The Option Investor Newsletter Tuesday 11-28-2000 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/112800_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 11-28-2000 High Low Volume Advance/Decline DJIA 10507.60 - 38.50 10613.90 10489.60 1.03 bln 1148/1687 NASDAQ 2734.98 -145.51 2891.40 2734.46 1.92 bln 1080/2932 S&P 100 708.47 + 3.62 720.28 708.10 totals 2228/4619 S&P 500 1336.09 + 7.20 1358.81 1335.13 32.5%/67.5% RUS 2000 459.02 - 12.68 471.70 458.63 DJ TRANS 2796.41 - 28.35 2825.06 2781.18 VIX 30.51 + 1.49 30.68 29.07 Put/Call Ratio 0.68 ****************************************************************** Nasdaq closes at new 52 week low. Sorry, if you were in the market you were already painfully aware of that fact. The carnage was widespread but the chip stocks, B2B and networkers bore the brunt of the selling. Actually it appears anything with a double digit PE was targeted again except maybe biotechs. The pessimism is so thick traders simply do not want to take a position. Every rally is met with another wave of selling and with those investors buying the dips getting killed on a daily basis there is no incentive for others to step in. The Semiconductor Index also set a new 52-week low after Dan Niles made negative comments about several chip companies. It was simply a bad day in the market and the reason is not the election but earnings worries. With 23% of the S&P already warning the outlook is not good. The normally positive fourth quarter outlook is being dampened by a Fed which will not ease up on the interest rates and the lingering effects of the last six hikes. The retail sector that was up on Monday dropped today as worries of lower margins caused widespread selling. Analysts cited sales of as much as -50% off in many stores in a period where they normally post as much as 50% of their annual sales. If they have to discount that much on the first week of the season then what will they have to do as the longer than normal selling season drags on? One of the major events which was missed or ignored by the talking heads on CNBC was an interview with Waldo Best of MSDW. While he was talking about steel stocks and the topic probably put Bill Griffeth to sleep, he said that Morgan Stanley was now factoring in a 40% chance of a recession within the next twelve months. Am I the only one that is concerned by that comment? Mr. Greenspan are you listening? Morgan Stanley Dean Witter is not a fly by night brokerage company. They are well respected and this public pronouncement of the R word could cause even more market instability going forward. Dan Niles was personally responsible for a huge chunk of the Nasdaq and SOX drop today. He said PMCS might warn about inventory problems as soon as today. Since ALTR is the only company in the chip sector that has warned he feels there is a lot of undiscovered problems and the major companies could drop -50% to -75% on any earnings miss. He warned that by selling now investors would eliminate that risk. PMCS dropped -6, INTC -2, MU -3.63, NVLS -4.75. Broadcom also lost ground, -12.50, but had the added negativity of another acquisition. They acquired VisonTech Ltd, a leading supplier of MPEG-2 technology for $776 million in stock. This was their 12th acquisition this year and the 19th since 1999. BRCM at $85, can you believe it? Down -140 in the last three weeks! I listened to Henry Nicholas the BRCM CEO today and he was very upbeat about the company. He said they had already issued a press release saying they were comfortable with analyst estimates and the acquisition today would be accretive to earnings in the third quarter. He convinced me but he has a large investor conference on Wednesday and he will have to convince them as well for the slide to stop. With a PE of 227 it is still not cheap but I would be a player when it finally rebounds. After the market close today CHPC, a provider of test and packaging services for the semiconductor makers, warned that higher inventory and slowing demand would seriously impact earnings for the next quarter. CMOS announced earnings that beat analysts estimates by a penny but warned that in the current environment there was concern that orders for chip testing equipment would be pushed out and they said revenue could be down substantially down for next quarter. Looks like some confirmation of the Niles call already. Another sector that received several warnings today was the PC sector. Several analysts said that all the PC makers had excessive inventory going into the selling season and that inventory levels were even higher than the end of the third quarter. Analysts felt that they would have to take hits in the fourth quarter for this unsold inventory. With PC demand slowing they felt Compaq was the most at risk with a reseller channel stuffed with equipment. Compaq immediately issued a press release saying they were comfortable with channel inventory levels. This is probably the only thing that kept the sector from really selling off. CPQ lost -1.71 (-7%), DELL -2, GTW -1, HWP -1. Those numbers may not seem very large but this sector has already suffered greatly. Dell is only $22 now and CPQ $23. Brocade, another stock I watch closely, got hammered with the rest of the networkers today but the main cause for the drop (-28) was their earnings which are expected on Wednesday. Investors are just not taking any chances. With stocks losing 50% of their value on an earnings miss it brings a whole new meaning to "never hold over earnings." The B2B sector also took a big drop but most of the news was positive. There were several upgrades and coverage initiations but the sector dropped mostly on the association with the Internet lepers. Yahoo dropped to a new 2-year low of $37 and the incubators CMGI and ICGE moved even closer to penny stock status. This should not impact B2B companies but this is what the analysts were blaming it on. ARBA -5, ITWO -11, FMKT -4, CMRC -4, VRSN -5. The Dow was not immune to problems today. JPM as an extension to CMB through the buyout dropped -4.13. Salomon Smith Barney cut earnings estimates on CMB from $.90 to $.70 based on drops in the investment portfolio. Citing the drops in the market and the corresponding stocks in their portfolio they felt a mark to market election would cause them to miss estimates substantially. This was the first in a wave and others are sure to follow. The economic reports today showed the economy still slowing with the Durable Goods Orders dropping -5.5%. This was the first drop in the last three months. Wednesday we get the revised GDP numbers and something in the +2% range is expected. Much higher and the Fed will hold the line and much less the recession bears will be out in force. 