The Option Investor Newsletter Thursday 10-05-2000 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/100500_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-05-2000 High Low Volume Advance/Decline DJIA 10724.20 - 60.30 10843.30 10722.70 1.18 bln 1257/1549 NASDAQ 3472.10 - 51.00 3549.01 3459.58 1.87 bln 1594/2331 S&P 100 764.45 + 2.42 768.41 760.81 totals 2851/3880 S&P 500 1436.28 + 1.96 1444.17 1431.80 42.4%/57.6% RUS 2000 502.67 - 4.82 508.98 502.64 DJ TRANS 2568.30 + 8.30 2589.67 2558.21 VIX 23.63 - 0.12 24.45 22.99 Put/Call Ratio .70 ****************************************************************** The Churning Continues I don't think I was the only one to breathe a sigh of relief when the bell rang. It was bumpy ride for the markets today as traders continued to churn stocks in search of ascending issues. For the NASDAQ, DELL's comments from yesterday weighed on hardware stocks and PCLN's problems once again brought selling pressure to the Internets. This is the type of market that we have to take a day at a time, and just getting through it was the biggest relief today. The first order of business this morning before the open was news of Priceline.com(PCLN) announcing that two of its licensees would be shutting down. The licensees, Webhouse Club, which sold groceries and gasoline at name-your-own prices, and Perfect Yardsale, a used-merchandise seller, will no longer be in business with PCLN. According to Webhouse Founder and PCLN's Vice Chairman Jay Walker, the reason: PCLN needs more capital for the operation and it wouldn't be feasible to raise another $100 mln. As a result, he will be "winding down" the businesses over the next 90 days. It is interesting to note that both of these licensees are separate businesses from PCLN and do not affect PCLN's operations. Yet, in this fickle market, investors and traders will jump on any bit of information to sell. From what was a $100 stock in March, PCLN has deteriorated to $5.81 a share, losing $3.56 on the day, a whopping 38%! That's amazing. Especially considering that this "winding down" will no way affect PCLN's books. Just goes to show the type of market environment October has brought upon us. Traders took PCLN's woes one step further and used this information to sell other leading, or not-so-leading, Internet stocks. Feeling the heat were old-school Internets AMZN(-2.44,-6.7%), YHOO(-3.25,-3.7%), CMGI(-2.81,-11.5%), and ICGE(-3.31,-21%). Those are some massive percentage losses for these once highly touted and highly capitalized companies. Managing to remain in a league of their own from the old guard was AOL. Although not having an impressive year, AOL broke out over the $60 level once again on word that is merger partner Time Warner(TWX) would not pursue its proposed deal with Britain's EMI record company. This was the major obstacle for approval of the AOL-TWX merger in the EU. European regulatory officials felt that an EMI-TWX marriage would create an all too powerful force in the music recording industry. By walking away from the EMI deal, both AOL and TWX were freed from the burden of potential blocks to their own merger, as well as their stocks. TWX finished up $5.24 to $91.24, and AOL added $2.85 to $61.50. Today's decision will likely clear the way for merger approval by the EU, and the FTC, which expects to reach a decision before the next Presidential Inauguration. The real story today was the NASDAQ's reaction to DELL's words of warning last night after the bell. Confirming the trend of slowing earnings growth, DELL was the third high profile old tech company to warn, after INTC and AAPL. The announcement rocked hardware stocks from the get-go. DELL lost 10%, or $3, to close at a two year low of $25.19. It dragged down the other box makers including CPQ(-3.64), GTW(-2.77), and HWP(-7.38). For the NASDAQ, it feels like it is just one thing after the other, like a snowball growing as it rolls down the mountain. And the damage was across the board today, with Networkers(SCMR:-13.88), Semis(AMCC:-13.63), B2Bs(ARBA:-13.63), and Software(SWCM:-11.88) all feeling the selling heat. While the NASDAQ traded in a 90 point range, it waffled around the 3500 level for most of the day. On the chart below, notice how the NASDAQ has fallen from its prevailing downtrend that began in early September. This drop off has taken the NASDAQ into a lower trading range that is bound on the upside at 3600. Tuesday's low of 3382 was the arbitrary support point after the previous low of 3521 from August was taken out. Many traders looked to this level for support, and now technicians are nervous about possible tests of May's low of 3042. This morning on CNBC, Ralph Bloch of Raymond James stated that the two major indices, the NASDAQ and the INDU, need to be on the same page to advance. In addition, he said that a breakdown in the INDU would likely result in a market test of the May lows. Volume on the NASDAQ was healthy at 1.83 bln with decliners beating advancers 23-15. Breadth continues to trend on the negative side and is a serious concern for the tech sector. Now that it appears that the overall market health is hinged on the two major indices getting together and moving in lock step, the INDU becomes ever so important. During the past couple of weeks, the INDU has made a nice recovery from the 10600 level, running into resistance at 10850 on the way. In fact, traders have attempted to break through 10850 three different days since bouncing from 10600 to no avail. Today's close has brought the Dow 30 to critical point: smack dab on the recent trendline that it has recovered on. Tomorrow's trade will be key in determining the sentiment for the INDU and the markets. A breakdown from this level could result in a retest of 10600, and a weak INDU will only add to the pressure on the NASDAQ. A bounce for the INDU will help the index narrow its ascending wedge, in which it can coil to break that overhead resistance. Tomorrow's Non-Farm Payroll will likely determine traders' sentiment and an early direction for the INDU. On the earnings front, Alcoa(AA) posted earnings of $0.42 per share, in-line with lowered estimates after the company warned on September 18th. AA ran up prior to earnings from the $25 level, and finished today's session down an eighth to $27.13. Merrill Lynch upgraded some of the other old-economy stocks today to a Near Term Accumulate from a Neutral. On their list was CL, PG, G, and CLX. Investors have neglected many of these issues during the past year and their recovery would greatly help the health of the INDU. On the flip side, JC Penney(JCP) warned today that their 3rd quarter earnings will not meet the Street, citing consumer spending slowdown. JCP lost $1.25 and now trades at $10 a share. Looking ahead, traders will be watching tomorrow's Non-Farm Payrolls and Unemployment Rate for direction. The markets expect 225K and 4.1%, respectively. Equally important will be the technical outlook for the markets. If traders want to sell techs again tomorrow, they probably will either way. There is a downward bias in the market and we have seen many of the high-flying leaders of the NASDAQ fall drastically in the past week. Even, EMC, which has held up relatively well, has come under heavier selling pressure the past two days. As traders continue to churn the market, we must take these October sessions day by day. Interestingly enough, the VIX.X was down today to 23.63, indicating that fear really hasn't grabbed hold of the investment community yet. We are approaching the full swing of earnings season next week, which could be our saving grace or the last straw. Use caution and stop loss orders as price volatility increases. Remember, when in doubt, stay out. Cash can always come in handy on a rainy day. Good luck. Matt Russ Editor ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** 2 Types of Traders - Which One Are You? There are really only two types of traders. We call them Winners and Losers. Now don't get us wrong, no trader wins 100% of the time, however, consistent winners learn to cut their losses while allowing their profits to run. The key to consistently winning is applied knowledge. The place to obtain this knowledge is at the October Options Expo. This event will take place in Denver, Colorado, from October 27 through the 30th. Seating is limited. To sign up click here: http://www.OptionInvestor.com/workshop A Taste of What You Will Learn: Looking for ways to spot early reversal patterns? Candlestick charting may be the answer for you. Here you will learn the most important candlestick formations, how to use them, and why. Learn how to use candlesticks with western technicals from the foremost expert on Japanese Candlesticks, author Mr. Steve Nison. Learn to use the Arms Index (TRIN) effectively for short-term trading from the Index's inventor, Mr. Dick Arms. Mr. Arms is the author of several books on trading, including the renowned "Trading Without Fear." Mr. Arms will be sharing his newest charting system called "EQUIVOLUME." This is the first new charting system since