The Option Investor Newsletter Wednesday 09-06-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/090600_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-06-2000 High Low Volume Advance/Decline DJIA 11310.60 + 50.00 11401.20 11253.20 1.00 bln 1594/1237 NASDAQ 4013.34 -129.84 4136.84 4013.34 1.75 bln 1747/2335 S&P 100 814.28 - 9.21 825.08 814.11 totals 3341/3572 S&P 500 1492.25 - 14.83 1512.61 1492.12 48.3%/51.7% RUS 2000 536.32 - 2.70 539.24 535.27 DJ TRANS 2751.07 + 23.67 2765.36 2724.71 VIX 22.65 + 1.28 22.96 21.79 Put/Call Ratio .55 ****************************************************************** Looks Like Buy The Rumor, Sell The News I know, I know. It's a cliche that you here on the Street all the time, but I think the past two trading days are a perfect example. With a quiet, low volume NASDAQ rally in August, it appears that investors piled in on the buyside prior to the Labor Day weekend. After being bombarded with the not-so-subliminal "post Labor Day rally" mantra, investors not wanting to miss the boat bought the rumor, attempting to get in front of a perceived rally. Well, Labor Day has come and gone, and those myths and legends about the return of volume have come true...but on the sellside. Those money managers just weren't ready to spend those summer savings on stocks that are at sky-high valuations, at least in the tech arena. But that's not to say that they aren't spending. In a search for value, the two major market indices have once again diverged. The buying continues at the NYSE, driving the INDU higher and keeping its uptrend intact. Traders snatching up interest rate sensitive issues, especially the Financials, have been shifting out of tech issues in what has been a two day rotation. Keeping the Financial sector hot is the continued consolidation and speculation as to which outfit will be swallowed up next. Rumors surrounding JPM during the past week have fueled the stock's new highs. After last week's announcement that DLJ would be acquired by Credit Suisse for $11.5 bln, the spotlight shifted to JPM. Today, a German weekly magazine reported that Deutsche Bank was planning to bid for the Wall Street investment bank. This sent the shares of Dow Component JPM up $7.81, almost 5%, to new highs. With the Fed all but out of the picture for the rest of the year, investors have been flocking to brokerage stocks and banks. The news trickled down to others like BSC(+2.38), also seen as a takeover target. Citigroup(C) also made a deal today, announcing that they would buy Associates First Capital(AFS) for $31.1 bln in stock. Share holders of AFS will receive 0.7334 shares of C, making the buyout price of AFS $42.49, a 56% premium over Tuesday's closing price. AFS is the largest consumer finance company in the U.S. and also has a strong presence in Japan. This acquisition will give C further global reach in its credit card business, consumer and commercial finance, and it will provide "recurring and predictable earnings," according to Citigroup's CEO Sandy Weil. AFS finished up +10.63, or 38%, at $38.63 while C sold off $2.56 to $55. In the wake of this news, JPM's gains managed to outweigh C's loss and the INDU continued its run. Today's trading activity found the INDU bound between 11300 and 11400. The INDU has been climbing higher on the back of its 10-dma, currently at 11211. Profit takers ravaged the index early last week, but since bouncing from 11100 last Thursday, the INDU continued onward. Shaking off a Drug sector downgrade and the negative INTC comments on Tuesday, the INDU has turned to the Financials and Cyclicals. Traders did, however, reverse the INDU's course at 11400, the site of the April 12th's top before the Spring sell-off. Volume at the NYSE was just shy of a billion shares, 999 mln, and the breadth was positive 4-3. The sector rotation that we saw last Spring appears to happening again, as traders move to better value. And until the NASDAQ valuations become more attractive to investors, this trend may continue as we await 3rd quarter earnings. A Big Board debacle that caused more hurt on the NASDAQ was the DLJ Hong Kong analyst call on Micron(MU). With the Semiconductor Sector still reeling from USB Pipper Jaffray's Tuesday downgrade of INTC, DLJ's Boris Petersik lowered his rating on MU from a Buy to an Underperform. Huh. Sounds like "Sell" to me! Especially considering that he slashed MU's price target to $50 from $122! Sounds like this guy didn't do his homework the first time around. Citing an earlier-than-expected drop in DRAM spot market prices and expected weaker pricing into September, Petersik essentially commented on the entire sector. He claims that inventory build-up among manufacturers will possibly lead to a DRAM flood in the spot market, pressuring prices down. But, DLJ seems to be the lone ranger on this call. Many other notable semi analysts came out in defense of MU and the DRAM market as a whole. Merrill's Joe Osha acknowledged recent pressure in the DRAM spot market, but doesn't see it as a meaningful indicator several months out. And that's probably because it's the spot market, being short-term in nature. MU got crushed with an 11% drop of $8.63 to $69.88. Falling in sympathy were: INTC(-3.56), ALTR(-3.38), KLAC(-5.75), and AMD(-2.75). The Semi Index(SOX.X) lost almost 6% today. This news spread through the NASDAQ like wildfire, and profit takers sold first and asked questions later. After making an almost 20% recovery from the lows in August(3521 on 8/3) before the Labor Day weekend, the NASDAQ was a little top heavy, to say the least. The fabled buying volume that investors were waiting on has yet to materialize. In place of that buying volume has been negative news a la CIEN and INTC, whispers about 3rd quarter earnings, and a general shakiness. As a result, we have seen some interesting technical developments in the NASDAQ. The selling started right at the open, which was also the high of the day. The close: exactly on the low of the day. A 129 point range. A 129 point loss. The NASDAQ hasn't had a triple digit