The Option Investor Newsletter Wednesday 08-30-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/083000_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-30-2000 High Low Volume Advance/Decline DJIA 11103.00 -112.10 11210.30 11096.30 819 mln 1401/1420 NASDAQ 4103.81 + 21.64 4115.99 4065.82 1.54 bln 2143/1901 S&P 100 820.93 - 6.37 827.30 819.48 totals 3544/3321 S&P 500 1502.59 - 7.25 1510.49 1500.09 51.6%/48.4% RUS 2000 532.33 + 2.70 532.38 529.11 DJ TRANS 2726.17 - 34.27 2760.31 2722.80 VIX 19.59 + 0.67 20.17 19.21 Put/Call Ratio .53 ****************************************************************** The Return Of Net Stocks Has anyone else seen the resurgence in the Internet sector of late? This sector is second-to-none when it comes to exciting investors. We have been watching stocks in this group begin to show life this month and the AMEX Internet Index broke out above resistance this afternoon. That puts the sentiment on full speed for a bullish move. Check out the chart below to see today's move over 550. I can't help being excited here too when I look at the individual charts of some Net stocks. This has been a classic summer consolidation and investors are breathing life back into these stocks. Many stocks in this group are trading at a five month highs. Check out LNUX, FMKT, CMRC, VERT, CHKP, HOMS, CNET, PPRO, GNET, VRSN, CPTH, and INKT for signs of stocks gaining momentum in a hurry. Time for a deep breath. I just can't help getting excited over the prospects of a fall rally after such a dull summer. Nevertheless, we aren't there quite yet. The employment report due out on Friday is still on the forefront of most trader's minds. After the strong housing report this week, it will be crucial to see a number that doesn't spook the Fed. The current estimates is for 160K new non-farm payrolls created. Unemployment is middle of the recent road at 4% and average hourly earnings is expected to rise by 0.4%. Also on Friday, the NAPM will be released for August with an expectation of 51.8%. These are important numbers to say the least. Now to the markets. The senior circuit was on the downside today as the DJIA fell 112.09 to 11103.01. Volume was average at 818 mln while the breadth was even. I consider this a bout of profit-taking ahead of Friday's numbers. The S&P 500 also lost ground today, giving up 7.23. But the S&P 500 did have a nice bounce off support at 1500 late in the afternoon. And the Russell 2000 went up 2.74 points today. The home of the Net stocks, the Nasdaq, rallied today by 21.74 for its first close over 4100 since July 18th. The official closing number was 4103.91 on volume of 1.53 bln shares. Its nice to see decent volume even though many participants are waiting until after Labor Day to rejoin the markets. Advancers beat Decliners by a 21-19 margin. The big push for this index was the B2B sector which received bullish comments from CSFB. The big news of the day was the announced merger of Credit Suisse First Boston and Donaldson, Lufkin and Jenrette. CSFB will buy the investment banker for $11.5 billion dollars. Zurich-based Credit Suisse will pay $90 for each outstanding share of DLJ held by the public, a premium of almost 10% on DLJ's closing price Tuesday. DLJ shares saw a 32% runup over the last two days amid rumors a deal was imminent. "Combining these two great firms creates a global powerhouse with the platform, financial resources and intellectual capital to rival any financial services organization in the world," said DLJ Chief Executive Officer Joe L. Roby. "The goal is to create a dominant global presence that can compete with the top firms." This will just fuel more global mergers within the sector. Amazon.com rose more than 8% on Wednesday after a Wall Street analyst said that a new French store and a string of recent partnerships spelled a bright outlook for the online retailing giant. In the research note, Goldman Sachs analyst Anthony Noto reiterated his Buy rating on Amazon, saying the company's outlook was "positive". AMZN said on Monday it planned to start selling digital books using a special Microsoft format to make such books easier to read on a computer screen. AMZN closed up $3.31 to $42.94. That's not all for major news either. Broadcom fell for the second straight day on word that INTC is suing, claiming patent infringement. In the suit, Intel alleges Broadcom has violated five Intel patents, one relating to networking, one to chip packaging and three to video compression. Intel is seeking an injunction preventing further infringement, plus unspecified damages and court costs. A spokesman from Broadcom said that this is the first they have heard about the matter and that Intel made no attempt to resolve the situation before bringing suit. BRCM closed $238.44, down $13.50 while INTC lost $0.63 to finish at $73.44. So we are starting to see signs of the awakening of the markets. The QQQs are thinking about a move over 100. The volume is picking up on the Nasdaq composite. The Internets are moving to a four and a half month high. What a relief for us Market Wrap writers who have been rehashing the same "Summer Blues" sentiment for months. And while the fog is lifting, there are always thinks to watch out for. For instance, the data due out Friday carries a lot of weight. The month long rally has been due in part to a silent Fed. We could lose that key factor if more new jobs are created than expected and the hourly earnings number spikes up. No one wants to see unemployment back down to 3.9-3.8%. Not after the strong Housing Starts number from earlier in the week. The DJIA is stalling this week despite some strong individual moves in the financials too. The main concern here is that some manufacturing companies will be hit with profit warnings due to a further interest rate rise and slowing demand. This is the same broken record we've been hearing for months and months, but it did weigh on the blue chips today. But it is time to start thinking about earnings warnings as September is only a day away. With the VIX down below 20 still, it will only take a few key warnings to spice things up. With that said, I am still optimistic about the signals that we are seeing. But the one main signal I have been waiting four months for has still not