The Option Investor Newsletter Tuesday 09-12-2000 Copyright 2000, All rights reserved. 1 of 2 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/091200_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-12-2000 High Low Volume Advance/Decline DJIA 11233.20 + 37.70 11255.80 11113.70 985 mln 1366/1402 NASDAQ 3849.51 - 46.84 3958.36 3834.34 1.60 bln 1792/2218 S&P 100 802.57 - 5.55 811.79 801.10 totals 3158/3620 S&P 500 1481.99 - 5.86 1496.93 1479.67 46.6%/53.4% RUS 2000 532.43 - 1.19 535.95 531.96 DJ TRANS 2685.40 - 5.82 2699.70 2681.70 VIX 21.18 + 0.22 21.43 19.85 Put/Call Ratio .60 ****************************************************************** The unthinkable has come to pass. Are we having fun yet? The volatility has returned and those slow and easy profits from August are now history. The Nasdaq has now lost over -400 points from its intraday high on September 1st and is approaching a -10% sell off. Multiple support levels have been broken and large caps are leading the sell off. We anticipated that the two weeks after Labor Day would be rocky and the results have certainly been even worse than expected. The Dow dropped -79 points at the open but rallied back mostly on the JPM news to close up +37 points. Considering the JPM gain of +16 was equivalent to almost +80 Dow points you can see where the Dow would be without the merger news. Chase is the rumored partner today for a $30 billion price tag. The Nasdaq did rally slightly at the open and struggled to maintain 3950 until early afternoon. Around 2:PM the bottom fell out and it closed -100 points off the high. The unthinkable? Cisco closed under $60. Many analysts have pointed to CSCO as the GE of the Nasdaq and warned that a close under $60 would be a lights out signal for the Nasdaq. August 3rd was the last day CSCO traded this low ($58.50) and June 1st before that. CSCO is now significantly under the 200 DMA at 62.27 and investors are confused as to why. Cisco is the largest company in the tech sector and has no earnings problems, very strong growth, good management and great prospects. Quite different from many of the high ratio companies with little or no earnings. The volume was quite strong with over 76 million shares trading. Average daily volume for the last ten days was 33 million. Once it broke $60 this afternoon the volume was huge. There are many who feel CSCO at $60 is a bargain and I would not be surprised to see a pre- open recommendation of some kind tomorrow. Still the general is wounded and the troops will be looking for a sign of life. Other disturbing factors included SunMicro which closed negative yet again after trading up most of the day. After that huge drop yesterday the bounce back to $119 was encouraging but the CSCO drop was a death blow to the SUNW gains. Oracle which opened positive also started down much earlier in the day and finished down -4.06 and appears to be accelerating. The 200 DMA is 70.37, a number we hope not to see soon since there is strong support at $73. Microsoft was no help with a -.69 and neither was Dell with a -.88 but at least neither were heading south at the same high rate of speed as CSCO and ORCL. Oracle has earnings on Thursday and this was surely part of the exodus problem. With warnings galore traders were deciding not to hold over. We were blessed with one miracle with WCOM closing even for the day. It appears to have found a bottom at $30 and should not do much more harm to the Nasdaq until that bottom erodes. On the good news side of the ledger Intel managed to post a small gain even as CSCO was falling. Is the PC sector sell off over? I would not bet on it. Gateway was up fractionally and HWP may be showing signs of recovering from the drop but it is too early to take them off life support. They say that as the chip sector goes, there goes the Nasdaq. Other than Intel the chip sector was heading south at the same high rate of speed as CSCO today. AMCC -6, PMCS -2, MU -1.56 (that is actually good), RMBS -2.44, BRCM -6.12 and AMAT -3.50 on heavy volume. Are all the bottom fishermen chained to their desks? How much lower will these go before the bargain hunters show up to nibble? Worse than the chips was the fiber optic sector and they need more than Band-Aids to stop the bleeding there. SDLI -19, down -100 points in the last three weeks. GLW -8, down -52 in two weeks. CIEN -5, down -51 points in two weeks. Did somebody invent something to take the place of fiber? I think not. Michael Murphy's latest release says that the fiber sector is only 10% of what it will be in the next couple years. I agree but investors are running for cover like somebody discovered a fiber eating virus. (My bullish self sees a possible bottom forming in those three stocks beginning about 2:30 this afternoon but WAIT FOR CONFORMATION) Corning, the world's top producer of fiber-optic cable, is entering the market for gene-research tools known as DNA chips, joining Affymetrix and Incyte Genomics. Corning has developed a high-speed manufacturing process for DNA chips, allowing researchers to analyze thousands of genes simultaneously. Spurred by the mapping of the human genome, chipmakers are supplying research tools for biotechnology and drug companies racing to discover disease-causing genes and to develop new drugs. To make its chips, Corning combines technologies, including a process used in making automotive catalytic converters, a glass redraw process used to make hair-thin strands of optical fiber, and a micro-printing process formerly used to apply decorative patterns to consumer cookware. Imagine the quantum leap from dishes to DNA chips! Chips are down, fiber is down, software is down. About the only sector not in the tank was biotech, again. This love-hate relationship with the biotech stocks is enough to give you ulcers. They were up today but with different degrees of gain. Some were spiking up into the close which is a sign of sector rotation out of the techs while others like PDLI and FRX are at recent highs and holding. Still, proving it is a stock pickers sector AFFX, HGSI and DNA look like they could use some antibiotics against sellers. PRI Automation Inc. shares fell 39% after the largest maker of automation tools for semiconductor plants announced that fiscal fourth-quarter sales and profit would miss forecast. Chipmakers, rushing to add capacity for the thumbnail-sized chips that power computers and cell phones, have pressured equipment makers like PRI to build tools faster. Demand for chip equipment moves in sharp cycles of boom and bust. Analysts and PRI executives said these warnings don't indicate that demand for chips is slowing. Want to bet? When the bears are in control there may not be any safe place to park your money except cash. Cash looks really good right now. This is a triple witching expiration week and those are normally bullish. If this is bullish then I don't want to see bearish! Recently traders have been buying as we approach the key economic reports hoping for a good news rally. Do you think somebody let the cat out of the bag and that is why the big money was leaving in billions today? Since the recent PPI/CPI rallies preceded market friendly numbers, a bad PPI report Thursday would definitely have us scratching our heads. How did the sellers know in advance? Hopefully the numbers will be good, +0.1 headline and +0.2 core rate and the market will breathe a sigh of relief and relax. There is simply a lot of pent up anxiety this week and we are still three weeks from October. The Nasdaq always corrects quickly and sharply. The last six days qualify as that. The other scenario that shows best on the Nasdaq is the bear trap rallies. After 2-3 sharply down days we get a relief bounce and then another drop. After today the market is approaching oversold once again. The Nasdaq has support from here to 3725 and then 3655 and then we will run out of rope at 3500. Under 3500 is no mans land and we don't want to go there! The next three days are economic minefields with the Import/Export Prices tomorrow, PPI on Thursday and CPI on Friday. Add Oracle and Adobe earnings on Thursday and you have a volatile mix. The Nasdaq appears primed to go lower without the intervention of a lot of bargain hunters. The positive side, gloom and doom. When the gloom is so thick you can't see your screen and the generals are falling left and right, the end should not be far off. When traders finally decide that they can't stand the pain and move to the sidelines we then get the high volume drops like CSCO today. These climax selling sessions normally lead to rebounds. We just don't know if tomorrow will be an even bigger selling session or the beginning of the rebound bargain hunting. The Nasdaq has given back about -60% of the August gains and could find a floor at any moment. The continued threat of future earnings warnings is now priced into the market with the almost -10% drop from the Sept-1st high. Remember the Fed is on hold unless we get a disastrous set of economic reports. Once those are past investors will breathe easier, at least until October! Now repeat after me, "CSCO is a bargain at $60." A-T Attitude, a premium provider of real time quotes and charts has joined the free seminar in Boston next Tuesday. Check out their website at www.atattitude.com and then come meet them and see their presentation on Tuesday Sept. 19th. Preferred Trade will be showing the new 4.0 version of their trading software. It is free and we feed you breakfast and lunch, plus an afternoon seminar with Chris Verhaegh and option strategies you can use in these volatile markets. http://www.OptionInvestor.com/seminar/dtn Good luck and sell too soon. Jim Brown Editor ********************************************** Live in Boston - HAVE LUNCH WITH OIN SEPT-19th ********************************************** Busy in Boston? Have lunch with on us Tuesday September-19th. OptionInvestor.com, Preferred Trade and A-T Attitude will hold a FREE seminar on Tuesday complete with handouts, freebies, door prizes and over six hours of solid information which can improve your trading results. Lightning trades, real time quotes, the best option strategies and a FREE BREAKFAST and LUNCH! How can you go wrong? It is free but you have to register so we can order food. http://www.OptionInvestor.com/seminar/dtn ********************* FALL SEMINAR SCHEDULE ********************* The Austin TX seminar is September 21/23rd. Options expiration will be over and earnings still several weeks away. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of in-depth education. Don't miss it! Some comments from recent attendees: I want to thank Chris, Steve and Scott for the excellent workshop held in Detroit last week. Having been to the Expo in Denver in March (which was fabulous), I was ready for a smaller, hands-on approach to hone my less-than-perfect skills. I was not disappointed. One can never get too much education in options investing, and Chris and Steve offer terrific, unique approaches. Laurie Chris & Steve, I would like to thank both of you for a great experience at the Atlanta Workshop. I learned more in the three days of the workshop about investing and trading than all of my undergraduate and graduate courses combined. It was a lot of information in a short time and I hope to put it to use very soon. Mike I attended the Atlanta seminar and wanted to forward my positive comments. The seminar "really lit my fire". I have been a trader for 20 years and often go to seminars and this was the first one that really taught me the most. Dr Lloyd Jim, I had the good fortune of attending the meeting in Orlando. Like your newsletter, it was a CLASS ACT. Chris and the others did a great job. Chris was by far the best performer but the gentlemen beside me was an option trader with several seminars under his belt and almost freaked out when Chris finished his Index Presentation. JC I am writing this note to compliment you and your staff on the great job they did in Atlanta. But more importantly I would like to single out Steve Rhoades as one of the finest speaker/teacher on technical analysis that I have ever had the pleasure of hearing. I am doing my best to persuade other members of the two investment clubs that I belong to, to attend the Detroit seminar. Sincerely, ML We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh, Steve Rhoads and staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City Sep 14-16 Chicago ** sold out ** Sep 21-23 Austin TX Sep 28-30 Boston Oct 12-14 Charlotte NC Oct 19-21 San Francisco Nov 02-04 Phoenix Nov 09-11 Miami FL Dec 07-09 Philadelphia Dec 14-16 San Antonio Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ********************************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 ***************************************************************** **************** MARKET SENTIMENT **************** Bottom's Up? Austin Passamonte "New market highs" is a phrase we haven't heard in a while. Nor should we expect to. This market's future looks dreary as our western NY summer was, if that's the season we call it. Bad news first. Most everything is a technical mess. All NASDAQ markets are below 200 DMA and threatening to sink further. The OEX has broken trendline support dating back to lows set in May. The Dow and SPX are sitting on important moving-averages and poking through to the downside. Support for everything else is now resistance. Oil prices aren't going down but 3rd quarter earnings might be. Traders are scared and weak hands have been busy bailing out the lifeboats. Bellweather CSCO broke the critical $60 mark and still trades below it in after-market hours. Wonder if any sell- on-open orders will get parked tonight by part-time traders next to hit the panic button? Doom & gloom, gloom & doom. For the bulls who hope we've hit bottom,let's not go there. Technical studies indicate plenty of downside room remains. Further down? We here at Market Sentiment surely think so. All at once? We surely doubt it just as strongly. Techs have taken a pounding and trader's darlings are looking cheap. Further selling at the open tomorrow is more likely than not but we're looking for near-term bounce soon. Measuring by option open-interest values, there is minimal overhead resistance for the OEX from 802 to 825 and the QQQ from 91 to 97. Do we think the market will hit either of those? Probably not, but any favorable news at all this week can see us shoot part- way there in a single day. It might only last one trading session but intraday-traders playing September contracts will enjoy profit multiples in the hundreds if it happens. There are those who believe that government reports are leaked to market insiders before they actually appear. We don't know about that, but have watched markets rally into good news with uncanny accuracy. Now we're selling off instead. Interesting to see how data shapes up this time. PPI, CPI, triple-witch Friday. Nervous traders. Markets in great turmoil. Cheap options moving 200 - 400% or more intraday. Three sessions left. Where would you rather be than right here, right now? ***** VIX Tues 9/12 close; 21.18 CBOE Equity Put/Call Ratio The CBOE equity put/call ratio is a contrarian-sentiment indicator. Small traders are majority of equity-option players. Numbers above .75 are considered bullish, .75 to .40 neutral and bearish below .40 ************************************************************* Tues Thurs Sat Strike/Contracts (9/12) (9/14) (9/16) ************************************************************* CBOE Total P/C Ratio .60 Equity P/C Ratio .52 Peak Volume (Index & OEX) CBOE Index & OEX put/call ratio is now a "smart money" sentiment indicator, as majority of buying done by institutional traders. Numbers above 1.5 are considered bearish, 1.5 to .75 neutral and bullish below .75 ************************************************************** Tues Thurs Sat Strike/Contracts (9/12) (9/14) (9/16) ************************************************************** All index options 1.34 OEX Put/Call Ratio 1.07 30-yr Bonds Fri 9/08 close; 5.75% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 840 - 825 15,781 3,149 5.01 820 - 805 15,279 21,959 .70 *** OEX close: 802.57 Support: 800 - 785 5,978 15,017 2.51 780 - 765 589 16,930 28.74 Maximum calls: 820/5,181 Maximum puts : 805/6,439 800 Moving Averages 10 DMA 818 20 DMA 818 50 DMA 807 200 DMA 782 NASDAQ 100 Index (NDX/QQQ) Resistance: 100 - 98 31,762 24,534 1.29 97 - 95 31,416 38,470 .82 94 - 92 15,533 33,444 .46 *** QQQ(NDX)close: 91.5 Support: 91 - 89 17,413 45,374 2.61 88 - 86 2,558 18,533 7.25 85 - 83 4,198 25,424 6.06 Maximum calls: 95/24,483 Maximum puts : 90/15,011 Moving Averages 10 DMA 97 20 DMA 96 50 DMA 95 200 DMA 94 S&P 500 (SPX) Resistance: 1550 15,042 1,717 8.76 1525 15,621 7,792 2.00 1500 52,857 51,962 1.02 SPX close: 1481.99 Support: 1475 20,355 19,109 .94 1450 11,438 16,003 1.40 1425 4,665 9,444 2.03 Maximum calls: 1500/52,857 Maximum puts : 1500/51,962 Moving Averages 10 DMA 1501 20 DMA 1500 50 DMA 1482 200 DMA 1444 ***** CBOT Commitment Of Traders Report: Friday 9/08 Biweekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures Net contracts; +791 (long) - 2,700 (short) Total Open Interest % 11.5% net-long 12% net-short NASDAQ 100 Net contracts; -3,427 (short) -2033 (short) Total Open Interest % 21.74 net-short 4.84% net-short S&P 500 Net contracts; + 46,014 (long) -52,185 (short) Total Open Interest % 21.36% net-long 8.95% net-short What COT Data Tells Us: Commercial positions in S&P 500 and DJIA remain at or above five-year extreme short levels. NDX commercials continue to go shorter. Small specs continue to build net-long extremes in SP00S but have given ground in DJIA and switched over to heavily net- short in NDX. Weak hands are shaking out, only a matter of time in our opinion before they crumble. (Not Shown) Commercial positions in 10-Year Note and 30-Year Bond markets at or near five-year extreme net-short levels. Small specs build net-long. Summary: "Smart money" insiders expect stock market to decline and interest rates to rise. Small traders directly opposite, creating diverse set up favoring commercial sentiment for future market direction. Bullish: Fed's finished ? Benign government reports ? Oversold market levels soon ? Disparity in overhead call/put ratios Bearish: Oil Prices COT reports Recent pre-warnings, downgrades Broad market's break of critical M/A support Market leaders breakdown Low VIX Technical chart indicators ************** MARKET POSTURE ************** As of Market Close - Tuesday, 09/12/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 11,233 11,050 11,450 SPX S&P 500 1,481 1,475 1,535 ** COMPX NASD Composite 3,849 3,650 4,200 ** OEX S&P 100 802 796 832 ** RUT Russell 2000 532 520 550 NDX NASD 100 3,666 3,500 4,050 ** MSH High Tech 1,013 990 1,095 ** BTK Biotech 712 690 780 XCI Hardware 1,475 1,460 1,600 ** GSO.X Software 444 435 495 ** SOX Semiconductor 988 960 1,140 ** NWX Networking 1,197 1,150 1,305 ** INX Internet 543 525 605 ** BIX Banking 638 600 645 ** XBD Brokerage 698 685 710 IUX Insurance 753 705 800 ** RLX Retail 885 825 890 ** DRG Drug 383 365 410 HCX Healthcare 796 765 815 XAL Airline 150 144 162 ** OIX Oil & Gas 319 296 324 ** Fifteen alarms were triggered in the past two sessions as Thursday's triple witching has institutions active. Since the 3-day weekend, you can tell the pros are back at work. Alarms triggered to the downside (SPX, COMPX, OEX, NDX, MSH, XCI, GSO.X, SOX, NWX, INX, XAL). Alarms triggered to the upside (BIX, IUX, RLX, OIX). We've adjusted support and resistance levels on many indexes, but we've run out of room here. Please check last Sunday's update. We said, "it was just getting exciting!" *********** OPTIONS 101 *********** Refinement of Strategies By David Popper Is there anyone who has trading down pat? I do not know any successful traders who are not constantly refining their strategies on a routine basis. I felt that I crossed a watershed when I ceased bouncing from strategy to strategy, and instead began to refine the few strategies that I use. It is sort of like that old Kentucky Fried Chicken commercial that said "we do one thing and do it right." Well, doing one thing and doing it right does not mean that you should not attempt to refine and improve your strategy. It does mean that you should develop a consistent game plan and stick to it, while at the same time trying to improve it. It has been said that any strategy will work, if properly executed. By using the same strategy time after time, you are able to notice the small nuances of the strategy. A slight adjustment here and there can sometimes make all of the difference. So all that was said to simply say that I am refining my strategy by further clarifying my buy rules and sell rules. Below I will discuss these refinements. On the buy side, I want to remain cognizant of the fact that it seldom pays to buy a hot stock in a rapidly rising market. Inevitably, the buying frenzy subsides and the stock sinks under its own weight. Therefore, in making a buying decision, I consider fundamental, technical, and sentiment issues. As far as fundamental analysis is concerned, I limit my purchases to stocks that I wouldn't mind owning. My own fundamental criteria is to buy leading stocks in leading sectors of the economy such as chips, fiber optics, etc. The stock should sport an excellent earnings and relative strength rating according to Investors Business Daily. As far as technical analysis is concerned, since I am a position trader(meaning I hold stock for a few days to a few weeks or alternatively write covered calls for the current option cycle), in a positive market, I try to buy these stocks off a base or on a dip. In a negative market, I will only make a purchase during extreme conditions, that is when a stock is free falling and settles or bounces AND the technical indicators show an upward divergence. I sell a stock in an up market when an extreme condition exists. I define an extreme condition in an up market as when the upper trend line is breached AND the technical indicators reveal divergences which indicate that we may be due for a reversal. This does not mean that I will sell right away, however, I will tighten my stops to protect my profits. By sentiment I mean that I try to trade a stock when there is a compelling reason to own the stock. For example, ORCL reports earnings on September 14th, after the bell. Although the stock may not go up, due to overall market conditions, if the market cooperates, there could be a short earnings run through Thursday. Another example is RMBS. It has an analyst meeting this week. This upcoming meeting gave RMBS to buck the trend and go up 3 points on Monday when the rest of the NASDAQ caved. Finally, there are a host of companies that are split candidates during the next earnings cycle. Many of these are listed at OIN and its sister publications. Simply put, these events cause enthusiasm, and enthusiasm causes short-term price appreciation. Realizing that this temporary injection of enthusiasm is often short-lived, I sell just before the triggering event. You see, the market is made up people and acts just like we act. I remember as a child, one of the most exciting days of the year was Christmas Eve, because anticipation was in the air. One of the most deflating times was Christmas afternoon because the excitement was over. Somehow the toys were an inadequate substitute for the anticipation. In short, I have used the above refinements to improve my strategy of using half of my account to write covered calls and half of my account to buy dips or to buy stocks heading into an event. I also stay loyal to my strategy instead of placing my loyalty in a stock. Being loyal to a stock is dangerous. Read any message board and you will find a lot of banter about the merits of particular stocks. The bulls claim undying love, while the bears talk about excessive valuations and new technologies which will blow the company's products. Over time, both are right. Stocks will go up and down, analysts will change opinions, and positive and negative surprises will happen. Today's market darling may not be the highflier tomorrow. Remember IOM? How about Dell? It is still a fine company, but an investment in Dell over the past year would definitely not create a banner investment year. Loyalty to a strategy forces you to make stock selections at least monthly. This forces you to stay abreast of the current developments and to continue to trade the current trend setters. In short, it forces you to remain a knowledgeable trader. ************** TRADERS CORNER ************** With The Fed On Hold, When Will We Rally? By Mary Redmond During the last week, the markets seem to have been worried about everything from earnings to oil prices and the Euro. It seems that everyone has forgotten something very important. The Fed isn't raising rates anymore. The one factor which has been dragging down the market more than anything else for the last 18 months is almost certainly over. Of course, you can't say with 100% certainty that the Federal Reserve is not going to raise rates at any point in the near future. However, the overwhelming majority of recent economic indictors have pointed to a slowing economy and demand side inflation which is under control. Most Fed watchers now feel that the chances of another rate hike this