The Option Investor Newsletter Monday 09-25-2000 Copyright 2000, All rights reserved. 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/092500_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-25-2000 High Low Volume Advance/Decline DJIA 10808.20 - 39.20 10897.30 10783.00 986 mln 1267/1581 NASDAQ 3741.22 - 62.54 3868.11 3737.50 1.78 bln 1789/2252 S&P 100 766.01 - 8.07 779.10 763.47 totals 3056/3833 S&P 500 1439.03 - 9.69 1457.42 1435.93 44.4%/55.6% RUS 2000 515.38 - 3.44 521.74 515.29 DJ TRANS 2555.63 - 41.51 2598.40 2554.72 VIX 24.40 + 0.23 24.88 23.16 Put/Call Ratio .51 ****************************************************************** Trading Scared Fears of profit problems erased early morning gains in both the DOW and NASDAQ. Major markets opened higher this morning after last Friday's rebound, but were unable to hold onto their gains. The carryover from the Intel warning in conjunction with a round of profit taking in last Friday's Tech leaders combined to carry the broader market well into the red this afternoon. It was a little disappointing not to see last Friday's buying follow- through today and keep the NASDAQ above support at 3800, but, we still have four days of trading remaining during this bearish month known as September, so today's sell-off was not unexpected. This coming Friday marks the end of the third-quarter, and with it we should expect to see an increase in volatility, whether it positively or negatively affects the market remains to be seen. Nonetheless, the end of a quarter can create trading opportunities, which we'll elaborate upon below. Asian and the majority of European financial markets finished higher this morning, which caused the COMPX to gap above the 3850 level. The +50 point gap higher in the NASDAQ this morning following last Friday's recovery was encouraging for the bulls sake. But, just when you think the bulls regained control of the NASDAQ, the bears come out of hiding to sell the Tech sector lower. Around 11:30 EST this morning, the bears came out with vengeance after last Friday's defeat, and sold the COMPX below the 3850 level, then subsequently drove the index below its critical support level at 3800. After wrecking support near 3800, the bears didn't rest until near the close of trading, where the NASDAQ finished just off its day lows. Despite the NASDAQ's monumental rebound last Friday, the Tech-heavy index has yet to break its string of lower highs. Since forming a double-top near the beginning of September, the COMPX cannot seem to buck the bears. What's more, the COMPX's nearly 10% drop this month would mark the worst September in over 10 years. Needless to say, I'm looking forward to this Friday for myriad reasons, with the ending of this particular September number one on the list. Away from the NASDAQ and the Tech sector and into the realm of Energy, oil prices fell below $32 a barrel this morning after President Clinton authorized the release of 30 million barrels of crude from the U.S. oil reserve after market close last Friday. Although the actual impact of an extra 30 million barrels of crude oil is still unknown, the market responded by pulling prices down to a one-month low. The falling oil prices resulted in an extended pullback in the Energy sector, which has been a recent market leader. The major integrated oil stocks took it on the chin today, led by losses in: XOM -$0.69, BP -$0.88, CHV -$1.50, and UCL -$0.56. While the one-day point losses in the aforementioned might not seem significant, the overall direction in the fallen Energy sector is causing some market problems. However, while the falling price of oil hurt the Energy sector, it helped several other industry groups. The Capital Goods sector benefited from easing oil prices, led by modest rallies in TYC, GE, and MMM. Also reaping rewards from the falling price of oil was the Financial sector. The prospects of easing energy prices led the market to believe that inflation will remain in check and interest rates will remain stable or even head lower. The thought of lower interest rates induced a broad rally in the Finance sector, which lifted the Regional Banks, Money Centers, Insurers, and the Brokers. The Finance sector tried to stabilize the Dow Industrials, but the losses in the Tech sector were too much for the blue chip index. Among the notable losers on the DOW today were: HWP -$2.87, IBM -$2.13, INTC -$2.56, and MSFT -$2.00. The longer-term trend of the DOW remains relatively bullish despite the index's poor performance during the month of September. Since hitting a low during the bear market last Spring, the DOW has traced a successive series of relatively higher lows. However, over that same time, the DOW has also traced a series of relatively lower highs. The ensuing diamond that formed this year should lead to a breakout in the coming months. Whether the DOW breaks up or down remains to be seen. However, falling energy prices and interest rates, and stable foreign markets are certainly conducive to a prospective Fall rally in the DOW. Speaking of rallies, several sectors continue to show strength in the face of the September bears. It would appear the Biotech and Fiber Optic sectors have already begun their Fall rallies. The former has