happened. That signal is the two billion share volume days at the Nasdaq. I want to see back-to-back days, followed by a consistent average near that level. Then I will be in heaven. Actually, heaven is hand- held internet access to my trading account to trade options from a golf course somewhere, but I will settle strong volume on the Nasdaq. (For now anyways!) The S&P futures are about flat right now. I expect the range on the key indices to be somewhat subdued tomorrow. Volume should shrink again ahead of the weekend. This is to be expected and barring a bad number on Friday, things should pick up again next week. Ryan Nelson Editor ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=377 ************************************************************** *************** ASK THE ANALYST *************** The next step in spotting big winners is picking entry points. By Eric Ultey Old traders call it play, but those of us in the know call it technical analysis. The practice of plotting time, price, and volume on a nifty little chart is of the utmost importance in spotting future winners in the stock market. Once you've completed your homework on a company's fundamentals, and decided it's a stock worth owning, your next step is picking a profitable entry point. On spotting entry points, Jesse Livermore had this to say, "Whenever I have had the patience to wait for the [stock] to arrive at what I call a 'Pivot Point' before I started to trade, I have always made money in my operations." Buying a stock at the 'right time' is both psychologically and financially critical. Earning profits after immediately entering a position makes it a lot easier to bear the pullbacks that every stock experiences during extended rallies. In my opinion, the best time to buy a stock, in hopes of catching its next big rally, is when it breaks from an extended consolidation. Like the CSCO situation we reviewed last week, every leading stock needs time to rest before charging to new highs. After the sleeping stock market beauty has consolidated for long enough, its best to buy when the stock breaks from its slumber. As I mention in this column, it is crucial to confirm any breakout attempt with volume that is relatively heavy. High trading activity suggests big institutions are behind the stock's move and the rally has staying power. Often times, investors might miss a stock's initial breakout. There is still time to buy the stock. Take CIEN for example, which I reviewed below. The stock broke to new highs two weeks ago, and pretty much hasn't stopped climbing. Traders and investors willing to take on a little more risk might consider buying such a leading stock during pullbacks to significant support levels, such as the 5-dma in CIEN's case. Once you pick a winning sector and subsequently choose a leading stock within the group, you can't just walk blindly into the investment. By combining the best of both worlds, technical and fundamental, add a little discipline, and you've got yourself a profitable recipe for stock market success. One more thing, keep it simple! Finally, the Summer is winding down. Let's get back to business with some decent action in the market and some tradeable trends. I hope you all have a safe and wonderful holiday weekend, after, of course, you send in money making stock requests to Contact Support. As always, please put the symbol of your requests in the subject line of the e-mail. ---------------------------- SanDisk - SNDK SNDK has been consolidating for the last three months. I would appreciate your opinions on the stock. Resistance seemed to be around 75. It has broken through that. Do you think the stock may be on an earnings/split run? - Thank You, Peter It looks like Sandisk is breaking out of a base and could be ready to run again...please tell me what you think? - Thank You, Christine What is your opinion on SNDK? I've been playing the upside on this successfully for the past 3 months. I don't see you mention it. Or, have I missed your blurb? - Dan We first reviewed SNDK in early July, back when the stock was stuck in a consolidation. Due to popular demand, let's do it again. To review quickly, SNDK is a leading maker of flash memory, which is used in all of our neat little electronic gadgets such as digital cameras, music players, and cell phones. Since early July, SNDK has lined up several significant revenue- generating contracts. The company signed a licensing agreement with TDK, which covers SNDK's patented flash technology. Canon chose SNDK as the key supplier of memory circuits for its new digital video camcorder. And, Nike selected SNDK to supply flash memory for its portable audio player. What's more, SNDK said in late August that it was opening sales channels in China. In short, business is good for SNDK. Need proof for the preceding statement? Get this. The company blew away second-quarter estimates in late July by a whopping 50%, and raised EPS estimates by four pennies for the current quarter. Despite SNDK's recent run, the stock remains relatively cheap when you consider the company's 37% projected earnings growth rate. SNDK's low multiple leaves room for expansion, which means higher stock prices! SNDK's individual attributes are in place for an extended rally into the Fall. But, the macro movements of the Chip sector still need to cooperate if SNDK is going to move substantially higher. It would appear the sentiment in the Semi sector has recently shifted to the side of the bulls, after the bears enjoyed a brief moment of glory back in July. As long as the Chip sector continues to climb, I think SNDK will lead the way, and even outperform the broader group because of its superior fundamentals and rosier outlook. To answer Peter's question, I don't think SNDK is quite yet into split territory. I could be wrong, but start thinking 2-for-1 closer to the $100 level. Earnings will be the driving force with the arrival of the Fall. In the meantime, more contracts and sector rallies will be the main catalysts to carry SNDK higher. I'm very pleased to see that many of you spotted SNDK's breakout last week. It was picture perfect! A strong rally out of a four month consolidation combined with confirming volume. So, what happened? Well, since SNDK's breakout last week, the $SOX