year are extremely low, and in fact, the next Fed rate move may be a decrease. Many high profile market analysts have stated that we could be setting the stage for a whopper of a Fall rally. Remember that the Fed has been dragging down the market for over a year. Since April of 1999 when we got that first inflationary CPI, we have had the constant nagging fear of Fed rate hikes. It is difficult for a market to rally strongly in an environment of uncertainty about continually rising interest rates. Now the cycle of rate hikes is basically over, and the market is acting a little like a bunch of kids who don't realize it's summer vacation. The Fed has been a worry in the back of our heads for so long that it feels strange not to be worried about rate hikes anymore. The issue is, have the rate hikes slowed the economy so much that earnings will be slower, and if so will this ruin the market? Let's consider that the last series of rate hikes was in 1994, a year in which the S&P 500 stayed flat. Following the cycle, we had three consecutive years of superb gains in the Dow and S&P, although some companies earnings were lower. In fact, 1995 and 1996 were two of the best years ever in stock market history. In addition, the composition of the Dow and S&P have changed since 1995. The S&P has a significantly higher percentage of technology companies now than the index did 5 years ago. Also, remember that Dow Jones & Co. jazzed up the Dow last year by adding Microsoft, Intel, Home Depot and SBC. Technology stocks are generally less sensitive to interest rate increases. So, although certain sectors in the averages may suffer from higher interest rates and a slower economy, the overall performance of the averages may not be adversely impacted. Companies like Cisco and Microsoft with little debt usually do not have earnings which are dramatically impacted by a Fed Funds rate increase from 4.75% to 6.5%. It remains to be seen if the major technology companies earnings will be slower than last year, and if so, how the markets will respond. In addition, the 10-year and 30-year bond rates are in very bullish territory, due in part to the Treasury Department's ongoing program of retiring the government debt. This has helped to keep long term rates stable, although the high yield corporate debt rate spread is higher than it has been in several years. Some smaller growth company stocks have been impacted by the high corporate cost of borrowing, and may respond well if we see a Fed rate cut next year. What is a rally catalyst going to be? Perhaps we need to see proof that the major companies in the indexes still have solid earnings growth. If interest rates stabilize, even if earnings decrease somewhat, the markets should rally. If history is any guide, the markets hate a rising interest rate environment more than slower corporate earnings. During the last week and a half, the market has reacted poorly to a number of analyst downgrades on tech companies. However, we also need to consider that the warnings for the most part have come from the analysts and not the companies. Some analysts may choose to give their estimates on the low side. It is safer to estimate lower earnings and be surprised to the upside than to estimate high earnings and be surprised to the downside. We need to wait and see what the companies have to say. If Cisco, Sun Microsystems, Oracle, JDS Uniphase, or Nortel were to state that their earnings will be below expectations this could destroy the NASDAQ. However, most of the major tech companies in the S&P 500 have not yet stated that they are concerned that their earnings will be below expectations. We also may consider that a weaker Euro may hurt some companies earnings, but can also benefit the U.S. markets by drawing cash out of Europe and into the U.S. Over the last few months, the Treasury Dept has estimated that approximately $25 bln per month from European investors has gone into U.S. equities and equity funds. Also, it seems every day now we hear about some large European bank taking over some American brokerage firm. This brings additional cash into our markets. While we are waiting for a real rally we can make some money on quick daily trades using the right technical indicators. For example, if you see the chart of NT on Monday, there was an entry point when the stock was oversold and briefly dipped below 70, after which it moved up to 73. This occurred nearly simultaneously with the NASDAQ sell off Monday morning. Also, Sycamore had a good put entry on Tuesday. The stock went up on Monday, however, at 124 it was still not on the uptrend chart it had been for the last several months. It needed to clear 135 to continue the uptrend. On Tuesday, the stock struggled to hold its highs, but the technicals pointed to a contrarian sell signal. Within an hour, the stock had sold off from 122 to under 115. ****** Power Play! Hot Sector to Have on Your Watch List By Scott Martindale I was on national TV yesterday (did you see me?). CNBC is holding their Power Lunch segment in various Southern California locales this week. No, I wasn't a featured guest, but the camera panned by me at the start of the show, and I was ready with a question (and an OIN plug) if they had asked the audience. My pal from Puerto Rico was standing next to me, and his broker back home called his cell phone right after the camera panned by to tell him he saw us. [Nothing like national exposure to boost your career. I'm waiting for the phone to start ringing right now.] As the markets search for a bottom to serve as a springboard for the much anticipated Fall rally, I'm thinking about hot, volatile sectors that might be fun to play. You know, a new-technology sector comprising a handful of high-growth companies sporting lots of buzz, lots of promise, and lots of upside potential (particularly those quite a bit off a recent high), but with relatively little further downside risk. Okay, so you say there are several of these sorts of sectors. Well, let's look at a couple that kind of jump out at me. I'll highlight one today and perhaps others in this column in the future. In honor of my brief exposure to Power Lunch, today I'll talk about power, specifically fuel cells. You might not believe this, but I started writing this article on Monday (everything prior to this sentence, in fact). How prescient of me. Today, most of you know that fuel cell stocks gapped up and didn't look back, which serves to illustrate the point I planned to make. This type of sector is highly news driven. Because of that, you must be nimble and ready to strike when the iron is hot. Yesterday, Ballard Power (BLDP) got a bit of a boost from a CS First Boston upgrade after the California Air Resources Board reaffirmed its Zero Emission Vehicle (ZEV) mandate, i.e., 10 percent of automakers' light- and medium-duty vehicle unit sales in the state must qualify as zero emission vehicles by 2003. The Canadian fuel cell maker surged $8 to $110 after the firm boosted its recommendation to Strong Buy from Buy and reiterated its $170 price target. Trading in shares of fuel cell companies such as BLDP, Fuelcell Energy (FCEL) and Plug Power (PLUG) has been extremely active in recent weeks. CS First Boston says that the current price move in stocks in the group is due to "tangible fundamental developments" in the sector as opposed to earlier big moves that were largely the result of general market strength and the momentum on highly speculative stocks that goes with it. Fuel cells convert oxygen and hydrogen into electricity via a chemical reaction. Because they employ a chemical reaction to generate power, they have very few moving parts, little noise, and none of the pollutants you get from mechanical combustion engines. This makes them very reliable to operate and substantially more efficient than mechanical engines in the conversion of chemical energy from any carbon-based fuel into electrical energy. The drawback of course is price: they are very expensive compared with standard combustion. However, with electricity bills skyrocketing along with oil & natural gas prices, fuel cell technology is looking more attractive. In fact, the market opportunity is enormous, encompassing virtually every home, office building, car and bus. The Economist magazine estimates that half of all cars sold in 2018 will be powered by fuel cells. So after BLDP got its boost from an upgrade yesterday, everyone else decided to join the party today. First, FCEL got a price target increase from Jefferies ($440 vs. the previous $129) based on an analysis of the company's fuel cell/turbine hybrid. Then, IMPCO Tech (IMCO) announced that a team of scientists from IMPCO, Lawrence Livermore National Laboratories and Thiokol Propulsion successfully hydroburst tested a high-performance prototype hydrogen storage cylinder designed for Fuel Cell Vehicle applications (FCVs). Well, say no more. If you look at the list of top gainers for today (on an otherwise disappointing day), it's filled with fuel cell and other alternative energy companies such as BLDP, FCEL, IMCO, PLUG, APWR, SATC, ENER, AVA, HPOW, MKTY, CPST, MCEL and ACPW. A chart comparing the intraday percentage change in BLDP, PLUG, FCEL, and CPST shows that there was money to be made today. A particularly astute trader might have bought a cheap OTM call after yesterday's more limited action in anticipation of some follow-through today. But any trader can jump in early on the first bounce after the opening gap and pick up a cheap OTM call or a more conservative ITM call. Those of you who enjoy that zesty feeling of going naked might even want to sell short-term puts on the new show of strength. Out-of-the money calls allow you to profit from a big gap up on the news without risking a lot of cash, and buying more than one contract lets you lock in some gains along the way without having to completely exit the play. Plus, you usually get the best return on investment. In-the-money calls or naked puts allow you to get more correlation to the actual stock price move, but that goes both ways, and of course the percentage return is lower. Either way, as OIN constantly reminds us, take some profits off the table along the way. As the stock runs on the news, you'll want to lock in some gains or move up your sell stops. And evaluate your position closely before holding it overnight. Because moves in these sorts of stocks can be so sudden, fast, and brief, the opportunities are infrequent, so we don't often get them as recommended plays in the OIN. But if you stay on your toes, you can get in on these moves. Of course, another way to benefit is to buy the stock when it has come back to rest at firm support, and just wait for the next move to happen. [Yesterday, that would have included such names as PLUG, IMCO, AVA, and MKTY.] If history is any indication, it shouldn't be too long of a wait. ************************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.sungrp.com/tracking.asp?campaignid=469 ************************************************************** ************* SECTOR TRADER ************* Down Five Days Out of Six for the OEX By Buzz Lynn sectortrader@OptionInvestor.com We noted here on Sunday that weakness could carry over into next week. That has been true for the NASDAQ and for the OEX, but not the Dow. NASDAQ has been down 6 days out of the last 7 and re- traced nearly 400 points from its September 1st high of 4259. While we thought factors unknown, including the price of oil, might support the market once known, oil ministers volunteered that there was indeed a real shortage, which has kept the price of oil above $30 since the meeting. In short, the price isn't likely to fall to the $25 target price anytime soon, especially now that winter is here and sure to drive seasonal demand thus increasing the cost of heating oil. No good news here. However, there is still a chance that unknown economic factors once known could have a positive effect on the market. We just won't know that until import/export prices are announced tomorrow, until retail sales and PPI are announced on Thursday, or until the CPI and business inventories are announced on Friday. No wonder investors are nervous! That's a lot of unknown information that will influence investment decisions. If those reports are mostly benign, investors can then breath a sigh of relief and build some support at these levels. We would expect that most if not all the reports would show no inflationary signs, ex oil and food. Since nobody eats, drives a car, or heats there home, we're in the clear! All joking aside, core rates are what the market watches. There may yet come a day when the "ex" things matter, but until