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Daily Newsletter, Monday, 09/18/2000

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The Option Investor Newsletter                   Monday 09-18-2000
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        09-18-2000        High      Low     Volume Advance/Decline
DJIA    11808.50 -118.50 10935.60 10798.20  960 mln    684/2215
NASDAQ   3726.52 -108.71  3862.32  3702.54 1.61 bln   1099/2977
S&P 100   778.93 - 10.84   791.16   777.14   totals   1783/5192
S&P 500  1444.51 - 21.30  1467.77  1441.92           25.6%/74.4%
RUS 2000  516.68 - 14.20   531.23   516.42
DJ TRANS 2620.16 - 51.30  2676.93  2619.29
VIX        23.01 +  1.08    23.21    20.83
Put/Call Ratio       .57
******************************************************************

Blame It On The Euro, High Oil Prices, Or A Bottomless Tech Sector.

They were selling stocks today.  The broad market has been
engulfed by a sea of red during the past three weeks over concerns
of corporate profits taking a hit in the third quarter.  Many of
those concerns have recently been realized in the form of myriad
warnings across a broad range of industry groups.  Although third-
quarter warnings generally make their way into the market around
this time of year, for some reason it feels a little different.
Is it the high cost of energy?  Despite what some economists
suggest, the ten-year high in oil prices will impact both
corporate profit margins and hit the consumers in the pocket.
Have you heard from the Fed chief recently?  Although Greenspan
spoke at a bankers meeting today, he's been relatively mute as of
late.  Possibly because there still exist concerns that Doc
Greenspan raised rates a little too much and too fast.  How about
the euro?  What about Intel (INTC) trading below its 200-dma?  How
does that make you feel?  With a host of fears mounting, there
exists no compelling reason to buy stocks right now.

The lack of buying interest over the last two weeks has left the
bears free reign over the Tech sector.  Over that time, the path
of least resistance for the NASDAQ has obviously been down.  In
the past eleven trading sessions, the NASDAQ has finished in the
green on only two days.  You'd think the NASDAQ was due for a
technical bounce tomorrow, but it won't happen if the outlook in
the Tech sector doesn't improve.  Volume on the NASDAQ totaled
1.58 bln shares today, which was enough trading to take notice
of. It was not however, capitulation selling, which might have
signaled a market bottom.  Finally, the plunge in the COMPX
today was lead by the Tech Generals, which is all the more
worrisome.  CSCO fell -$2.69 and is back to its critical $60
support level.  INTC lost -$1.69, and is well below its 200-dma.
ORCL -$1.88 is still bleeding from its ill-received earnings
Report last week.  DELL shed -$1.31 en route to falling to a new
52-week low.  JDSU dropped -$5.81 and sank below its $100 support
level.




As I detailed on the COMPX chart above, there are two very
distinct and interesting patterns developing.  First, the
bigger picture shows the COMPX broke its trend-line of lows.
While the COMPX is still trading at a relatively higher low,
today's breakdown might position the index to retest support
near the 3500 level.  It's hard to argue a compelling bullish
case for the Tech sector after looking at the COMPX's failure
today.  Second, you can see the two little green candles on the
chart, which follow exactly three days of selling.  Well, we've
witnessed three consecutive days of selling again, which might
lead to a bounce tomorrow.  However, if the COMPX does bounce
tomorrow, it would not mean we are in the clear.  And, it would
not be a rally that I would buy.

The INDU haven't faired much better over the past two weeks.  In
fact, the DOW has lost 400 points in the space of four trading
days.  Looking at the DOW chart, again, we should expect a
technical bounce tomorrow.  But, what we suspect usually doesn't
happen.  The DOW's recent slide was triggered by weakness in the
big Financials, namely AXP, C, and especially JPM.  Of course,
the Tech components such as MSFT, INTC, and IBM haven't helped to
buoy the DOW's slide.





Today's fresh batch of earnings warnings were spread across
myriad sectors.  The not-so illustrious Auto Parts sector was
full of warnings today.  Eaton (ETN) and Dana (DCN), both parts
makers, warned of lower earnings due to a slowdown in the auto
market and the skidding euro.  A disconcerting warning was also
issued by Rockwell (ROK), a diversified manufacturer of
automated controls.  ROK said its auto parts division was the
main reason for the shortfall, but the company had also suffered
from a shortage of electronic components.  If component shortages
are affecting ROK, the very same shortages might be pressuring
other segments of the Tech sector.

Meanwhile, in a different segment of the Tech sector, the
already-beaten down Allaire (ALLR) said it would lose more money
than previously expected in its third-quarter.  Although ALLR's
shortfall resulted from company specific problems, the
announcement spurred a broad sell-off in the Internet Software
and Services sector.  The big losers included ARBA -$8.50, ITWO
-$2.75, EXDS -$1.89.