the 1930's! You won't want to miss being one of the first to learn about this new technique. Mr. Jim Crimmons will be helping you learn how to manage your taxes as a trader and how to get Trader's Status when filing. If you face nightmares with your current tax situation, and want an easier and more effective system for tracking your trades, you don't want to miss this class. Mr. Jim Brown, President and founder of OptionInvestor.com will be teaching "How to Prepare to Trade the Market," along with other useful trading strategies. This will include information on how best to prepare and find your new plays. Then you will go to battle the next morning, as we make LIVE trades using the very candidates you helped us find. There is no better way to learn how to trade than to TRADE WITH THE PROS! This is just a taste of the event. You will spend four days with over a dozen professional traders. This is not just a 9 to 5 seminar. We are going from early morning to late night. This is serious training for serious traders. You won't need to go anywhere else, as you will be staying in one of the nicest hotels in Denver, The Inverness Hotel and Golf Club. Not only will we be feeding your mind for almost 15 hours a day; we will also feed your body, with delicious meals and breaks five times a day. What an opportunity to spend four days in luxury, learning from the pros, while being fed in so many ways. You may be asking, "How much will this Power-Packed Options Expo Cost Me?" This is a great question, however, the question you should really ask is, how much will it cost you if you don't attend? Have little mistakes or a lack of specialized education in the options arena cost you any money lately? Or could you have reaped greater profit if you only had the right tools? How much would successful trading techniques have saved you last Spring during the NASDAQ sell-off? Learn to protect yourself and profit in volatile markets. The only difference between the pros and amateurs is EDUCATION, ACTION and EXPERIENCE. We are providing the EDUCATION and EXPERIENCE, so that when you take the ACTION, you will have a winning combination. To register click here: http://www.OptionInvestor.com/workshop Check out an outline of events here: http://www.OptionInvestor.com/workshop/outline ********************************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 **************** Coiled Springs By Austin Passamonte If you're getting tired of this market's chop, join the club. Is there some unwritten law that states we must trade between plus and minus 50 points of yesterday's close, multiple times daily? Sure seems that way. As traders we revel in the 100+ point moves one direction or the other, one session or more. We've enjoyed that in the recent past and Market Sentiment believes such will be upon us once again. Looking at daily charts of most major indexes and numerous big-cap stocks, we see more "doji" stalemate candles racked together than my high-school chess team amassed. Such clear evidence of investor confusion and indecision suggests we are at a short-term crossroads right now. When balance is found and neither side can tip the scales, pressure is built. Hourly and 30 minute charts show prices coiling into all sorts of wedges, pennants and other tight patterns. That can't, won't and doesn't last forever! Short-term charts give near-term signals. We expect a sizeable pop soon which could go either way. Tomorrow's employment report could be the catalyst (excuse) for one side to say "uncle". Yesterday afternoon a huge block trade of almost 15,000 QQQ Oct 92 Calls cleared the market. Someone is betting nearly two million dollars that we will move up from current NDX levels soon. Want to bet against them? It is either a big-time speculation or mother of all short-stock hedges by a market pro. Maybe it's Jim trying to earn his wife Sondra that new Prowler she's been hankering over. In any case this is good to know. The COT report is released tomorrow after 3:00pm EST. Let's see if the SP00S commercials have covered shorts, added to or stood pat as of Tuesday's close. Also good to know. Daily chart technical oscillators remain oversold and struggle to emerge. Each time they do, another pre-warning steps on their fingers. Who else will warn tomorrow after the close? We'd wait 'til then ourselves, given the choice. Right now technical levels of support & resistance see us range bound with room to clear the upside. As we well know, rallies emerge from the darkest depths of public sentiment and we'd say we're close. Five weeks ago people couldn't buy stocks high enough. Now they can't sell them low enough. Guess where we'll likely be five weeks from now? A few companies actually making their numbers will surely help. Don't expect any sustained rallies to begin now and carry through until March. That's unrealistic. Expect a rally any time but don't try to buy the bottom. Take your chunks from the middle and be grateful for what the market gives. It offers up solid profits more days than not in either direction, if we are gracious and accept what's given! ***** VIX Thursday 10/05 close; 23.63 30-yr Bonds Thursday 10/05 close; 5.90% 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. Thursday (10/05/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 805 - 790 19,516 4,588 4.25 785 - 770 9,952 8,543 1.16 OEX close: 764.38 Support: 760 - 745 4,005 15,073 3.76 740 - 725 89 12,532 140.81*** Maximum calls: 800/8,135 Maximum puts : 750/7,034 Moving Averages 10 DMA 763 20 DMA 779 50 DMA 797 200 DMA 783 NASDAQ 100 Index (NDX/QQQ) Resistance: 94 - 92 30,274 18,667 1.62 91 - 89 24,605 35,662 .69 88 - 86 11,337 23,942 .47*** QQQ(NDX)close: 85.875 Support: 84 - 82 2,863 11,753 4.11 81 - 79 1,097 14,175 12.92 78 - 76 82 7,967 97.16 Maximum calls: 92/19,462 Maximum puts : 90/17,242 Moving Averages 10 DMA 88 20 DMA 90 50 DMA 92 200 DMA 95 S&P 500 (SPX) Resistance: 1500 19,031 17,889 1.06 1475 22,263 17,028 1.31 1450 13,893 11,345 1.22 SPX close: 1436.28 Support: 1425 7,834 17,674 2.26 1400 1,254 12,068 9.62 1375 993 8,691 8.75 Maximum calls: 1475/22,263 Maximum puts : 1350/23,179 Moving Averages 10 DMA 1436 20 DMA 1453 50 DMA 1471 200 DMA 1447 ***** CBOT Commitment Of Traders Report: Friday 9/22 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 Total Open Interest % 13.37% net-long 11.78% net-short NASDAQ 100 Total Open Interest % .04% net-long 8.9% net-short S&P 500 Total Open Interest % 29.07% net-long 10.57% 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. *Data updated on 10/06 by COT Bullish: Fed's finished Benign government reports Disparity in overhead call/put ratios Bearish: Oil Prices (falling) COT reports (changing?) Recent pre-warnings, downgrades (unending) Broad market's break of critical M/A support Market leaders breakdown ************** MARKET POSTURE ************** As of Market Close - Thursday, 10/05/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,724 10,550 10,900 SPX S&P 500 1,436 1,415 1,465 COMPX NASD Composite 3,472 3,250 3,750 OEX S&P 100 764 750 776 ** RUT Russell 2000 502 485 525 ** NDX NASD 100 3,424 3,250 3,700 ** MSH High Tech 926 890 926 BTK Biotech 694 650 790 ** XCI Hardware 1,238 1,210 1,350 ** GSO.X Software 410 385 445 ** SOX Semiconductor 832 800 960 NWX Networking 1,189 1,135 1,210 ** INX Internet 446 430 510 BIX Banking 621 600 635 XBD Brokerage 651 620 670 IUX Insurance 781 735 790 RLX Retail 804 780 850 DRG Drug 411 370 425 HCX Healthcare 847 825 860 XAL Airline 147 138 152 OIX Oil & Gas 308 296 332 Seven alarms were triggered over the last two sessions all to the downside. Lowering support on (OEX, RUT, NDX, BTK, XCI, GSO.X, NWX) Lowering resistance on (SPX, MSH, RLX) Raising support on (IUX, HCX, XAL). ************** TRADERS CORNER ************** Just Tradin' By Molly Evans One can learn a whole lot in just a year. This time last year saw me putting on some of my first options trades. What a great time! The low of October 1999 for the Dow was registered at 9651 on the 15th while the Nasdaq saw its low of 2632 on the 18th. (Did the markets really move in tandem way back then?) They both ran a good leg up the hill but the Nasdaq smoked the Dow by gains of 59% to the Dow's 18% effort until they hit a hurdle on January 3rd 2000. I remember the day well. Ignorance is so bliss. I thought, "Huh! What's the problem?" Makes me laugh to think of it all now. But then, our runners soon found their legs again and all was well. The Dow petered out on the 14th of January though, topping at 10,150 and fell sick for a solid three months before hitting its bottom at the low 9730s three of four days. As you all know, the Nasdaq went on to rise exactly 2500 points from that October 18th low until it topped out at 5132 on March 10th. That was a 95% gain in just under 5 months. Glory days. It's kind of fun to think back to that time. For those of us who like to trade the high flyers, our only concern was whether we were picking the stock that would run the hardest. We never paused to consider if it was a worthy investment. I didn't anyway. You didn't