then it will be treated like an "off-budget" item in Congress. So if all that doesn't alleviate your fear, you can take heart in the technical indicators, which are now trending into oversold positions. Add to that historical and Bollinger band support on the NASDAQ 3800 and 800 support on the OEX, not to mention a 6-day downtrend in need of reversal, and we have reason to start paying attention for an upside entry. Did we forget to mention this is option expiration week, which tends to support prices? Anyway, trade smart and wait for an entry. The time is getting closer - we just don't know exactly when. ************** QQQ ************** QQQ - NASDAQ 100 $91.25 -1.56 (-3.88 this week) Are we there yet? Bet you've heard that question from your kids. I always tell my daughter, "when I was your age, we never got there and we were grateful". We both laugh for another five minutes until she asks again. In the market, it isn't that simple. However after falling for five of the last six days on the NASDAQ, we are due for at least a bounce. Every day that it delays only coils the rebound spring tighter. Here's what we see. NASDAQ has historical and Bollinger band support at 3800. It also has major trendline support at 3800. That translates to about $91 on the QQQ - $90 for a really firm number. Stochastic and MACD have now crossed into oversold territory on daily chart too. We would start to look for a flattening out and reversal from here, perhaps by Friday, but no guaranties. Keep in mind the bounces we've had historically over the last 5 years have come at these technical levels of support. All the while, oil and interest rates were falling and profits were rising. The one wild card that may make it "different this time" is the price of oil and its stealthy but real effects on corporate profits. Warnings have come so far mostly form smokestack companies. However, if one of the five horsemen of the NASDAQ warns, it would likely trigger further declines. Despite the technicals telling that we may be nearing a bottom, that kind of news would be devastating. For now, indicators are telling us that we may be late to the party for a put play, but not quite ready for a call play. Nearly 1.6 mln shares on the NASDAQ tell us there may be more to fall. Keep your powder dry. It's worth noting too that as a contrarian indicator, there is a ton of OI on puts compared to the calls. Based on this, it's possible that we are very near a sentimental low. Calendar Spread: Maybe we should have listed this as a naked short call play? There really have been no opportunities to leg into this position as the price has fallen, at least to purchase the long leg. There have however been some opportunities to sell the short as the price has fallen. Support is at $90 and $91 and may yet give us an entry on our long leg. We would then consider closing our short positions and go long on the long leg. Wait for the bounce and a reversal of stochastic and MACD on the daily chart for confirmation if this is your plan. After buying the long leg at a bounce off support, consider selling the short position after a rollover at resistance of perhaps $94, $97.50, or $99.50. BUY CALL JAN- 90 QVQ-AL OI= 4959 at $11.00 SELL CALL OCT- 95 QVQ-JQ OI= 2732 at $ 4.00, ND = 7.00 or less SELL CALL OCT- 97 QVQ-JS OI= 2730 at $ 3.25, ND = 7.75 or less SELL CALL OCT-100 QVO-JV OI= 3892 at $ 2.25, ND = 8.75 or less Long Call: As noted above, based on OI, MACD, stochastic, Bollinger Bands, historical support levels, 6 out of 7 days down, we may near a bottom. Unfortunately, one bad economic report could spoil it all sending this market further into the cellar and lingering oil concerns aren't helping. All that said, don't get lulled into a trade on 1 day's price action. Wait until you see a reversal of the technical indicators on a daily and a 60-min chart, and sentiment start to shift back to the positive. BUY CALL OCT- 90 QVQ-JL OI= 356 at $6.25 SL=4.25 BUY CALL OCT- 95 QVQ-JQ OI= 2732 at $4.00 SL=2.50 BUY CALL OCT-100 QVO-JV OI= 3892 at $2.25 SL=1.25 Bullish Put Credit Spread: Getting closer to ground zero by the day, only those on the bomb squad should attempt this play. It carries a lot of risk (still definable and limited though) and will wreck your margin account in a New York minute if you don't understand it. The objective is take in a credit by buying a spread and having both positions expire worthless. Let's borrow from Sunday since the play hasn't changed. "First, you must be convinced that the slide is halted and that QQQ is going to turn positive (watch for a stochastic and MACD reversal). You then sell an OTM put, say an OCT-90 and collect a premium - in this case $4.38, and simultaneously buy a lower strike, say OCT-85 for $2.75. This puts $1.63 in your pocket. The danger is that QQQ closes under $90, or worse, under $85 at expiration and the stock is put to you at $90. However you have the right to put it to someone else at $85 so your maximum loss is $5 minus your initial credit of $1.63, or $3.38. However, you can completely close the position early if the trade gets away from you and reaches your level of pain prior to maximum loss. You need a margin account to do this. At a close over $90 at expiration, you keep the whole $1.63. It's like a naked put only with an insurance policy that lets you sleep a bit better at night. You will give up some return for the downside protection." Support is at $90 and put OI suggests too much pessimism. SELL PUT OCT-90 QVQ-VL OI=5490 at $4.38 BUY PUT OCT-85 YQQ-VG OI=1495 at $2.75 Net Debit = $1.63 or better Average Daily Volume = 18.4 mln ************** OEX ************** OEX - S&P 100 802.57 -5.55 (-10.33 this week) In a similar trading pattern to the NASDAQ and QQQ (see above), OEX too is nearing support at the 800 level. Technically, it is pressing on the lower Bollinger band and is in the oversold position on the stochastic and MACD. That indicates a turnaround may be near. While economic reports should clear up investor uncertainty on the market's direction, one bad report could send OEX over the 800 edge. In the meantime, OEX may need a bit more time to consolidate at this level. If it can't hold and decides to sell off more, 798, then 791 are the next levels of support. But watch 800 to see if holds for now and let investors response to economic news be your guide to an entry. VIX? Currently ineffective, but watch it for its value as one piece of the puzzle. Concerning OI, puts are currently heavily favored indicating we may be at support Long Call: Like Sunday, most of the meat is contained above. Support is pretty strong at 800, however, we need to see that hold in the face of coming economic reports. Stochastic and MACD also need to stabilize and begin to move back up on the daily and 60-min . OEX is close to meeting all these criteria. Be patient and wait for a reversal. Lack of abundant and cheap oil isn't going to help the cause. Resistance is at 804, and 807. Support is at 798 and 791 if 800 can't hold. BUY CALL OEZ-JR OCT-790 OI= 10 at 31.00 SL=22.00 BUY CALL OEX-JT OCT-800 OI= 562 at 24.50 SL=17.25 BUY CALL OEX-JB OCT-810 OI=3317 at 18.13 SL=13.25 Bullish Calendar Spread: As noted above, we have not yet found a bottom and have yet to get a good entry point. Our luck may be about to change as long as economic reports are well received and the technical indicators (MACD and stochastic) flatten out in the oversold territory and reverse course to the upside on a daily chart. Leg in to the long position at support (likely 800; possible 790) and sell the short position at resistance (810, 815, 820). After 5 days down in the last 6 trading sessions, it is quite possible we are nearing a bottom. Again, watch for a bounce at support before entering the long. BUY CALL DEC-840 OEX-LH OI= 610 at $19.50 SELL CALL OCT-840 OEX-JH OI= 823 at $ 5.63, ND=13.88 SELL CALL OCT-850 OEX-JJ OI=1371 at $ 3.38, ND=16.13 Bullish Put Credit Spread: Flak jacket required. Gunslingers only. You need to be able to exit this position fast if it goes against you. Don't even enter it if you don't understand the concept. Our job is to sell a put at support and buy a lower strike price put as a hedge in case we are wrong. You must be convinced the OEX will finish at 800 or above on Friday. That way after you have taken in a credit, you expectation would be to have both position expire worthless and you keep the credit in the process. In this case following the play below, you maximum loss would limited to $5 minus the $1.63 credit or $3.38 so you need margin. On any serious dip under 800, we suggest closing before you reach that threshold of maximum pain. SELL PUT SEP-800 OEX-UT OI=5072 at $4.13 BUY PUT SEP-795 OEZ-US OI=2139 at $2.50 Net Credit = $1.63 or better Average Daily Volume = 1269 ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 11233.23 -25.16 37.74 12.58 Nasdaq 3849.51 -82.06 -46.84 -128.90 $OEX 802.57 -4.78 -5.55 -10.33 $SPX 1481.99 -6.65 -5.86 -12.51 $RUT 532.43 -2.08 -1.19 -3.27 $TRAN 2685.40 -41.56 -5.82 -47.38 $VIX 21.18 0.27 0.22 0.49 Calls YHOO 107.00 2.19 0.69 2.88 Analysts concur OI thought NTRS 89.94 1.25 1.06 2.31 New, basking at new highs PALM 47.13 0.00 2.13 2.13 New, Tech on the rise AFL 61.06 0.75 0.06 0.81 Bucked negative market ITWO 161.13 -2.38 3.00 0.63 Bottom of range, bounce? COF 65.75 0.53 0.06 0.59 Continues to shine AAPL 57.75 -0.44 -0.69 -1.13 Dropped, fell from tree AGIL 69.25 -0.88 -0.75 -1.63 5 and 10-dma converging BEAS 61.13 -1.13 -0.81 -1.94 Holding up, bounce at $60? AZA 75.94 -1.75 -0.31 -2.06 Taking a break, entry??? CMRC 69.13 3.75 -6.00 -2.25 Pull back on profit taking IDTI 90.13 -3.69 0.69 -3.00 Trying hard to go higher SNDK 77.63 -4.00 0.31 -3.69 Dropped, Semis slipping CFLO 109.56 -3.63 -0.19 -3.81 Breakout attempt today CHKP 140.75 -8.19 2.69 -5.50 Thank you Merrill, Go CHKP MERQ 112.38 -5.25 -3.75 -9.00 Dropped, good-bye support Puts TLGD 95.38 -5.69 -6.38 -12.06 New, Telecom rollever CREE 116.50 -2.31 -4.44 -6.75 Breakdown below $120 today LVLT 74.25 -1.56 -3.50 -5.06 New, falling like a rock CMTN 46.88 -0.63 -3.00 -3.63 Telecoms in the red SCMR 113.44 4.88 -7.69 -2.81 Yet to find bottom MMM 88.06 -1.00 -0.88 -1.88 Slow and steadily lower UK 38.03 0.13 -0.09 0.03 Biding time around $38 DIGL 74.38 1.88 -1.25 0.63 Upgrade scared bears away PCS 48.25 -0.34 1.50 1.16 Bounced to resistance PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** MERQ $112.39 -3.73 (-8.99) So much for support! MERQ's trading range between $120 and $130 didn't last so much as five minutes this week as the selling began right at the open yesterday morning. The bulls tried to mount a recovery, but failed to regain the $120 level; they settled for support at $115. The sellers let the bulls have their way for most of today's session and then attacked with a vengeance in the final hour of trading, pushing MERQ as low as $111.75. Volume was light today, and we could see support develop near current levels, but the momentum run that we wanted to play is over and it looks like there may be more weakness ahead. MERQ is booted off the call list tonight, but we'll keep an eye out for the stock to recover when investors' moods improve. AAPL $57.75 -0.69 (-1.13) This Apple fell off the tree and is rolling down hill! Unfortunately the market sentiment got the best of the Hardware sector this week and APPL folded under the pressure. The stock was unable to penetrate the key resistance level at $60 in the past two sessions and is currently finding support around $57 and $58. It's certainly not profitable for a stock to retreat more than advance, as in the present case with APPL. Therefore, we're putting AAPL in the rotten fruit bin tonight. If you have open positions, target shoot for exits on intraday peaks. The company is confirmed to report earnings on October 18th, after the market close. SNDK $77.63 +0.31 (-3.69) With weakness in the Semi sector, it seems the bulls have forgotten about SNDK and its memory products. On Monday morning, the stock attempted to get above $82 on decent volume. Getting as high as $82.50, buying interest waned. As volume pulled back, so did the stock. SNDK may have had few sellers but with even fewer buyers, there was nowhere to go but down as it finished the day down $4 or 4.92% on 78% of ADV. This was despite SNDK being ranked in an article as one of the top 100 growing companies in the United States. Today SNDK encountered resistance once again at $82. Once again it was the same story, very few sellers but even fewer buyers. SNDK did however manage to buck the trend of the semiconductor sector and the NASDAQ to close up fractionally on 68% of ADV. News of EMusic.com uses SNDK's flash cards and a new joint