has consolidated its recent gains for four straight days, which emphasizes the importance of sector direction. Don't fear though, a pullback after a 35% rally such as SNDK's is perfectly normal. Call it a natural reaction. The declining volume on which SNDK has traded over the last four sessions is typical. Wait for the $SOX to resume its rally and watch for SNDK to lead the Chip charge. ---------------------------- 4 Kids Entertainment - KIDE In the latest issue of OIN, you described how to spot future winners. It's earnings that matter - you say - and I can only agree. However, there are quite a few stocks out there with great earnings, no debts and a bright future, but the price doesn't move. One pretty good example is KIDE. Could you have a look at this stock and tell me, what I may do wrong when holding this stock. Maybe I missed something significant. - Thanks in advance & best regards, Stefan Thanks for writing into OIN, Stefan! You're right, earnings do matter. And, KIDE has definitely had some great earnings growth over the past year or two with the introduction of the Pokemon craze into the United States. In fact, Fortune Magazine recently published its infamous list of Fastest Growing Companies. And, the #1 company on list was KIDE, who blew away the competition with 312% EPS growth last year. The operative words, though, are 'last year'. So, what gives? The main issue afflicting KIDE is the company's revenue stream is so narrow. KIDE derives a concentrated 95% of its sales from Pokemon-related products and licensing. Such a narrow-focused business leaves KIDE at the fate of children's fickle tastes and demands. And, children's demand for Pokemon paraphernalia is on the down. My little sister, Stefanie, who is 10 years young, was a big proponent of anything Pokemon last year. She and her friends, who amazingly have a great deal of purchasing power through their ability to sway parents, would gather everyday after school to buy new Pokemon products. I don't think she has even touched her Pokemon stuff for over six months. Ala Peter Lynch, if Stefanie is not buying Pokemon anymore, I would bet the rest of American children are not buying. KIDE's CEO recently appeared on CNBC in an attempt to defend his company and its focus on the Pokemon craze. I completely disagree with his stance that the Pokemon craze is still going strong. It's not! The company needs to diversify in an attempt to stabilize its revenue streams and fend off the ill effects of fads. And, the company is doing just that. KIDE recently acquired the rights to the Cabbage Patch Dolls, who were made famous back in the 80's. Also, the company is developing licensing agreements with Marvel to tap into the X-Men movie. Furthermore, KIDE has over $100 mln in cash on its books to pursue additional licensing agreements. So, I wouldn't count KIDE completely out. But, at the same time, there's nothing that really excites me about the stock. Of course, if somehow the demand for Pokemon re-ignites KIDE will take off. But, I just don't see that happening. While KIDE was the fastest growing company last year in terms of EPS, the company's inability to sustain such growth has hammered the stock down from its peak of the Pokemon craze. Future stock market winners must have a proven history of earnings growth and, more importantly, the ability to grow profits well into the future. Unfortunately, I don't think KIDE will be able to do so given its current business model. ---------------------------- Titan - TTN Could you explain the recent sharp fall on TTN, please? - Thanks, Connie What's going on with TTN? The stock has been heading south without a reason that I could think of. - Alfredo First Emulex, and now this? Today, TTN announced that it would sue the contraband of shortsellers, who have been spreading false rumors about the company in an attempt to drive the stock price down. Whoa, I love the Internet, I have a great job because of it, but there have been some weird happenings with the advent of such a great technology. To answer your questions, Connie and Alfredo, the bears have been attacking you and TTN. It sounds like a consortium of hedge funds and/or professional short sellers have ganged up on TTN in hopes of unscrupulous profits. As far as I'm concerned, those type of stock market participants are the enemy. Unless, of course, I'm holding puts on a stock under attack. But, seriously now, spreading falsified rumors is detrimental to a stock. Just look at EMLX's underperformance since the hoax last week. The stock has suffered, for what, a lie? Now, there have been some valid concerns raised about TTN's business model, as was mentioned on an interview with the company's CEO this afternoon on CNBC. TTN is a holding company of sorts, that builds and launches technology related businesses. One area TTN has taken special interest in is food irradiation. The technology improves food safety and prolongs shelf life, but has received scrutiny from Ralph Nader and European regulators, among others. However, the FDA has approved food irradiation for the use on fruits, vegetables, and the meats of the world. TTN recently filed with the SEC to spin-off its food irradiation firm SureBeam, which is expected to raise upwards of $127 mln. Now, TTN's announcement today presents an interesting situation for traders and investors alike. If the company can prove that the reasons for the stock's sell-off were unwarranted, we might see a tremendous short-covering rally. Remember RMBS? Additionally, TTN is a successful company, with a solid history of earnings, and an equally solid projected future of profits. Analysts predict TTN will grow earnings by 32% annually over the next several years. That leaves TTN as a bargain at its current levels for the investor with a longer time horizon. However, because of the rumor spreading, TTN probably won't recover all of its losses prior to the bear attack. But, even a partial recovery would yield some handsome profits given the stock's current low level. TTN might be worth considering for the long haul if it beats the bears and clears its name on Wall Street. ---------------------------- Ciena - CIEN CIEN had bullish comments from ABN AMRO on 08/18/2000, PaineWebber also set target price of $255/sh after