clearly surpassed the Semi sector as the leading industry group this year, lead by recent gains in MEDI, MLNM, and PDLI. Along with the Biotechs, the Optical-related stocks continue to advance to new highs, which was epitomized today by rallies in GLW, CIEN, and JNIC. On the other side of the Tech sector today were the Semis. Individual rallies were hard to find in the Chip stocks today. The carryover from the Intel warning pressured Chip Equipment makers such as AMAT, CMOS, and KLAC today. The Chip manufactures also felt the pain today as MU, CY, TXN, NSM, and XLNX all fell substantially lower on heavy trade. The problems in the Chip sector are making it harder for the broader markets to mount substantial rallies, especially the NASDAQ. And, what would be a Monday without a profit warning from a Tech company? Lexmark (LXK) said after the close that it expects lower earnings for the second-half of its fiscal year. LXK blamed its shortfall on a slowdown of sales in inkjet printer products and, of course, the weakness in the euro. The fact that LXK felt the ill-effects of the euro might scare the market tomorrow and leave traders asking who's next? The fear of profit warnings mentioned in the introduction will most likely continue to influence trading this week. In bullish earnings news, PALM reported exceptional fiscal first quarter numbers after the close today. The consensus among analysts was for PALM to earn 2 cents per share; the company doubled projections by reporting 4 cents per share. Amazingly, for the third consecutive quarter, PALM reported year-over-year revenue growth north of 100%. The market had been expecting good numbers from PALM, which explains the stock's 23% rally since the beginning of September. As expected, PALM edged slightly lower in afterhours trading as the "sell the news" crowd emerged. However, the bullish report from PALM could give the bulls something to believe in tomorrow. Also on the earnings front this afternoon was Cabletron Systems (CS). The Internet equipment maker reported a profit of one penny per share, edging past the consensus estimate to lose one penny. CS's three biggest competitors are CSCO, JNPR, and RBAK. The better-than-expected report from CS could help the aforementioned fend off the bears tomorrow. As I mentioned above, the end of the third-quarter this Friday will play a key role in the direction of the market this week. The term commonly used to describe the end-of-quarter phenomenon is "window dressing". Wall Street money managers like to make their portfolios look as pretty as possible when they report their quarterly holdings to big institutional clients and investors. As a result, the worst performing stocks over the past quarter generally are replaced for the best performing stocks during the same period. We could see the affects of end-of-the- quarter window dressing as soon as tomorrow morning as fund managers scramble to "clean-up" their portfolios by Friday. As such, if you're thinking of bottom-fishing in a group of beaten down stocks, i.e. Telecom Carriers, you're probably better off waiting until next week after the fund managers are done with their end-of-quarter selling. Also worth watching might be the leading stocks during the last quarter. As fund managers load up on the quarter's biggest winners, their buying will most likely drive the market's recent leaders higher. Other than the quarterly window dressing this week, traders will look forward to economic numbers in the form of Durable Goods orders Wednesday morning, and second-quarter final Gross Domestic Product numbers along with Jobless Claims Thursday morning. All in all, the economic data is fairly mute this week, with earnings garnering the market's full attention. Additionally, traders will continue to monitor the levels of oil and the euro and their future influence on corporate profits. Barring any major catastrophe, we will likely remain in a fearful market, which can present opportunities for the fleet afoot trader. However, it's hard to find a clear and present trend in the current market environment, which presents more risks for the swing traders who like to hold positions longer than one or two days. With that said, trade with your head, not your emotions. Eric Utley Research Analyst ************************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=535 ************************************************************** ************** TRADERS CORNER ************** A Look at Bollinger Bands Austin Passamonte It's important to have several technical tools we can rely on to guide us in the markets. Some traders try to overlap twenty- seven different studies to super-filter their trades, the idea being elimination of all losses. That can be achieved alright because we'll never get a clear buy signal to enter while waiting for everything to converge. Yes, I study numerous technical indicators. The bigger a position I take, the more of them I study. Sound familiar? Fear or hope can make us justify about anything we want to see. Don't like what one tech indicator is saying? Click... let's see if we can find one that agrees with our bias. While this approach might make us feel all warm & fuzzy inside or at least quell that giant pit in our stomach (you know the one), it will not add dollars to the trading account. As a matter of fact, it will probably cause a reverse money-flow instead. Nope, the only way to trade chart indicators is to treat them how witch doctors throw bones: cast what's in the bag out in plain view and read 'em how they fall. As chronicled here, I rely heavily on stochastic studies to initiate trades. That doesn't make me a one-trick pony. I also pay attention to chart formations, points of support and resistance in addition to many other oscillators. Bollinger Bands rank right up in the top three tools for me. As a matter of fact, I honestly know I could chuck all the other stuff out the window and make a bunch of money just trading Bollinger Band and stochastic signal convergence on daily charts. Nothing else. That of course would mean I could only take trades every few weeks or months as my target markets reached extremes while sitting on cash in the interim. What would I do with myself? How could my broker and all those market-makers put their kids through college without my support? Gosh, I have a lot of responsibility to them not to sit out all the market noise and wait for sure-thing trades to emerge. For those of you who feel detatched from all this and don't mind trading less and earning much more, let's review one of the best tools in the market for achieving just that. Bollinger Bands Moving bands that channel price action are popular technical tools. Bollinger bands are most popular. Invented by John Bollinger, these variable channels display extreme price action and market volatility that's likely to correct in the near future. Flowing price channels are constructed with the baseline of a particular period's moving average. This forms the middle or "fair value" line between the upper and lower "extreme" bands. Upper & lower bands follow this moving average, growing narrow and wide as market action occurs. These values are known as "standard deviations" of the selected moving-average line. A popular default setting for Bollinger Bands is 20(2), meaning the baseline moving average is 20 time-periods of our selected chart. Each upper and lower bands mark points of value two times deviated from "normal" or expected price action. This is the setting I prefer to use. Some traders tighten their bands to get more signals but I want price action to prove it is seriously outside the norm before buying in. Upper and lower bands are two-times current market's volatility away from this mean. Theory is extreme or volatile price action will soon return to normal much like a stretched rubber band snaps back to shape. Like a rubber band, the further short-term price action moves away from its baseline the more sharp and dramatic its return might be. Price levels above the middle value line indicate strength in the underlying while prices below suggest weakness. A move from one side of the moving average line to the other may indicate a change or reversal in sentiment and strength. Likewise, prices moving along upper or lower extreme bands can be signs of a continued move in that direction. Release from the band and a move back towards the centerline could result in a near-term price reversal. The 20-period Moving Average line also acts as support and resistance. It is common to see levels turn from hitting this mark as well. Price action rising up from lower extreme bands may fail at the overhead resistance while prices falling from upper extreme bands may find support at the middle line. There is a tremendous amount of interpretation that technical traders glean from B-band action. Would it surprise you to learn I boil things down to just a few basics for myself and go from there? "Idiots Guide To Trading" is my favorite book yet to be written until an even simpler version is released. I just wait for price action to push into or pierce one of the extreme Bollinger bands and then release from there. Long term study of any chart we put in front of our face will prove that market prices eventually move from one extreme to fair value and over to the opposite extreme before starting the journey all over again. That's great for stock players but options have time decay as natural baggage. I honestly and truly believe we all could buy LEAPs or sell front-month option contracts on symbols that push into extreme upper or lower B-bands and converge with stochastic action on daily charts to make vulgar amounts of money. If I ever find the cure for keypad/online brokerage addiction I might just try and prove it. Until then, we need to quantify Bollinger band action for the short-term trader as well. I still use daily charts as printed in here most every issue along with stochastic and MACD studies. My first leading indicator is price behavior with the bands. Violate one band or the other and you've got my attention in a hurry! Using this tool to identify unusual volatility and extreme price action can help indicate market corrections. Vital information for traders to have as these recent examples demonstrate. (Daily chart, NDX) This daily chart of the NASDAQ 100 index shows eight different time frames where price action pushed into extreme upper and lower bands before release. If we used this violation of extreme