venture called Digital Portal may have helped keep the stock afloat. With little interest in the stock from buyers and sellers alike, we are closing this play. PUTS: ***** No dropped puts today ************************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=476 ************************************************************** 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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The Option Investor Newsletter Tuesday 09-12-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************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.sungrp.com/tracking.asp?campaignid=470 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** IDTI $90.00 +0.56 (-3.13) IDTI fought a fierce battle with the bears today in an attempt to move higher. The company unveiled a new memory chip Monday morning, which is intended to handle Internet data. Wall Street applauded IDTI's new product as Bank of America raised its 12-month price target to $125 from $100 this morning and SG Cowen reiterated its Strong Buy rating and lifted its near-term price target to $100. The early encouragement from Wall Street today drove IDTI to a new 52-week high at $95.63. If it weren't for the late-day rollover in the NASDAQ, IDTI might have held onto its early-day gains and faired a lot better. The stock is acting like it wants to go high, if only the broader Tech sector cooperates. With that said, aggressive traders might look to enter IDTI on a bounce off support at $90 early tomorrow, if the $SOX shows strength. Another possible entry might be found if IDTI rallies above the $94 level on healthy volume, with a rally above $95 providing a more conservative entry. Confirm direction in the $SOX before entering the play! ITWO $161.13 +3.00 (+0.63) The late-day sell-off in the NASDAQ yesterday took its toll on our play. For the first time this month, ITWO finished the day below its support level at $160. Thankfully, Wall Street came to ITWO's rescue this morning. Needham & Co. initiated coverage on the stock with a Strong Buy rating this morning and set a $222 price target. The analyst initiation caused ITWO to gap $6 higher this morning, which didn't allow for a solid entry into the play. The bullish effects of Needham's words this morning were soon forgotten as the NASDAQ sank in late-day trading. As expected, ITWO followed the broader Tech sector lower this afternoon to finish the day right near its trading range low of $160. As we previously mentioned, the $160 level is a crucial support area. If the NASDAQ rallies tomorrow, ahead of Thursday release of economic data, aggressive traders might look to enter ITWO on a bounce off $160. If $160 fails, you might be wise to step aside. If we get a substantial rally in the NASDAQ, you might look for ITWO to pop back above its 10-dma, which is just above at $162.75. CHKP $140.75 +2.69 (-$5.56) Monday morning looked like trouble was going to rear its ugly head again. CHKP moved down in sympathy with the NASDAQ in early morning trading. A low of $140.88 was logged in, but, by mid-day the buyers had come out of hiding, lifting CHKP to $148. CHKP said Monday they were signing as one of 12 charter members of a newly formed Internet security group, known as Counterpane Security Associates. Furthermore, they released a new product suite for qualified business startups, known as "SVN Solution Pack for Startups". By days end, trouble reared its ugly head for both the NASDAQ and CHKP. As the market worsened, the sellers came out and pounded CHKP down $8.19 to close at $138.06, below its 10-dma at $145.80, on heavier than normal volume. Tuesday started off a bit better than Monday with Merrill Lynch starting coverage on CHKP with an Accumulate rating. The coverage and a positive NASDAQ helped Check Point off to a good start, as it was up over $2 in the first half hour of trading. By mid-day, the NASDAQ stabilized and buyers got more frisky, pushing CHKP to $145.63, up $7.56 just off its intraday highs of $147.25. However, things got much worse as we neared the end! The NASDAQ slipped into negative territory and CHKP slipped lower to finish off its day highs. Volume picked up late in the day and CHKP stabilized into the close, by finishing up $2.69 at $140.75. It was encouraging to see CHKP stay in positive territory today. From here, it is imperative to continue to monitor market sentiment and the direction of the NASDAQ before you decide to enter a new trade. Conservative traders may want to wait for CHKP to move up through its 10-dma (currently $145.80) on strong volume before jumping in to this play. AZA $75.94 -0.31 (-2.06) Nothing goes up in a straight line, and AZA proved that concept this week. After running up consistently for 3 weeks, our specialty pharmaceutical play ran out of steam. On Friday, the buyers pushed AZA up to a new high, but general market weakness created too much downward pressure and we have seen the stock come back to support at the $76 level over the past 2 days. Today's close at $75.94 is just fractionally above the 10-dma ($75.63), and we need to see this level hold in order to keep our play alive. Due to the strong run up over the past few weeks, there isn't any strong support until the $67-68 level. Although there is intraday support at $71-72, a failure to hold the current support level would be an indication that the momentum run is over. On the positive news front, and possibly holding up the share price today, the company rewarded shareholders with a 2-for-1 stock split announcement this morning. Although there will need to be a shareholder meeting to approve the necessary share increase, this is likely a sign of management's confidence in the future of the company. Assuming shareholders approve, the record date will be November 1st with the actual distribution taking place November 15. A bounce from support (preferably near current levels) can be considered for new entries, but conservative investors will want to wait for strong buying volume to push AZA through $80 before playing. COF $65.75 +0.06 (+0.59) Financial stocks continued to shine as investors looked for shelter from the technology sector. As a major player in the credit card market, COF is riding the wave of enthusiasm generated by the knowledge that the Fed is out of the picture for a while. Although our play has had a hard time moving significantly higher so far this week, it has been encouraging to see COF move fractionally higher each day, with the support of solid volume. Monday's trading propelled COF to a new all-time high at $66.13, and today's close of $65.75 isn't far behind. Since the rally in Financial stocks began in the middle of August, the 5-dma (currently $64.63) has proven to be supportive and did so again today. COF's dip to its 5-dma this morning was as bad as it got as the price recovered, then strengthened for the remainder of the day. Attractive entries can be had as COF drops to bounce either at the 5-dma or intraday support levels found at $64, and then $62. More conservative players will want to wait for strong buying volume to push shares through $66 and back into new high territory before playing. AFL $61.13 +0.13 (+0.88) Steady Eddie! AFL did not show any signs of profit taking Monday morning, even as the markets continued their declines and by mid-day, AFL was up at $60.75, on better than average volume. AFL flexed its muscles later in the day and bucked the negative market trend, by closing in positive territory for the day, up +$0.94 at $61 in heavy trading. Tuesday morning, sentiment within the Technology sector became more bullish. This caused investors to order the "Tech Soup" and pass on "The Duck in Bernaise Sauce". In other words, AFL took an early morning rest, as the stock drifted just below the flat line in the first half-hour of trading. By mid- morning, the Tech investors were still busy and not paying much attention to our favorite duck. Volume was below normal half-way through the trading day and AFL was down fractionally at $60.75, still sitting comfortably above all its important moving averages. As things got scarier in the Tech sector late in the day, investors decided to come back to AFL, possibly as a spot to hide. The buyers lifted AFL by $0.13 on average volume today, to close the issue at $61.13, well above its 5-dma and 10-dma, currently $57.50 and $55.60, respectively. It's possible this quacker could keep moving up from here, but, conservative traders might look for a light-volume pullback to the above-mentioned 5-dma and 10-dma, along with a bounce, for an ideal entry point. YHOO $107.00 +0.69 (+2.88) With many of the NASDAQ leaders taking some hard losses today, i.e. CSCO, YHOO managed to hang on to a gain, bucking the NASDAQ trend. Helping YHOO do that was a couple of analyst comments. Bear Stearns initiated coverage with a Buy recommendation and a $160 price target. Jeffrey Fielder of Bear Stearns said, "YHOO's product range covers nearly every aspect of the Internet as YHOO attempts to aggregate the best of the Web and repackage it for use in a multi-device environment." Then, Prudential Securities came out in its Analyst Morning Meeting today stating that investors misunderstood Koogle's comments last week and reiterated their $155 price target. Boy, that sounds a bit familiar, just six days later than OI! But, we all know by now why we're playing this one. Echoing the aforementioned comments, YHOO offers a unique opportunity of a good entry and with limited downside, especially considering the NASDAQ's continuing slide. Volume the past two days has been about average, yet that's alright given the broader market selling. We would watch for buying volume to move the stock to $110, a point of resistance. A conservative entry could be attained on a solid move through that level. Otherwise bounces from $105 or current levels could provide entry into October contracts. We would not recommend trading September contracts. CMRC $69.13 -6.13 (-2.25) It's not over until the fat lady sings; she's still in her dressing room. Today's pullback to firmer support at $69 and $70 doesn't indicate that CMRC won't give an encore to yesterday's stellar performance. On Monday, the FTC put antitrust issues aside and approved the formation of Covisant, an enormous online marketplace for the world's largest automakers. It's estimated that their combined annual spending of $300 bln will eventually be funneled through the single portal, along with another $500 bln from suppliers. The FTC's approval of the Internet auto-exchange in conjunction with an upgrade from Prudential propelled CMRC out of its five-month consolidation. CMRC was in the news again today, announcing its plans to develop a global content network to rival a partnership made last week between IBM, I2, and Ariba to form an online business directory. CMRC retreated with the NASDAQ today. No matter though, the audience still cheered for this B2B. UBS Warburg yelled Buy and upped their price target to $90 from $75. Bear, Stearns, & Co could also be heard with a Buy recommendation and a target price of $75. Next week, Commerce One and Ariba will kick off conferences to showcase what's in their product pipeline, expand on recent announcements and perhaps, make dazzling proclamations of future exchanges that'll drive up the share price even more. The anticipation alone should keep the momentum in gear. So look for volume levels to keep topping the ADV of 8.14 mln shares and we've got a winning show on our hands. Consider taking entries off the pivotal point near the $72 level or look to enter the play on a rally above resistance at $75. If you'd like to enter on better strength, wait for positive direction from the NASDAQ, and watch for CMRC to move through Monday's intraday high at $78.13. AGIL $69.25 -0.75 (-1.63) It appeared the sellers got up earlier than the buyers on Monday morning as AGIL dropped in the first hour of trading. Getting close to it's 200-dma at $65.80, the stock bounced at $66.38 when the buyers finally woke up to bid the stock higher. Encountering resistance at the 10-dma, AGIL settled down by mid-day and ended down 88 cents or 1.23% on 35% of ADV. Like yesterday, today saw the 10-dma, now converged with the 5-dma at just below $71.50, act as resistance. An early morning attempt to rally above that point was met with selling. From there, AGIL traded lower to close the day down fractionally on 77% of ADV. A bounce off support at $68 or the 200-dma could provide for an aggressive entry point. Those looking for confirmation will want to see AGIL clear $71.50 before entering. The company announced today that it signed a contract worth over $1 million with Universal