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Daily Newsletter, Monday, 10/02/2000

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The Option Investor Newsletter                   Monday 10-02-2000
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        10-02-2000        High      Low     Volume Advance/Decline
DJIA    10700.10 + 49.20 10721.20 10631.30 1.03 bln   1264/1649
NASDAQ   3568.90 -103.92  3714.48  3559.84 1.79 bln   1424/2732
S&P 100   763.26 +  3.43   768.52   759.12   totals   2688/4381   
S&P 500  1436.23 -  0.28  1445.60  1429.83           38.0%/62.0%
RUS 2000  511.67 -  9.70   523.40   511.66
DJ TRANS 2464.42 - 57.22  2526.27  2460.71
VIX        23.43 -  0.42    24.12    22.34
Put/Call Ratio       .72
******************************************************************

Did I Hear Someone Say Divergence?

I know I heard someone say it as the two major indices went their
own ways today.  Even as I awoke this morning to green futures'
quotes, it just didn't feel right.  How quickly can traders forget
the drubbing that the markets took on Friday's quarter end?  About
a half hour.  That's how long those positive feelings lasted after
the open.  Both the INDU and the NASDAQ slipped quickly and 
scrambled to recover their footing.  While they both did turn 
around early on, only one of them would hang on for the day.  The 
INDU managed to post a gain, while the NASDAQ went into a free 
fall, violating major support on the way.

The story today was the NASDAQ's 2.82% decline on the first trading
session of the fourth quarter.  I heard market pundits all morning 
talking about what the past Octobers have done to the markets and 
so on and so forth, but only one thing is certain, October has a 
mind of its own.  And today, traders picked up where they left off
on Friday.  The NASDAQ kicked off October by opening at the high 
of the day and closing just off the lows, giving up 103 points in
between.  Concerns from last Thursday's AAPL warning continued to 
plague hardware stocks, particularly DELL, which lost another 5% 
to close at $29.19.  This is really unbelievable to see, 
especially considering that this once pre-eminent NASDAQ leader 
hasn't traded at this level since October 23rd, 1998!  INTC also
was a significant drag on the NASDAQ, and the INDU, trading below
$40 for a brief moment, a level not seen since the first week of
January 2000.  With "the generals" falling left and right, there
has been some significant technical damage done.

With the NASDAQ's dominant downtrend and its moving averages high 
above its current level, traders and technicians were looking to 
recent lows as stopping points.  I should say "support," but 
"stopping points" is more fitting after hearing other traders
desperately saying "it's gotta stop here" throughout the session.
The most recent low of 3614 set on September 22nd, the day after
the INTC warning, couldn't stop the selling.  Then, 3600 was next
but that proved to fail as well.  After that, it looked like clear
sinking to 3521, the low from August.  It would have been nice to
take it down to that low and turn the market around on higher 
volume, but the NASDAQ wouldn't be so lucky.  Regardless of how 
low the NASDAQ goes, we are going to need a high volume 
capitulation that leaves smoking skid marks.  Volume was decent, 
but by no means heavy, coming in at 1.75 bln shares.  Breadth on 
the NASDAQ was 2-1 in favor of decliners.  

The chart below is the same chart that I included in my Wrap from 
last Wednesday, same trendlines too.  Notice that we did, indeed,
get a oversold relief rally on Thursday the 28th, right up into the
downtrend line.  Today's trading resulted in a violation of 3614 
and 3600, which represented key psychological support.  After 
closing at 3566, we will be watching that 3521 low from August 
closely.


 

Contributing to this breakdown were the Biotechs.  Sparked by a 
Banc of America downgrade of MEDI, the BTK.X lost 7.5% today.  The
downgrade was to a Market Perform from a Buy, as analyst Eric Ende
cut MEDI's 2001 earnings from $0.89 per share to $0.75 on fears
of slowing sales of MedImmune's major drug, Synagis.  As a result,
Biotechs got hammered across the board.  Bucking the trend at the
NASDAQ were CHKP(+11.00), ADBE(+7.75), NEWP(+4.38), and 
RMBS(+4.06).

Yet, in the world of diverging indices, not all was bad.  The INDU
held strong today after following the NASDAQ's bumpy lead.  
Driving the Big Board index were Financials and Oil Service stocks.
Oil futures rose over a dollar today as traders speculated on a 
production interruption as Hurricane Keith drenched the Yucatan 
Peninsula and heads toward the U.S coast on the Gulf of Mexico.  
Traders continued to rally oil stocks which have outperformed the
market handily over the past four months.  XOM broke out to new 
highs, adding $2.38 to $91.44.  Financials also were bid up as 
traders foresee a favorable interest rate environment for the next 
six months, given evidence of slowing demand in the form of 
earnings warnings.  JPM(+5.13), AXP(+2.25), and C(+1.31) all had 
solid gains to help the INDU stay in positive territory.  
IBM(+5.19) also had a big day, and amazingly, CAT(+3.25) shook off
its own earnings warning from Friday to rally.