loss since July 28th. But what really is technically concerning here is the double top near 4300 and the break of the recent trendline. On July 17th, the NASDAQ made a high of 4289, and then on September 1st, 4259. With the clean break of the trendline that led the NASDAQ higher in August, this combination raises some red flags. The 200-dma, currently at 4001, will be watched closely by traders and technicians. Below that, the 50-dma lies at 3966. Volume on the NASDAQ was a healthy 1.7 bln, with breadth negative 24-17. The question remains: how low will money managers let this go before bringing back that buyside volume? We have been mentioning for weeks, even months, that the VIX.X was reaching historical levels that typically trigger selling. Today, the VIX.X closed at 22.56 as selling bred fear in traders and investors. An increase in volatility will likely cause a bumpy ride for the NASDAQ, not to mention opportunity for option traders. Looking forward, as fear increases and investors begin to question their faith in the "post Labor Day rally," the NASDAQ appears to have a downward bias. The VIX.X has been screaming overbought and a breather like this isn't out of the ordinary. Are the money managers in the huddle picking their plays and licking their chops? Probably. They will be the ones to breath fire back into the NASDAQ stocks. The NASDAQ's technical picture deteriorated significantly today, and everyone seems to be standing back waiting for the dust to clear. Given a 4.5% drop in the NASDAQ during the past two days, a bounce may come, but be sure that it isn't a dead cat bounce. Is the selling the news over on the NASDAQ? That is a question that all traders are asking themselves, and an answer that we all nervously await. But, it isn't all nailbiting trading. The INDU has been pushing forward on the heels of the Financials. As a side-note, YHOO was quite active in after-hours trading on comments made by CEO Tim Koogle at the Robertson Stephens Internet Conference in San Francisco. Jim and I have decided to initiate a special news-related play this evening. Please see below for the play. Matt Russ Asst. Editor ********************** News-Related Call Play ********************** YHOO $107.88 (close in after-hours) Entry point!! After closing NY trading at $112.06, comments made by YHOO CEO Tim Koogle at the Robbie Stephens Internet Conference were misinterpreted, sending the stock as low as $103.25 in after-hours. Hasty traders sold YHOO when they misinterpreted Koogle's comments and thought that he said advertising sales have decreased. Then, Koogle appeared on CNBC in an interview clarifying that Yahoo in no way has changed their guidance. The stock bounced back and closed after-hours at $107.88. Robbie Stephens senior Internet analyst Lauren Cooks Levitan confirmed that "it was consistent with comments that Koogle and other management have been making" and "that their outlook for their potential online advertising remains very robust." Due to the miscommunication and selling that resulted, we are initiating a call play on YHOO at current levels in an attempt to take advantage of the news. Earnings are October 10th, confirmed. ********************************Advertisement******************** Option trades starting at only $15.50, stock trades as low as $9.95! Mr. Stock provides key advantages to the serious option investor. Along with complex option trading online, fast executions, advanced charting capabilities and the ability to trade from any screen, we now offer some of the best commissions on the Internet. Our staff understands the sense of urgency required in today's market and will respond quickly to your most important trading needs. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ***************************************************************** *************** ASK THE ANALYST *************** A Trading Tariff? By Eric Utley Aren't taxes high enough? Last Sunday morning, a certain far- left presidential candidate appeared on one of those morning talk shows, you know the type. Mr. Nader - oops, said his name - told reporters that if he were elected to the White House he would implement a tax on active traders and speculators, with a special emphasis on options and futures operators. A levy above and beyond the already high taxes imposed upon successful traders. The trading tax, as Mr. Nader described it, would remove the excessive speculation from the market, which was deemed detrimental by Doc Greenspan several years ago. Now, I'm not a political pundit, so I won't bore you with my opinions. But, Mr. Nader's proposal got me thinking. What benefit are we, as options traders, to the market? Surely our excessive speculations must be of some benefit to the broader world of finance. In the options arena there are three main players: market makers, hedgers, and speculators. We generally fall into the latter camp. As such, speculators assume the majority of risk that is associated with the market. Risk, mind you, that is very necessary for the wheels of capitalism to keep turning. As you have read in OIN columns in the past, options market makers go into the equity markets to hedge their trades with us, the retail options players. Which, in turn, makes the market all the more efficient and allows for the deployment of capital to the most useful resources through increased liquidity. In my biased opinion, options traders play a crucial role in the operations of the market. To hinder our trading, through an additional tax, would only slow the heaven-sent idea of capitalism. Needless to say, Nader won't be getting my vote. This week's column is filled with a potpourri of requests. If you have a stock that smells good, or one that smells rather bad, send it to Contact Support, and we'll have a look. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Citigroup - C How high can this go? - Anonymous Citi had been on a pretty steady rise for the last two months until the news today. You've probably heard by now that C is buying Associates First (AFS). The deal will immediately add to C's earnings upon completion of the merger, which is bullish for Citi shareholders. Through a series of acquisitions and mergers over the past several years, C has morphed into a financial powerhouse. Sandy Weill has successfully combined the forces of Citibank, Travelers, and Salomon Smith Barney into one successful company. Now with the Associates deal, C will gain a further global presence in Japan, where AFS is the number five consumer finance company. C has followed the philosophy that bigger is better, noting its increasing size through merger and acquisitions. So far, the strategy has worked. With C, you're getting a company with steady earnings growth around the 15% mark. Not blowout numbers, but not too bad when you consider the stock's relatively low multiple. C is the largest home equity lender and the second largest credit card company. If you're looking for a core financial holding in your portfolio C is probably your best choice. The fact that C is a definition finance stock makes it highly subject to interest rate volatility and economic conditions. As it stands now, interest rates are stabilized, inflation is in check, and the economy is still growing, which have all combined to carry C to new highs recently. With the current macro economic conditions favoring the Finance sector, C stands to move higher from its current levels. With that said, the sell-off stemming from the acquisition announcement today might provide an excellent entry point into the stock. As long as interest rates and inflation remain in check, C should rise into the end of the year. Of course, one bad economic report could change all of that. For now, though, things are looking up for C and the rest of the Finance sector. The big sell-off today makes it rather difficult to game a trade in C. Analysts approved the deal today, but it might be wise to wait for traders to concur and carry the stock higher before jumping in. ---------------------------- Ford - F F has been beaten down lately. Obviously, the tire fiasco is a black eye, but it ain't putting F out of business. Is $25 a share a good entry point, or would you stay on the sidelines on this one? Or maybe a leap play? - Thank you, Benny Benny, you're probably right in that the recent tire fiasco is not going to put F out of business. With that said, this might be a good time to pick-up some blue chip stock on the cheap. However, you all know how I feel about buying stock at depressed prices. It's more difficult to do it correctly and it's harder to make money buying low. The reason is that you might have to wait for several months or longer before F rebounds and shows you a good profit. The question with situations like F is that are there better alternatives in the market to put your capital into. Chances are, you can probably find stocks with more potential than F. To begin with, there are plenty of companies with better earnings growth than F. The automobile giant is expected to grow its EPS by single digits over the next couple of years. That's not real exciting. Of course, using leaps will leverage a rebound in F, which makes a play on the stock a little more enticing, but not much. The bottom-line is F's earnings growth is dismal, and if the U.S. economy slows a little more, the stock might suffer a little more. In the near-term, the tire issue will continue to influence the stock one way or another. Now, if you must fish at the bottom, I think it's safe to say that F has some solid ground beneath it. For what it's worth, DLJ reiterated its Buy rating on F last week, which resulted in a bounce off its yearly low. So, if you're looking for an entry into the stock, you might look for a bounce off the $24 level, or near that area, over the next couple of weeks. I think it's safe to say that level is the floor for the stock. It remains to be seen what sort of liability or financial responsibility F will have to take on as a result of the tire issue. As such, there still exists some downside risk even at its current levels if the government steps in and levies some sort of penalty. If you're really looking to get into F, it might be more prudent to wait for the tire issue to clear and jump back into the stock once it climbs out of the recent mess. ---------------------------- Phillip Morris - MO The stock's been climbing for a while now; top performer lately. Too late to play this one? - Thank you, Benny Thank you for sending in two great requests Benny. I thought it would be interesting to review MO given its recent performance and the developments surrounding the company, and its potential for higher prices into the end of the year. MO has been smoking lately, figuratively and of course literally. Investors have been jumping back into MO on the hopes of a decline in the claims against the company, among other issues. The fact is the worst in the way of litigation is behind MO, and that's welcome news for shareholders. There is a long list of bullish arguments for MO right now. Here are just a few: the company recently raised its dividend, it's cheap, the company has pricing power with its products, and investors have overlooked the fact that MO derives over 50% of its revenues from non-tobacco and foreign operations. Whether you oppose it or not, the tobacco business is a money- making endeavor. Think about - if costs, such as legal fees or raw materials go up, all MO has to do is raise the price of its cigarettes. And, since their product is addictive (as I well know) consumers are willing to pay higher prices. Furthermore, there are tremendous barriers to entry into the tobacco business. MO won't be facing new competition any time soon. If you're looking for a steadily growing company and don't morally oppose the tobacco industry, it's hard to pass-up on MO. However, we come back to the same conundrum we faced with F, in that, are there better alternatives in the broader scheme of things? In the long-term, if you're holding MO you're going to face risks stemming from the nature of the company's business, tobacco. That could present a