2% should move the Fed into a neutral bias when they meet on Dec-19th. Remember, the other key date is Dec-18th when the Electoral College names the new president. All the hoopla will be over and traders will not be able to use the election results as a whipping post for market woes. If we get a positive result from the Fed as well then maybe this market will turn around. Since we all know the markets move before the events we could expect some firming in the next week or so. FYI, Bear Stearns is estimating that the GDP will be revised down to only +1.7%. This would be the softest quarter since 2Q-1995. Should this come to pass the Fed would almost have to react with a minimum neutral bias on Dec-19th. The election mess is still weighing on the markets. There was a rumor this afternoon that the Gore press conference would be a concession speech. The Dow moved off its lows about +85 points and the Nasdaq +50 points. Once he started speaking and they saw he was not conceding the market dropped off immediately. I get hate mail for saying the market wants a Bush win but I did not make this up. It is just a fact and the Gore fans will have to live with it. Actually after watching all the different cases in play in Florida I think there is still a real possibility that Gore will be the next president and the market will have to deal with that eventually. In six different cases there are about 2800 votes that could go to Gore depending on the interpretation of the different judges. About +261 votes have a very good chance of being added to Gore in two cases. Any other win in any other case would put him over the top. When/If that happens the markets will probably be unsure of direction. Some sectors will sell off immediately, drugs would be one. On the other hand the market would be thankful to just get the problem behind us and we could rally on the news as well. It is a very interesting time in the market. Remember last week when I suggested waiting until the Nasdaq broke over 3200 as an entry point for calls? Well that was -500 points ago and another +250 point failed rally. If you followed my advice you saved a lot of money by staying out of the market. Our put players are doing very well but we know that everyone is not comfortable with that strategy. Where is the market going tomorrow? Nobody knows for sure but we are clearly in the over sold column once again. The Nasdaq is now -1100 points under the 200DMA. While some may feel that is severely undersold it may be just PE decompression. Back in March there were hundreds of stocks with huge triple digit PE ratios. Not so any more. We are rapidly approaching more normalized PEs but some stocks, BRCD would be one, are still valued at huge ratios. BRCD with a PE of 515 ranks high on the "overvalued" list but chip stocks with real earnings and PE ratios in the teens are also out of favor. So where is the beef? If AMAT at 18 is not a buy then what does the market want? In short, it wants to know what the future holds. It wants to know who the president will be and when the Fed will release its vice grip on the economy. It wants to know that there will be a soft landing not a crash. The market is the most efficient discounting mechanism of future events known to man. Unfortunately in the current environment the discounters are drawing a blank. The old adage of "when in doubt, sit out" is becoming the golden rule. New problems are appearing. Margin calls are accelerating but many investors are just covering with cash. This means there is still no real fear of a prolonged down trend. With every support level that is broken by each tech stock there are new waves of selling. Traders that pegged their hopes on every conceivable last ditch support level are now faced with those levels breaking on almost a daily basis. The "it can't go any lower than that" crowd is beginning to see the light. Traders are also saying that instead of there being a "buyers boycott" there are more and more sellers. There has not been a real capitulation event yet with high volume and big drop. Today for instance only posted 1.9 bil shares on the Nasdaq. That capitulation event may still be in our future. 2650 is the next support level if we cannot hold the line here. That support dates back to Aug-Sept of 1999. That would be a -50% haircut from the March highs. Can it get there? Sure! Will it get there? Nobody knows. As an aggressive investor I would back up the truck at any rebound around 2650. As a conservative investor I would recommend waiting until the Nasdaq closed over 3000 again. Yes, that is several hundred points away but it would be a real confirmation of a trend reversal. If you are tired of being ground into hamburger then wait for the trend to change in our favor. We continue to get email that goes like this: "I have been successful in playing calls for the last two years but the last two months I have given it all back. What am I doing wrong?" Answer: You are trying to play calls in a down market the same way you did in an up market. For the last two years with very little effort you could have made a fortune buying calls on big cap tech stocks. Since Sept-1st we have been in a down market with many stocks losing -50% to -75% of their value. Dip buyers have been getting killed. It takes more than 5-min a day to decide what stock you are going to buy the next day. If you are an investor that only buys calls then you need to wait for the market to turn in your favor. Look at a chart of the Nasdaq. You would not buy a stock that had the same chart patterns. Learn to be patient. It is cheaper and more rewarding. You have seen me write about John Dessauer, a newsletter editor with a 20-year history. John spoke at our March Expo here in Denver to about 600 attendees. John uses a common sense bottom up method of stock picking and has been very successful. He has asked me to speak at his "Dream Seminar at Sea" in March. The itinerary looks more like a vacation than a seminar with stops in Aruba, Caracas, Grenada, Dominica, St Thomas and San Juan but John will manage to keep us busy. If you have interest in this event visit this link: http://www.cruzproductions.com/dessauer/ On a sad note tonight we morn the passing of Peter Sandek and his family. Peter was the leader of the Atlanta Option Investor Club. Peter flew his plane to the March Expo in Denver and just got his instrument rating this month. His plane crashed on the way home from visiting relatives over Thanksgiving. Our prayers are with them. Good luck and don't buy too soon. Jim Brown Editor ************************* REGIONAL SEMINAR SCHEDULE ************************* Only one seminar left. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of in-depth education. Don't miss it! Date City Dec 07-09 Philadelphia Has the market been beating you up? Did you give back your gains from April/August? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1039 ************************************************************** **************** MARKET SENTIMENT **************** Bearish Bubble? By Austin Passamonte No newsflash here - buying puts has been a very profitable venture for the past three months. And it may promise to be just as good an approach for a few more ahead as well. Current market action reminds us of that from late 1998 until March 2000. How you ask? Simple. Just flip your charts upside-down and overlay the two. Market action moved straight up those charts back then with the occasional weak dip making buy & hold call options a simple strategy. Today we see the mirror reverse. Continual selling for twelve weeks with the occasional weak rally to sell into makes buy & hold put options a simple strategy as well. The difference has been strictly mental perception. It's easy to accept the "fact" that markets can remain grossly oversold as prices soar to unlimited heights. It was easier to visualize QCOM at $1,000 than $100 not long ago. We will more readily believe the myth that trees can grow to the sky than the fact that fire can reduce them to ash much faster. The painful truth of reality was exhibited this year in our precious western forests ravaged by historical fires, and likewise equity markets in metaphorical fashion. Market Sentiment has trudged a return back to the bear cave once again. We are well aware how anxious market bulls are for any glimmer of hope that a powerful rally will ensue, and that can never be ruled out. However, odds weigh heavily in favor of further downside to come as explained below: 1. Pressure on all markets is based on weak earnings, high valuations and uncertainty ahead. Everything else including the election fiasco is just noise. Fear of a hard landing has grown and signs do point to this being a concern. 2. Warning season ahead. Any market bell-weathers that prewarn will confirm nervous market fears and send us down to new lows post-haste. The advent of equal disclosure would intensify this as institutions flock to dump shares along with retail. 3. Weakening dollar. Daily chart signals show bearish divergence on the dollar as pointed out to us by Molly Evans. Bonds and gold alike are gaining strength as a flight to quality by foreign money may have begun. 4. Oil prices won't fall until the first or second quarter of next year at the earliest. Cold weather in the U.S. will create considerable economic pressure immediately from here. 5. Fed meeting euphoria. We expect the markets to rally strong into the Fed meeting mid-December in anticipation of a change in sentiment at the least. Will Greenspan give equity markets the green light so soon after a lengthy campaign to slow things down? What happens to trader sentiment if the Fed doesn't ease their stance? Lest you think Market Sentiment is alone in viewing this market beneath a thick fur coat & claws, the latest COT report shows that SP00S commercials INCREASED their historical 10+ year net-short holdings by almost 10% more than what they were already short. This is a huge red flag. These market behemoths scaled into their short contracts in the CME commodity pits at levels far above where we trade today and are hold substantial profits. Not only haven't they begun scaling out to capture huge gains, they shorted even more! Market mavens of soon-to-be tested fame can tout "SPX 1575 levels by year's end" every day until then but that will not manufacture reality. Market Sentiment chooses to follow the big boys trading $Billions in the "belly of the beast" and will continue to successfully trade in their direction as we have for more than a decade. We expect tradable rallies ahead and look for the next to emerge anytime from here. This does not change the fact that all markets are creating another multi-year bottom to base from and begin the next long-term rally. That bottom does not seem to be here yet and could lie below a considerable distance away. Trade with caution and in both directions for sure. When in doubt, consider foregoing calls to buy puts in this environment. It has worked for twelve-plus weeks now and could continue for quite some time as well. Profits are the focus, regardless of direction! ***** VIX Tuesday 11/28 close: 30.39 30-yr Bonds Tuesday 11/28 close: 5.69% 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. Tuesday (11/28/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 745 - 730 12,254 3,639 3.37 725 - 710 5,863 8,955 .65 OEX close: 708.47 Support: 705 - 690 1,044 7,180 6.88 685 - 670 46 9,495 206.41*** Maximum calls: 740/5,325 Maximum puts : 680/4,538 Moving Averages 10 DMA 717 20 DMA 730 50 DMA 739 200 DMA 774 NASDAQ 100 Index (NDX/QQQ) Resistance: 75 - 73 40,378 41,501 .97 72 - 70 28,261 45,424 .62 69 - 67 13,047 15,796 .83 QQQ(NDX)close: 65.45 Support: 64 - 62 896 8,390 9.36 61 - 59 5,443 4,321 .79 58 - 56 17 1,215 71.47 Maximum calls: 80/38,993 Maximum puts : 80/37,697 Moving Averages 10 DMA 71 20 DMA 74 50 DMA 80 200 DMA 92 S&P 500 (SPX) Resistance: 1400 64,880 54,662 1.19 1375 32,481 24,771 1.31 1350 14,331 32,244 .44 SPX close: 1336.09 Support: 1325 4,553 19,860 4.36 1300 6,946 20,208 2.91 1275 1,919 16,446 8.57 Maximum calls: 1400/64,880 Maximum puts : 1400/54,662 Moving Averages 10 DMA 1355 20 DMA 1382 50 DMA 1395 200 DMA 1438 ***** CBOT Commitment Of Traders Report: Monday 11/27 Weekly 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 (Current) (Previous) (Current) (Previous) Open Interest Net Value -138 +100 -2462 -2436 Total Open Interest % (-1.94%) (+1.42%) (-9.76%) (-9.60%) net-short net-long net-short net-short NASDAQ 100 Open Interest Net Value -363 -733 -223 -77 Total Open Interest % (-1.76%) (-3.58%) (-0.42%) (-.16%) net-short net-short net-short net-short S&P 500 Open Interest Net Value +68303 +61563 -79145 -72376 Total Open Interest % (+34.74%) (+32.17%) (-11.76%) (-10.91%) net-long net-long net-short net-short What COT Data Tells Us: Commercial positions in S&P 500 remain at their ten-year extreme short levels with the disparity between Small Specs and Commercials increasing. Small specs have now gone to a net-short position on the DOW. Data compiled as of Tuesday 11/21 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/112800_1.asp ************* READERS WRITE ************* Regarding Debit Straddles... By Ray Cummins Dear OIN: I am trying to follow the straddle picks in the newsletter. How many straddle picks do you do every week/month? What's the best way to determine whether to get in or out? What's the best way to read up on straddles so I can invest properly? Thanks, GO ************ Hello GO, We offer Straddle positions once or twice a week, when favorable positions are identified. You can also scan optionable issues based on historical volatility to generate a list of candidates and then evaluate their chart patterns to select potential plays. To help with your trading, here is some basic information on the strategy: Debit Straddles The debit straddle is an appropriate strategy for occasions in which one suspects that the price of the instrument will move substantially but does not know in which direction it will go. This "delta-neutral" technique can work very well in situations where important news is about to be released and it is expected to be either very favorable or extremely detrimental. Corporate earnings announcements, new drug approvals, merger or takeover speculation, and annual board meetings (splits/spin-offs) are just a few common examples of situations in which uncertain information will be released on or near a specific date. Option trading is generally very active in these cases and participants expect the issues to move significantly after the announcement. However, trading straddles on these occasions is certainly not without risk. When investors already know or expect the event, options will be overpriced (relatively high implied volatility) and the price of the underlying stock may not move enough to make the position profitable when the announcement occurs. If this happens, the worst thing a trader can do is to hold on to a previously purchased straddle in the faint hope that some other, unanticipated news will be released before the options expire. The most important thing to remember when evaluating a straddle is to understand that the greater uncertainty associated with the previous examples are known by everyone. The options will often be priced according to a higher stock volatility, making the play unfavorable. The most attractive straddles will be those in which the trader is confident that the underlying issue will be more volatile than everyone else. Time-value characteristics: The first subject we must discuss is often considered the most important component of option pricing: time value. As most of you know, option premium consists of two components: Intrinsic Value and Time Value. Assume that a current stock's price is equal to the strike price. In this case, an option's premium for the call and put does not have any intrinsic value, only time value. The main factors that influence Time Value include: 1) The number of days until expiration 2) Implied Volatility 3) How far the option is in or out-of-the-money. At-the-money options have the highest time value. As the option starts moving in or out-of-the-money, the time premium begins to drop in value. The closer the option is to expiration, the more its premium will shrink (per unit time) due to time decay. This gives us a guideline in selecting a straddle. We should pick an expiration month so that the price of the straddle will not be too high (too far from expiration). However, it must also provide enough time for the stock to perform as expected, before we have to exit the trade to preserve capital. One important fact to remember; the highest increase in time decay for at-the-money options occurs in the last 30 days before expiration. That means we should rarely hold a straddle position to expiration. When you understand that time decay is working against you, you can begin to choose trades in which other beneficial components will help your position profit, even as time passes. Pricing components: Now you've learned that time decay is working against us in the straddle. What other factors can help us to achieve the goal of selling at a higher price in the future? Two components; Implied Volatility and Intrinsic Value. Implied volatility is a characteristic of an option's time value. The higher the implied volatility, the higher the option's time value is. When you find a situation where implied volatility is statistically low (probability dictates that it should start to move higher), you can occasionally make a profit by selling your straddle at a higher price, even if the underlying stock price doesn't move significantly. Obviously, any increase in implied volatility will boost the time value of your position and move your trade closer to a profitable outcome. (Editors note: If you do not have a thorough knowledge of Implied Volatility, please review that subject before you participate in these types of positions. It is important that you understand the concept and how it relates to option pricing before you spend money on strategies expected to profit from changes in volatility.) Another basic component that can help us profit in a straddle is Intrinsic Value. Once again, assume that the underlying price is equal to the strike price; this means that our straddle does not have any intrinsic value. When the stock starts moving in either direction, one of our options will become "in-the-money." This will cause the intrinsic value to expand in that option. But, in contrast, the time value of both positions begins to decrease as the underlying moves away from the at-the-money strike. Remember, the further the option is in or out-of-the-money, the less time value it contains. The rate of change for both of these values is very important. Intrinsic value has a rate of change equal to one; if the stock price moves one point into the money, intrinsic value increases by one point. Time value is obviously much more complex. The rate of change depends on how far away the option is from the strike price; the further the option is in or out-of-the-money, the smaller the rate of change on a one point move in the underlying issue. With that concept in mind, it is easy to see that when the underlying issue's price moves away from the strike price, we gain more in intrinsic value than we lose in time value. That's one way in which a debit straddle achieves profits. Keep in mind, the measurement of the underlying issue's move is statistical volatility and we look for straddle positions on instruments where we expect that component to increase. Making the strategy work: To construct profitable straddle positions, it is important to be aware of the effects of all these components. A theoretical edge in one or two of these factors can make a position favorable but it is better to have the majority of them on your side. If one were to review trading histories, the most common mistake among new traders is the purchase of short-term straddles. You can profit from these positions but generally that occurs only when the underlying starts moving immediately after the play is opened. Of course it appears attractive because the straddle does not have a large