Scientific Industrial Ltd. AGIL will implement its Agile Anywhere and Agile Buyer solutions worldwide. BEAS $61.13 -0.81 (-1.94) Considering the rough start to the week for the NASDAQ, BEAS has been holding up quite well. Attempting to stage a Monday morning rally above its 5- and 10-dma, the stock was successful until it hit resistance at $65.75. From there, the sellers took over to close the stock down $1.13 or 1.78% on 63% of ADV. Today the 5- and 10-dma continued to act as a barrier. Opening above the 5-dma (now at $63.13), the stock made an attempt at the 10-dma at $64.81 but with a softening Tech market, BEAS closed down fractionally on 47% of ADV. A bounce off support at $60 would be a good target to shoot for but make sure volume confirms a bounce. A more safer way to play BEAS would be to wait for BEAS to move strongly above its 10-dma. On Monday the company announced an alliance with wireless company Capslock to jointly adapt and develop mobile commerce applications based on the BEAS platform. CFLO $109.56 -0.19 (-3.81) So far this week CFLO has been persistent. It appears that the $115 level is proving to be formidable resistance. On Monday the stock attempted for the third time to break through $115. Touching it in the early hours of trading on strong buying volume, the stock traded drifted lower for the rest of the day when the volume eased to close down $3.63 on 154% of ADV. Not one to give up easily, today CFLO again attempted to break through $115. Getting as high as $115.50 in the early going, the stock traded sideways before end of day weakness in the Tech index dragged CFLO down to close down just fractionally on 98% of ADV. Trading volume in CFLO has been tapering off since mid-August. CFLO will need that volume to return if it is to break $115. Doing so will be confirmation of strength in the stock and offer a conservative entry point. Aggressive traders will look a bounce off support at $105 as a possible entry. ******************* PLAY UPDATES - PUTS ******************* CMTN $46.88 -3.00 (-3.69) The telecom equipment makers took a turn for the worse today as fears of a spending slow-down and earnings warnings reigned supreme. CMTN slipped past its pivotal support point at $50 yesterday and fell further into the sell-off mire today. The trading activity in CMTN continues to remain robust as the stock slides lower, which bodes well for those of us on the short-side. Since breaking through support at $50, CMTN doesn't have major support again until the $40 level. That's not to say the stock might stabilize before $40, but from the looks of today's trading, CMTN's path of least resistance is down. In order to gain entry into the play, aggressive traders might pull the trigger early tomorrow morning if the NASDAQ continues to slide. Otherwise, wait for the selling to pick-up steam and target shoot for entries near whole levels; watch for a failure next at the $46 level. Aggressive traders might also consider entering the play during intraday rallies. If CMTN advances, watch for the stock to find resistance at the $48 level and consider entering the play if the bears return. UK $38.00 -0.13 (+0.00) It's been a quiet two days in the Chemicals sector so far this week. UK has essentially churned around the $38 level for the last three trading sessions. Volume has tapered off over that time, which might suggest the big sellers have taken a break from beating the stock down. However, it was a little surprising to see UK edge lower today while the NASDAQ bled red. Traders typically find solace in the Chemicals sector while the Tech sector stumbles. Obviously, that wasn't the case today. In light of the mysterious trading in UK today, we decided to hang around. The obvious and more conservative entry into the play would be on a failure of support at the $38 level. Make sure to confirm the return of volume in conjunction with lower prices before entering the play. Aggressive traders might consider entering the play on a UK rally to resistance at $39.00 or near the stock's descending 10-dma near $39.50. MMM $88.06 -0.88 (-0.94) Now that's the kind of action we like to see. Although the decline is proceeding slowly, our MMM play is definitely headed in the right direction. Friday's close just below the 200-dma (then at $90.06) left the door open to a possible recovery early this week. But, the bulls couldn't deliver, and that door slammed shut yesterday as MMM fell throughout the day. After bouncing at the 100-dma (then at $88.50), the bears finally sent the bulls packing today as they turned back an attempted recovery at the 200-dma and pushed MMM lower still, closing at $88.06, below the 100-dma. This was the last of the supportive moving averages that MMM had to lean on and it will now have to rely on historical support, found at $86.50 and again at $84. Driving the decline over the past 2 weeks are concerns about rising oil prices and economic slowdown. The warning last week from Dupont was the opening salvo and traders are simply waiting for the other shoe to fall. The best strategy for new entries is to wait for a bounce up to either the 100-dma or 200-dma, and then buy puts as the selling volume picks up and MMM rolls over. PCS $48.25 +1.50 (+1.12) Monday morning's downdraft didn't scare PCS stockholders like you would hope. We saw PCS open in negative territory, only to bounce back above the flat line, with not much trouble and by mid-morning PCS was flat on the day. Even after the market worsened, PCS held up well only closing down -$0.38 for the day at $46.75, on lighter-than-normal volume. The positive sentiment in the Tech sector Tuesday morning provided PCS with a chance to move up by over $1 in early morning trading and by mid-day, PCS was up $1.75 at $48.50, just a fraction above its 10-dma (currently $48.40). Even as the markets headed lower PCS maintained its sea legs going into the closing bell. Volume was light for the day, which is encouraging for those of us short. PCS closed in positive territory, up $1.50 at $48.25, but just below its 10-dma (currently $48.40) Look for further price deterioration on heavier volume from here as a good entry point, as PCS's close was held below its 10-dma. Conservative entry might be provided by way of a failed rally attempt, confirmed with weak volume up to the $49-$51 range. DIGL $74.38 -1.25 (+0.63) DIGL's robust volume accentuates the battle of the bulls and bears. Since last Wednesday, trading activity has been at 25% to 125% above the norm on the decline. This week, DIGL attempted to rebound off Friday's low of $72. However it slammed into a wall of resistance at $79.38 and $77.94, respectively, while still trading near $73 intraday. The volatility offered the more adventurous entries off the 5- dma ($77.63). If you err more on the side of caution, then wait for DIGL to fail and violate recent support before jumping into this downward momentum play. The dismal forecast impacting the telecoms and the jittery market should continue to pressure the share price in the short-term. However, be aware that two distinguished firms are bullish on DIGL. On Monday, Robinson- Humphrey upped DIGL to a Buy from Outperform and issued a $145 price target. First Union also began coverage with a Strong Buy recommendation and a $125 price target. Keep stops tight to protect against unplanned events. SCMR $113.44 -7.69 (-2.81) It initially appeared SCMR was base- lining at $120-$122 and settling into a comfortable trading zone. Today's performance, however, gives evidence that SCMR has not yet found bottom. Directly from the open, SCMR slid below the pivotal $120 mark. It then fell hard under $115 on strong volume and eventually landed below the 100-dma ($112.14), smack on the $110 mark. A weak close just above this technical indicator is a bearish sign. If the telecoms continue to turn lower and the broader market weakens, SCMR might be poised for a big fall. There's plenty of room before SCMR finds some support around $100 and $105. If there's an intraday rebound, consider taking more enterprising entries off upper resistance at $120 and the 5-dma ($121.08). Keep stops tight. From a more reserved perspective, look for SCMR to bleed a little more and trade under the 100-dma line. CREE $116.50 -4.44 (-6.75) Overhead resistance reigns supreme in this put play. The 5-dma is proving to be formidable resistance for CREE. On the rare times it does peek through, the 10-dma provides yet another barrier. Just above that is the 50- and 200-dma converged in the $125 area. Above that the 100-dma is at $130 has been impenetrable. With so much resistance up above combined with a weak Tech market, it is no wonder why our put play in CREE has so far been nicely profitable. So far the failures to rally above the 5-dma have provided with aggressive traders with entry points on a daily basis. As long as this trend holds it will continue to do so. We mentioned on Sunday that a break below support at $120 would see the next strong support at $112. Look for former support at $120 to act as resistance and a failed rally above that point as a possible entry. Below $112 is support at $110 and $105. ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.sungrp.com/tracking.asp?campaignid=463 ************************************************************ ************** NEW CALL PLAYS ************** PALM - PALM, Inc. $47.13 +2.13 (+2.13 this week) Known for its ubiquitous Palm-branded handheld devices, PALM brought handheld computing to the masses. Although Apple pioneered the concept of the Personal Digital Assistant (PDA) with its ill-fated Newton series, PALM, which was spun off from 3Com (COMS) in March, has managed to convince consumers they can't live without these little electronic gadgets. The company's product offerings have grown and now include the Palm III, Palm V, and the Internet-enabled Palm VII product families. These pocket-sized PDAs allow users to use pen-based input and to copy and synchronize information between the device and a personal computer. The IPO of PALM in early March was one of many new offerings last spring, and it received an amazing amount of interest on its first day. Opening the day at more than double its offering price, the stock quickly shot as high as $165 before more rational thinking prevailed, bringing the price back to earth. In the midst of the spring NASDAQ correction, PALM shares languished for months, finally bottoming near $20. Finally, in late June, volume began to increase, and the stock has seen significant accumulation ever since. The most recent bout of profit taking ended in mid-August, and the subsequent rally has brought the price up through resistance near $45. Today's strong gains pushed PALM through this level to close at its highest point since late March. The technicals, such as MACD and Stochastics, are still looking strong, and the 10-dma (currently $43.44) has provided support on each pullback over the past 3 weeks. The bulls ran into resistance today at $48, and above that looms the $53 level. Below the $45 support level is solid support around $40. Use pullbacks to support as buying opportunities, but make sure volume confirms the bounce before playing. The pullbacks recently have been brief and shallow, so the $45 level looks like the best point to target shoot. Continuing strength that pushes PALM above $48 on strong volume will provide a more conservative entry. The newswires have been busy reporting all that PALM has been up to lately. After announcing its 100,000th registered developer for their handheld platform yesterday, PALM debuted a new support network for its army of developers, which will offer easier access to technical information and professional networking services. The sheer number of developers indicates the strong demand for their devices and assures a steady stream of new products and software. Also on Monday, Computrade Systems upgraded PALM to a Buy, based on the improving technical picture. BUY CALL OCT-45*UPY-JI OI= 3396 at $5.38 SL=3.25 BUY CALL OCT-50 UPY-JJ OI= 2066 at $3.00 SL=1.50 BUY CALL OCT-55 UPY-JK OI= 83 at $1.69 SL=0.75 BUY CALL NOV-50 UPY-KJ OI=15272 at $4.50 SL=2.75 BUY CALL NOV-55 UPY-KK OI= 2957 at $2.88 SL=1.50 Picked on Sep 12th at $47.13 P/E = 529 Change since picked +0.00 52-week high=$165.00 Analysts Ratings 6-2-1-0-0 52-week low =$ 19.88 Last earnings 07/00 est= 0.00 actual= 0.03 Next earnings 10-19 est= 0.02 versus= N/A Average Daily Volume = 8.29 mln NTRS - Northern Trust Corp $89.94 +1.06 (+2.31 this week) Northern Trust Corporation is a Chicago-based multi-bank holding company established in 1889. The company is known primarily for its flagship operation, The Northern Trust Company. They provide