bands as our setup alert and entered trades when stochastic action reversed from its own extreme overbought/oversold zones, do you see any big losers? For that matter, do you see any losers at all using proper stops? A good case for trade less, make more. Will someone please come up with "the patch" for frequent traders soon? I for one would keep a lot more money! (Hourly chart, NDX) The shorter our time span the less accurate signals become. Here we see Bollinger bands on the NDX hourly chart walking their way down the lower band in succession. Without the benefit of clear hindsight any of those would tempt us to buy calls on their own. Great as a setup tool for us to watch the action but we must have confirmation of market change through other tools for success. Hourly stochastic lines indicate the NDX has more room to fall before finding near-term support at the lower band resting 48 index points below today's close. (Daily chart, XOI) Oil again. Those XOI November 520 puts (XVI-WD)that sold for 7.625 ask this time last week are now fetching 27.125 today. That's 355.74% return on contract cost in about one week. Upper B-band penetration was our first clue this market was over-extended. Bearish stochastic divergence noted last Wednesday along with the fast & slow bars turning down clearly made this one a high-odds play. Why in the world did I let myself get caught in QQQ's prop-wash all week, spinning my wheels when this baby ran to the moon? Simple... who trades the XOI? There it was, staring me in the face but I passed on that to make no headway with an old familiar instead. I hope I'm alone in that mistake but vow not to let it happen again. Famous last words? That pretty-much sums up my use of Bollinger Bands. They are the very first signal to indicate a market is two times or further outside its "normal" price pattern and things are now fixin' to change. Doesn't mean it will right away; I need to see other tools tell me when the tide has turned. Once that happens as witnessed above, all we need is the good sense to listen and apply our trading capital to that knowledge. Here's wishing your common sense is light-years ahead of mine! See you Wednesday for more fun, and best trading wishes 'til then. Contact Support ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=549 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** AGIL - Agile Software Corp. $83.69 (+3.69 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 In the face of a shaky market last week, AGIL managed to hold up well and in the process, even made some progress. The first half of the week saw the stock move steadily higher, using its 5-dma for support. With formidable resistance at $75 cleared, the next to go was $77. Last Wednesday, AGIL attempted to break out strongly. Clearing $80 in early morning trading, the stock moved higher. Encountering resistance at the $83 level brought in the profit-takers. On Thursday, AGIL made another attempt to break above $83. Unable to do so, the sellers managed to get the stock to close in the red, breaking its 6-day winning streak. Friday saw AGIL gap down at the open. Successfully bouncing off support at $75 provided aggressive traders with an ideal entry point. From there, AGIL spent most of the day trading sideways until the last half-hour when the stock took off to close the day up fractionally. This was no easy feat considering the recovery necessary to end the day in the positive. Volume came in at 125% of ADV. Depending on the market next week, AGIL at its current level could be a solid entry point. The $75 mark continues to be a key support level. There is also support from the 10-dma at $76 as well as light support at $77. Above that the 5-dma rests at $79.28. A confirmed bounce off a support level could provide for an aggressive entry point. For those who want to make sure, a break above $83 with conviction would be the target to shoot for. Comments Despite the turmoil in the Tech sector in recent weeks, AGIL has managed to quietly climb towards its 52-week high. The stock has fallen under heavy accumulation, indicated by the swell in volume during the past two weeks, and finally closed above the $83 mark today. Aggressive traders enter the play at current levels early tomorrow if the NASDAQ rallies. Conservative traders might wait for AGIL to build momentum and enter the play on a volume-backed rally above $85, thereafter resistance is sparse until $90. Additionally, if AGIL pulls back on light volume, traders could look to buy a bounce off support at $80, or lower near the 10-dma, which moved up to $78 today. BUY CALL OCT-80 AUG-JP OI=583 at $10.50 SL=7.50 BUY CALL OCT-85*AUG-JQ OI= 93 at $ 8.00 SL=5.75 BUY CALL OCT-90 AUG-JR OI=199 at $ 5.75 SL=3.75 BUY CALL NOV-85 AUG-KQ OI= 4 at $10.25 SL=7.00 BUY CALL NOV-90 AUG-KR OI= 15 at $ 8.50 SL=6.00 Picked on Sep 5th at $74.06 P/E = N/A Change since picked +9.63 52-week high=$112.50 Analysts Ratings 2-6-0-0-0 52-week low =$ 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 = 608 K ******************* 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. You may subscribe at any time but your subscription will not start until your free trial is over. 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