amount of time value and the small movement required for profit seems very probable. The problem is, if the underlying doesn't move right away, time decay will start to increase rapidly and your position will suffer regardless of the (eventual) stock price movement. Most experienced traders agree that two to three months should be the minimum time frame for (debit) straddles. If you have a choice between two different series of expirations and the implied volatility for the longer-term options are lower, you should consider the position with the greater time value because those options are likely to be theoretically cheaper. Always remember to look for volatility that is low with respect to its historic levels. The reason is the tendency for volatility to return to its former range or median value. The concept is often called the "Rubber Band" effect and it basically means there is a high probability that when volatility is pulled too far in one direction, it will eventually reverse, moving the opposite way. This pattern of behavior is the primary reason why experienced traders use volatility-based positions to make money. They try to construct plays that take advantage of the future volatility of an issue - when the current value is high or low compared to recent historical trends. Volatility is a predictable and powerful component for derivatives traders and understanding this concept is paramount for consistent profits in the options market. More information on this and other spread/combination techniques can be found in Sheldon Natenburg's book, "Option Volatility and Pricing Strategies" and "Options as a Strategic Investment" by Larry McMillan, available in the OIN bookstore. Good Luck! ************** TRADERS CORNER ************** Reflections On A Year Full of Trading Lessons By Scott Martindale You can count on certain things in life: death, taxes, and a post- election rally. So can someone tell me when the election is going to end? Briefly, I'm going to make another comment about this proud moment in our history. Maybe I don't watch enough TV (choke!), but I haven't heard a real explanation why certain people think we can get a "full, fair and accurate" vote count for Florida solely by recounting three heavily Democratic counties. I finally heard Sean Hannity and Bill O'Reilly on Fox last night really press the issue. One Democratic guest finally said something like, "Well, the Republicans should have contested the counts in those other counties." What kind of argument for fairness, accuracy, and completeness is that? Oh, oh...what's that I hear? Gore is on TV as I write this saying he proposes a full recount of the entire state -- because he believes that most of the disputed ballots are in the poorer (heavily Democratic) precincts that use antiquated voting machines. Oh, oh...look at the market sell off as he speaks. [Looks like I'll have to stop out of my PDLI calls....Done.] But even a statewide recount won't address the issues of illegal postmarks on absentee ballots from dangerous military locations, premature network news projections dissuading Florida Panhandle voters in the Central time zone, and so on. On this large scale, we will never have an accurate count of voter sentiment. Maybe next time we'll ensure that all precincts nationwide use modern voting equipment, absentee ballots will be standardized, and the TV networks will cool their projections. It's amazing how many rare or unforeseeable events have converged upon us this year. Not only was it the quadrennial election year, but the presidential election was unimaginably close, contested, and divisive. The newly introduced Euro cratered in a way no one could have foreseen. We've witnessed an economy that has been both overheated and non-inflationary such that the Fed has not known quite what to do with it. We have unprecedented cooperation within the OPEC cartel and a possible war brewing in the Middle East. We've seen a tech stock bubble that brought comparisons to the tulip bubble of a previous century. Our collective fear of missing a continued bull run was greater than our fear of the bubble bursting. [I guess we call that greed.] And then we've seen multiple failed attempts at a Nasdaq bottom. These events have resulted in a market most of us have never seen and probably couldn't imagine in this time of sustained prosperity. Perhaps we've learned something from it. But then again, we're only human. For me, it wasn't the best year to encounter this kind of market. This was the year I left the relative safety of my career within the big corporation to strike out on my own as a management consultant, freelance writer, and part-time trader. In previous years, stop losses quickly became stop gains as good stocks inevitably recovered and kept rising, carrying the indices to record highs. This year, however, my conditioned reluctance to sell after a major gap down on a good stock -- for fear of missing what used to be the "inevitable" short-term recovery -- has been detrimental in most cases. The bounces still come but have usually been short-lived (often only intraday). After crying wolf for a long time, fear mongers like Martin Weiss can finally claim a victory on their tech stock tumble prediction. However, they also predicted crashes on the Dow and S&P, a big spike in gold prices, and the fall of the dollar. Although I've made some money trading short-term puts on QQQ, I anticipated continued strength in tech this year because of their relative immunity to interest rates and cyclicality. The false rallies sucked us in. I suspect many traders will report losses for the year -- many for the first time. I recently read a few simple money management reminders that became especially important this year. They bear repeating here. First, let's talk about margin trading. You need to recognize the overall market trend. Obviously, we have been searching for a bottom on Nasdaq for sometime now, so the trend has been down. In a downtrending or bear market, you must be defensive -- do not buy on margin. You can get aggressive again when the trend has changed decidedly, but don't jump on the first V-bottom or two-day rally. And even in a bull market, avoid using all your available margin since a volatile swing or correction may blow you out of the water. Use trailing stops. If you are like me, you are hesitant to take a big loss on an option when the underlying stock sells off after hours and the option opens the next day way down. You want to wait for a bounce. If the bounce comes in the midst of market strength, you think there might be some follow-through, so you are hesitant to exit into the strength. This is a tough situation, no doubt. If you don't stop out at the next day's open, the