need to! As I said, ignorance is bliss and there was plenty of it in the market. No wonder we laughed at the naysayers. This is the new era! Get with the program. I remember chastising my mom for holding onto her AHP stock. "Mom! Get a clue!" I raked her over the coals when she said she was thinking of buying more at its year low of $40. "No mom! Those stocks are on sale for a reason! Geez, you're embarrassing me! Buy as much CMGI as you can get. You can't lose!" You didn't need TA either. Everything I looked at was overbought. They all looked the same. But so what? They could get more overbought. I remember March 11th well too. I bought that dip with a vengeance; couldn't believe people were just tossing these great stocks aside. It was the mother of all sales. Of course, the crash landing three days later hurt pretty badly but at least it was over quickly. The gaping wounds healed on the outside I guess but...I for one, was a changed investor and trader on the inside. The psychology of trading books call it "Rock Bottom" when a trader essentially blows up his own account and then capitulates at the exact low. Some never come back to the market again. Some try to blame it on the market, Alan Greenspan, a message board or even the companies of the stocks they chased. They then come back to try it all over again as the market is "better now" but repeat all their previous mistakes. And then there are those, like me, that vow this will never happen to them again. A vow like that is a true awakening and a high commitment to learning all about something one never really had a clue about in the first place. It takes time, energy, patience and practice. There's no holy grail and there's no set system that someone else can prescribe for you. It's been nearly seven months that I've been pouring over books and websites learning about trading, options, strategies, the market, economics and even myself. And what have I learned? I've learned that the markets are multi-dimensional, dynamic and fascinating. I've learned that everyone has an opinion about the market but many people don't want, no, let me re-phrase that, can't tolerate to hear that it might be going down nor do they want to hear the bad news behind declines. Furthermore, most people think that the markets are always a safe place for their money as long as they buy and they hold. I've learned that I've got the patience of a gnat when it comes to trading and I've got to constantly slap my hand to keep it from clicking into high risk but high reward trades. Don't worry! I'm learning. I do still have those Dupont LEAPs I bought this past summer. ZZZZZzzz. Perhaps most importantly, I've learned that while it is good to educate yourself, forming definite market opinions is a very hazardous pastime if you're a trader. That's been another issue I struggle with. This market is a whipsaw until proven otherwise. I lean bearish but that's because as I told you, one, I read voraciously and study the economics. It's all there. If my head is in the sand, I can't see very well. Not good. I want to know what the real deal is. Secondly, I told you I have the patience of a gnat. As Chris Verhaegh says, "Bear pie is served up fresh, hot and fast." We're in a downward trend and sitting on some very important key support lines. How's it going to play out? I don't know. No one does. I know some pretty darned smart folks are calling for a major crash very soon. But then again, as I said previously, the markets are multi-dimensional and dynamic. I believe there are a lot of controls in place that we don't even know about. Who says the market has to go anywhere? I've been hearing "rally coming" since before Labor Day and in the other ear someone is screaming, "SELL everything! Run for your life!" What's a girl to do? I'm just tradin'. Trading the trend, whatever it is at the moment and concentrating on chart patterns, self discipline and taking note as to how the markets react to various fundamental and technical events. I like spreads; I like various long strategies, short plays and covered calls. I think it's dangerous to hold positions overnight and I am doing so with less and less frequency. I'd love to again be a position holder and "let those profits run" but they just don't do that. At least the stuff I know and love to trade doesn't. I wonder what's going to happen too, but it's ludicrous to try and pick a bottom here and go in big for positions. I may have that bear bias but short squeezes are pretty painful and I'm not about to load up on puts for that big crash that may never come. When I see patterns forming on my screen, I pounce. I was quite happy in some aggressive long call plays on Tuesday but then all of the sudden there were red candles dirtying up the picture. They got bigger and bigger, and then there was one to follow that one and then another. What in the world?!? I finally got a clue that something was afoot that I didn't know about when the Nasdaq had dropped thirty, going on forty points, in about 5 to 10 minutes. The FED! I'd completely forgotten. How could I have forgotten? You've never seen a girl fly into action faster to flip plays. You can trade only from the hard right edge of that chart. When things are going along nicely and they suddenly reverse in ALL of the plays, it becomes a Kodak moment at this trader's station. What had been shoring up to be a great day became a pretty painful one within twenty minutes. However, you've got to look at the big picture; the day before and the day after were glorious for me. That's the nature of it. Gotta love it! No fear. Just get right back on that horse and call it right. I know I can't control how my plays are going to be treated by the market. The only thing I can control here is myself. Maybe that's the most important lesson I've learned so far. I wish you all well, it's been a tough year for all traders. Hang in there. ************************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=591 ************************************************************** ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10724.92 49.21 19.61 64.74 -59.56 74.00 Nasdaq 3472.10 -103.92 -113.07 67.27 -51.00 -200.72 $OEX 764.45 3.43 -5.23 4.00 2.42 4.62 $SPX 1436.28 -0.28 -9.77 7.86 1.96 -0.23 $RUT 502.67 -9.70 -7.00 2.82 -4.82 -18.70 $TRAN 2568.30 -57.22 33.76 61.82 8.30 46.66 $VIX 23.63 -0.42 0.96 -0.64 -0.12 -0.22 Calls QCOM 82.88 0.06 1.19 5.94 4.44 11.63 Winner! NT 66.75 2.88 0.00 1.25 3.13 7.25 New LLY 84.56 -0.25 0.88 0.75 2.06 3.44 New CHKP 159.38 11.00 -12.63 -1.66 5.16 1.88 Rebound! CIEN 117.19 -1.44 -11.25 4.31 2.75 -5.63 Recovered ADBE 148.50 7.75 0.44 -5.44 -9.50 -6.75 Entry Pt? PEB 107.94 -3.69 -0.13 2.31 -7.06 -8.56 Dropped SEBL 98.81 -8.81 -5.47 5.69 -3.91 -12.50 Needs NAZ MERQ 139.50 -5.31 -10.94 -2.44 1.44 -17.25 Volatile! JNPR 197.94 -12.81 -4.69 6.50 -10.00 -21.00 Dropped AGIL 67.50 -2.63 -11.63 0.81 -9.00 -22.44 Dropped MUSE 171.50 -8.56 -8.88 1.50 -13.50 -29.44 Dropped CFLO 108.00 -0.63 -7.25 -13.38 -13.75 -35.00 Dropped Puts AETH 90.00 -11.94 0.06 -3.63 0.00 -15.50 Bear target AKAM 39.69 -5.63 -2.88 1.47 -5.78 -12.82 Looks bleak QLGC 75.63 -0.69 -8.63 2.06 -5.13 -12.38 New DIGX 39.63 -3.63 -4.13 0.38 0.13 -7.25 Stable JBL 50.00 -2.31 -1.31 -1.00 -2.13 -6.75 New CMOS 23.75 -1.63 -3.13 0.69 -2.19 -6.25 Thanks MU CPTH 55.13 -4.56 -4.19 6.00 -2.88 -5.63 Lower path 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: ***** AGIL $67.50 +9.00 (-22.44) Yesterday, AGIL gapped down at the open, near its 50-dma at $68.79. Spending most of the day trading in a narrow range at that level, a late day recovery on strong volume resulted in the stock closing up fractionally on almost three times the ADV. Starting off much like yesterday, selling pressure in the early morning led to trading in a narrow range. Instead of ending the day with a recovery however, further selling into the close put the stock below it's 50-dma. While AGIL is still above its 200-dma, currently at $65.95, a break below that level leading to further selling in current market conditions is quite possible. As a result, we are closing this play. CFLO $108.00 $13.75 (-35.00) No longer immune to the movements of the broader markets, CFLO has been breaking below support levels which took weeks to build. CFLO's dip earlier in the week was initially viewed as normal profit taking; it has turned out to be a full-fledged sell-off. Yesterday, the stock lost nearly 10% on twice the ADV in spite of a rallying NASDAQ. While CFLO did stop at the key level of $120, the support level did not hold up today as stock shed another 11% on four times the ADV. While the stock did manage to close above its 50-dma at $104.59, CFLO's sell-off on accelerating volume and its break below key support at $120 have forced us to drop the play. MUSE $171.50 -13.50 (-29.44) Wednesday's volatile action in the MUSE provided a glimmer of hope as a strong sell-off in the early morning led to a convincing recovery by the end of the day. Forming what looked like a hammer reversal on a bounce off strong support at $160 (near its 50-dma), a follow-through today would have offered a possible entry point. Instead, the sellers took control after two failed attempts to break though resistance at $185. The failed reversal to the upside and additional resistance from the 5-dma, now at $187.21, leads us to believe that further selling could be ahead. With that, we are taking money off the table. JNPR $197.94 -10.00 (-21.00) Given a stay of execution on Tuesday by its ability to hold the $200 support level, JNPR succumbed to continuing weakness in the Technology sector today and gets the axe after all. Yesterday's recovery off the $191.50 low gave the appearance that JNPR would be able to hold support, but continuing earnings warnings from technology leaders like DELL were more than the bulls could stand, and they allowed the selling to proceed unchallenged today. Volume was slightly above the daily average as JNPR gave up $10, and with the technicals all pointing down, it looks like JNPR could test the $180 level before the selling abates. Earnings are only a week away, but the negative market environment makes it unlikely that our play will be able to mount a serious recovery between now and then. Needless to say, JNPR moves onto the drop list tonight, as we make room for stronger plays. PEB $107.94 -7.06 (-8.56) The Biotechs have continued to deteriorate throughout the week, and PEB has finally followed suit, falling through the $112 support level and closing today's session fractionally below the $108 level. This had previously looked like rock-solid support, and today's action combined with the rollover in Stochastics and MACD makes it clear that PEB is weakening by the day. It was hard to find pockets of strength in the beleaguered Technology sector today, and those that could be found didn't contain our play. Rather that hold on and hope, we'll move on to other plays with a more positive near-term outlook. PUTS: ***** No dropped puts today. ************************Advertisement************************* PRIVATEBUY.COM(tm). SHOP ONLINE. ANONYMOUSLY. ANYWHERE. Protect your identity with PrivateBuy.com the first way to pay for goods & services on anywhere on the Web in pure, unadulterated anonymity. Your identity will be cloaked no matter where you buy! Sign up for your free privatebuy account today @ http://www.privatebuy.com/signupdisplay.asp?srcid=4E2W ************************************************************** 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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The Option Investor Newsletter Thursday 10-05-2000 Copyright 2000, All rights reserved. 2 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/100500_2.asp ************************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=622 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** CHKP $159.38 +5.19 (+1.88) It's been a wild week of trading so far for CHKP, with the stock trading over a 25 point range in the past four days. The increased volatility in CHKP, and the broader markets for that matter, has created several trading opportunities. One such opportunity was created yesterday when CHKP bounced off support at $145 and subsequently lead the rebound in the Tech sector. CHKP's extended rebound today, in spite of the broad sell-off in the Tech sector, bodes well for our play. The stock finished just below resistance at $160, a level that held CHKP back for most of today's trading. Aggressive traders might look to enter new positions in CHKP if the stock pops back above the $160 level early tomorrow. But, even the aggressive traders might want to wait for the NASDAQ to strengthen before entering new positions. The more conservative traders might wait for CHKP to regain momentum, and wait for the Tech bulls to return in force before entering new positions. A conservative entry point might be found if CHKP breaks above $165, or higher above the $170 level. If the NASDAQ continues to slide and drags CHKP lower, aggressive entries might be found near the stock's support levels at $150, or lower near $145. SEBL $98.81 -3.94 (-12.50) The problems in the B-2-B sector and warnings from major software makers have combined to weigh heavily on SEBL this week. Moreover, the general sentiment in the Tech sector has not necessarily been conducive to our bullish play. However, the buyers returned to SEBL yesterday to lift the stock from its sell-off mire. And, although SEBL pulled back today, the stock has developed a steady trend of relatively higher lows over the past two trading sessions. However, if SEBL is going to move higher in the coming weeks, the stock will need cooperation from the NASDAQ. With that said, conservative traders might wait for the NASDAQ to stabilize before entering new long positions. Aggressive traders might continue to look for quick trading opportunities in SEBL using tight stops. One such aggressive play on SEBL might be an entry on a quick move back above $100 early tomorrow. Additionally, if SEBL's trend of higher lows holds tomorrow, aggressive traders might consider entering on a pullback to around the $97.50 area. However, use caution in entering new call positions given current market conditions. A more conservative entry might be found if SEBL rallies above the $104 level in conjunction with a strong NASDAQ. MERQ $139.50 +1.44 (-17.25) It's been volatile the past couple of days, not only for the NASDAQ, but for MERQ as well. Yesterday, the stock experienced weakness in the early going. Bouncing off strong support at $130, MERQ attempted to stage a comeback. While not entirely successful, the stock did manage to significantly narrow the gap, closing down just $2.44. Today, MERQ attempted to continue its recovery until encountering resistance near its 5-dma around $146-147 area; the stock spent the rest of the day back filling. Despite the late-day pullback, MERQ managed to close up slightly on average volume in the face of a weak market. Aggressive traders might look for entries near MERQ's support levels at $135 and $130, but only after confirming a bounce with volume. Conservative traders will want to see MERQ break through its 5-dma, now at $143.63, before entering. In yesterday's news, the company expanded its customer base through an alliance with Genuity Inc., which will license MERQ's ActiveTest system. As well, COMS has enlisted MERQ's services, to provide Web performance management solutions for an upcoming Internet-based poll, which is said to be the world's largest. QCOM $82.88 +4.44 (+11.63) She's a blue ribbon winner! Oversold conditions and a break from economic worries provided the catalyst for QCOM's strong upward moves in recent sessions. QCOM bounced off the $71 - $71.50 area yesterday and hasn't looked back. The bullish ascent through $75 and then $78.13 (QCOM's near-term high), blinked a green light for even the more conservative to take a position in this momentum play. Today, the strong advances extended QCOM above the previously elusive $80 level! The volume was tremendous at more than double the ADV. At this critical level, the excitement should generate more momentum and effectively drive up the share price. Intraday, $80 and $81 held up well and should evolve as near- term support. Consider buying into strength as QCOM moves through $85 or target shoot dips for an entry. CIEN $117.19 +2.75 (-5.63) Shares of CIEN came back into focus amid the rallying conditions yesterday. Earlier in the week, CIEN saw the underside of the supportive 5 & 10 DMAs in heavy selling. Its recovery is a good indication, but we still need to be cautious. On Wednesday, another peculiar piece of coverage was initiated. Analyst Susan Kalla at Bluestone Capital Partners started CIEN with a ST Underperform and a LT Market Perform as well as issued correlating price targets at $103 and $125. Sounds like a different version of "Who's that... and who issues a lower price target?" syndrome. Currently CIEN is perched on the 5-dma ($117.18). More enterprising traders may find an entry off this level, but it may be wiser to stack a few more chips in the corner. Instead, consider waiting for CIEN to resume a strong uptrend and move through the 10-dma ($121.44) on respectable volume before taking additional positions. ADBE $148.50 -9.50 (-6.75) Is that an entry point or just a waypoint on a downward trip for our play? After we added it on Tuesday, ADBE has had two really tough days, giving up nearly $15 in the process. As we said on Tuesday, "Even the strongest stock can't buck the broader market trend forever.", and the past two days have been the proof. The only news since Tuesday's all-time high was another analyst initiating coverage with a Buy rating, so it seems the selling is just profit taking and selling in sympathy with the technology sector weakness. Thankfully, there hasn't been a decent entry point yet, but the big question is where will it form. Today's weakness plunged ADBE through its 10-dma ($154.55), and the late-day bounce occurred just above the $145-146 historical support level. Below that, ADBE should find lots