serious financial risk, depending upon who's in the White House, which I'll expand upon below. The bottom-line is the tobacco industry has treated investors very well in the past, and will probably continue to do so because of the characteristics of the business. Good for investors, bad for consumers! Political risks abound with MO. The stock has been plagued over the last several years by the Clinton administration. I'm not attacking the current President and his troops, but they haven't been the kindest of people to certain businesses, and maybe, rightfully so. Boy, I've got to stay away from these political parallels to the investing world. Anyway, if Bush gets elected, MO (and Mr. Softee) stand to reap huge rewards in the way of less government litigation. If Bush wins, some analysts suggest that MO would almost immediately go to $50 or $60, which is around 200% above its closing price today. Goldman Sachs recently said MO is worth $80 per share. Now, to answer your question Benny, it's definitely not too late to jump into MO if these analysts are correct. However, whether they are or not remains to be seen. And, whether Bush wins or not also remains a variable. Whatever plays out, things are definitely looking up for MO as has been reflected in the market recently. ---------------------------- Tyco - TYC I know Tyco has been a hot topic ever since the great guru of a shorting newsletter told Wall Street about some accounting problems that didn't exist. Shame they never went after him, but I guess all is fair in love and war. Alas, a year has gone by and is only now showing signs of what I think is a recovery. I would be interested in your comments and analysis on Tyco. - Respectfully, Vinny TYC was the target of a malicious rumor about one year ago. Like you wrote Vinny, some big shorts started a rumor that TYC had some problems with its accounting, which would result in a host of problems, in turn punishing the stock, etc... The rumor hindered the performance of TYC for quite some time. As I mentioned last week, even if the talk isn't true, it can still hurt the stock, as in the case of EMLX and TYC. What ever came of the TYC rumor? Nothing. So, here's the situation we are now presented with. TYC has essentially traded for the last year at the same level. By that I mean, pre-rumor TYC was trading around $55, and now, the stock is around $55. So, for the last year, TYC's stock has essentially gone nowhere all the while the company has been increasing its earnings at a healthy clip. TYC is expected to grow its bottom-line by 21% over the next several years, which gives the stock a pretty cheap valuation relative to its current price. The way I see it, because of the rumor surrounding the company, TYC spent the last year in a huge consolidation, while making increasingly larger amounts of money. The stock has just recently emerged from that consolidation and might be ready to run again. To give you a little background on the company, TYC is a diversified manufacturing company. Its four areas of focus include, Telecom and Electronics, Healthcare Products, Fire Protection and Services, and Flow Control. For obvious reasons, the Telecom, Electronics, and Healthcare sectors are pretty good areas of the economy to be operating within right now. What's more, TYC recently spun-off its fiber-optic services business known as Tycom (TCM), which garnered an unexpected $2 bln in its IPO a month ago. TYC has been lining up healthy contracts at an equally healthy rate over the last several weeks, which should boost its profitability into record territory. To be quite frank, I don't have anything bad to say about TYC. As long as the broader market rises, TYC should outperform. Given the whole rumor 'thing', I think the stock represents a good buying opportunity at its current levels. ---------------------------- Optical Cable - OCCF What can you tell me about OCCF, it does not have options, but I have noticed sky high volume on the stock compared to the float (and the ADV). 95% of the stock is held by insiders, and over half of the remaining is held by institutions. The stock has also ran from the mid 20's to over 40 this week. - Thanks, Bob The magic words are 'Fiber Optic'. OCCF has one of those words in its name. Hey, two out of three isn't bad. All joking aside, OCCF manufactures and sells high quality fiber optic cables for high bandwidth uses such as the transmission of data, video, and voice. OCCF designs its cable for campus-like applications, such as schools and suburban corporate centers. OCCF's cables are used in moderate distances of up to 10 miles, hence the campus applications. OCCF announced its third-quarter results today, along with several other positive developments. The company increased its EPS by a respectable 26% over last year's profits. The company also set a 3-for-2 stock split; I commented on stock splits last week in my review of CIEN, which I spoke highly of. However, OCCF's split seems a little, off? I don't understand why the BOD would declare a stock split just as OCCF is coming off its recent lows. So, the stock split doesn't get me too excited about the stock. However, the company's solid earnings growth over last year's does catch my interest. What's more, it's been hard to go wrong with anything in the Fiber Optic sector this year, ala GLW, JDSU, CIEN, and SDLI. However, the preceding are heavy hitters, and OCCF is not. Which brings me to the fact that no analysts cover OCCF. That makes it hard to gauge what kind of earnings growth prospects the company has. Yes, institutions control quite a bit of stock, but they can sell pretty quickly. ADCT is a company that operates in a similar business with more of a proven history. OCCF's recent rally probably attracted you to the stock. But, I think the market factored in all the good news today over the past four trading sessions. OCCF's big run on huge volume leaves the stock up in the air right now. It's hard to pick a good entry point on a stock that has run so much so quickly. I think the most prudent course of action