In one of your columns you suggested that
daily chart signals generated can be very powerful for back-end
month trades. This last week using the strategy I wrote October
calls on Amazon, CMGI, CSCO, EMC, INTC and SUNW (though I might
have jumped the gun on a few of these, but I am also concerned
about the VIX!!! ). I also placed orders on OTM September puts
for these stocks.

Do you think it is appropriate to go out only to October to
write the calls, or is November even better with these signals?
I'm still trying to get my timing down with these otherwise I
probably wouldn't have jumped the gun on several. Also, when you
place protective stops when first putting on a trade, at what
percent of the trade do you usually begin with? 75% of the initial
cost of the option? 50% or dollar value?

Any advice or recommendations you can give would be greatly
appreciated. Sincerely, Scott S.

Well Scott, we'll cover those excellent questions in a bit but
first let me commend you for executing this system to
perfection. It seems you are combining the best of both long
and short-term plays to swell that trading account.

My strongest advice is to move your money from a broker that
doesn't allow stops over to one of many that do. We can't
afford not to trade without stops; one busted play that could
be prevented usually takes much, much longer to regain that
it did to lose the same amount of capital.

Profits are too precious for risking open plays without prudent
stop usage. We can't trade without them and don't see how you
will in the long run, either. That would certainly be step one
for me.

As discussed before, no one time-length chart can give us the
complete picture for the market we can safely trade from. A
combination of two or more creates a powerful forecasting
tool indeed.

Daily charts provide the big picture. Big enough for my time
frame, anyway. They show market strength and trends lasting a
few weeks to months in length. Such is enough for me to know
the overall stage of that market.

When oscillator signals such as stochastics & MACD top out
into the overbought range it warns that further upside is
limited. Limited but not halted. These tools can and do hang
up there for days & weeks at a time before the inevitable
reversal.

However, we want to initiate long positions that need time
to perform only when daily charts show that this is still
highly possible. Make sense? In other words, technical tools
topped out on a daily chart tells me the next MAJOR move will
likely be to the downside. We either monitor that for such a
correction or move on to the next symbol on our list.

If daily chart technical signals are all bottomed out in
oversold territory, the next big move is likely a rally.
That doesn't mean we can just go buy calls or LEAPs and wait
for profits to roll in.

Hourly and 30-minute charts indicate price fluctuation inside
the overall trend move shown in the daily chart. These are the
fabled "waves within waves" of Elliott Wave theory. Just because
our market is in a primary uptrend doesn't mean it's time to go
long.

If daily chart signals are all turning up but hourly/30 min
charts are both turning down, we can expect slight to moderate
price corrections right away. Calls bought with impunity just
because daily charts signal up will likely get pushed down in
the process. Not good.

Waiting for all three chart time-frames to align in convergence
gives us the very best odds of catching the short and long-term
market waves in harmony. Now we can buy puts near the top or
calls near the bottom almost every time. Isn't it nice to jump
in and have your plays go profitable almost at once? That's
what patience rewards us with.

As Scott shows us, he takes long-term positions when daily
and short-term charts align. The covered call system works
well when buying the LEAP or stock near the bottom of a
cycle and selling the call near a short-term top. This allows
one to go short the call just as prices peak, giving a good
chance to buy it back for less when that small down cycle
within the overall uptrend bottoms.

That's as aggressive a covered-write strategy as I've ever
seen. While certainly not for everyone, Scott demonstrates
the proper use of long and short-term charts for each type
of play.

I would add that traders entering long-term plays should buy
all the time they can afford. Just don't use it, as Jim Brown
teaches. Excess time keeps the trade from loss through decay,
limiting price action to market movement instead.

Stop prices should be set according to profits targets. If
one expects an average of 50% profit or more of purchase price
per trade, a stop at 20 - 25% of purchase price risks less
than expected reward. Half or more winning trades will result
in cumulative gains over time.

*****

Today was an example of signals failing to align, discipline
and frustration. We watched the OEX waiting for serious action
following last week's price coiling at the end.  Serious action
occurred alright, but no avail to me.




Today's hourly chart is the setup. Here's a clean glimpse at
what I saw. Starting from the vertical line at the 28th (today's
date) we see stochastics flat above 80% in overbought territory.
Index price rests at support on middle Bollinger Band line. MACD
never went negative since the 24th. No signal set up either way.




Here's our trigger chart, the 30 min window. Again, no clear
trade signals either way. Does the market care? Zoooom! From
823 to 835 straight up the chart. September 830 calls (OEXIF)
trade from 10.75 to 15.75 before topping out. Shucks, where'd
that rally come from?

If you study both charts you'll see trade signals align for a put
play at 14:38 this afternoon. Index was falling from high to 832
and Sept 820 puts (OEXUD) were trading for 6.75 ask. Swing trades
taken on these signals right then are above water as we speak.