of help at $140 and the $137 level. While it was disconcerting to see ADBE fall as much as it has this week, and on very heavy volume, it was nice to see the late-day bounce today, which likewise came on very heavy volume. The bulls may be making a stand at current levels, but we need to see the confirmation of strong buying before jumping into the play. In light of the tenuous market conditions, we would be extremely cautious of buying intraday dips to support unless the whole market turns around. The best entry strategy will be to wait for strong buying volume to push ADBE back above the 10-dma before jumping into the play. ******************* PLAY UPDATES - PUTS ******************* CMOS $23.75 -2.19 (-6.25) The broader Chip sector enjoyed a reprieve from the bears yesterday as traders bid shares higher ahead of MU's earnings report. The rally in the NASDAQ added fuel to the momentum of the $SOX. However, the market received MU's report with a strong bearish bias, which resulted in wide spread selling in the Chip sector once again today. The return of the bears today resulted in a new low in CMOS' month-long descending channel. The stock rolled over at the $27 level this morning, and didn't stop falling until finding support at $23.69. The fact that CMOS closed just above its intraday low today bodes well for our put play going forward. As we've written in the past, CMOS doesn't have major historical support until the $20 level. As such, the stock could be headed significantly lower from current levels. Aggressive entries might be found if CMOS rallies to resistance at $25 or higher near $26 then subsequently rolls over. A more conservative entry might be found if CMOS falls below $23.69, with confirmed weakness in the $SOX. CPTH $55.13 -2.88 (-7.63) The path continues to be lower for CPTH, as parent company CMGI continues to sink, making new 52-week lows on a daily basis amidst weakness in most Internet issues. Yesterday, on an up day for the NASDAQ, CPTH staged a recovery attempt. Bouncing off support at $50 in early morning trading, the stock blasted off to close up $6 on very strong volume. In doing so, CPTH closed above its 5- and 100-dma (now at $56.45 and $56.78). It appears CPTH's rally may have been a bear trap, as today the stock slipped back below the two moving averages. Look for failures to rally above these two points as well as the 10-dma near $60 as aggressive entries while the conservative traders might continue to watch for a break through $50 on volume to enter new plays. The two Strong Buy ratings of CPTH from CIBC World Markets and Adams Harkness earlier in the week have had little effect on stopping CPTH's downward momentum. Nonetheless, make sure a rollover is confirmed beforeentering on strength. DIGX $39.63 +0.13 (-7.25) Despite the rallying conditions, DIGX provided us with another two days of profit opportunities as it stretched lower. On Wednesday for example, the share price slid down to $36.25 and established a new bottom to challenge. Additionally, the $40 mark and the 5-dma, which is currently at $41.65, are still serving as an effective line of resistance. But, let's take off the blinders for a moment. DIGX has lost over 50% of its value since it first tumbled through $80 on September 5th. Therefore, we can't ignore the possibility of a recovery. The recent lows and upcoming earnings could entice buyers to start nibbling. Yesterday too, Adams, Harkness & Hill began new coverage on DIGX with an Accumulate and issued a 12-month price target of $59. So, keep stops tight if you plan to buy into further weakness or have open positions. Last, but not least, mark your calendars. Digex scheduled a conference call for October 26th from 9am to 10am EST to report its 3Q earnings. AETH $90.00 +0.00 (-15.50) If you like target shooting, then AETH was your play on Wednesday. The wide intraday swings offered a variety of opportunities from highs above $98 and to lows near $88. However, take a look at a daily chart. It's evident that the $90 level is firming as a bottom. However, looking at it from a more bearish perspective, AETH's bullseye close on $90 in the most recent two sessions indicates that it's testing its support level. The established pattern of lower-highs is also a good sign that there's more weakness ahead for AETH. But, unless your strategy is to aggressively day trade amid a volatile session, play cautiously and wait for downward momentum to break the barrier at $90. The company is expected to report earnings around October 23rd; however this event shouldn't sway trading over the short-term. AKAM $39.69 -5.78 (-12.81) We held our breath throughout the mini-rally yesterday, but it was all for naught. AKAM didn't come anywhere close to touching the 10-dma (clear up at $49.75), and then proceeded to continue its downward slide today. We had a pretty clear entry as the price fell through the $44 level this morning, and the confirmation came this afternoon as the selling intensified. Rather than anything news-related, the decline in AKAM is being driven by continued fear in the Technology sector, and warnings from the big boys like INTC and DELL certainly aren't helping. Even the mild recovery near the close today looked half-hearted as the stock couldn't even manage a close above $40. While things are looking bleak for AKAM shareholders, we need to make sure we don't get caught off guard. With Stochastics deep in oversold territory, and AKAM buried in its lower Bollinger band, an oversold bounce is not out of the question (yesterday's action notwithstanding). Keep your stops in place and use any such bounce as an opportunity to open new positions. Once the buyers have their 15 minutes in the limelight, consider opening new positions when the bears come back in force. Until the NASDAQ comes out of its death spiral, look for AKAM to continue lower. ************************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=592 ************************************************************** ************** NEW CALL PLAYS ************** LLY - Eli Lilly & Co. $84.56 +2.06 (+3.44 this week) Lilly is a leading innovation-driven pharmaceutical corporation. They are developing best-in-class pharmaceutical products by applying the latest research from their own worldwide laboratories and from collaborations with well-known scientific organizations. As their products save and improve lives, they also save overall health care costs: they are often less expensive than other forms of health care, such as surgery and hospitalization. Lilly employs more than 31,000 people worldwide and markets their medicines in 179 countries. Lilly has major research and development facilities in 9 countries and conducts clinical trials in more than 30 countries. In a turbulent market for Tech stocks, investors are reaching for the Prozac, literally. Investors in LLY have experienced a little turbulence themselves when in early August, Barr Laboratories (BRL) won a judgment in the Federal Appeals court, allowing them to start selling a generic version of Prozac. Since the 29% plunge, LLY has found support at the $65 level and from there, spent September on the mend, closing back above the 200-dma (now at $75). With fears of a slowing economy, many Tech issues have taken it on the chin, but it's times like these that investors turn to drug stocks as safe havens. After all, people still get sick in a slowing economy and as a result, still buy medicine. As well, LLY's senior vice president of pharmaceutical products, John Lechleiter, proclaimed that "Prozac is not our future," adding that the company expected to submit as many as 10 new products for FDA approval by 2002. This has helped LLY's stock price appreciate over the past month and so far, October is off to a great start. The 50-dma, now at $81.53, has proven to be formidable resistance over the past couple of weeks for LLY. The break through that level today, along with the 100-dma at $84.30, has cleared up much overhead resistance. A bounce off the two moving averages or off support at $80 would provide for aggressive entry points while conservative traders will watch for LLY to break through $85 with conviction before initiating a play. From there, resistance can be found in increments of $5 at $90, $95 and the psychological $100. Yesterday, Lehman Brothers reiterated their Buy rating on LLY, along with a $100 price target. Today, SG Cowen analyst Steve Scala offered bullish praise for the company, based on the promise of LLY's sepsis drug Zovant. With earnings coming up on October 19th and bullish comments from analysts, look for a possible earnings run as a driver for LLY's stock price. BUY CALL OCT-75 LLY-JO OI=2589 at $10.13 SL=7.75 BUY CALL OCT-80*LLY-JP OI=4921 at $ 5.75 SL=3.75 BUY CALL OCT-85 LLY-JQ OI=4364 at $ 2.50 SL=1.25 BUY CALL NOV-85 LLY-KQ OI= 604 at $ 4.38 SL=2.75 BUY CALL NOV-90 LLY-KR OI=1099 at $ 2.44 SL=1.25 Picked on Oct 5th at $84.56 P/E = 30 Change since picked +0.00 52-week high=$109.00 Analysts Ratings 6-11-13-0-0 52-week low =$ 54.00 Last earnings 06/00 est= 0.60 