the third quarter profits and revenues; stock finally broke $200. Would you please look at CIEN and see how valid the two projections are and give us some suggestions how we should approach the stock. What is firm support and resistance? Thank you for your input. - Denis CIEN has been on a tear as of late, and not by coincidence, made its way onto the OIN call list. The drivers behind CIEN's recent run are earnings and a stock split. By now, we all now how I feel about the former, so I won't bore you with the details. However, I must mention, along with reporting third-quarter results, CIEN executives guided analysts to better-than-expected profits for its current fourth-quarter. There's nothing quite like the music of upward earnings revisions to the ears of the bulls. During the company's conference call, CIEN's CEO said, "We believe we'll be able to outperform current consensus expectations for net income and earnings per share for our fourth fiscal quarter." Beautiful! As I previously mentioned, CIEN also declared a 2-for-1 stock split two days before reporting earnings. Here at OIN, you often read about the potential for a stock split in our play write-ups, and for good reason. A split declaration by a company's Board of Directors signals confidence in their stock price. A split announced after a stock has run, such as CIEN prior to the declaration, can be even more telling. In fact, I have read, that after a company announces a split, the stock tends to outperform the broader market by an average of 4% three days later. Something to remember for future trades. At the rate CIEN is going, PaineWebber's target price of $255 might be reached next month. But, as we all know, stocks just don't go straight up. Or do they? CIEN has been marching with incredible strength after announcing earnings and declaring its split. You can see on the chart that CIEN appears to be climbing 'profit' stairs upwards and into the heavens. The stock's 5-dma has been almost a perfect support level during CIEN's run. Buying the dips is definitely in fashion with CIEN right now. Until the stock breaks well below its ascending channel, I will remain bullish on CIEN. With mo-mo investors currently behind CIEN, there are two ways to play the stock. Like I mentioned, buy the dips or try to get in on the beginnings of a big intraday rally. Over the past week, CIEN has tended to charge well past its previous 52-week highs after momentum builds during strong intraday rallies. ---------------------------- LM Ericsson Telephone Company - ERICY I have been watching Ericsson (ERICY) after the poor performance results over the past few months following the split. It appears to be undervalued and potentially in a position to grow if the Fall rally does materialize. What do you think of this pick? - Thanks, Rich I just couldn't resist reviewing ERICY. I think the stock has a great ticker symbol! If they'd just drop the 'Y'... In all seriousness, ERICY has been hit hard over the past few months. Trouble in the Handset sector really began brewing in late July when NOK warned profits would come in lower-than-expected in the third-quarter. NOK blamed its shortfall on the seasonal summer slowdown and component shortages. A little later, ERICY warned analysts of the same problems. And, who could forget the failure of MOT to meet its unit shipment goals? Aside from the parts problem and consumer slowdown, ERICY has to contend with greater competition. Traditionally, ERICY, NOK, and MOT have dominated the handset market, but, Asian competitors have recently entered the space, which has tightened ERICY's already small profit margin of 9%. ERICY has been making some strides lately. The company landed a healthy contract from China Unicom earlier this month and today announced it would team with manufacturing partners in an attempt to cut costs. There's no denying that the cell phone stocks are trading at depressed levels. One could argue that ERICY is even cheap at its current levels. But, I would argue that if you wanted to gain exposure to the handset space, you might as well buy the leader in NOK. Both stocks are trading at very similar valuations, but NOK has a little better projected earnings growth, which is a result of the company's stronghold on the cell phone market. I'm not bashing ERICY by any means. But, if you're going to buy into a sector that is trading at depressed levels you better off owning the leader of the group. The developments of Internet-enabled phones and procurement of that technology might spur the demand for cell phones this holiday season and get these stocks back on track. The cell phone makers are manufacturing some pretty neat little gadgets that might catch the eye of the conspicuous Christmas consumer in a few months. Whether it be ERICY or NOK, I think the handset business will continue to blossom in the years to come, making both stocks long-term winners. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************** TRADERS CORNER ************** Stochastic Indicator By Austin Passamonte Much of my email from fellow readers inquires about learning technical analysis. What single best book do I recommend, etc. Well, things I share in this forum about technical indicators were amassed over fifteen years from dozens of videos & books, hundreds of magazine articles and thousands and thousands of actual charts. I'd guess a majority of it pertained to the commodity futures market but you know what? I think these tools work much better and more clearly in the equity world. In my opinion this has to do with greater liquidity and participants creating smoother, more predictable action. If that's the case why ain't I rich yet? Good question Wendy. There are countless books in print about technical analysis across the spectrum. Some are MIT-level math that begin far above my head and rise from there. Others are plagiarism by professional authors and non-traders. That leaves plenty of excellent work in the middle for you to discover. Those listed within OIN bookstore are a great place to begin. Meanwhile, is it OK with you if I spend the next several visits here exploring what I've learned in graphic detail? Hope you don't mind. I will use index and HOLDR symbols in all my examples but everything applies