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Daily Newsletter, Monday, 09/11/2000

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The Option Investor Newsletter                   Monday 09-11-2000
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MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        09-11-2000        High      Low     Volume Advance/Decline
DJIA    11195.50 - 25.10 11286.10 11139.30  905 mln   1525/1295
NASDAQ   3896.35 - 82.06  4008.46  3880.69 1.48 bln   1568/2433
S&P 100   808.12 -  4.78   818.42   804.76   totals   3093/3728
S&P 500  1487.85 -  6.65  1506.76  1483.01           45.3%/54.7%
RUS 2000  533.62 -  2.08   539.63   532.94
DJ TRANS 2691.22 - 41.56  2745.55  2685.47
VIX        20.96 +  0.27    21.92    20.40
Put/Call Ratio       .60
******************************************************************

Earnings jitters and energy price concerns hit the market.

Is a bounce imminent or will the bears prevail?  The Tech-heavy
NASDAQ fell for the second-consecutive session today on third-
quarter profit concerns, which added to last Friday's losses.
It seems the bears are fattening up as they usually do during
September, before their long awaited hibernation in the coming
Winter months.  Adding to the bears' fury today was the rally in
crude oil futures above the $35 mark, but more on that later.
With the post-Labor Day rally yet to materialize, market
participants are searching hard for reasons to buy stocks.  Yet,
at the same time, there isn't a real compelling case to sell
stocks at their current oversold levels.





Volume picked up on the NASDAQ today as 1.4 bln shares traded,
which makes the sell-off a bit more disconcerting.  The COMPX
attempted to rally this morning after amateur hour, but ran into
resistance at 4000.  From there, the Tech sector was steadily
liquidated as the day wore on.  Today's sell-off marks a nearly
perfect 50% retracement of the NASDAQ's big August rally.  With
that said, we might be due for a technical rebound tomorrow
morning.  The NASDAQ did bounce off its day lows near the close
of trading this afternoon, which might be a prelude to a bargain
buying-induced rally over the coming days.  However, if the
sellers show-up early, we might see the NASDAQ fall to its 100-dma
at 3831, below that level help is located at the 3800 level.  The
NASDAQ's sell-off thus far in September has carried many leading
stocks down to critical support levels.  To solidify my point, it
might be worth your while to pull-up a chart on CSCO as it nears
its $60 support level.  The thought of CSCO falling below $60 is a
bit scary for the NASDAQ bulls out there.  Speaking of CSCO, the
stock shed -$2.69 today.  Other fallen NASDAQ leaders included
SUNW -$5.50, JDSU -$4.56, ORCL -$3.13, CIEN -$15.63, and JNPR
-$14.56.

The DOW followed the NASDAQ's lead late this morning and headed
into negative territory for the third-consecutive day.  IBM, which
finished the day -$4.88, was the biggest drag on the blue chip
index.  Goldman Sachs cut its fourth-quarter revenue growth
estimates on Big Blue.  Goldman's downward revision of IBM's
revenues was the catalyst that sprouted earnings jitters in the
broader Tech sector.  If it weren't for IBM, the DJIA would have
had a respectable day.  The Financial components of the DOW plowed
higher as a new wave of consolidation spread through the group,
which I'll expand upon below.  AXP and JPM both tacked on
respectable gains to neutralize the effects of the IBM sell-off.





The DOW has faired a little better than the NASDAQ, on a relative
basis, thus far in September.  However, the Industrials are
looking a little top heavy at their current levels and might be
ready to rollover.  After August's big rally, a few more weeks of
consolidation might be in order for the blue chips.  Although,
in similar fashion to the NASDAQ's current position, the DOW might
also be due for a technical bounce tomorrow morning.

Never mind OPEC, oil prices are still on the way up.  October
crude oil futures rose above $35 a barrel today, which marked a
ten-year high.  A ten-year high!  Over the weekend, OPEC agreed to
boost output by 800 K barrels per day beginning in October.  The
"drop in the bucket" increase was not enough to appease the
futures market.  Traders' concerns over a shortage in heating-oil
are becoming more legitimate as we approach the Winter months.
The simple fact is heating-oil inventories already are at
extremely low levels, which is supporting the high prices in the
futures market.  A relatively "bad" winter could send energy
prices into the stratosphere.  The high cost of energy not only
hits consumers in the pockets but also hurts the broader economy.
Every $1 increase in a barrel of oil takes away $15 bln in
discretionary buying power from the U.S. consumer.  Have you been
on an airplane recently?  Notice the fuel surcharge that several
carriers have added to the ticket price?  Although we live in
technologically-driven economy, energy costs still matter.  Just
ask DuPont (DD), who warned of lower third-quarter earnings last
week due to rising energy costs.  I expect we'll hear several
additional earnings warnings in the coming weeks resulting from
high energy costs.  After all, 'tis the season to warn.