would be to wait for some consolidation and a pullback in the stock. ---------------------------- 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 ************** Fast Cars, MACD, Etc. By Austin Passamonte Last week's discussion of stochastic studies brought the expected volume of questions. Leading the pack by far were requests for one or two good books on technical analysis. "Technical Analysis From A - Z" by Stephen Achelis & "Getting Started In Technical Analysis" by Jack Schwager are two of many I have in my library and refer to frequently. The former is basic and concise with the latter much more involved. The best of both found right here inside OIN's bookstore. I stated that 80% of everything applicable to trading with stochastic study was included within my section. That leaves 20% to be discovered over time. I failed to elaborate the fact that endless articles and book pages read covering the topic went into that boiled- down version. Make no mistake, all that extraneous stuff had importance of its own. A few readers mentioned need for more extensive, in-depth study of stochastics. I say, have at it! Such was important to me as well, minimalist that I am. Can I share a personal story? Wendy & I were graciously hosted by Jim Brown, family and company at OIN headquarters in Denver recently. One day I joined Jim for a ride in his very high-end Jaguar sports coupe. At first glance, it's obviously a beautiful car. Based on what I know about cars it seemed rather quick to me by appearance. Well, Jim barely tapped the accelerator while rolling out of the parking lot and my head snapped back. Wow, it'd been awhile since that happened to me last! I shrugged it off as a guy driving a new car he wasn't quite used to. That idea began to fade when the same thing happened five or six more times in short order. A couple hairpin turns deftly handled convinced me this man & machine worked well together. Understand I spent a few years tinkering with sports cars in my youth. Extensive knowledge it gained back then allowed for easy decision making in the present. Jim's car is fast and that's that. Some people would need to pop the hood, crawl under the car, read the owner's manual, download tons of data from Jaguar's website and quiz numerous mechanics before reaching the same conclusion I did with equal confidence. How we arrive at our respective belief levels is much less important than the fact that we do so. Confidence in our decisions come from extensive knowledge of the subject or blind faith, and everything in between. By all means take whatever steps necessary to build your belief system for any technical tool used to trade money with. (On a side note, Jim took Wendy for a ride in his Jag at speeds reported by reliable sources we don't dare put in print. My girl was instantly ruined forever. All I've listened to since then is the very same car for her or bust and bust ain't an option. If I can't trade our way to one soon, she's threatening to take over the trading operation. Thanks a lot for the pressure, Jim!) Pop the hood and study to your heart's content or merely turn the key and go, either way these technical tools will work for you. Moving Average Convergence/Divergence (MACD) MACD is a popular technical indicator used to predict near- term changes in the underlying market. MACD measures the gap between one longer-term moving average versus a short term moving average. The indicator has an equilibrium line valued at zero which two moving averages cross above and below. It also registers a "histogram" that graphically shows the gap between moving lines indicating momentum or strength of the move. Some chart services offer MACD study with moving average lines and histogram while others offer only one or the other. We will discuss and depict the use of each in these examples. MACD is useful to determine whether a market is going up or down in addition to portending possible reversals in sentiment and direction. When both moving average lines are below the zero-value graph it indicates bearish sentiment for the issue. Likewise, both moving averages above the zero-value means sentiment is now bullish. This equilibrium line is extremely important. When both M/A lines cross from one side of this level to the other it indicates distinct change in market sentiment. Traders look to go long markets that move from below zero value to above and go short those whose lines cross from above to below. Another valued signal occurs when the fast or shorter moving average crosses over the slow or longer moving average line. Fast line crossing over and moving up signals a bullish move, while fast line crossing down through the slow line is bearish. This can occur on either side of the zero line but bearish signals above zero and bullish signals below zero may offer much stronger changes in overall sentiment and possible price reversal. Histogram bars move above or below their base zero line as the M/A lines cross over each other. Longer histogram bars show the rate of momentum this action is creating. Traders watch histogram bars for signals of reversal as they converge or diverge with current price action. Let's review some real examples below: Philadelphia's Gold & Silver Index moved sideways through 1999 and most of 2000. See any sizable swings in between? If we used MACD alone to buy & sell the signal changes, what would our results have been? Focusing on the moving-average lines, when both are deep within an extreme distance from the zero value line, it portends a stronger price reversal that lines hovering close to zero. Note when the fast line crossed the slow well away from the zero line, a sizeable correction began in the majority of cases. MACD, as all technical tools, is best used in conjunction with other studies to filter out false signals but we can see its behavior in the example above. The S&P 500 cash-index (SPX) also moved sideways during much of year 2000. Buy and sell signals were generated on a frequent basis, as we identify five substantial buys and sells since mid-April. Watching