Away from the Tech sector, Gillette (G), the battered consumer
products maker, fell to a new 52-week low after the company
warned its third-quarter revenues would come in lower than
analysts had anticipated.  The world's largest razor maker blamed
its sales shortfall on the slumping euro.  The currency exchange
problems afflicting multinational companies have been rampant
across several sectors.  Over the past two weeks, DuPont (DD),
McDonald's (MCD), Colgate-Palmolive (CL) and now G, have all
warned of lower-than-expected profits due to the euro's slide.
Not by coincidence, each of the aforementioned are trading at or
near 52-week lows.  I have a feeling we will be hearing from a
few more multinationals this week.  I don't think all the
currency problems have been completely discounted into the market,
specifically the Consumer Products sector.  A few of the big
multinationals that have yet to warn of euro problems include:
Procter & Gamble (PG), Avon (AVP), and Estee Lauder (EL).  And
with that counsel, I urge you to tread carefully in the euro
sensitive sectors.

It was hard to find one winning sector today amid the flurry of
warnings and Wall Street fears.  Even the market-leading Energy
sector took a break today, despite the rebound in oil prices.
Traders found some solace in the Drug sector as capital sought
out defensive positions during today's sell-off, but there is no
real discernable trend to trade in the Pharmas.  A few bright
spots in the Tech sector continue to be ADBE +9.38 (still rallying
after blowout earnings last week), QCOM +$3.56 (renewed hopes of
CDMA technology being adopted in China), and EMC +$1.06 (bullish
presentation at the Bank of America Investors conference this
morning).  So, all is not gloom and doom in the Tech sector; there
are still a few bulls defending their positions.  At the same time
though, if you go long this market be very careful in your stock
selection, the bears are relentless.

So, if the path of least resistance is still down on the NASDAQ,
and it's hard to find a strong group of stocks to trade, what are
we to do?  Let me tell you about a trade I put on in the QQQ last
week, which might help you profit from any continued downside move
in the NASDAQ.  Last Thursday, the lower-than-expected PPI report
caused a major gap higher in the NASDAQ.  The Tech sector was
holding up relatively well for most of the day, that is until the
professionals returned from their lunch breaks ready to sell into
the rally.  I noticed that many of the big Tech leaders such as
CSCO, INTC, and MSFT began acting very weak around 1:15 EST.  The
tick on the NASDAQ also began falling into negative territory, very
quickly I might add.  As soon as the QQQs began retracing the gap
open, I was good for 10 SEP 93 Puts.  Yes, I knew expiration was
the next day, and yes it was a risky trade.  But, it was a small
position and after all, I'm a speculator and must take risks.
Anyway, back to the trade.  The NASDAQ kept weakening and with a
little bearish speak from Ralph Bloch, sank near the close.
Since expiration was the following day, I took my 30% gain.  The
more adventurous Matt Russ put on a very similar trade, but held
his position until expiration morning, which resulted in a 100%
gain for him.  With the directional-bias in the NASDAQ favoring
the bears, don't be afraid to look for a solid entry into a put
play.





There won't be much in the way of market-moving economic data
this week.  Instead, the markets will focus almost solely on
earnings, and the events that might impact profits.  What's more,
several companies will kick off third-quarter earnings this week.
Companies on the profit docket include:  FedEx, Jabil Circuit,
Goldman Sachs, Lehman Brothers, Morgan Stanley Dean Witter,
Celera Genomics, and the always-interesting quarterly announcement
from CMGI.  Good numbers from the Brokers this week might help to
stabilize that group's recent slide, which might portend a recovery
in the Financial-sensitive DOW.  On the other hand, a major
earnings disappointment this week or a high-profile warning might
send the market into a nosedive.  Either way, it's best to trade
with the direction of least resistance.  Until the NASDAQ and
DOW show us some stabilizing price action, the clearest path is
to the downside.  Be smart!

Eric Utley
Research Analyst


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

Technical Vs Fundamental Study
By Austin Passamonte

This seems like a really good point in time to compare the
two camps of technical and fundamental market study. Traders
expecting (read that as hoping) for a monumental fall rally
have witnessed a reverse-rally instead. How did this happen
and could it have been foreseen?

Fundamental traders believe the markets are a great unknown,
moved daily and hourly at whim through developing news and
the change in sentiment this causes.

Technical traders believe that all news & events currently
known and anticipated are reflected in chart-study behavior
right there for interpretation.

Personally, I am a devout technician that relies on chart
action for 90% of my trading decisions. I leave the other
10% for news and events that appear out of the blue to
negate technical study in its tracks.

It's my view that attempting to trade news is impossible
over the long-term for small traders. By the time legal
information reaches us, market pros and countless others
have already acted upon it. How many times have you seen
after-market traders bidding shares up or down right as
"hot news" breaks only to lose several points or more by
the next regular session?