The chart below indicates that the INDU has been rangebound for the
past two weeks between 10550 and 10900.  It appears to be building 
a base at the 10550-10600 level.  Today's trading was in a fairly
narrow range as the INDU held 10650 solidly throughout the day.   


 

In the Financial arena, however less high-profile, it is worth 
noting that FleetBoston(FBF) announced that it will acquire Summit
Bancorp(SUB) in a $7 bln deal.  This deal is thought to be a 
strategic fit for FBF and would also provide them access to the
wealthier New York/New Jersey market.  FBF hopes to market its 
brokerage services and online banking to these customers.  FBF
lost $0.50 to $38.50, and SUB gained $3.75, a 10% gain.

On the earning front, Walgreen's(WAG), a Chicago-based retailer, 
posted record results of $0.19 per share, in line with analyst
estimates.  Their rapid expansion was attributed to booming 
prescriptions and the healthy condition of the U.S. drugstore
business.  While WAG avoided an earnings squeeze, their stock 
couldn't avoid the sellers as it lost $0.81 to close at $37.13.

The earnings loser of the day was XRX, which warned after the
bell that things weren't as rosy as they thought.  The company 
stated that earnings really won't be earnings as they look to post 
a $0.15 to $0.20 LOSS versus analyst estimates of a $0.12 per 
share GAIN.  This is another chapter in the book of woes for XRX 
which just doesn't seem to end.  XRX closed in NY at $15.31, but 
is down to $12.50 in after-hours.  This may weigh on some of the 
old economy INDU stocks tomorrow.

Looking ahead, the Fed will be meeting tomorrow.  Huh?  I know, 
it's funny how you don't hear about FOMC meetings when just about
everyone has written them off for the rest of the year.  The 
meeting is essentially a non-event as there are no expectations of 
any move on short term interest rates.  Not even on the bias.  In 
fact, there hasn't been a move since the 50 basis point hike on 
May 16th.  Time sure flies.  Keep your eyes peeled this week.  We 
will continue to see volatility and maybe even some nice buying 
opportunities, if we can capitulate this downtrending NASDAQ.  
That is what everyone is waiting for so that we can get on with 
this expected strong 4th quarter.  In this type of market, both 
the upside and downside can be played equally well, it just takes
looking at things differently.  In regards to my Editor's Plays 
from the weekend, I did not gain entry into the SEBL play as it 
broke down, yet the QQQ puts did break $88 for an entry.  Good 
luck and when in doubt, stay out.

Matt Russ
Editor


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

Trusting Our Lying Charts
By Austin Passamonte

This is a true story laced with human emotion. Hope, fear, 
elation, overconfidence, chagrin, fear, relief and elation.
Did I repeat myself? Just another week in the life of an option 
trader.

It all started on Monday, September 25th as the markets rolled 
over yet again. We were following our 60/30 swing trade chart 
signals for the new IndexSkybox.com live-trading website. Even 
though it was still in the final stages of our test series, 
these trades have all the magnitude of public scrutiny to me.

Our charts gave unmistakable entry signals and we bought QQQ
Oct 90 puts, SPX Oct 1425 puts and OEX Oct 760 puts. Everything 
went our way into the close. The OEX put-play hit its profit
target within two hours and we held the others over with equal 
measures of hope & fear. The way markets have roiled lately 
we prefer our trades to open and close within one session, 
thank you very much!

All went well and our QQQ and SPX trades closed at their 
profit targets early into Tuesday. Nice way to start the 
trading week and to be honest, we were feeling a wee frisky 
for our own safety. Has that ever happened to you? Nice wins
just clear the trading account and we're itching to do it 
again.

If only the markets were as anxious to oblige. The absolute 
most dangerous time to enter a new trade is right after closing
out the last winner. Especially if we're on a roll.

So here I am watching the charts, scanning targets to spot 
the next entry. Common sense tells us if we were just
playing the downside and got out, a reversal to the upside
must be next. Then again, what does common sense have to do
with options trading?

Flipping through charts of the Dow, NDX, SPX and OEX showed
most of their respective 60/30 chart signals buried in the
oversold zones with no apparent sign of turning up yet.

OEX charts surprisingly looked pretty good. Stochastic
fast-bar values on the short-term charts were actually just
turning up and MACD histogram easing from negative to the
neutral line. High time to buy call options based solely on
that.

(60/30 min charts, OEX)

 

Here's pretty much what I saw. And that's just what I did. Went 
and bought the Oct 780 calls @ $10 and set our stop-loss @ $8 to 
protect.