banking, investment, and trust services to businesses, financial institutions, and affluent individuals worldwide. The financials are basking in the glow of takeover speculation and all the scuttlebutt concerning the potential takeovers is driving many stocks to new 52-week highs. NTRS, who already possesses one of the most solid long-term uptrends in the industry, is a happy recipient. Today, in a recent series of new highs, NTRS set the latest record at $90.38. The volume was heavy as investors bought into the sector on news of "serious talks" between JP Morgan and Chase. NTRS, with one of the best earnings track records, was a top pick in today's rush. Besides which, NTRS is clearly at a price that would suggest that a split could be pending. Historically speaking, the past three splits all occurred in December. Therefore it's possible that we may have to wait a few months. But with NTRS entering the $90 range, the anticipation could generate some excitement of its own. At the moment, our play on NTRS is based on the current momentum. The stock appeared to gather strength once it crossed over the 10-dma ($84.94) last Friday. The near-term support is now higher at $88, just above the 5-dma ($87.34). Confirm strength above $90 and watch for challenges at the century mark. Consider entering on intraday bounces off $89 and $90 if we aren't afforded any pullbacks. Northern Trust is confirmed to report its earnings on October 16, before the market opens. BUY CALL OCT-80 NRQ-JP OI=292 at $11.50 SL=9.25 BUY CALL OCT-85*NRQ-JQ OI= 93 at $ 7.38 SL=5.50 BUY CALL OCT-90 NRQ-JR OI=221 at $ 4.25 SL=2.50 BUY CALL JAN-85 NRQ-AQ OI=102 at $10.00 SL=7.50 BUY CALL JAN-90 NRQ-AR OI=192 at $ 7.75 SL=6.00 Picked on Sep 12th at $89.94 P/E = 47 Change since picked +0.00 52-week high=$90.38 Analysts Ratings 1-4-11-0-0 52-week low =$40.16 Last earnings 06/00 est= 0.50 actual= 0.53 Next earnings 10-18 est= 0.53 versus= 0.44 Average Daily Volume = 728 K ************* NEW PUT PLAYS ************* TLGD - Tollgrade Communications $95.38 -6.38 (-12.06 this week) Tollgrade Communications designs, engineers and manufactures network assurance equipment for the telecom and CATV industries. TLGD develops solutions for today's network testing problems - and those of the future. Their solutions are engineered for fast- changing telecom and CATV networks comprised of fiber, copper and coax. As well, their solutions are designed to transport tests and test information quickly and automatically between centralized network locations and customer lines. TLGD's patented MCU technology allows local exchange carriers to remotely diagnose problems in the local loop. Sector sympathy goes a long way when considering a play. With many telecom-related stocks hitting their highs in mid to late July, it's been for the most part, downhill ever since. Like its peers, TLGD hit its peak in mid-July at $168.88. Encountering strong resistance at $170, the stock sold down mercilessly before finding bottom at the $80 level. From there TLGD moved higher along with the rest of the NASDAQ. Its recovery hit a snag when the stock was unable to break through resistance at $130. Since then, the stock has drifted ever lower, with strong resistance provided by the 50-dma, now at $120. While August did provide some relief for investors in TLGD, September, so far, is shaping up to be a rough month. Unable to break through resistance at $120, the stock for the past few days has been selling off on the back of its 5-dma, currently at $105.84. Psychology also plays a role when considering a play, as today TGLD broke below the psychological support level of $100. Now below par value, the stock also broke support at $98. In addition to this, TLGD closed definitively below its 100-dma today, which is located at $102.21. While volume was light, at only 65% of ADV, the ease with which TLGD has been violating support levels is a message that comes through loud and clear. At this point, aggressive traders will look for the failures to make it above the 5-dma as entry points. As well, failed rallies above $100 and the 100-dma are also good entry points. Above that, there's resistance in increments of $5 at $105 and $110. Make sure volume confirms the downside before entering. Support can also be found in increments of $5 at $95 and $90. The final level of moving average support at the 200-dma is all the way down at $70. As there has been little company-specific news for TLGD, confirm direction with sector sympathy when considering a play. With the fall today, TLGD slipped past its lowest OCT options series. Look for at-the-money and out-of-the-money contracts to be issued in the coming days, and wait for OI to build before jumping in. BUY PUT OCT-105 TQK-VA OI=10 at $18.25 SL=13.00 BUY PUT OCT-100*TQK-VT OI=23 at $15.38 SL=11.25 Average Daily Volume = 775 K LVLT - Level 3 Communications $74.25 -3.50 (-5.06 this week) Billing itself as a major bandwidth merchant, LVLT is building more than 20,000 miles of fiber-optic networks in the US and Europe. Based on Internet protocol (IP) communications, the company's network also includes undersea capacity across both the Atlantic and Pacific oceans. Thinking ahead, LVLT has packed its network with fiber and conduits for future upgrades. Currently serving such data-intensive customers as ISPs and telecom carriers, the company's services include dedicated circuits, Internet access, server and network equipment collocation, and dark fiber leasing. The long steady decline in the Telecom sector has LVLT firmly in its clutches. Falling nearly 50% during the Spring decline, the stock has attempted three times to recover, only to be turned away every time. The rally in August represented the first time that the stock was unable to at least temporarily clear the 200-dma (currently at $87.94). The last 2 weeks of August saw LVLT rise from support near $60 to as high as $88 before the bears reasserted control. The subsequent selling has now pushed the stock below its declining 50-dma (currently at $75.50). Telecom stocks from T and WCOM to NT and CSCO have been having a hard time this month, and LVLT seems to be caught in the middle of a perceived slowdown in the sector. Even frequent announcements of new products and services have been insufficient to slow the selling. And, of course the September 5th downgrade from a Buy to a lowly Hold rating by Kaufman Bros certainly didn't help. Stochastics and MACD are diving earthward, and the 30-dma (currently $71.13), is the last moving average that could possibly provide support. LVLT found support near $72 this afternoon, but if the NASDAQ's slide continues, it doesn't look like this level will be able to hold, and unless the 30-dma provides support, $70 will be the next stop, followed by 65. Feel free to jump on board the decline if continued selling pressure pushes the stock down through today's lows near $72. Bucking the trend of the broader market will be difficult, but we could see an intraday bounce to resistance near $75-76 before the decline continues. Bargain hunters will use any such recovery as an opportunity to get a better entry, initiating new positions as the stock succumbs to renewed selling pressure. BUY PUT OCT-75 QHN-VO OI=306 at $7.13 SL=5.00 BUY PUT OCT-70*QHN-VN OI=363 at $4.63 SL=2.75 Average Daily Volume = 2.38 mln ********************** PLAY OF THE DAY - CALL ********************** COF - Capital One Financial $65.75 +0.06 (+0.59 this week) As one of the top 10 credit card issuers in the U.S., Capital One's secret weapon is its vast databases. The company uses this data to match a potential Visa or MasterCard customer to any one of its thousands of cards, varying in annual percentage rates, credit limits, finance charges and fees. Ranging from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor credit histories, the company has a credit card for just about anyone. The company also sells wireless phone services, mortgage services, and consumer lending products. Most Recent Write-Up Financial stocks continued to shine as investors looked for shelter from the technology sector. As a major player in the credit card market, COF is riding the wave of enthusiasm generated by the knowledge that the Fed is out of the picture for a while. Although our play has had a hard time moving significantly higher so far this week, it has been encouraging to see COF move fractionally higher each day, with the support of solid volume. Monday's trading propelled COF to a new all-time high at $66.13, and today's close of $65.75 isn't far behind. Since the rally in Financial stocks began in the middle of August, the 5-dma (currently $64.63) has proven to be supportive and did so again today. COF's dip to its 5-dma this morning was as bad as it got as the price recovered, then strengthened for the remainder of the day. Attractive entries can be had as COF drops to bounce either at the 5-dma or intraday support levels found at $64, and then $62. More conservative players will want to wait for strong buying volume to push shares through $66 and back into new high territory before playing. Comments We're looking for another new all-time high for COF. Given the recent run, we would look for a normal pullback near $64 - $65 for entries, with a bounce of course. Better-than-average volume has backed COF's advance over the past six sessions. The 10-dma lies at $62.45. If profit takers step in tomorrow, we would view pullbacks a good entries into a strong uptrending stock. BUY CALL OCT-55 COF-JK OI= 31 at $11.75 SL=9.00 BUY CALL OCT-60*COF-JL OI= 306 at $ 7.75 SL=5.75 BUY CALL OCT-65 COF-JM OI= 803 at $ 4.63 SL=2.75 BUY CALL DEC-60 COF-LL OI= 916 at $10.25 SL=7.50 BUY CALL DEC-65 COF-LM OI=2203 at $ 7.25 SL=5.25 Picked on Sep 10th at $65.16 P/E = 33 Change since picked +0.59 52-week high=$66.13 Analysts Ratings 12-12-2-0-0 52-week low =$32.06 Last earnings 07/00 est= 0.54 actual= 0.54 Next earnings 10-11 est= 0.58 versus= 0.45 Average Daily Volume = 967 K ************************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=477 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Technology Slump Continues.. The market rotation persisted today as the Dow rallied while the Nasdaq slumped. Monday, September 11 The market ended lower Monday amid new concerns over earnings in the technology sector. Investors also worried about the impact of rising energy prices on the economy. The Dow closed down 25 points at 11,195 and the Nasdaq ended down 82 points to 3,896. The S&P 500 index fell 5 points to 1,489. Trading volume on the NYSE reached 902 million shares, with advances beating declines 1,531 to 1,299. Activity on the Nasdaq was average with 1.48 billion shares exchanged. Technology declines outpaced advances 2,440 to 1,569. In the bond market, the 30-year Treasury fell 12/32, pushing its yield up to 5.72%. Sunda's new plays (positions/opening prices/strategy): Enzo Biochem ENZ OCT40P/OCT45P $0.62 credit bull-put Steven Madden SHOO MAR15C/OCT15C $1.12 debit calendar Juniper Net. JNPR SEP220C/170P $3.00 credit strangle Oracle ORCL SEP95C/SEP75P $1.00 credit strangle Stocks traded in a wide range during Monda's session and all of our new positions were available at or near the suggested prices. Portfolio Plays: The market slumped today on concerns over declining corporate profits. Weakness in biotech, airline, and drug stocks pulled the Dow lower on expectations of lower third-quarter earnings and worries over energy costs and how they will affect stocks in the second half of the year. Hewlett-Packard (HWP) led the blue-chips lower, falling $8 after reporting it is in talks to buy the technology consulting arm of Price-Waterhouse-Coopers for up to $18 billion. IBM (IBM) fell almost $5 after Goldman Sachs lowered its fourth quarter and yearly earnings estimates on the company as a result of the strong U.S. dollar. Shares of Alcoa (AA), Coca-Cola (KO) and 3M (MMM) also moved lower. Pessimistic views on some of the leading technology issues by Wall Street analysts spurred investors to take profits from the recent Nasdaq rally. A number of top companies dropped after their ratings were lowered and numerous heavyweights followed the downward trend. Computer networker Juniper Networks (JNPR) tumbled $14 to $183 while Ciena (CIEN) fell $15 to $184. Sun Sun Microsystems (SUNW) slid $5 to $115 and Cisco Systems (CSCO) fell almost $3 to $61. On the Nasdaq, biotech stocks were also very weak as merger announcements took a toll on Genzyme (GENZ) and Human Genome Sciences (HGSI), two major companies who sought to enlarge their market presence. Fortunately, losses in the broader indices were tempered by gains in banking and financial shares, which benefited