The semi-crisis in the energy market is, however, carrying several
sectors to all-time highs.  The high price of oil translates into
big profit margins for the energy-related companies.  The Oil
Producer and Oil Service sectors bolted higher today on the back
of $35 oil prices.  The offshore driller, Global Marine (GLM),
rose $1.81 to a new 52-week high.  The natural gas conglomerate
El Paso (EPG) rose to a new all-time high along with Coastal
(CGP); the two companies plan to merge later this year.  The
integrated refiners also enjoyed the high crude prices today as
XOM added $1.50.  P gained $1.44 and CHV rose $2.63 after a report
said the two were in merger talks.  If oil prices continue to
trend higher, consumers might be able to fight the pinch in their
pocketbooks by investing in the group and riding the Energy sector
higher.

The feeding frenzy in the Financial sector intensified today.
Goldman Sachs (GS) announced it would acquire the privately
held Speer Leeds & Kellogg (SLK) for about $6.5 bln.  The deal is
significant because it will combine one of the world's leading
investment banks with one of the leading market making and
clearing firms.  SLK makes markets in over 6,000 NASDAQ stocks
along with listed securities on the NYSE and AMEX.  The spree of
consolidation in the Financial sector is not unexpected.  The
repeal of the Glass-Steagal Act last Fall opened the path to
merger and acquisition activity.  We should expect to see further
consolidation within the broad Financial sector, which might
continue to carry the group higher.

For once, there was relevant and pertinent news out of Washington
today.  This morning, the Justice Department filed a lawsuit
against the four U.S. options exchanges (CBOE, AMEX, Philadelphia,
and Pacific).  The DOJ alleged the exchanges stifled competition
by limiting the trading of certain contracts to just one exchange.
In doing so, the DOJ implied the exchanges were able to
artificially inflate spreads on certain contracts.  The four
exchanges agreed to be censured by the SEC and spend $77 mln on
market enforcement.  It remains to be seen what ultimately comes
from the lawsuit, but, hopefully it translates into the multiple
listing of more options contracts.  Obviously, the more liquidity
and players in a given market the more efficient it becomes, which
translates into smaller spreads and bigger profits for us, the
retail option traders.

With the exception of the Energy and Financial sectors, the
broader market has taken a beating in the last week.  Now, we
all know that the market doesn't move in a straight line.  With
that said, many traders might be looking for a bounce early
tomorrow morning, especially with a heavy docket of economic data
scheduled to be released later this week.  The August PPI is
scheduled for release Thursday morning and the August CPI a day
later.  Traders might begin positioning for a run into the PPI as
early as tomorrow.  However, the market has been selling off with
little opposition lately.  That might suggest the path of least
resistance is still down.  Put your biased opinions aside in the
coming days and let the market tell you which way to trade.  Go
with the market and your chances of profitability will greatly
increase.  Trade against the market and, well, it can get pretty
ugly.  Let profits run to the sky and cut losses with the blink
of an eye.  Good trading!

Eric Utley
Research Analyst


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**************
TRADERS CORNER
**************

Common Questions Fielded
By Austin Passamonte

I sure enjoy receiving fellow OIN readers feedback.  While
it's not always possible to answer each & every one, I do
indeed read them all.  With that in mind, why don't we visit
some of the most common topics I recently received? (edited
for brevity)

Dear Austin:
I always enjoy your articles but you sure seem to be getting
different entry points than I am! During amateur hour it seems
the market opens in the direction it is going for the day,
accelerates in that direction and then reverses trend around
1/2 hour after open. This can sometimes give good entries
if the opening pattern continues and regains its original
trend.

Every now and again the market will reverse the open trend and
never regain its original, hanging you out to dry on a trade
hence the axiom of never trading during amateur hour.

The problem I'm having is that after amateur hour, momentum
for the day is often gone. Yesterday I opened trades on NEWP,
EXTR, AMCC, SANM and PWER on good entry points with strong buy
signs on the 60 min charts with MACD turning +, stochastics
oversold and turning up off the bottom Bollinger Band.

Yet by 10:30 most of the day's movement was over (this was
especially true in August's low volume). What little movement
in my direction was taken up with getting past the bid/ask
spreads so by the end of the day the trades were barely break
even at best. Today with the open down, the spreads caused the
trades to be immediately in the red even with little stock
movement, so I closed the positions. They have since declined
more but again by 10:30 most movement for the day is done.