actual= 0.61 Next earnings 10-19 est= 0.71 versus= 0.62 Average Daily Volume = 3.79 mln NT - Nortel Networks $66.75 +3.13 (+7.25 this week) Nortel Networks is a leading global supplier of data and telephony network solutions and services. Covering all the bases, its business consists of the design, development, manufacture, marketing, sale, financing, installation, servicing and support of networks for both carrier and enterprise customers. With a presence in over 150 countries, NT serves local, long-distance, personal communications services and cellular mobile communications companies as well as cable television companies, Internet service providers and utilities. It wasn't that long ago that NT was playing 2nd fiddle to both CSCO and LU, but the times, they are a changing. LU has failed to execute for several quarters in a row, leaving NT to duke it out head to head with CSCO. NT excels in this comparison as well, with CSCO nowhere near the optical capabilities of the optical networker to the north. This little Canadian upstart has been built into a powerhouse, through superior technology and an acquisition strategy that is second only to that of rival CSCO. We last played the Nortel back in July, as the stock soared to tag its current all time high of $89 on the date of its last earnings announcement. The report was stellar, and the outlook for the current quarter is similarly rosy. How can you argue with 45-50% revenue growth on annual sales in excess of $26 billion. So why did the stock sell off to below $60 recently? It is the season, not the stock. Virtually anything that even remotely resembles a technology stock has been punished in recent weeks, but this is creating just the kind of opportunity we live for - buy low and sell high. The analyst community seems to agree (see news below), and now that the company has completed its acquisition of Alteon WebSystems, NT looks well positioned for growth throughout the remainder of the year. Then, as if we needed more motivation, earnings are rapidly approaching, with the company set to announce their results on October 24th. Support at the $60 level looks rock solid, with strong support sitting at the 200-dma ($62.94). Bargain hunters can consider taking advantage of intraday dips, buying bounces near support. Just make sure that the buyers are showing up in force and you aren't trying to catch a falling knife. More cautious investors will want to wait for NT to scale resistance at $68 before playing. NT announced today that it had completed its acquisition of Alteon WebSystems, adding yet another notch to the leading optical networking company's belt. If you think that analyst upgrades are the fuel of stock appreciation, then NT should be just about topped off by now. On Tuesday, CSFB reiterated their Strong Buy rating, followed by ING Barings initiating coverage with a Strong Buy and Sands Brothers starting coverage with a Buy rating yesterday. NT now has a total of 35 analysts following the stock of which 31 of them rate the stock either a Buy or Strong Buy. BUY CALL OCT-65*NTV-JM OI=59055 at $5.25 SL=3.25 BUY CALL OCT-70 NTV-JN OI=11140 at $3.00 SL=1.50 BUY CALL OCT-75 NTV-JO OI=11175 at $1.50 SL=0.75 BUY CALL NOV-70 NTV-KN OI= 5232 at $6.13 SL=4.00 BUY CALL NOV-75 NTV-KO OI= 2177 at $3.75 SL=2.25 SELL PUT OCT-60 NTV-VL OI=18139 at $1.81 SL=3.50 (See risks of selling puts in play legend) Picked on Oct 5th at $66.75 P/E = N/A Change since picked +0.00 52-week high=$89.00 Analysts Ratings 21-10-2-1-1 52-week low =$24.78 Last earnings 07/00 est= 0.14 actual= 0.18 Next earnings 12-14 est= 0.16 versus= 0.14 Average Daily Volume = 13.00 mln ************* NEW PUT PLAYS ************* JBL - Jabil Circuit, Inc. $50.00 -2.13 (-6.75 this week) Founded in suburban Detroit in 1966, Jabil Circuit, Inc. provides electronic manufacturing services for companies in the communications, personal computer, computer peripheral, automotive and consumer industries. Jabil offers its customers the total manufacturing solution including circuit design, board design from schematic, mechanical and product design, sourcing and procurement, prototype and volume board assembly, system assembly, design and implementation of product testing, direct fulfillment, warranty and repair services from 20 facilities in North America, Latin America, Europe and Asia. Jabil is one of the world's largest electronic manufacturing services providers. While JBL is not a box-maker, recent action suggests that it is being treated like one. As a major supplier of the components that go into PCs, a slowdown in computer sales suggests a slowdown in demand for JBL's components. Ever since the earnings warnings from INTC and AAPL, anything computer-related has been feeling the heat. Unable to break though $70 in early September brought in the JBL sellers. Finding support at its 50-dma (now at $57.51), the stock attempted to recover but encountering resistance at a lower high of $65. Another recovery attempt found JBL encountering yet another lower high, this time at $60. The resulting rollover led to a break below support at the 50-dma. Since then, the moving average has become a resistance point, one of many to be unsuccessfully tested. Most recently, JBL has been riding down the 5- and 10-dma (now at $53.16 and $55.05) on accelerating volume. Yesterday's earnings warning from one of JBL's major customers, DELL, only added fuel to the selling fire. Closing right on the $50 mark, down 4.08% on almost twice the ADV, puts JBL below it's 100-dma, currently at $51.74. With that level breached, the only moving average left for support is the 200-dma, just below at $46. Aggressive traders looking to enter the play will look for a failure to rally above the 5-, 10-, or 100-dma as a possible entry point. Conservative traders will watch tomorrow to see if JBL breaks below $50 for an entry. A break on strong volume will likely see JBL testing the 200-dma. BUY PUT OCT-55 JBL-VK OI=1237 at $6.50 SL=4.50 BUY PUT OCT-50*JBL-VJ OI= 793 at $3.38 SL=1.75 Average Daily Volume = 1.35 mln QLGC - Qlogic Corp $75.63 -5.13 (-12.38 this week) QLogic Corporation is the leading manufacturer of fibre channel bus adaptors. The company is also a designer and supplier of semiconductor and board level input/output (I/O) components They've been designing and marketing SCSI-based (small computer system interface) products for over 12 years and sells its products to server, workstation, and date peripheral makers. Blue-chip clients include Compaq, Dell, Hitachi, IBM, and Quantum Corporation. In recent times, the $85 level proved supportive on pullbacks, but Tuesday's tech massacre pushed QLGC over the edge. The downward intensity brought the share price under $80 for a bearish finish near the intraday low. A weak open on Wednesday, followed by its inability to move back through $85 with any conviction, prompted us to keep an eye on QLGC. The successive development of lower lows and highs, the break below the 100-dma ($78.43), and today's 6.3%, or $5.13 decline cinched it. While former support at $85 should offer a solid ceiling, the 100-dma at $78.43 should begin to evolve as the upper trading band. Look for volume to remain respectable to strong on the decline. If you choose to buy into subsequent weakness on moves through today's intraday low of $74.19, expect some resistance at QLGC nears $70. We're anticipating QLGC will lose more ground as its industry continues to be plagued with earning concerns and downgrades. Four of its major players: INTC, AAPL, MU, and the most recent DELL, all gave warnings that the future wouldn't be as bright as analysts would expect. This alone generates a magnanimous pressure among the hardware-related stocks. BUY PUT OCT-80 QLC-VN OI=645 at $9.00 SL=6.25 BUY PUT OCT-75*QLC-VO OI=551 at $6.13 SL=4.25 BUY PUT OCT-70 QLC-VP OI=425 at $3.75 SL=2.00 Average Daily Volume = 2.66 mln ********************** PLAY OF THE DAY - CALL ********************** AKAM - Akamai Technologies $39.69 -5.78 (-12.82 this week) Using software based on the company's proprietary mathematical algorithms, AKAM provides a global delivery service for Internet content, streaming media and applications that improves Website speed, quality, reliability, and scalability. It even helps to protect against Website crashes due to demand overloads. Superior delivery of customer Web content and applications through a worldwide network is achieved by locating the content and applications geographically closer to users. Exploiting the fact that even on the Internet, the shortest distance between two points is the fastest, AKAM monitors Internet traffic patterns and delivers its customers' content and applications by the most efficient route available. Most Recent Write-Up AKAM $39.69 -5.78 (-12.81) We held our breath throughout the mini-rally yesterday, but it was all for naught. AKAM didn't come anywhere close to touching the 10-dma (clear up at $49.75), and then proceeded to continue its downward slide today. We had a pretty clear entry as the price fell through the $44 level this morning, and