DO NOT rush out and buy this move at the open tomorrow! It is
already underway and too late to safely join! No longer a viable
signal, it's merely an example of how even the most reliable set
of tools a trader can choose for himself cannot and does not work
100% of the time. Alas, we can only take what the market clearly
offers.

Why not buy the market this morning when we see it rally? Based
on what? Tea leaves? Gut instinct? I've yet to try the tea leaves
but they can be no worse than my gut instinct, I'll tell you that.
There was only one hint we had of today's OEX pop; S/R Indicator
as listed in Saturday's Market Sentiment. Call/Put open interest
ratio was extremely light from 823 to 835. Overhead resistance
above there was strong.

Hey, I don't take my shoes & socks off to tackle that higher math
for nothin' - that's trading information. We stated that a failed
test of 835 would be considered a good long-put opportunity.

Laying my money where my math is, I bought September OEX 820 puts
(OEXUD) as the index rolled over near 832 before 15:00 EST. Let's
see how those 60/30 chart signals treat me tomorrow!

Hope you caught both ends of today's move and all that follow.
See you Wednesday & Best Trading Wishes.

Contact Support


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

VRSN - VeriSign, Inc. $181.44 +5.06 (+5.06 this week)

VeriSign is the leading provider of Internet trust services
and digital certificate solutions needed by Web sites,
enterprises and individuals in order to conduct secure
electronic commerce and communications over IP networks.  VRSN
has used its secure online infrastructure to issue over 100,000
of its Website digital certificates and over 3.5 million of its
digital certificates for individuals.  The company also offers
the VeriSign Onsite service, which allows an organization to
leverage the company's trusted service infrastructure to develop
and deploy customized digital certificate services for use by an
organization's employees, customers and business partners.  To
date, over 300 enterprises have subscribed to the OnSite service
and VRSN has strategic relationships with industry leaders
including Cisco, Microsoft ,RSA, Security Dynamics, and VISA.

Most Recent Write-Up

This past week has seen the continuation of the uptrend that
began in the previous week.  Using the 5-dma for support, VRSN
has been moving steadily up.  Encountering resistance at the
$162-163 area during the prior week, VRSN started the week and
remained above that level.  Spending the better part of the
week in a mini consolidation, the stock touched its 5-dma on
Wednesday and from there, blasted upwards to close just below
resistance at $175.  The next day, that level was easily surpassed
on a Thursday morning gap up.  From there, the stock attempted
unsuccessfully to break through resistance at $180.  This level
is clearly the next hurdle to overcome as Friday's attempt failed
to clear it.  This led to a move lower as profit-takers stepped
in before bouncing off the $173 level.  Ending the week on a quiet
note, VRSN closed down $2.06 on 56% of ADV.  If the current trend
continues to hold, then a successful bounce off the 5-dma (now at
$171.43) could provide for the ideal entry point.  For the more
aggressive, a bounce off the $173-174 area could be the target to
shoot for.  Conservative traders will want to see VRSN clear that
hurdle at $180 with convincing volume before making an entry.
After $180,  resistance could be encountered $183, $185 and $188.
Connecting the highs and lows since finding a bottom in mid-August
at the $140 level, the stock has traded higher in an upward
regression channel spanning 15 points from top to bottom.  The
5-dma has closely followed the bottom of the channel, currently
near $169, putting the top of the channel near $184 and moving up
fast.  Nonetheless, even the aggressive player looking to buy a
bounce off the lower part of the channel will want to see the
stock clear the 5-dma as confirmation before entering.

Comments

Finally!  VRSN had a good surge on Monday to break through the
$180 resistance that proved to be too strong last Thursday.
Right from the get-go, high volume buying pushed the stock
solidly over $180 as it settled in around $181 for the remainder
of the day.  Pullbacks to $180 along with a bounce could provide
an aggressive entry.  We would like to see it hold $180 on a test
as intraday support.  Below, buyers have been supporting the VRSN
at the $175 level.  Volume will be key, considering the light
volume in the NASDAQ.  Watch this index for direction of this
tech issue.

BUY CALL SEP-175 QVZ-IO OI=1450 at $13.25 SL=10.50
BUY CALL SEP-180 QVZ-IP OI=1225 at $10.25 SL= 7.50
BUY CALL SEP-185*QVZ-IQ OI= 753 at $ 8.00 SL= 6.25
BUY CALL OCT-180 QVZ-JP OI= 165 at $23.00 SL=18.00
BUY CALL OCT-185 QVZ-JQ OI=  48 at $20.63 SL=16.00

SELL PUT SEP-170 QVZ-UN OI= 518 at $ 4.13 SL= 5.75
(See risks of selling puts in play legend)

Picked on August 24th at $178.44    P/E = 1275
Change since picked        +3.00    52-week high=$258.50
Analysts Ratings     14-11-1-0-0    52-week low =$ 43.75
Last earnings 07/26    est=-0.01    actual= 0.07
Next earnings 10-25    est= 0.05    versus= 0.01
Average Daily Volume   = 4.1 mln



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