to individual stocks equally as well. After all this time, 80% of what I needed to know lies within this article. The remaining 20%? Hey, give it fifteen years and you'll be there! Seriously, the rest comes from watching live action on your favorite symbols and developing a "feel" for action/reaction. Shall we proceed? Stochastics: One of the most popular technical tools are stochastic indicators. Widely used to determine price changes and reversals in all financial markets, there are several key signals to identify near-term price changes. Stochastic signals are composed of two moving-average lines. Their movement is based on a rate of change in the underlying market's closing price versus the high and low over a given period of time. These lines are labeled %K and %D. The %K line moves faster than %D. This is because %D is an averaged figure of %K's value, so it must react slower in relation. Each of these lines are commonly referred to as the "fast" and "slow" lines or bars. Stochastic indicators are found in two major versions; fast stochastics with two numeric-value settings are most responsive to price changes but are erratic and "noisy", giving many false signals. Slow, smooth stochastics use a third numeric-value to reduce or blend market "noise", giving a clear picture of overall movement. I prefer smooth stochastics with a value setting of 10(3)5. Don't be afraid to experiment with these settings to learn what correlates best to price action in a chosen market or markets. There is an incredible array of stochastic setting variables and discussion on the subject. We'll defer all that, instead let's focus on basic structure and use of the indicator. The actual indicator study consists of plotting both moving lines within a value zone of 0 to 100. As one or both lines approach or penetrate the area of 0 to 20, underlying prices are said to be "oversold". The indicator is telling us that near-term price action has dropped to an extreme and corrective bounce is likely. One or both lines reaching or penetrating the area from 80 to 100 is said to be "overbought". This means near-term price action has pushed levels to an extreme and a corrective sell off is likely. Once stochastic fast line turns up from 20% oversold range or turns down from 80% overbought range, a reversal may be near. Confirmation of this is the slow line turning to reverse course in tandem with the fast line. The clearest trade signals occur when both stochastic fast and slow lines penetrate one extreme ranges and turn sharply away to move the other direction. The more rapid and extreme a move the more volatile underlying action will be. Stochastics like all oscillator signals work best to predict corrections within prevailing trends. In other words, buy signals are best taken within an up-trending market while sell signals are most reliable in down trends. They predict brief pullbacks in rallies and brief spikes in declines. Stochastic signals are best in neutral, flat or rolling markets when buy or sell indications are equally reliable. Overbought/oversold is the basic, most prominent use of these indicators for trading a market. However, in my opinion it isn't the best use of all. If every market tool I rely on had to be taken away save for one, this would be it. I have never used another single study that gives such high-odds indication as the following does. Divergence: Whenever we see divergence action between stochastic signals and correlating price behavior, a change in current price action is almost guaranteed. How soon or dramatic is unclear but change is almost certain. Such divergence shows that the market today is stronger or weaker than the last recent high or low as indicated by stochastic action. We will examine and outline this visually below. Diversions are spotted by comparing current market price levels to the last relative high or low. In other words, if a market now exceeds new recent highs, are stochastic lines higher than the previous time as well? If not, our peak is in jeopardy. If the market is at new recent lows, are stochastics lower than the last time as well? If not, we may have just put in a bottom. In summation, stochastic study is the indication of overbought or oversold extreme conditions in a market. There are many variable settings and versions, but each act essentially the same. Diversion of any kind between stochastic movement and price action is a clear indication of near-term price reversal. Let's review some charts to see these signals in action. (Daily Chart, TXX) The CBOE Technology Index (TXX) is a classic example of sideways market stochastic signals. With the understanding that this study isn't meant to trade alone, can you see here where buying call options near oversold 20% zone and puts near overbought 80% zone would be a highly-profitable venture? Waiting for one or both lines to near or penetrate an extreme and turn to reverse is a powerful buy & hold strategy in rolling markets. If we took every trade marked here using distant-month options and 25% stop loss protection, what would our potential results have been? I like our chances! (Daily Chart, SMH) Again, looking at the AMEX Semi-Conductor HOLDRs (SMH) we see a bit more erratic movement in this brand-new market but results are the same. Lines moving at or into extreme zones and reversing signal a significant price change. Notice the two lines from July to August showing stochastics making a higher-high than the last peak while SMH holders fail to do the same. What could that mean? Remember what we said about divergence action before? (Daily Chart, OEX) You had to know the OEX would make it into this discussion. Two clear examples of price/indicator divergence in May and June clearly led significant price reversals. In May the index went from 740 to 780+ in four sessions following clear divergence. Five sessions later the index retraced from 780+ to 724. Again, divergence between price action and the stochastic indicators emerged. Five more sessions saw a rise from 725 to almost 800 straight up! Depending on which option contracts bought, these three moves could yield 100 - 400% returns on option cost. Would you agree that stochastic/price divergence among other tools are one to watch? If I could only pick one out