the histogram grow or M/A lines to flare from zero value, peak and reverse is the signal to alert us for potential trade setup. Seeing the lines cross or histogram switch from one side of zero line to the opposite is our signal to execute the trade. The NASDAQ 100 Index Tracking Stock (QQQ) followed a defined ascending channel over the past few weeks. Considering it was a strong uptrend, we are best served to ignore sell signals and only take buy signals based solely on this study. Four possible entries are depicted as market prices corrected and pulled back to trendline support. MACD signals switching from negative to positive at the time offered brief, profitable trades. As the NASDAQ 100 struggles to convert overhead resistance to support we witness the MACD signals at an extreme high cross over. This could signal near-term weakness at the very least for its next trading session. Our personal preference for value settings is 18(8)6 in the chart service template. Length 1 = 8, length 2 = 18, smoothing = 6 based on closing price value for each period if requested. MACD is a popular oscillator technical tool that clearly outlines potential changes in market sentiment and direction. It offers an excellent source of future market action when coupled with other market indicators. Best Trading Wishes! Contact Support ************************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.nobletrading.com/newaccount/optioninvest.html ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** AGIL - Agile Software Corp. $73.00 -1.06 (-1.75 this week) Agile Software is the leading provider of Collaborative Manufacturing Commerce solutions that speed the "build" and "buy" process across a virtual manufacturing network, thereby improving time to volume, customer responsiveness and cost of goods sold. Agile's solutions manage product content, and the critical communication, collaboration and commerce transactions among Original Equipment Manufacturers (OEMs), Electronic Manufacturing Service (EMS) providers, suppliers and customers in Internet time. Most Recent Write-Up Like many Tech stocks, July was a rough month for AGIL. After failing to break through formidable resistance at $75, the stock spent the rest of the month selling off sharply. Finding bottom at just above the $45 level in the beginning of August, the stock has since moved higher. In doing so, it had to break above the 100-dma and 50-dma (now at $53.96 and $64). Most recently, AGIL cleared the 200-dma at $65.67, a support that has since been successfully tested. AGIL's recovery was also helped by a stellar earnings report on August 17th, the company posted a narrower than expected loss of 3 cents versus a loss of 9 cents from the previous year. Beating Street expectations by a penny, AGIL moved strongly higher post-earnings. The stock was likely helped by positive comments from Chase H&Q and more recently, U.S. Bancorp Piper Jaffray's Senior B2B analyst Timothy Klein, who initiated coverage on AGIL with a buy rating. According to Klein, "We believe that strong industry fundamentals and the trend toward increased-outsourced manufacturing and shorter product lifecycles will directly benefit Agile's growth prospects. In addition, we believe the company has strong technology, solid fundamentals and very promising growth potential." At this point AGIL finds itself where it was in early July, attempting to overcome strong resistance at $75. Aggressive traders looking for an entry will look for a confirmed bounce off the 5-dma at $71.57 or the 10-dma at $69.10. There is also support at $71. A break through $75 on strong volume to confirm upward momentum will be the signal for conservative traders to enter this play. Comments Boy, they hit the NASDAQ today and they hit it hard. Yet, AGIL didn't see the price action or the volume action that the broader tech market saw. AGIL was spared from the hefty selling as it traded in a narrow $1.50 range. Look for intraday support to hold at $72, with technical support below at the 10-dma of $69.98. Bounces from either of these levels could provide entry into this play. Overhead, $74.50 will pose as intraday resistance. *** September contracts expire in two weeks *** BUY CALL SEP-65 AUG-IM OI= 65 at $9.38 SL=7.00 BUY CALL SEP-70*AUG-IN OI=410 at $6.00 SL=4.25 BUY CALL SEP-75 AUG-IO OI= 86 at $4.13 SL=2.50 BUY CALL OCT-75 AUG-JO OI= 48 at $8.13 SL=6.25 BUY CALL OCT-80 AUG-JP OI=186 at $6.25 SL=4.50 Picked on September 5th at $74.06 P/E = N/A Change since picked -1.06 52-week high=$112.50 Analysts Ratings 2-7-0-0-0 52-week low =$ 18.31 Last earnings 08/17 est= -0.04 actual= -0.03 Next earnings 11-16 est= -0.02 versus= -0.05 Average Daily Volume = 558 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The Semiconductor Sector continues to haunt the Nasdaq... Technology investors sold for profits today amid concerns over future earnings and revenue growth. A number of analysts have begun to dissect what companies say about current sales and the outlook for profits and many believe the group is vulnerable to further selling pressure as the pre-announcement period for the third quarter approaches. The semiconductor industry was the source of much apprehension today and a downgrade of Micron (MU) following the recent lowered rating on Intel (INTC) sent buyers fleeing from the sector. Merrill Lynch and Donaldson, Lufkin & Jenrette both noted there is inventory in the system that will place pressure on the DRAM spot market over the coming months. Meanwhile, the industrial group rallied amid optimism for the financial arena as merger news lifted the sector. J.P. Morgan (JPM) was among the Dow's upside movers, supported by rumors of a potential buyout but the bullish activity was widespread with shares of Boeing (BA), Honeywell (HON), United Technologies (UTX), and 3M (MMM) moving higher. The "merger-mania" continued in the banking industry with Citigroup (C) announcing that it is buying Associates First Capital (AFS) in a stock transaction valued at about $31 billion. The merger announcement and expectations that the group will see more unions sparked the flame and speculation that Deutsche Bank AG is in talks to acquire J.P. Morgan simply fueled the fire. Within the broad market, utility, retail and paper shares achieved favorable gains but drug and biotechnology stocks continued to suffer. Oil and oil service shares rallied as crude futures climbed to 10-year highs but the upside move has triggered new concerns over the ability of the stock market to continuing growing in the midst of excessive energy costs. Rampant prices have yet to moderate and analysts are convinced that OPEC will not increase production to subdue the trend when it meets later this week. As far as the potential for a September rally, that could be the one straw that "breaks the camel's back." 