bounce may never come, and your position may get worse. And if you hold the position and get a bounce, this year has shown us that it can fade fast - too fast for anyone who is not glued to the screen. All experts agree that the best strategy is to take emotion out of the picture by using objective stops. Perhaps most important of all, diversify your plays. We all know we shouldn't put all our eggs in one basket, but sometimes we fail to realize that individual sectors, and technology stocks as a whole, often move together. A basket of bullish plays on BEAS, ARBA, SDLI, CHKP, and QCOM works great in a bull market, but it is not very diversified in a struggling market. Another good lesson for the year is this: Take with a grain of salt anything you hear from Wall Street's paid analysts, whose recommendations and projections originate from the companies themselves and are tainted by conflicts of interest. How many times this year have we seen an analyst come out with a Strong Buy rating and an ambitious price target, then "pile on" the stock after an earnings miss or general market selloff by downgrading it and lowering the target? Also, with only $3,000 in losses deductible against regular income each year, plan your taxes carefully. Keep in mind that losses beyond $3,000 can be carried forward. If you are holding LEAPS or stocks that are underwater, you might want to consider selling them before year-end. So, what's up for the near term? I've gone a bit more to cash in my long-term account, and I've stopped out of some stocks I've accumulated in my trading account. I also bought some more QQQ puts at today's close, emboldened by OIN's last intraday commentary on CSCO weakness. At today's close, my personal watchlist for short-term plays showed only five green symbols out of about 75 total. They are the VIX (of course), two gold stocks, HD, and USIX. I'll talk about USIX and the ASP sector in my next article. ***********************ADVERTISEMENT************************ From the hottest IPO to the latest market trends, you won't find more extensive business and financial news on the web than by signing up for Individual.com, the personalized FREE service that lets YOU choose what's news. Register at Individual.com now! http://www.sungrp.com/tracking.asp?campaignid=1036 ************************************************************ 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: ***** EXTR $66.69 -3.63 (-12.50) Extreme changed course soon after the open on Monday and the uptrend that we were following has now come to an end. The catalyst for this week's move down was the same old lingering negative sentiment for the Nasdaq and Telecom stocks. The stock offered some profitable trade opportunities last week as it recovered from a recent sell-off, but the volume wasn't strong enough to reverse the longer-term pattern. We noted on the weekend that it was sitting near the top of the current pattern and that prudence was in order. Now we see that the sellers were ready to take the stock back down and stop us out of the play. This is really nothing new for long plays in the past two months as you have to be ready to take small profits off the table when conditions allow. TQNT $36.25 -4.13 (-8.25) No matter how good the fundamentals, it's difficult for a chip stock to rally when the Philadelphia Semiconductor Index (SOX.X) is heading into 52-week low territory. On Monday, in sympathy with a falling chip sector, TQNT dropped $4.13 or 9.27 percent on over 130% of ADV. Today, our stop loss at $40 was triggered as the stock fell another 10.22% closing just above the 50-dma, now at $35.96. While volume today was lower than average, and support at the 50-dma held, we are sticking with our game plan. As a result, we are no longer covering TQNT. ENMD $21.63 -3.75 (-4.38) Hmmmm. ENMD receives a seven year subcontract valued at $7-14 mln for research & development of a federal malaria vaccine, and the stock gets crushed. That breaks down to about $1-2 mln per year in additional revenue for ENMD. Regardless, the stock got caught up in the heavy NASDAQ selling and fell through its support at $22. That happened to be our stop loss level. The selling today on ENMD began right out of the gate and although it may find some relief tomorrow, we will be dropping this Long Term Play tonight. PUTS: ***** No dropped puts today ************************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=1054 ************************************************************** 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 Tuesday 11-28-2000 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/112800_2.asp ************************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=1055 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** A $50.69 +0.19 (-0.25) Agilent started the week off with a major acquisition announcement. In an aim to enhance its software offerings to communication providers, Agilent inked a cash deal with Objective Systems Integrated (OSII). This acquisition and the recent November 17th agreement to sell off its medical division to Philips Electronics (PHG), clearly suggests that Agilent is moving more towards the tech and telecom industries. From an earnings viewpoint, it's expected that the purchase will cut Agilent's profits by about $0.02 in fiscal 2001, but over the longer-term will accelerate growth projections. The news didn't upset the apple cart and A continued to trade higher on Monday, just falling shy of moving through the $52 level. Today, the stock gapped up at the open and raised to immediate resistance at $52.75. Intraday trading was also strong with short-term support inching higher to $51.50, while $50.50 sustained the deeper dips. The bullish moves this week have left the near-term dmas down below the $50 mark. A return to the 10-dma, currently at $46.84, offers an aggressive entry on a pullback, but let's keep our stop set at the $44 mark for protection. A high-volume break through $52 warrants consideration for the more conservative traders to take positions. CELG $59.75 -4.88 (-0.63) As we anticipated in Sunday's write-up, excitement over the upcoming American Society of Hematology (ASH) Meeting helped drive CELG higher Monday. In fact, Biotechs rallied across the board ahead of the event. With the meeting starting Friday, the event has had a history of showcasing upcoming potential blockbuster drugs. News of CELG presenting at the show helped shares rally $4.24 or over 7 percent on higher than average volume. Today however, with a nervous market, traders were eager to take profits and protect capital. With that, CELG fell 7.54 percent, closing right above its 100-dma. Volume today however, was lighter than on yesterday's