I had the next two hours until close to reflect on where this 
play went wrong. The conclusion is: I flat-out made a poor 
judgment error and watched the market reverse from precisely the 
point we bought in to steadily slide towards bell where our stop 
at $8 was cleanly taken out.

Where did I go wrong? Simple. I saw the OEX appear to flash an 
early buy signal while the Dow, NDX and SPX charts were flat to 
downright ugly. How in the world could the OEX go and rally by 
itself? Are its components not sprinkled across these other 
indices? Does it move contrary to all market natural law known 
to our universe? What in the world was I thinking?

That's the problem; I wasn't. Thinking began after the trade was 
entered and I had time to watch it suffer, slowly bleeding to 
death until my stop order provided merciful relief.

Has hindsight ever parted the seas of fog and allowed you
to identify exactly what went wrong and how it could have
been avoided? Where in heck is all this hindsight wisdom
when we need it worst; times that foresight is all we have 
to work with would find hindsight most welcome indeed.

*****

The week went on and Thursday morning came along. We had a
few more trades and witnessed markets try to rally each
morning only to stall as waves of anxious sellers greet each
rally attempt.

Even Maria and Carl were pretty skeptical on Thursday when
pre-market futures were pointing up. I must admit, listening
to their negative skepticism about how we've seen failed
rallies each day did affect me. 

Now the night before I'd studied charts in the peace and
silence of post-market action and felt pretty bullish for
Thursday. All charts signals on the big four indexes were
deep in oversold territory and curling up. The Game Plan
sections of IndexSkybox.com were chock full of bullish news.

Within five minutes and a few words spoken on CNBC, my
confidence was shaken. Were the reporters right? Did they
know more about today's market direction than my charts?
Time would tell.

Opening bell rang and the Dow took off with NDX trying to
follow. Up went the Dow and then settled back. Up and back.
The NASDAQs each went positive and negative...positive and
negative. What would be our fate?

(60/30 charts, SPX)

 

Again, here is approximately what I saw under live fire. Decision
time, point-blank. The 60/30 setups were screaming to buy calls on 
the QQQ, SPX and OEX. Darn those lying charts; didn't they realize 
everyone knew we'd see another market rollover today? Stupid 
charts anyways! 

For ten minutes, I agonized over what to do. Buy calls or stay
flat, buy calls or stay flat. Ten minutes seemed like hours
in a dental chair. Novocain please?           

To be honest with you, I almost didn't pull the trigger. The
pressure of trading "live" in a public website only added to
my indecision. My own money...I'd be in at the bell based on
what the charts showed. The possibility others could follow
suit really had me question what I saw.

By now, CNBC was on mute and it was gut-check time. Finally, I
took Ameritrade Stewart's advice and just bought. Clicked it
in there. What pushed me over the edge? Prior experience
numerous times ignoring chart signals, succumbing to that
proverbial gut-instinct and paying the price for it.   

What's the worst that could happen if we were wrong? Our
tight stops would get hit and little harm done. After all, small
losses are an inevitable part of profitable trading. Bigger wins
or more frequent wins being the other part, of course.

For an hour, these trades went nowhere. That's easy to deal with
when one can part themselves from the screens, but again it's an
eternity waiting for live plays to inch out of danger. Just do
something, for gosh sakes! Reassure me I was right or stop me
out and end the suspense. 

Soon after 11:00am, the Dow caught fire and boogied up the 
charts. The OEX play hit its target with ease, as did the
SPX calls. Too much ease in their case as we bought them at
$20, placed our stop-protect order below entry at $15, and set a
mental target to sell if the play reached $25. Risk one to make
one unit with high-odds entry was our goal.

Well, the SPX 1450 calls we bought at $20 reached $25 and slid,
$25 and slid. We placed a sell-limit order on the first touch
and exited at the next one. Nice 25% profit in less than half
the market session. Eat your heart out, Buffett!

What I noticed during this time were block trades of 50, 100
and 200 SPX contracts going through while my target was almost
in reach. This should have told me to ride the trade just a
smidge more, but we try to be objective and methodical as 
possible. That the trade was languishing a bit had me anxious 
to be out.

Well, it didn't languish for long. One last dip after our sell
stop was hit had me feeling pretty smug until the SPX turned
tail and scampered up the charts, blowing past our exit at $25
to trade above 33 points before the close! We were grateful for
the easy 25% gains but 65% was looking a lot better, I have to
admit. Stick to the plan, stick to the plan I chant to myself.
  
(60/30 charts; QQQ)

 

Same story; next day. Friday followed one of the most bullish
performances in quite some time, until Apple fell from the old
earnings tree. Post-market futures dove and we prepared to buy
puts near the open.

Did the media help us out? Heck no, all they could talk about 
was the big intraday recovery after INTC the week before and
how we could likely see that repeat today. Thanks for the vote
of confidence in our put strategy, CNBC!

