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Daily Newsletter, Monday, 09/25/2000

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The Option Investor Newsletter                   Monday 09-25-2000
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******************************************************************
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


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**************
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


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**********************
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






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