of all, this would be it. (Daily Chart, NDX) Not to leave technology out, here's a daily chart of the NASDAQ 100. Clear patterns of divergence emerge here as well. If we took position trades with QQQs or the new CBOE mini-NDX (MNX) options, how would we fare? 800+ and 600+ point moves leave plenty of "chunk" in the middle to glean. (Daily Chart, XOI) Black gold, Texas tea. Jed Clampett from "Hillbillies" fame would be doin' right-fine these days and this chart might help him. You be the judge. If we bought options on the AMEX Oil index (XOI) or CBOE oil index (OIX) the results would be the same. no possum stew for us granny, it's first-class dining all the way! There is much more discussion to stochastic study than shown but you see most everything necessary within this work. Keep it simple, focus on spotting extreme reversals and especially price/ stochastic divergence to increase your chances for success. Monday we'll cover MACD and Wednesday Bollinger Bands. Looking forward to our visit next week! Contact Support ************************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 OF THE DAY - CALL ********************** TIBX - TIBCO Software $98.88 +4.13 (+2.63 this week) TIBCO's ActiveEnterprise enables businesses to connect resources with customers and automatically deliver event-driven information across networks and the Web in real-time. The company also offers e-commerce, consulting, and support services. Customers license the software to integrate, personalize, and distribute content. TIBCO is enhancing its business-to-business trading capabilities. Reuters owns more than 60% of the company, and Cisco holds a minority stake of 7%. Most Recent Write-Up Yesterday's action brought TIBX near the psychological resistance level of $100, but backed off before the close. Today was a test of support at the 10-dma of $93.09, from which buyers resurrected the stock several times throughout the day. The dip occurred within a ten minute period around 11:00am EDT on about 50K shares and the damage was done. From there, the selling subsided and the buyers began their repairs. With the 10-dma holding as support, we are especially encouraged as the upside volume outpaced the downside as the session wore on. The stock actually popped a dollar in the final moments on 65K shares. While the action wasn't news related today, there was some news out. IWOV and TIBX announced a strategic alliance to provide comprehensive solutions in the B2B marketplace. Not to leave anyone out, TIBX also inked a multi-year agreement with ARBA to bundle its infrastructure software with ARBA's buy-side application, Ariba Buyer 7.0. Entry into the play can be obtained on further high volume bounces from the 10-dma. Below that, a dip to $90 could provide entry if met with a bounce. Overhead, a strong move through $95 could take the stock to intraday resistance at $97. Look to the NASDAQ behavior for direction in this issue. Comments Tibco recovered nicely from weakness early in the week. It is now sitting just under resistance at $100 and threatening a breakout. The volume picked up today relative to the past three sessions and move over $100 on increasing volume would trigger our entry criteria. Remember to play cautiously ahead of Friday's employment data. BUY CALL SEP- 90 PIW-IR OI=553 at $12.00 SL=9.25 BUY CALL SEP- 95*PIW-IS OI=278 at $ 8.88 SL=6.75 BUY CALL SEP-100 PIW-IT OI=402 at $ 6.50 SL=4.75 BUY CALL OCT-100 PIW-JT OI=428 at $13.00 SL=9.75 BUY CALL OCT-105 PIW-JA OI= 30 at $10.75 SL=7.75 SELL PUT SEP- 90 PIW-UR OI=235 at $ 2.38 SL=3.50 (See risks of selling puts in play legend) Picked on August 27th at $96.25 P/E = N/A Change since picked +2.63 52-week high=$147.00 Analysts Ratings 5-2-1-0-0 52-week low =$ 6.58 Last earnings 06/00 est= 0.01 actual= 0.04 Next earnings 09-21 est= 0.05 versus=-0.01 Average Daily Volume = 1.55 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** As the World turns, so the Market goes...(yawn)... Industrial stocks slumped today as investors took profits in blue chip issues. The Dow opened lower and remained firmly in the red throughout the session, even as a rally in the brokerage group sent finance shares to recent highs. The sector was on the move with major bank stocks leading the way after Credit Suisse First Boston announced it's buying Donaldson, Lufkin & Jenrette in an $11 billion deal. Credit Suisse will pay $90 for each share of DLJ, a premium of about 10% over the company's current value. In addition, Morgan Stanley Dean Witter suggested that the group is currently sporting reasonable valuations and recommends owning the stocks because of their inexpensive cost relative to other market performers. Meanwhile, the Nasdaq edged higher on strength in Internet stocks but selling pressure in the semiconductor and computer hardware groups limited the day's gains. Rambus was the most newsworthy issue, falling for the fourth straight session in the wake of Micron Technology's lawsuit against the company. Earlier in the week, Micron filed a claim asserting violations of Federal antitrust laws and infractions relating to certain Rambus patents. Micron claims Rambus had an obligation to share a new SDRAM technology with the private, industry-created committee that they both are members of, as a means of setting standards. Rambus contends that they should have proprietary control of technologies invented in their laboratories. Investors appear to have made an early assessment of the case, dumping both stocks since the news became public. In the broader market, biotech and utility shares were the upside movers while retailers, consumer products, energy, and major drug stocks were generally lower. Looking forward, most analysts believe the fundamental backdrop for the stock market is still exceptional, and profit growth is expected to remain solid. Based on that outlook, we will continue to search for positions that have a high probability of achieving a reasonable profit along with relatively low risk and reduced potential for loss. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return METHA SEP 45 41.50 56.75 $3.50 8.6% PHCM SEP 85 78.25 86.56 $6.75 7.1% ADBE SEP 115 109.68 129.56 $5.32 6.4% SMTC SEP 80 75.43 116.13 $4.57 6.1% MIPSB SEP 45 43.25 51.38 $1.75 5.4% NAVI SEP 45 42.87 46.75 $2.13 5.0% MIPS SEP 45 42.88 56.53 $2.12 5.0% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MIPSB SEP 45 43.37 51.38 $1.63 14.2% METHA SEP 40 38.37 56.75 $1.63 14.0% TUTS SEP 85 83.19 115.50 $1.81 10.0% MIPS SEP 40 38.87 56.53 $1.13 9.9% ADBE SEP 105 102.75 129.56 $2.25 9.4% VRTX SEP 57.5 56.44 79.50 $1.06 9.0% Adj 2-1 split NAVI SEP 40 39.00 46.75 $1.00 8.9% QLGC SEP 85 83.50 105.38 $1.50 8.7% EMLX SEP 55 53.75 100.50 $1.25 7.9% SMTC SEP 70 68.62 116.13 $1.38 6.9% MMCN SEP 55 53.94 118.25 $1.06 6.7% MXIM SEP 65 63.75 83.38 $1.25 6.6% INKT SEP 100 98.62 126.00 $1.38 6.3% PHCM SEP 65 63.50 86.56 $1.50 6.2% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return SNWL SEP 100 101.31 77.00 $1.31 10.8% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** ARTG - Art Technology Group $101.88 *** Revenge Play! *** Art Technology Group offers an integrated suite of Internet customer relationship management and e-commerce software applications, as well as related support services. They enable businesses to understand and manage online customer relationships and to market, sell and support products and services over the Internet more effectively. Their Dynamo product suite includes an application server that is specifically designed to enable and support Web applications, as well as e-commerce and Internet customer management applications. Art Technology Group was one of the "Murphy's Law" issues that we closed prematurely last month, only to watch it rebound to a profitable finish at option expiration. Now the stock is "back on track" and a number of analysts have issued positive forecasts for the company. Last Thursday, ABN-AMRO upgraded the company to "outperform," based on anticipated momentum from the upcoming analysts' meeting and third-quarter results. The analyst said the company has won some high profile accounts recently and the trend is expected to continue because the company's technology is pure Java and attractive to developers and engineers. In addition, ARTG is expected to accelerate top-line growth at an impressive rate. Salomon Smith Barney also recently initiated coverage of Art Technology Group with a "buy" rating and a 12-month target of $108. The analyst reported that ARTG has been aggressively expanding its client base over the past year and that the company's systems integrator relationships will play a major role in its ability to scale its business model going forward. ARTG - Art Technology Group $101.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 90 ARY IR 386 14.25 87.63 5.1% *** Sell Put SEP 85 ARY UQ 116 1.38 83.63 10.4% *** Sell Put SEP 90 ARY UR 70 2.38 87.63 14.4% Chart = ****** BOBJ - Business Objects $106.88 *** Technicals Only! *** Business Objects S.A. develops, markets and supports e-business intelligence (e-BI) software for client/server environments, Intranets, Extranets and the Internet. Using e-business intelligence, organizations can access, analyze and share corporate data for better decision making. Application Software is one of the favorable sectors in the market and Business Objects is one of the leaders in the industry. The company was recently rated a new "buy" at McDonald Investments and we think the analyst was right on target with the bullish outlook. From a technical viewpoint, the issue has excellent support near our cost basis and the favorable option premiums will allow us to open the position at a conservative entry point. BOBJ - Business Objects $106.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 90 BBJ UR 20 0.81 89.19 5.8% Sell Put SEP 95 BBJ US 39 1.69 93.31 9.9% *** Sell Put SEP 100 BBJ UT 11 3.00 97.00 14.7% Chart = ****** INFA - Informatica $100.00 *** New High Coming? *** Informatica provides analytic applications and infrastructure software that help eBusinesses to evaluate and fine-tune the performance of their key operational areas for more effective decision making. Their products help simplify the integration and analysis of information through an enterprise data integration platform that automates the process of retrieving, organizing and consolidating data from multiple systems. Working in conjunction with this data gathering capability is a suite of analytic applications to evaluate the performance of a corporation's entire chain of customer, partner and supplier relationships. Informatica recently announced it will acquire privately held Zimba, a leading provider of applications that enable mobile professionals with real-time access to corporate and external information via wireless devices, voice recognition and the Web. The pairing of Zimba's patent-pending mobile applications with Informatica's market-leading e-business analytic software will help empower the ranks of information consumers within today's leading organizations. Easy access to key corporate data from any location will help professionals capitalize on the growing infrastructure for mobility and real-time business insight. By enabling anytime, anywhere access to corporate information, the company will help businesses increase the efficiency of their mobile professionals. The key in this industry is to produce software that provides a company's employees with wireless access to whatever data they need, at any time of the day, from any location. Based on the recent bullish activity in the issue, investors believe that INFA is destined to be one of the top companies in the group. INFA - Informatica $100.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 85 UYF UQ 15 1.50 83.50 10.8% *** Sell Put SEP 90 UYF UR 35 2.88 87.12 16.7% Chart = ****** MANU - Manugistics $85.94 *** New Cisco Deal! *** Manugistics Group is a global provider of intelligent supply chain optimization solutions for businesses and eBusiness trading networks. Its solutions include client assessment, software products, and consulting services, all of which can be customized for a clients specific requirements. Their newest generation of solutions help businesses to improve their logistics and trading with their partners by utilizing the Internet. Speculation that Manugistics may have won a new contract with Cisco Systems (CSCO) pushed the company's shares to an all-time high this week. According to published reports, the company has secured a multimillion dollar contract for supply-chain software and the deal may grow larger as Cisco deploys the new products. In addition, Manugistics also recently landed a contract with John Deere, which will use the company's e-business software to improve its product flow to distribution centers and enhance communication with carriers. Manugistics' technology will help develop capacity utilization at fleet and distribution centers, improve service levels, and reduce costs. Those of you who favor the outlook for the company's turnaround prospects can speculate on the outcome of the reports with this relatively low risk position. MANU - Manugistics $85.