rally. For aggressive traders, a bounce off the 5-dma at $59.75, the 100-dma at $59.56 or the 10-dma at $56.25 could be targets to shoot for. There is also support at $55 and our stop price at $52. If the market bounces tomorrow, a move above the 50-dma at $60.46, with the buyers returning in force, could allow for a conservative entry. AMGN $66.34 -0.84 (+0.28) Swimming upstream through another turbulent, politically-charged week, AMGN has actually managed to post a gain over the past 2 days. Granted, it is only a fractional gain, but in this market environment, we'll take what we can get. Like most of the Drug and Biotech stocks, AMGN is moving in concert with the daily tides of the election battle; moving higher when it looks like Bush will be the victor and falling back when the Gore camp casts doubt on that possibility. The stock's valiant attempt to break through the descending trendline ($68) was rebuffed again today as negative sentiment ruled the markets, causing all the major indices to close in negative territory. The 50-dma, 200-dma, and the ascending trendline have converged near $65, and this is the level where we expect to witness the next battle between the bulls and the bears. If this level holds up as support, it should provide a launching point for another test of resistance near $68-69. The other alternative will open the door for another retest of support near $62, the location of our stop. At this point, the best entry point looks like a bounce from the $65 support level, although more aggressive traders can target shoot a volume backed bounce from $62. Once the election is resolved, AMGN should be able to finally break above its descending trendline, and that would be a good entry trigger for more conservative players. ******************* PLAY UPDATES - PUTS ******************* HAND $55.63 -3.19 (-2.50) Monday morning buyers scooped up shares of HAND, taking the share price as high as $62.56. Lehman Brothers' restatement of its Buy rating, and accompanying comments that reiterated the company's positive earnings track for December likely gave HAND a boost on Monday. The bullish momentum was however, short-lived and ineffectual. Just before noontime, HAND was swiftly cut down from the $62 level and taken to the underside of the $60 mark on increasing volume. This morning, another feeble attempt to breakout above $63 failed miserably. The downward momentum kicked in full-throttle and the share price saw $54.31 before stabilizing at the $55 and $56 levels. Depending on your risk tolerance, the past two sessions have offered a variety of entry points. As we move forward with this put play, look for continued weakness under the 5-dma ($57.83) coupled with a break of $53 on strong volume to warrant additional positions; particularly if you're more on the conservative side. Although we're keeping our stop loss set higher at $63 to provide room for mild gyrations in trading. YHOO $36.97 -3.15 (-3.91) Yahoo reported Monday that holiday shopping got off to a strong start last week. The company said that transactions were more than double the number that occurred on the Friday after Thanksgiving last year. Despite the good news, YHOO has plummeted both days this week. You know sellers are running the show when you see such optimism quickly discounted. The point being that investors are more concerned with advertising and page views than they are with transactions right now. Tuesday's trading was especially promising with YHOO hitting fresh two-year lows. As we have mentioned before, the stock lacks support in technical terms. This descent may not be resolved until YHOO capitulates in the mid-$20s. Still we will keep an eye out for buyers at the $36 level which held up well this afternoon while the Nasdaq continued to sink. Otherwise, continue to ride the momentum while adjusting your stop loss to preserve profits. Currently our stop is set at $42.00, meaning we will exit on any close above that price. MVSN $42.50 -5.25 (-6.63) It's been very quiet on the news front lately for MVSN and with that, the stock has traded in sympathy with the NASDAQ. Gapping up at the open on Monday morning, the stock encountered resistance at $54. From there, the sellers took control, moving the stock lower for the rest of the day, closing the morning gap and then some. At the end, MVSN closed down $1.38 on heavy trade. The selling continued today as MVSN encountered resistance at the 5-dma, now at $47.47. From there, the stock headed deeper into the red but found support just below the $40 level. Despite a slight bounce at the end of the day, the stock closed down almost 11 percent on above average volume. Another failed test of the 5-dma could provide aggressive traders with an entry as well as a failed rally above resistance at $47 and $50 but be aware that our stop price has been moved down to $49. A break below $40 on strong selling volume would allow traders to jump in for a solid entry. NEWP $61.94 -1.13 (-9.31) Our put play headed ever deeper into negative territory to start the week. Encountering resistance at the 10-dma on a Monday, the sellers took advantage of the temporary strength to sell the stock down. For the day, NEWP dropped $8.19 or over 11 percent. While trading volume was average, the bears were clearly in control. Today, the company announced that it would be making a corporate presentation this Thursday evening at Credit Suisse First Boston's annual Tech conference. The CEO and CFO will be talking about the company's most recent earnings report, provide details about its operations and outline plans for growth. While this helped to lift the stock up in early trading, resistance at $70 was too strong and from there the selling continued, with the stock closing down another 1.78 percent on almost 115% of ADV. Look for another failed rally above the 5 and 10-dmas, at $66.68 and $72.29, respectively, as possible aggressive entry points, as well as resistance at $70 and our stop price of $71. For the more risk averse, a break below support at $60 confirmed by volume would be the target to shoot for. SLR $33.25 -1.44 (-2.31) Solectron opened up over a point on Monday, at $35.50, when the markets gapped open. However, the opening pattern was a big bearish red candlestick, and the stock was not able to break its trend. SLR hovered around $35 for most of the day, then collapsed and closed at $34.68. Overall sentiment was weak, and selling volume rose on Tuesday, as over 5.8 million shares traded, and SLR formed the highly bearish three black crows pattern. It appears that SLR will not have the strength to cross the converged 50 and 200-dmas of $41 any time soon unless overall market sentiment changes. With a P/E of over 43, and a newly assumed