Searching the charts for one key feature, one little signal
to push me over the edge was found on the 60-min NDX and QQQ
charts. Not only was everything curling down out of short-term
overbought, but we had bearish stochastic/price divergence in
front of our eyes.

As many times as I've touted that signal right here with you,
how in the world could I fade the signals and not buy puts?
With that we loaded up on QQQ, SPX and OEX puts. You can guess
the rest. The markets hovered and promptly tanked, sending them
through our profit zones into the green.

Moral of the story? Maybe these charts aren't really lying
to us after all. Maybe when they converge to shout calls or
puts, we should blindly listen and follow orders. Based upon
last week's action, what do you think?

*****

Housekeeping: We receive numerous emails and enjoy them all
but for the sake of time conservation and repetitive questions,
let me pre-answer the bulk of it here.

We use Qcharts "Trader Package" for the system you see above
but this is not an endorsement. Just our current choice, highly
subject to change.

All technical settings and signal interpretations have been
covered in numerous OIN articles to be found in the "Education"
section of this front page from the "Traders Corner" link.
The answers to most questions are found within.

We cannot comment on or discuss specific stock or option trade
setups or opinions. Just methodology to approach generic trade
situations.

If you have further interest in learning more about this and
other methods of trading options live, please visit us at:

www.IndexSkybox.com

You can follow the day's trading action live as it unfolds,
watching over our shoulders as we wade into battle with the
institutions and market-makers to glean our fair share and
more.

Hope to see you there and Best Trading Wishes until we meet
again Wednesday!

Contact Support


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

CHKP - Check Point Software $168.50 +11.00 (+11.00 this week)

Check Point Software is in the Internet security business.
They develop, market and support Internet security solutions for
enterprise networks and service providers, which also include
Virtual Private Networks and Managed Service Providers.  There
are three main product lines for CHKP and they are security
products, traffic control for bandwidth management, and finally
management products.  In a nutshell, Check Point delivers
solutions that enable secure, reliable and manageable business-
to-business communications over any Internet Protocol network
including the Internet, intranets and extranets. 
 
Most Recent Write-Up

SEBL has been dominant in overcoming resistance from the Tech
bears during the last three weeks, which was epitomized Friday
morning with a new all-time high over $118.  Of course, the Strong
Buy reiteration by Wit SoundView helped SEBL to its new 52-week
high.  But, try as it might, SEBL finally succumbed to the
weakness in the Tech sector.  SEBL was not along in its battle
with the bears last week.  Several counterparts, including ITWO,
MSFT, and ORCL, felt the bears fury.  However, despite the heavy
selling that dragged SEBL lower last week, the stock is still in
a clearly defined up-trend and should continue to rally as long
as the NASDAQ cooperates.  As such, SEBL's pull back last Friday
could prove to be a profitable entry point as third-quarter
earnings season approaches.  If SEBL's month-long pattern of
relatively higher lows continues, the lowest the stock should fall
is right at its 10-dma, currently located at $106.44, which also
happens to be the site of SEBL's last low.  With that said,
aggressive traders could look for a bounce off support just below
at $110, of if that fails, watch for SEBL to bounce off the
pivotal $106.44 area.  A more conservative entry might be found
if the NASDAQ strengthens early next week and SEBL rallies back
above the $114 level.  It might be worth monitoring the direction
of SEBL's sector before entering new long plays.  Watch the
action in MSFT, ORCL, and ITWO before entering new positions.

Comments

Talk about bucking the trend!  Not to mention, another high!  As 
the NASDAQ accelerated to the downside throughout the session, 
CHKP's intraday chart was a mirror image.  With no news, this 
move on more than double the ADV certainly turned our heads.  To 
gain entry into this play, we would look for a pullback on some 
profit taking.  A bounce from $160 or $155, site of the 10-dma, 
along with a return of buying volume would be playable.  If the
buyers return early on, look for a strong move through $170 for
entry after amateur hour.  As oversold rebound on the NASDAQ 
wouldn't hurt either.

BUY CALL OCT-160 KGE-JL OI=649 at $15.88 SL=12.50
BUY CALL OCT-165*KGE-JM OI=362 at $12.75 SL=10.25 
BUY CALL OCT-170 KGE-JN OI=915 at $10.25 SL= 7.75
BUY CALL NOV-170 KGE-KN OI=142 at $17.50 SL=13.50

Picked on Sep 3rd at    $149.44     P/E = 198
Change since picked      +19.06     52-week high=$170.75
Analysts Ratings     13-5-0-0-0     52-week low =$ 20.13
Last earnings 06/00   est= 0.21     actual= 0.25
Next earnings 10-20   est= 0.26     versus= 0.15
Average Daily Volume = 2.00 mln



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