My question is, are you getting the doubles you write about
from printed quotes at begin and end of day or are you actually
trading them? If so, will you please discuss your entry strategy?
Thanks for your response! Bob W
****

Austin- I'm 25 living in New York and have been trading options
for over a year. I played SMH and QQQ HOLDR options according to
the oscillator line up you've been discussing and wow does it feel
good to be on the right side of the market again.

I'll get to my point; do you consider support and resistance
levels. Meaning when something set's up do you look to see how
far it will move before it runs into a 50 or 200 day MA and take
that in to account to adjust the time frame and type of option
you buy for a particular trade? Thank you again, Jeff

P.S. Why get a Jaguar when you could get 67 or 69 Camaro?
Remember, it's not about comfort, it's about power.
*****

Hi Austin,
I know you're busy earning cash so you and Wendy can get the
Jag (Go Wendy!) so I'll make this quick. What do you do in the
situation where the daily chart looks bearish but the 60 and
30 minute charts look bullish? The OEX charts for example.
Does a bearish daily chart keep you from buying calls in the
very short term? Thanks, Dina
*****

Important issues first; what in the world did Jim Brown do
to me with that one brief Jaguar ride Wendy experienced?
Couldn't he have driven the Suburban instead?  Come to think of
it, Wendy rode in that too but isn't pining for one of them.
And now my friends are commenting too?  The pressure mounts.

We return to trading.  Without question I get more mail about
oscillators and trading charts than all other topics combined.
I have a feeling we could cover this every other week and
still get flooded with mail.  Soon there will be extensive
coverage on this and more but that's another story.

The only way I've ever traded properly (don't get me started
on all the stupid decisions) is by using two or more time-
length charts with the same technical tools for any symbol.

That has worked for everything from commodities to stocks
and options so far.  The basis for me had been chart patterns
like wedges, coils, head & shoulders patterns along with
B-Bands and stochastics.  The recent addition of MACD as a
filter has been a big plus as well.

Most importantly, I learned and re-learned numerous times
that trading just one time-length chart is a losing game
save one exception.  That exception would be when position
trading big moves on daily or weekly charts with wide stop
loss zones.  Even that is far from the best approach in my
opinion.

We must, must wait for daily, hourly and 30 minute charts
to align before granting us safe entry.  From the top down:

Daily charts with signals buried in extreme overbought or
oversold ranges without evidence of turning to reverse need
to be watched like a cloudy Oklahoma horizon in mid-summer.
Sooner or later you know a tornado will arrive, but life
doesn't cease meanwhile. If hourly/30 min charts align to
give us a possible entry opposite a benign daily, we can take
it with trepidation.

For instance, if technical signals on our daily chart are
extreme overbought zones but show no sign of turning down
there is room for the market to continue up. Hourly/30 min
charts that align to signal calls is a fine entry point.

The same hourly/30 min charts align to signal calls while
daily signals are rolling over and turning down is a
terrible entry.  Why the difference?  In this instance the
daily chart indicates a long-term correction or reversal to
the downside may be underway.  Trying to swing-trade calls
against such a strong downside push has little chance for
success.

It all boils down to Elliott Wave theory.  Markets move in
natural rhythms like everything else in the universe.  So
the idea goes.

Daily charts moving steadily one direction while short-
term charts head the opposite way is akin to strong winds
blowing ocean waves into shore while a major tide recedes.
The tide will ultimately win.

Daily charts stuck in neutral are like neutral tidal periods
and strong incoming winds.  Wave action on the beach will kick
up considerably now.

Waiting for all three charts to align and trading in that
direction is akin to an incoming tide during a stiff wind
blowing into shore.  Catch one of those with your surfboard
and it could be one long ride indeed!










Looking at these three charts of the Qs, can you see how they
differ in signals?  Daily tells us the move has plenty of room
to go before we find bottom.  Shorter-term charts will signal
the next bounce first.

I would hesitate to go long this market until the daily chart
completes the stochastic down move and turns to flatten or
reverse from there.  Any other signals on the smaller charts
for calls could very well be just a brief head fake.

Look at the technical signals on Friday, September 1st.  See how
the 30 min chart signaled to buy puts while still above the 100
strike?  Notice how the daily and hourly charts were aligned in
sympathy.  Think it was a decent day to buy QQQ (or MNX) puts?

There was still time to buy in early Tuesday (next session) and
hold on for a chunk of 200+% return on option entry cost.  That's
why we impatiently wait for clear convergence of the three.

I believe we can trade these oscillator setups with a bit higher
success percentage on index options than equities.  Broad indexes
and to a lesser extent sector options are much less susceptible
to surprise announcements that can torpedo even the best equity
option setups.  Numerous times I've watched a stock-option play
setup clearly, only to have breaking news on that company or even
its sector tank the whole thing.  Am I alone?