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 59.63 $3.50 8.6% PHCM SEP 85 78.25 94.44 $6.75 7.1% ADBE SEP 115 109.68 127.50 $5.32 6.4% SMTC SEP 80 75.43 104.94 $4.57 6.1% 2-1 Split 9/26 MANU SEP 70 67.81 90.06 $2.19 6.1% MIPSB SEP 45 43.25 51.06 $1.75 5.4% ORCL SEP 85 82.75 89.25 $2.25 5.2% ARTG SEP 90 87.63 97.06 $2.37 5.1% NAVI SEP 45 42.87 46.06 $2.13 5.0% MIPS SEP 45 42.88 57.25 $2.12 5.0% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MANU SEP 65 63.56 90.06 $1.44 14.7% MIPSB SEP 45 43.37 51.06 $1.63 14.2% METHA SEP 40 38.37 59.63 $1.63 14.0% INFA SEP 85 83.50 101.38 $1.50 10.8% ARTG SEP 85 83.63 97.06 $1.38 10.4% TUTS SEP 85 83.19 101.81 $1.81 10.0% MIPS SEP 40 38.87 57.25 $1.13 9.9% BOBJ SEP 95 93.31 102.63 $1.69 9.9% ADBE SEP 105 102.75 127.50 $2.25 9.4% VRTX SEP 57.5 56.44 79.00 $1.06 9.0% Adj 2-1 split NAVI SEP 40 39.00 46.06 $1.00 8.9% QLGC SEP 85 83.50 99.94 $1.50 8.7% EMLX SEP 55 53.75 96.63 $1.25 7.9% SMTC SEP 70 68.62 104.94 $1.38 6.9% MMCN SEP 55 53.94 107.31 $1.06 6.7% MXIM SEP 65 63.75 81.06 $1.25 6.6% ORCL SEP 80 79.06 89.25 $0.94 6.4% INKT SEP 100 98.62 123.78 $1.38 6.3% PHCM SEP 65 63.50 94.44 $1.50 6.2% MERQ SEP 100 99.00 123.00 $1.00 6.2% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return SNWL SEP 100 101.31 72.00 $1.31 10.8% 2-1 Split 9/18 LSCC SEP 80 81.00 70.50 $1.00 8.7% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** BLDP - Ballard Power Systems $110.06 *** New Trading Range? *** Ballard Power Systems is developing proton exchange membrane (PEM) fuel cells and fuel cell systems. A fuel cell is an environmentally clean power generator that combines hydrogen fuel with oxygen, without combustion, to produce electricity, with pure water and heat as the only by-products. It produces power efficiently and continuously, as long as fuel is supplied. Ballard is developing their PEM fuel cells for use in transportation, stationary power generation and portable applications. The fuel-call sector is rallying again and Ballard is at the "top of the heap." Fuel cells are a low-polluting, energy-generating technology that can be used in a range of industries with various practical applications such as powering automobiles or replacing cell phone batteries. Their potential is enormous with supplies of oil falling and the cost of finding new energy sources rising. In addition, fuel-cell technology offers potential in third-world countries as it can be utilized in making a power grid with low installation costs in remote areas. Ballard Power is a leader in all of the fuel-cell technologies and the company's strong points include sound management and solid customer base, with many of the major potential end-users in the industry. Investor interest in fuel-cell developers is growing and with the Vice President's affection for alternative energies, this sector may be one to watch in the coming months. Today's "break-out" above a recent resistance area may be just the impetus to propel the issue to a new trading range. BLDP - Ballard Power Systems $110.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 105 DFQ IA 212 6.88 103.18 6.0% *** Sell Put SEP 100 DFQ UT 450 0.56 99.44 5.5% *** Sell Put SEP 105 DFQ UA 34 1.69 103.31 14.0% ****** INFA - Informatica $101.38 *** Short-term Speculation! *** 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 its plans to buy 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 and we favor the recent technical support near the cost basis. INFA - Informatica $101.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 90 UYF UR 45 0.81 89.19 9.1% *** Sell Put SEP 95 UYF US 1 1.69 93.31 15.9% ****** MANU - Manugistics $90.06 *** Still Going Up! *** 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 last 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 $90.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 70 ZUQ UN 125 0.81 69.19 14.5% *** Sell Put SEP 75 ZUQ UO 144 1.50 73.50 22.6% Sell Put SEP 80 ZUQ UP 229 2.31 77.69 27.6% *************** OCTOBER EXPIRATION *************** AVNX - Avanex $151.00 ** Own This One! *** Avanex designs, manufactures and markets fiber optic-based products, known as photonic processors, which are designed to increase the performance of optical networks. AVNX's photonic processors offer communications service providers and optical systems manufacturers improved levels of performance and miniaturization, reduced complexity and better cost effectiveness as compared to current alternatives. We believe this position offers an excellent risk/reward outlook for traders who are bullish on the issue in the long-term. Avanex's unique photonic processors are the main reason for the company's incredible growth and with new developments occurring everyday, the outlook for the future is excellent. At Avanex, a team of network and system application professionals work with both carriers and systems integrators to help them optimize their optical architectures, and at the same time demonstrate the new enabling capabilities of their products. The recently introduced "PowerShaper" dispersion management processors are easily the most advanced and cost-effective solution to improving current network performance in slope and dispersion compensation through a range of different applications. In addition, the availability of the new processors offers customers reduced time to market, and along with other Avanex photonic processors such as the PowerMux and PowerExchanger, truly provides the tools necessary to deliver next-generation communications services in today's market. That sounds great if you are a "photonic" technician but we simply favor the bullish outlook for the industry and the opportunity to own this issue at a reduced cost basis. AVNX - Avanex $151.