the confirmation came this afternoon as the selling intensified. Rather than anything news-related, the decline in AKAM is being driven by continued fear in the Technology sector, and warnings from the big boys like INTC and DELL certainly aren't helping. Even the mild recovery near the close today looked half-hearted as the stock couldn't even manage a close above $40. While things are looking bleak for AKAM shareholders, we need to make sure we don't get caught off guard. With Stochastics deep in oversold territory, and AKAM buried in its lower Bollinger band, an oversold bounce is not out of the question (yesterday's action notwithstanding). Keep your stops in place and use any such bounce as an opportunity to open new positions. Once the buyers have their 15 minutes in the limelight, consider opening new positions when the bears come back in force. Until the NASDAQ comes out of its death spiral, look for AKAM to continue lower. Comments As the NASDAQ continues lower, the Internet sector suffers. AKAM has felt the pain recently in the form of new 52-week lows. The stock continues to trace new yearly lows, with no bottom in sight. AKAM's late-day rally attempt today could provide a solid entry into new plays early tomorrow if the NASDAQ continues lower. A rollover around the $40 level could portend further downside. A more conservative entry might be found if AKAM falls below its freshly minted 52-week low at $38.50. BUY PUT OCT-45 RUG-VI OI=400 at $8.25 SL=6.00 BUY PUT OCT-40*RUG-VH OI=527 at $5.00 SL=3.00 Average Daily Volume = 2.11 mln ************************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=606 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Dell Deals a Deadly Blow... The stock market slumped today as concerns over upcoming earnings plagued the leading issues. Wednesday, October 4 Technology stocks rebounded today in a classic oversold rally. The broader market also advanced as investors rotated funds into old economy issues. The Nasdaq finished 67 points higher at 3,523 and the Dow ended up 64 points at 10,784. The S&P 500 index was up 7 points at 1,434. Trading activity on the Nasdaq heavy at 2.1 billion shares, with declines outpacing advances 2,142 to 1,882. Volume on the NYSE reached 1.16 billion shares, with advances beating declines 1,563 to 1,268. The Euro edged lower ahead of the upcoming European Central Bank meeting and crude oil futures retreated on news that stockpiles increased more than expected last week. In the bond market, the yield on the 30-year Treasury fell to 5.94%. Tuesday's new plays (positions/opening prices/strategy): I-Stat STAT OCT20P/OCT22P $0.56 credit bull-put BellSouth BLS JAN45C/JAN37C $1.00 debit synthetic SCM Micro SCMM MAR35C/MAR35P $13.50 debit straddle Our new positions were a difficult lot even in today's volatile session. I-Stat offered the target entry credit but BellSouth and SCM Microsystems were less cooperative, providing little opportunity to open the positions at the suggested prices. Portfolio Plays: The stock market enjoyed a modest rally today as investors went bargain hunting for choice technology shares. The Nasdaq erased early losses to close positive as bottom-fishing buyers emerged late in the session. Chip stocks were particularly strong with Intel (INTC) and Micron Technology (MU) leading the group, and telecom stocks also advanced on speculation that Nextel (NXTL) and AT&T (T) might join forces. In a show of unusual resilience, computer software issues rallied amid a slew of negative reports including a profit warning from Computer Associates (CA). At the same time, International Business Machines (IBM) moved up to $114 even though Merrill Lynch cut its third-quarter earnings estimates for the company. The bad news continued as Robertson Stephens cut its rating on Oracle (ORCL) and Amazon.com (AMZN), but despite the continued warnings from leading companies, stocks finished higher in most sectors. On the Dow, Hewlett-Packard (HWP), International Paper (IP) and SBC Communications (SBC) led the rally as investors moved funds into issues that have fallen to new lows over the past few weeks. The industrial average also got a lift from demand for the technology heavyweights and shares of blue-chip manufacturing and chemical companies helped propel the market higher. Retailers, which have been pummeled in recent weeks, also moved higher but the broad market's advances were limited by uncertainty over the Fed's new outlook for interest rates. Energy shares also slumped, as oil prices retreated amid reports of a buildup in U.S. crude stockpiles. Portfolio Plays: The rally today was welcomed by all but it may be too soon to quit our day jobs. A major profit warning from Dell Computer (DELL) was announced after the close and that could renew the earnings anxiety that has dominated the market in recent weeks. In fact, it was a big day for revenue warnings and before the open, Knight Trading Group announced that profits in the third quarter would be substantially lower than expected due to a slowdown in trading and expansion charges. The news thumped the online brokers and our bullish speculation play in NITE suffered a technical knock-out. There was no chance to limit the loss in the position so we are destined to ride out the news and work on lowering our cost basis in the issue, if it is assigned. The surprise announcements were rampant as Maxtor (MXTR) reported it will buy Quantum's Hard Disk Drive Group (HDD) in a stock transaction valued at $1.3 billion. Quantum's stockholders will receive 1.52 shares of Maxtor common stock for every share of HDD common stock they own and the merger will create the world's leading disk drive company. The pact did not help our recent diagonal position as Maxtor suffered from a brisk sell-off. To avoid a loss in the position, we have decided to close the long option and remain short at $10 for two weeks. If the issue rallies through resistance near the sold strike, we will buy the underlying issue to create a covered-call. In our big-cap technology portfolio, Ariba (ARBA) was the leading issue, up $17 after two days of significant losses. The volatile movement has worked in our favor with regard to the neutral credit strangle and we expect to achieve an early exit in the position if the issue remains in a relatively small trading range. Among the Nasdaq winners were Internet leader Commerce One (CMRC), telecom company Qualcomm (QCOM) and Ballard Power (BLDP). Today's rally in BLDP will allow us to pick the time and price for a potential adjustment, should it become necessary. Other notable advances were seen in Research in Motion (RIMM), Qlogic (QLGC), Tollgrade (TLGD), and Veeco (VECO). Gemstar (GMST) has endured the recent selling pressure with remarkable resilience and the technical indications suggest it may be bracing for a rally. Our short option at $95 will be in jeopardy if the issue moves to a higher trading range and we will monitor its activity on a daily basis. Industrial stocks also performed well and Federal Express (FDX) was the leader in that category. The issue moved up $1 to $45 and it will likely continue higher as crude prices consolidate. At the same time, the recent downside activity has been an asset to our bearish positions. American Home Products (AHP), Covad (COVD), International Business Machines (IBM), Halliburton (HAL), Microchip (MCHP) and Smith International (SII) have all suffered amid the selling pressure. Thursday, October 5 The stock market slumped today as concerns over upcoming earnings plagued the leading issues. The Dow finished down 60 points at 10,724 and the Nasdaq closed down 51 points at 3,471. The move out of growth into value boosted the S&P 500 index to a positive finish to 1,436. Trading activity on the Nasdaq was moderate at 1.85 billion shares with declines edging advances 2,341 to 1,593. Volume on the NYSE reached 1.17 billion shares, and declines led advances 1,549 to 1,263. In the U.S. bond market, the 30-year Treasury rose 19/32, pushing its yield down to 5.89%. Portfolio Plays: The broad market edged lower today as another round of profit warnings weighed heavily on investors. An early-morning rally was quickly thwarted by selling pressure as the recent onslaught of downward earnings revisions came back to haunt the leading issues. The rotation to old economy stocks failed to help the Dow's performance and the blue-chip laggards included Philip Morris (MO), Hewlett-Packard (HWP), International Paper (IP), and Home Depot (HD). Alcoa (AA) contributed to the downward bias, posting third-quarter earnings of $0.42 a share, equal to the lowered estimates as higher energy costs and softening in the transportation, construction and distribution markets cut into the company's bottom line. In the technology group, chip and hardware stocks were hardest hit, mostly due to the profit warnings from Dell Computer (DELL). After Wednesday's close, Dell announced that third-quarter revenue would fall well below expectations due to soft European demand and poor global sales to small-business customers. In