from rumors of further consolidation in the sector, and retailing stocks, which rebounded from a recent sell-off. Oil services issues also moved higher as crude oil prices edged back to 10-year highs, despite an agreement by OPEC to boost output. The majority of stocks performed poorly today but we did have a few winners in the Spreads portfolio. Business-to-business Internet company Commerce One (CMRC) vaulted higher after it and Intershop Communications AG announced a deal to integrate their electronic commerce software systems. Commerce ended almost $4 higher at $75 and our new, put-credit spread is off to a great start. Covad Communications (COVD) jumped over $2 to a mid-day high above $20 after the company announced that it will reach an installed base of 200,000 subscriber lines, exceeding analysts' expectations for subscribers in the third quarter by over 30%. In addition, Covad and SBC Communications (SBC) announced a new making Covad an in-region and out-of-region DSL provider for SBC. SBC also announced plans to invest $150 million to acquire a stake in Covad and the companies reported that several pending antitrust and regulatory legal issues were settled prior to the agreement. Our bullish debit spread achieves maximum profit if the issue remains above $17.50. Anheuser Busch (BUD) continued to lead the "Murph's Law" category, up $1.38 to $82, less than one week after we closed the position for a small loss. The original position is profitable with the stock price above $80. On the downside, a number of issues continue to display signs of weakening technicals and we have decided to close some positions and make adjustments in others to protect current profits and limit future losses. Our bullish plays in Leap Wireless (LWIN), Mail.com (MAIL), Ryder Group (R) and Vitria (VITR) were closed to protect profits. In addition, we are monitoring the short-term credit strangles on Sapient (SAPE) and Southdown (SDW) for any significant changes in character. Both positions offer positive returns but we won't risk a losing outcome for a few pennies. The Reader's Request positions have produced mixed results this month. Both Polaroid (PRD) and Lucent (LU) have slumped to new yearly lows and there is little indication that either issue will recover in the near-term. The PRD calendar spread was closed for a small loss and the bullish portion (OCT40-NP) of the synthetic position on Lucent is being rolled forward to January for a small debit ($0.25). Tuesday, September 12 The market rotation continued today as the Dow rallied while the Nasdaq slumped. The blue-chip average closed up 37 points at 11,233 but the technology index fell for a third straight session, ending down 46 points at 3,849. The S&P 500 index fell 7 points to 1,481. Trading volume on the NYSE reached 981 million shares, with declines beating advances 1,398 to 1,378. Activity on the Nasdaq was moderate at 1.59 billion shares traded, with declines beating advances 2,221 to 1,801. In the bond market, the 30-year Treasury fell 10/32, pushing its yield up to 5.74%. Portfolio Plays: Technology stocks plunged today as investors continued to fret over upcoming earnings and future revenue growth. The Nasdaq moved higher early in the session but the gains evaporated late in the day as profit-taking consumed the group. Among the major stocks, networking and chip issues led the downward slide with Cisco (CSCO), JDS Uniphase (JDSU), Lucent (LU), and Advanced Micro Devices (AMD) all moving lower. In contrast, The Internet group held its ground after Bear Stearns initiated coverage on a number of popular stocks with bullish ratings. Yahoo (YHOO), Lycos (LCOS), InfoSpace (INSP), About.com (BOUT), and Amazon.com (AMZN) were among the companies tagged with optimistic forecasts. The widespread selling pressure spilled over into the blue-chip average which, in spite of the negative undercurrent, managed to end with positive results. The Dow leaders included Intel (INTC), Home Depot (HD), Exxon-Mobil (EXOM), and drug bellwether Johnson & Johnson (JNJ). J.P. Morgan (JPM) also participated in the upside activity with renewed merger speculation fueling its gains. In the broad market, financial, paper, utility and airline stocks sagged while retail, major drug and biotechnology shares climbed. Oil shares moved in conjunction with crude oil futures and stock values fell in reaction to the dip in oil prices. The primary theme in the market has been an ongoing rotation from sector to sector but a shift from growth to value has been evident in our portfolio. A number of leading technology issues appear to be establishing near-term tops that will limit their potential for the next few weeks. Many of our best performers are moving into range-bound patterns with well defined resistance areas and there is little indication that the trend will reverse to the upside anytime soon. Fortunately, there were a few bullish moves in the Spreads/Combos section today. Juniper Networks (JNPR) rebounded almost $7, closing near $190 and for now, it appears that our new credit strangle has a good chance of expiring at maximum profit. Qualcomm (QCOM) and Virata (VTRA) rebounded from recent technical bottoms and these issues may continue to oppose the bearish trend in the short-term. Enzo Biochem (ENZ) added $4 to close near $63 after the company was rated a "buy" in new coverage by analyst Geoffrey Harris at UBS Warburg. The 12-month target price is $76 per share. Regeneron (REGN) also edged higher with the biotech group and the bullish move provided a new, early-exit opportunity for those in the September debit-spread (SEP25C/30C). The return for the position is now $0.75 on $3.75 invested, for one month. In earnings news, software giant Oracle (ORCL) is due to release its results on Thursday and a positive report might help stem the recent selling pressure in technology issues. Oracle is seen on average reporting per share income of $0.13, up from the $0.08 announced in the year-ago period. However, many investors chose not to wait for the upcoming report, driving the issue $4 lower in toda's session. The recent technical support at $84 did not hold and the next key test will come at $77. Our credit strangle will profit with the issue above $74 but a move below the current area of support (on increasing volume) will be an indication that lower prices are in the compan's future. Depending on the movement in the next few days, we will decide whether to exit the position or simply roll forward and down, in expectation of a future recovery. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - We received two requests for bullish spreads on technology issues today, but based on the recent technical outlook, the potential for further downside movement in the group is very high. However, with the Implied Volatility in options favoring put-credit plays, we have discovered a few positions that present favorable entry points into attractive issues. ****************************************************************** PLUG - Plug Power $52.50 *** A Big Day! *** Plug Power designs and develops on-site electricity generation systems utilizing proton exchange membrane fuel cells for many residential applications. The company's residential fuel cell system will be an appliance that will produce electricity through a clean, efficient process without combustion. The system will receive fuel from a home's existing natural gas line or propane tank, convert the fuel into a hydrogen-rich stream, and then combine it with oxygen from the air in a chemical reaction that produces electric power. PLUG's initial residential systems will be designed to supply 7 kW of baseload power, 10 kW of peak power, and 15 kW of surge load capacity, which will provide the full electricity needs of a home. They plan to bring their first residential fuel cell systems to market in 2001, and, by 2003 expect to offer different model sizes designed to meet the power needs of various market segments. Fuel-cell stocks were on the move today, as investor interest in the group surged on worries over higher electricity bills, gas charges and heating costs generated by the rising price of crude oil. The industry was also boosted by a bullish report that came out late last week and in anticipation of PLUG's upcoming meeting with sector analysts. On Thursday, Plug Power will conduct an analysts' meeting at its headquarters and the company is expected to update its progress in moving fuel cells closer to commercial production. As a result, implied volatility and volume in the compan's options jumped today as the stock rallied over $11 on renewed enthusiasm for the issue. A market-maker reported that signs of short covering were evident in Plug Power stock and he also noted that the industry, because of all the energy price increases, is attracting new attention. This position is based on recent increased activity in the stock and underlying options. While the play offers favorable reward potential, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. Because the issue has increased in value substantially during toda's activity, we will initially wait for some consolidation to occur before entering the position. PLAY (speculative - bullish/credit spread): BUY PUT OCT-35 PQL-VG OI=69 A=$1.38 SELL PUT OCT-40 PQL-VH OI=33 B=$1.93 INITIAL NET CREDIT TARGET=$0.75-$0.88 ROI(max)=22% ****************************************************************** BLDP - Ballard Power Systems $116.12 *** Fuel Cell Rally! *** 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-cell sector is rallying again as investors realize that with crude oil prices on the rise, the futuristic technology is becoming much more attractive. Fuel cells are a low polluting, energy generating technology that can be used in a wide 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. Since they use a chemical process to generate power without burning, and contain no moving parts, the unique products are efficient and reliable while emitting few impurities. In addition, fuel-cell technology offers potential in third-world countries as it can be utilized in constructing power grids with low installation costs in remote areas. Investor interest in fuel-cell developers is growing and Ballard Power is a leader in all of the primary technologies. Ballard's strong points include sound management and a solid customer base along with established relationships with many of the potential end-users in the industry. The recent rally above technical resistance was further supported this week after the issue was upgraded by CS First Boston to a "strong buy" and the momentum appears to be well-established. The stock has excellent buying support near our cost basis and the favorable option premiums will allow us to speculate conservatively on the future movement of the issue. PLAY (conservative - bullish/credit spread): BUY PUT OCT-90 DFQ-VR OI=27 A=$1.81 SELL PUT OCT-95 DFQ-VS OI=52 B=$2.43 INITIAL NET CREDIT TARGET=$0.88-$1.00 ROI(max)=25% ****************************************************************** - TECHNICALS ONLY - ****************************************************************** ALL - Allstate Corporation $31.82 *** Cheap Speculation! *** The Allstate Corporation serves as the holding company for the Allstate Insurance Company. Business is conducted principally through Allstate Insurance Company, Allstate Life Insurance Company and their subsidiaries. Allstate is engaged, principally in the United States and Canada, in the personal property and casualty insurance business and the life insurance and savings business. Allstate's business segments include personal property and casualty; life and savings; and discontinued lines and other coverages. Allstate is in one of the more conservative sectors of the market but in the past few months, the issue has rallied to recent highs as speculation over consolidation in the industry continues to generate optimism for the future of the company. With this week's bullish move, the issue appears to have successfully completed a "head-n-shoulders" bottom and based on the new investor interest, it may not be long before the stock returns to its old trading range near $40. Traders who support a bullish long-term outlook for the company can use this synthetic position to profit from continued upside activity, at the risk of owning the issue at a favorable cost basis. PLAY (conservative - bullish/synthetic position): BUY CALL JAN-40 ALL-AH OI=2443 A=$0.56 SELL PUT JAN-25 ALL-ME OI=1327 B=$0.38 INITIAL NET CREDIT TARGET=$0.00-$0.12 ROI TARGET=50% B/E=$25.00 Note: Using options, the position is equivalent to being long on the stock. 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