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 110 UYN VB 32 2.19 107.81 4.7% Sell Put OCT 115 UYN VC 2 3.50 111.50 7.2% *** Sell Put OCT 120 UYN VD 74 4.50 115.50 9.0% ****** METHA - Methode Electronics $59.63 *** New Entry Point! *** Methode Electronics is engaged in the manufacture of electronic components and devices that connect, control and convey electrical energy, pulse and signal including connectors, automotive components, printed circuits, and current carrying distribution systems. Components and devices manufactured by Methode Electronics are used in the production of electronic equipment and other products in the automotive, computer, voice and data communications equipment, industrial, military and aerospace, and consumer electronics industries. Their products are sold primarily to original equipment manufacturers and also to independent distributors. METHA rarely gets any attention but investors have taken notice since the company spun-off shares of Stratos Lightwave (STLW), a company which develops, manufactures and sells optical subsystems and components for high data rate networking, data storage, and telecommunications applications. STLW is now a market leader in high data rate optical subsystems, offering superior optical transmission line performance with top state of the art EMI characteristics. In addition, they market optical components and cable assemblies for use in these networks and currently, that's one of the most popular "high growth" industries. Whether you like one company or the other, it appears that both issues have a reasonable expectation of increased share value in the coming months. However, Methode Electronics will conduct a conference call in conjunction with its first quarter sales and earnings release on Thursday and after the news becomes public, we plan to initiate our "target-shooting" order, based on the movement of the issue. Wait for the outcome of the report! METHA - Methode Electronics $59.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 45 QME VI 57 1.94 43.06 9.7% *** Sell Put OCT 50 QME VJ 15 3.38 46.62 13.3% ****** NMSS - Natural Microsystems $72.75 *** Entry Point! *** Natural Microsystems provides enabling technologies to suppliers of networking and communications equipment. Its customers incorporate its software and hardware products and technologies into their own commercial offerings in order to enable service providers and enterprises to rapidly and cost-effectively deploy data, voice and fax applications and enhanced services in a networked environment. They also provide their clients with software development tools and systems architecture and engineering design services. Not content to rest after its 2-for-1 split on August 8th, Natural Microsystems has spent the past week achieving one business success after another. Ericsson recently named Natural MicroSystems as an approved Worldwide Supplier, and their new Alliance Generation 4000 voice hardware platform and Natural Access software development environment was selected as the basis for a next generation router by Viking Telecom. In other developments, Natural Microsystems PolicyPoint 1000, the company's leading IP traffic classification and shaping platform, received Sprint's Customer Systems Development Lab certification. This is significant because it is a necessary qualification for its being connected to a Sprint carrier network. Traders who favor the bullish technical outlook for the company can use this position to establish an acceptable cost basis in the underlying issue. NMSS - Natural Microsystems $72.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call OCT 65 YYQ JM 0 13.00 59.75 6.1% *** Sell Put OCT 55 YYQ VK 0 2.00 53.00 8.4% *** Sell Put OCT 60 YYQ VL 0 3.50 56.50 12.2% Sell Put OCT 65 YYQ VM 0 5.13 59.87 13.4% ****** RIMM - Research In Motion $80.31 *** Ride The Wireless Wave! *** Research in Motion Limited is a designer, manufacturer and marketer of innovative wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, they provide solutions for access to e-mail, messaging, Internet and intranet-based applications. Research in Motion's technology also enables a third party developers and manufacturers worldwide to improve their products and services with wireless access. Research in Motion is set to capitalize on the emerging wireless market, producing a hand-held wireless device, the 957, that allows wireless access to corporate e-mail, along with their Inter@ctive Pager product line and the BlackBerry wireless e-mail solution. RIMM announced a deal this week with private software firm Brience to expand enterprise applications to their devices. Brience specializes in adapting and delivering unique proprietary corporate information to any handheld in customized form, and the potential for applications for RIMM's devices is significant. Although the company is growing by leaps and bounds, Research In Motion is considered the opportunist in the hand-held computer sector, coming from relative obscurity to a top contender. Its stock, which has moved up substantially in recent sessions, may not be for conservative, "buy-and-hold" investors. However, if you want some excitement and the potential for excellent growth, consider selling one of these options to take a position in the issue. RIMM - Research In Motion $80.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 60 RUL VL 99 1.63 58.37 6.4% *** Sell Put OCT 65 RUL VM 30 2.69 62.31 9.5% Sell Put OCT 70 RUL VN 96 4.25 65.75 11.3% ************************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. 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