Fundamental trading is a lagging approach while technical
study can be a leading approach. Combining each to make
sense of the senseless might just be the best approach.

A perfect example is broad market action this year from mid-
May to date. Fundamental news during mid-May was dismal. The
media was building a case for how a summer slow-down and post-
earnings period just about guaranteed most indexes would test
recent lows.

Technical pictures showed many leadership stocks and major
indexes were grossly oversold and oscillator/price action
bullish divergence. On contrarian cue to fundamentals, the
markets took off straight north in a "surprise" rally.

Late July - same story. August was purported to be another
dismal period for the market. "Big money" players were all
on vacation and low volume markets would drift lower and
lower until high rollers returned to pump volume back in.

Technical study on longer-term daily charts were sitting
in deep oversold range and as we all know, the markets did
rally strong.

Fundamentally, this occurred as impatient traders took
advantage of low selling pressure to start nibbling on
their favorite stocks in anticipation. Others standing
around waiting for the post-Labor Day rally to begin saw
their favorites creeping up and decided to join the fray.

This fundamental trading behavior ahead of the "Fall rally"
turned into a fairly large spike on its own. The result of
that action on the technical charts showed the markets now
buried deep in overbought extremes right when the media
built bias full-steam for a pending breakout to new highs.

Day after day I watched Joe Kernan and David Faber on CNBC
espousing how so many leadership stocks were breaking out
to new highs (albeit on light volume) and the broad market
strength fundamentals were showing. Where else could we go
but straight up? Anyone who thought otherwise was inferred
to be ignorant.

They were right, such is bullish fundamental behavior. How
many times have you heard the mantra that stocks breaking
out to new highs were most likely to continue doing the same?
Me too.

I want you to think about this for a moment; if stocks
breaking to new all-time highs always continued to do so,
there would be nothing but new highs straight up the chart.
Right or right? Have you seen any of this lately?

Stock and call-option buyers enjoyed enough of that in 1999
to convince themselves such is reality when in fact it's not.
Sadly, we all must accept that fact or our trading accounts
turning to dust will painfully explain it for us.

Stock and option TRADERS (there is a big-time difference)
realize and accept the fact that market sentiment and action
can, does and will reverse on a dime these days. Astute
traders prepare to play both directions and have the chance
to profit wildly from the reality of volatility up and down.




In the NASDAQ chart above, red lines indicate recent negative
divergence, green lines point out tentative bullish divergence
and the long blue line shows historical bottom support tested
two times counting the end of May.

By the end of August when "new market highs" sentiment was
rampant, again our technical charts were telling us otherwise.
Oscillators were greatly overbought and clear price-action
vs stochastic bearish divergence was evident.

What technical signals serve as would basically be akin to
an MRI and X-ray of underlying market sentiment. Outwardly
everything on the surface seems to be weighted heavily
towards one direction while unseen forces were about to
take control.

In the case of August's creeping rally, starting-gun jumpers
drove prices up through pure expectation that institutional
traders would return to start buying from there. Surely they
would carry all these stocks currently selling at premium
prices even higher... panic buying would force them to. Our
technical studies indicated otherwise.

If price action manages to hold above the 3,500 range and bounce
from there as stochastics dip lower than late July, we have a
bullish setup on our hands. This would indicate in 3-D that
fundamental sentiment sees the market too cheap at those levels.
Breaking these trendlines and bullish patterns is evidence that
overwhelming sentiment is price levels aren't cheap enough yet.

With these examples serving proof-positive that technical
study guarantees trading success, let me share with you the
downside.

First, breaking news of great magnitude can and will negate
underlying sentiment in a flash. Markets can always go much
higher or lower than we ever expect or fear. Truth is, they
usually go down much faster and deeper than they go up.

The biggest challenge in technical trading is one I've spoke
of so many times...the toughest six inches to success in
the world. That would be the space between our ears.

I cannot begin to tell you how difficult it is to buy calls near
the bottom of a market or puts near a top. Think it's easy?
You'll find out real soon!

These markets are now trying to find a bottom and that will
eventually occur. This week? Next week? October? Hard to say,
but will you & I have the nerve to pull the trigger when it
happens?




Remember, this will almost certainly begin just as the media
is in full-bore bearish mode with an array of guest analysts
calling for lower and lower bottoms. If you find it easy to
disregard this heavy sentiment and start bottom fishing from
there, please teach me how!




The daily chart of Dow shows no apparent signs of recovery yet
for a bottom to be near. Looking at this clean chart, can you
see any past bullish and bearish price/stochastic divergence
that clearly warned of each market reversal?