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 70 ZUQ IN 15 18.13 67.81 6.1% *** Sell Put SEP 60 ZUQ UL 97 0.81 59.19 8.6% Sell Put SEP 65 ZUQ UM 157 1.44 63.56 14.7% *** Sell Put SEP 70 ZUQ UN 136 2.31 67.69 21.2% Chart = ****** MERQ - Mercury Interactive $117.13 *** Entry Point! *** Mercury Interactive is a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications. Their software and hosted services help e-businesses improve the user experience by enhancing the performance, availability, and reliability of their Web sites. By using Mercury Interactive's solutions to identify and assess performance problems, e-businesses can increase their ability to attract and retain customers, and give them a competitive edge. A wide range of businesses use their products, including America Online, Jobs.com, Ariba, Cisco Systems, Ford Motor Co. and Walmart. In addition to collaborative and business partnerships with corporations such as Tower Technology, i2, National Discount Brokers, and Ameritrade, Mercury Interactive has had more good news this month. They have received accolades from various sources, starting with being named one of Fortune Magazine's 100 "Fastest-Growing" Companies for the year 2000. The magazine placed Mercury Interactive #13 on this prestigious list. The Newport Group, an independent information technology research firm, reported that Mercury Interactive was the 1999 worldwide market leader for load testing products and related services. According to their report, Mercury Interactive solidified its overall leadership position with its load testing revenues, securing 49% of the Web market and 43% of the distributed environment market. Mercury achieved 323% growth from 1998 to 1999 in the Web space alone primarily due to its innovative Internet load testing solutions. A full 55% of the company's load testing business in 1999 came from new customers and that says a lot about the company's ability to generate future revenues. We simply favor the opportunity to be paid for trying to own the issue at a great price. MERQ - Mercury Interactive $117.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 100 RBF UT 80 1.00 99.00 6.2% *** Sell Put SEP 105 RBF UA 183 1.88 103.12 9.8% Sell Put SEP 110 RBF UB 73 3.13 106.87 13.9% Chart = ****** ORCL - Oracle $88.25 *** New Trading Range? *** Oracle is a supplier of software for information management. They develop, manufacture, market and distribute computer software that helps corporations manage and grow their businesses. Oracle is a leader in the information technology sector and has numerous corporate as well as government clients. Big-cap technology stocks are the focus of most investors these days but many of the issues have yet to prove their long-term standing in the industry. Oracle is a giant in the Application Software group and they are also competing in some new, rapidly expanding categories like customer relationship management (CRM) and Strategic Procurement marketplaces. Investors who want to participate in the growth of Computer software and information technology should consider this issue for a permanent portfolio position. The over-priced option premiums will provide traders with an excellent entry point and based on the current technical indications, the issue may soon transition to a new trading range. ORCL - Oracle $88.25 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 85 ORY IQ 23263 5.50 82.75 5.2% *** Sell Put SEP 80 ORY UP 9484 0.94 79.06 6.4% *** Sell Put SEP 85 ORY UQ 5203 2.13 82.88 11.8% Chart = *************** BEARISH PLAYS - Naked Calls *************** LSCC - Lattice Semiconductor $72.06 *** Range-bound? *** Lattice Semiconductor Corporation designs, develops and markets a wide variety of high performance ISP programmable logic devices and offers integrated solutions for advanced logic designs. Their products are sold worldwide through an extensive network of independent sales representatives and distributors primarily to OEM customers in the communications, computing, industrial and military markets. Semiconductor stocks continued to fall today, adding to losses sustained in recent sessions. Rambus (RMBS) was the primary cause of the decline as the company's shares slid further amid news of another lawsuit. This one is from South Korea's Hyundai, which is seeking a U.S. court's declaration that its products do not infringe on patents held by the developer of "chip-to-chip" interface technology. Although Rambus and Micron (MU) are the companies in the news, other chip and chip equipment stocks have slowly begun to give back their Summer gains, with many issues simply consolidating after a strong run earlier in the month of August. Lattice Semiconductor falls into a group of issues that have enjoyed recent gains but, based on the technical outlook for the stock, it appears the probability of the share value reaching our sold strike is rather low. However, there is the possibility of a continued rally so monitor the position daily for changes in technical character. LSCC - Lattice Semiconductor $72.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 75 LQT IO 758 2.44 77.44 16.4% Sell Call SEP 80 LQT IP 671 1.00 81.00 8.7% *** Chart = ***********************ADVERTISEMENT************************ Save Up To 80% Off At Everything Wireless! Click On The Link Below For Store Wide Discounts. 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.sungrp.com/tracking.asp?campaignid=351 ************************************************************ ******************* 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. 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