It's my personal opinion that diligently following these chart
setups on index options, a disciplined trader can have six wins,
two losses and two stops at par using a moving-stop strategy
every ten trades on average over time.  That equates to a 3/1 win-
loss ratio when we back out the break evens.

That is not easy to accomplish but certainly possible.  Sound
money-management strategies from there will result in solid
gains over time.

Equity-option players might have somewhat lower win/loss ratios
due to erratic volatility.  Then again, that's what makes them
so popular among speculators.  Let's not forget the fact that
a few of those big pops might actually go your way (never mine)
to pick up the difference.

Wednesday we will finish up questions about entry/exit points,
profit margins and a few other things left unsaid before space
expired.  Will squeeze in Bollinger Band details as well.

Enjoy expiration week, a chance to play hot potato & earn huge
multiples if you're right.  Patience pays!

Contact Support


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

CMRC - Commerce One Inc $75.00 +3.63 (+3.63 this week)

Commerce One has become one of the signature names in the
emerging B2B environment.  They provide e-commerce solutions
that enable buyers and suppliers of goods and services direct
access to trading communities over the Internet.  Founded in
1994 as DistriVision, the company was renamed Commerce One in
1997 and is based in Walnut Creek, CA.

Most Recent Write-Up

Major players in the B2B arena recently surged in anticipation
of another round of strong quarterly results.  B2B analyst
Patrick Walrayens at Lehman Brothers commented, "If you look
at any of these companies individually, all of them are going to
have a strong September, and people are getting a sense of
that."  Granted CMRC is at depressed levels and is way off its
split-adjusted high of $165.50 reached last year, but it appears
investors are taking another look at CMRC.  There's the
partnership between Commerce One and Germany's Sap, plus the big
industry exchange concept that may revolutionize the B2B market.
The concept is coined "direct B2B" and involves buying and
selling major supplies, like steel for the big auto makers,
instead of the typical office supply paraphernalia.  Whether
it'll catch on and work is another matter.  But for now, there
are signs that sentiment is shifting in Commerce One's favor.
Our objective is to take advantage of the volatility and parlay
some profits.  In the coming weeks, there'll likely be a lot of
developments with upcoming conferences and earnings to report.
The projection is for a sizzling hot run-up.  But since it's
impossible to predict concrete results, it may be a good idea to
set stops for protection.  If you recall from last Spring's
slaughter, this sector is not only fast and furious, but also
merciless.  Simply put, don't be blinded by Greed.  It's
absolutely essential to play the up-trend with your rose-tinted
glasses in your pocket.  Light support is at $70 and $71 with a
firmer platform at $65 for the more aggressive entries.  The
conservative will however wait for a bullish move through
immediate resistance at $75 before opening positions.  The
volume's been just fantastic with levels reaching three and four
times the ADV on the up take, so look for continued activity to
back another breakout.  More positive comments from analysts
would also be welcome.  This week Dain Rauscher Wessels
reiterated its Buy rating and upped the price target on CMRC to
$75 from $56.  Salomon Smith Barney also initiated coverage on
the stock with a Buy recommendation.

Comments

Welcome to breakout city!  CMRC broke out of a five-month
consolidation today on volume that was plenty convincing.
An impressive 2.6 times the ADV changed hands during CMRC's
rally.  The FTC's approval of an auto-exchange in
conjunction with an upgrade from Prudential boosted CMRC
into breakout mode.  If the NASDAQ slumps tomorrow morning,
you might consider entering the play on a pullback to CMRC's
pivot point near the $72 level.  On the other hand, if the
Tech bulls take the reigns early tomorrow aggressive traders
might look to enter the play on a bounce off CMRC's closing
level at $75.  More conservative traders might confirm
strength in the NASDAQ and target shoot for entry into the
play on a rally above CMRC's intraday high at $78.13.

BUY CALL OCT-65 RJC-JM OI=1054 at $15.00 SL=11.00
BUY CALL OCT-70 RJC-JN OI=8180 at $12.25 SL= 9.25
BUY CALL OCT-75*RUC-JO OI=3405 at $ 9.88 SL= 7.00
BUY CALL OCT-80 RUC-JP OI=5313 at $ 7.50 SL= 5.25
BUY CALL JAN-75 RUC-AO OI= 482 at $17.88 SL=13.00

Picked on Sep 10th at    $71.38    P/E = 91
Change since picked       +3.63    52-week high=$102.25
Analysts Ratings    12-15-0-0-0    52-week low =$ 11.44
Last earnings 06/00   est=-0.10    actual=-0.14
Next earnings 10-18   est=-0.12    versus=-0.08
Average Daily Volume = 8.14 mln



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