addition, analysts noted that earnings season for semiconductor companies will be less than outstanding due to falling demand in the personal computer and wireless markets. The Internet group also endured major losses as B2B stocks fell victim to profit taking from recent advances. On the bright side, shares of consumer product stocks rallied following a slew of upgrades from Merrill Lynch, and major drug, airline, biotechnology and financial issues also edged higher. At the same time, retail, utility, and paper stocks sagged. Oil shares also extended this week's losses as November crude fell to the $30 range amid an easing in supply concerns after the government successfully completed its auction from the nation's emergency reserve. Our portfolio experienced mixed results in today's session but there were a few bright spots. Research in Motion (RIMM) moved up another $8 on momentum from its recent positive earnings and Qualcomm (QCOM) continued to rally, rising over $5 to a 3-month high near $83. Tollgrade (TLGD) advanced $5 to $143 and Brocade (BRCD) rebounded $8 to $225, finishing squarely in the middle of our sold strikes in the neutral credit strangle. Sepracor (SEPR) advanced amid strength in the specialty pharmaceutical sector and St. Jude Medical (STJ) followed suit. Those of you that did not take profits in the STJ calendar spread should consider the issue's bullish indications as you prepare to make adjustments in the position. Unfortunately, a slew of leading stocks also moved lower today and there are a number of issues that need to be monitored for technical failure. Our new Reader's Request play in Worldcom (WCOM) was just one of the bearish positions, and we will try to list the issues that require early exits, to protect gains (or limit losses), in Sunday's narrative. The small-cap group performed very well today and the leader in that category was Read-Rite (RDRT). The stock surged $1.69 to a 52-week high on momentum from the recent contract announcements and our bullish combination play is approaching maximum profit. Caremark RX (CMX) rallied to a two-year high on strength in the health services group and those of you remaining in the bullish calendar spread should consider making an upside adjustment in the coming sessions. The position previously offered a $0.62 profit but the gains can likely be extended in the long option (DEC-$10) by transitioning to a diagonal spread. In the mid-cap group, Advanced Paradigm (ADVP), BellSouth (BLS), and Plug Power (PLUG) all moved higher and one of our previous straddle issues, Toronto Dominion (TD) rallied with the rebound in the financial sector. Those of you participating in the neutral debit strangle are beginning to reap the rewards of patience as the play now yields a $0.75 profit on $1.69 invested. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** LGND - Ligand Pharma $14.13 *** New Trading Range? *** Ligand Pharmaceuticals is a pharmaceutical company that discovers, develops and markets new drugs that address critical unmet medical needs of patients in the areas of cancer, men's and women's health and skin diseases, as well as osteoporosis, cardiovascular and inflammatory diseases. The company strives to develop drugs that are more effective and/or safer than existing therapies and that are more convenient and cost effective. Ligand's subsidiaries include Glycomed, Marathon Biopharmaceuticals and Seragen. Ligand currently markets three oncology products in the United States, all of which were approved by the United States Food and Drug Administration last year: Panretin, ONTAK and Targretin capsules. Ligand is also marketing two oncology products in-licensed for marketing exclusively in Canada, Photofrin and Proleukin. Ligand shares rallied today after the company reported that drug manufacturer Eli Lilly (LLY) made new milestone payments of an undisclosed amount for a diabetes drug, known as LY510929, and a back-up compound Ligand is developing. The drug and the back-up compound have been deemed as clinical candidates by the company, and will soon be tested for treating cardiovascular disease and type II diabetes. The products are in a group of several drugs being pursued under a five-year deal with Lilly, and Ligand said it may receive additional milestone payments, should a compound derived from the tests progress through human development. The two companies are collaborating on developing drugs with broad applications for treating metabolic diseases, such as diabetes, obesity, dyslipidemia, cardiovascular disease associated with insulin resistance and obesity. The stock has excellent technical support near our cost basis and the favorable option premiums will allow us to speculate, in a conservative manner, on the future movement of the issue. PLAY (speculative - bullish/synthetic position): BUY CALL NOV-17.50 LQP-KW OI=1031 A=$0.62 SELL PUT NOV-12.50 LQP-WV OI=53 B=$0.62 INITIAL NET CREDIT TARGET=$0.12-$0.25 ROI TARGET=50% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $465 per contract. ****************************************************************** K - Kellog Company $25.31 *** Cheap Speculation! *** Kellogg Company and its subsidiaries are engaged in the production and marketing of ready-to-eat cereal and convenience food products on a worldwide basis. The principal products of the company are ready-to-eat cereals and convenience food products, which are made in 20 countries and distributed in more than 160 countries. The company's products are generally marketed under the Kellogg's and Morningstar Farms names, and are sold principally to the grocery trade through direct sales forces for resale to consumers. They use broker and distribution arrangements for certain products, as well as in less-developed market areas. In the United States, in addition to ready-to-eat cereals, they produce and distribute toaster pastries, frozen waffles, frozen pancakes, marshmallow squares, cereal bars and meat alternatives. The company also markets these and other convenience food products in various locations throughout the world. Potential merger activity in the food group is underway again and cereal giant Kellogg has emerged as a candidate to acquire Keebler Foods (KBL), the #2 U.S. cookie and cracker maker. Kellogg is now seen as the front-runner in a field that once included France's Groupe Danone, British confectioner Cadbury Schweppes and Campbell Soup (CPB). Analysts say a Kellogg-Keebler combination would help Kellogg by lessening its dependence on the slumping cereal market and diversify the company into faster-growing businesses. Options on Keebler have been active in recent sessions, suggesting an announcement may be forthcoming and the implied volatility in near-term Kellogg options has also increased. If you think that today's bullish activity in Kellogg's share value is a sign of potential recovery, use this position to speculate conservatively on the future movement of the issue. PLAY (conservative - bullish/calendar spread): BUY CALL MAR-30 K-CF OI=135 A=$1.00 SELL CALL NOV-30 K-KF OI=46 B=$0.31 INITIAL NET DEBIT TARGET=$0.56-$0.62 TARGET ROI=50% The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. A bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. ****************************************************************** - STRADDLES/STRANGLES - ****************************************************************** HSY - Hershey Foods $52.38 *** Probability Play! *** Hershey Foods and its subsidiaries are engaged in the manufacture, distribution and sale of consumer food products. The company's principal product groups include chocolate and non-chocolate confectionery products sold in the form of bar goods, bagged items and boxed items, and grocery products in the form of baking ingredients, chocolate drinks, peanut butter, dessert toppings and beverages. Option premiums remain relatively inexpensive, although not as theoretically cheap as they have been in the last few months, thus neutral option-buying strategies are a favorable approach to profitable volatility trading. This "discounting" effect is particularly true of equity options and with the earnings season upon us, many stocks will experience violent moves without any warning. In many cases, the options market does not accurately reflect this capability for increased volatility and that can provide some excellent opportunities for astute investors. The simple and effective method to benefit from this condition is through the purchase of straddles or strangles. This position meets our criteria for a favorable strangle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. However, as with any play, the position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (aggressive - neutral/debit strangle): BUY CALL FEB-55 HSY-BK OI=261 A=$2.69 BUY PUT FEB-50 HSY-NJ OI=90 A=$2.31 INITIAL NET DEBIT TARGET=$4.75 TARGET ROI=50% ***********************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=612 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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