There are three separate signals I'll be watching for and any
one of those could be confirmation enough for me. In order of
importance, here they are:

As we've documented in "Market Sentiment" for some time, the
COT report clearly showed commercial traders at ten year net-
short extremes in the S&P futures arena. They began building
this accumulation with market levels in this vicinity and
higher. Soon they will cover these shorts and return to net-
neutral in position.

When that happens I will feel assured we are at or near the
very bottom in their opinion, which happens to be the most
reliable of all. Follow the commercials, follow the wealth.

The second signal I'd like to see is completion of the price
action/stochastic divergence on certain daily charts we've
illustrated before. If the patterns hold without being negated
by further market declines and begin to reverse, I'm buying
calls with plenty of time value on everything my accounts
can afford to risk.

The third signal I hope to see is the VIX release from it's
long-held levels near 20 or less. Piercing its upper B-Band
around 23.5 to 24 would show us that trader's fear level
might be at an apex. Today's spike was near this and we might
not wait much longer for fear levels to accelerate and push
us over the edge.

Contrarians rejoice; the bears are appearing in vast numbers
these days. More selling may be in store but that magic reversal
day when it all turns around may lie right around the bend! We
sure know the signs to watch for until then.

Contact Support


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

AGIL - Agile Software Corp. $77.25 +2.00 (+2.00 this week)

Agile Software is the leading provider of Collaborative
Manufacturing Commerce solutions that speed the "build" and "buy"
process across a virtual manufacturing network, thereby improving
time to volume, customer responsiveness and cost of goods sold.
Agile's solutions manage product content, and the critical
communication, collaboration and commerce transactions among
Original Equipment Manufacturers (OEMs), Electronic Manufacturing
Service (EMS) providers, suppliers and customers in Internet
time.  Current customers include Agilent Technologies, Dell
Computer, Flextronics International, GE Medical Systems,
Hewlett-Packard, Jabil Circuit, Lucent Technologies, Philips, and
Texas Instruments.

Most Recent Write-Up

Considering the rough week had by many stocks on the NASDAQ,
traders of AGIL have much to be happy about.  This week could be
summarized in one phrase: entry point followed by a breakout.
Early in the week, AGIL moved lower with the Tech sector.
Despite this, volume on the downside was low.  In fact, as the
Stock price drifted lower, volume dropped to anemic levels.
Monday and Wednesday saw the stock successfully bounce above its
200-dma (currently at $66.07), offering traders with an ideal
entry point.  There was some minor resistance at the $71-72 area,
which was easily cleared on Thursday.  Starting the day above that
level, the stock spent the rest of the day moving ever higher on
accelerating volume.  In doing so, formidable resistance at $75
was cleared on high volume.  For the day, AGIL was up 8.54% on
541% of ADV.  While Friday's open was below the $75 support, the
stock bounced off its 5- and 10-dmas (both in the $73.50 area).
Spending most of the day in a narrow trading range, AGIL moved up
strongly an hour before the close but some last minute
pre-weekend profit-taking erased part of the move up.  AGIL ended
the day down $1.81 or 2.35% on over twice the ADV but managed to
close above $75 support.  At this point, trading volume in AGIL
has increased greatly.  This is a bullish sign as previous
rallies have been accompanied by strong volume.  Support at $75
is strengthening, thanks to the rising of the 5- and 10-dma.  A
bounce off the two moving averages or $75 support could be a
buying opportunity, but make sure the volume supports the bounce
and market sentiment is in your favor before entering. There
appears to be resistance at the $77-78 level and then at $80.

Comments

In spite of the triple digit loss in the NASDAQ today, AGIL
powered higher on nearly four times its ADV.  The buyers came
out in full force to defend AGIL today, who might carry the
stock higher tomorrow if the broader Tech sector bounces.  A
more aggressive trader might use a pullback to support near the
$76 level as a possible entry point.  A more conservative entry
might be found if AGIL charges past resistance at $78 on
continued heavy trade early tomorrow.  The more tepid traders
might wait for the NASDAQ to strengthen before entering the
play.

BUY CALL OCT-70 AUG-JN OI= 64 at $11.88 SL= 9.00
BUY CALL OCT-75*AUG-JO OI=118 at $10.00 SL= 7.00
BUY CALL OCT-80 AUG-JP OI=566 at $ 7.63 SL= 5.25
BUY CALL JAN-75 AUG-AO OI=  2 at $17.75 SL=12.50
BUY CALL JAN-80 AUG-AP OI=324 at $15.65 SL=11.50

Picked on Sep 5th at      $74.06     P/E = N/A
Change since picked        +3.19     52-week high=$112.50
Analysts Ratings       2-7-0-0-0     52-week low =$ 18.31
Last earnings 08/17   est= -0.04     actual= -0.03
Next earnings 11-16   est= -0.02     versus= -0.05
Average Daily Volume   =   532 K



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