burden of additional stock issuance to pay for their takeover of NatSteel, SLR has fallen out of favor with investors. Consider taking a position on a failed attempt to rally past the 10-dma of $34.35, which would likely bring the stock to the 5-dma of $33.81. The next major support level is $30, and after that is the 52-week low of $28. SLR could conceivably fall below its lows if market conditions permit. However, remain cognizant that we are in an oversold market which could rally at any time, and set stops at $37. FCEL $51.69 -4.44 (-10.56) The possible scenario we described on Sunday for FCEL has worked out beautifully for our put play. FCEL actually reached $61.81 on Monday morning during the market rally, but it was a classic bull trap. After another attempt to rally past $61.50, FCEL sold off sharply for the rest of the day. FCEL broke below $60 Monday afternoon and ended up closing at $56.13. FCEL has lost 50% of its value from its high in October of over $100, and is now in a clearly defined down trend. FCEL is deeply below its 50-dma of $68.18, and is resting at the 10-dma of $51.63. A good entry point could be a failed attempt to rally past the 5-dma of $55.43, which could easily send the stock below its 200-dma of $49.42. If it breaks through $49, the next support level is around $38, which hasn't been tested since March. It is a long way down to the low level of $20 in May, but there is a distinct possibility that this level will be tested, depending on market conditions. Investors are looking for value in this market, and it is difficult to value non profitable companies like FCEL. However, the market indexes are now oversold and likely to rally. And with that, effect stops if FCEL closes above $61. VRSN $82.09 -5.09 (-11.16) It's hard to believe that VRSN was trading north of $200 just 2 short months ago, but here it sits, having lost a whopping 60%. The descending trendline that describes the highs during this decline, has steepened and is continuing to pressure the stock to the downside. As expected, the relief rally that began last Friday was a head fake, and the selling returned with a vengeance yesterday morning. Aggressive players got a great entry point as VRSN rolled over from its gap open near $100. The selling didn't let up today, and our play went right back for a test of support near $80. Earnings concerns have been particularly unkind to Internet stocks this week, and judging by VRSN's chart, there is likely more pain to come. Given the stock's failure to penetrate the $100 resistance level, and in an effort to keep the lion's share of our profits, we are moving our stop down to $91. This will make an attractive point for initiating aggressive positions, but make sure that selling volume is picking up before playing. Entries can also be considered as VRSN falls through its recent lows near $78, as this will open the door for the stock to drop to its next support level near $60. VRTS $99.03 -6.97 (-1.85) Just when the bulls thought it might be safe to come out and play, they got hit with another Technology selloff this week. Friday's weak rally continued through the first hour of trading yesterday before the bears came out in force again. The NASDAQ continues to trace new yearly lows and VRTS couldn't dodge the selling pressure, giving up nearly $7 in today's session. Resistance has solidified at $108, keeping our stop at $109 solidly in place. If the selling continues, a test of last week's low of $91 looks like an easy downside target and aggressive traders will use any relief rally as an opportunity to initiate new positions for the next leg to the downside. More conservative entries can be had as the selling picks up steam, pushing VRTS below intraday support near $97. Volume has picked up above the ADV again, and this confirmation of bearish sentiment will likely continue to confirm downside moves. ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1072 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: SGP - Schering-Plough $55.44 +1.06 (+1.94 this week) Schering-Plough is a holding company that, through its subsidiaries, is engaged in the discovery, development, manufacturing and marketing of pharmaceutical products worldwide. The company has three principal product lines; prescription products, animal health products, and over the counter (OTC) health care products. At the head of SGP's prescription drug roster is Claritin, the world's top antihistamine. The company's OTC brand names include Afrin (nasal sprays), Dr. Scholl's (foot care), and Coppertone and Bain de Soleil (sun care). In the wake of the Technology-related selloff this year, Drug stocks are looking pretty healthy. Even the election uncertainty can't keep the buyers away as they are searching for a safe haven for their investment dollars. Although a Bush administration will likely be more favorable to Drug stocks than a Gore presidency, this factor is being overshadowed by the fact that investors are running scared from Technology stock valuations, and this sector is one of the typical safe havens to which they are flocking. While the stock will not post the double-digit gains that momentum investors have become used to, the option premiums are much more reasonable. After consolidating above the $50 support level for over a month, SGP began slowly moving up about two weeks ago, and is now testing resistance between $55-57. Once clear of this obstacle, investors will set their sights on the 1999 high of $60.75. Intraday support at $53 looks like a good level for initiating new positions on any short-term pullback, and we have placed our stop just below at $52. Continued strength can also be used as a trigger for new entries, but wait for buying volume to push the price north of $56 before taking the plunge. As long as the Technology sector remains under pressure, SGP should continue to benefit from investors' search for a safe place for their investment dollars. Also monitor the progress of the election stalemate, as any resolution will likely have an effect on the Drug sector. BUY CALL DEC-50 SGP-LJ OI=8898 at $6.00 SL=4.00 BUY CALL DEC-55*SGP-LK OI=2894 at $2.25 SL=1.25 BUY CALL DEC-60 SGP-LL OI=2594 at $0.56 SL=0.00 BUY CALL JAN-55 SGP-AK OI=9528 at $3.75 SL=2.25 BUY CALL JAN-60 SGP-AL OI=5143 at $1.63 SL=0.75 BUY CALL JAN-65 SGP-AM OI=1759 at $0.69 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=SGP LOW VOLATILITY: CGP - Coastal $83.50 +0.94 (+1.31 this week) Coastal is a Houston-based energy holding company with consolidated assets of $16 billion and subsidiary operations in natural gas transmission, storage, processing and marketing. Coastal and El Paso announced on January 18th a definitive agreement to merge. The merger is expected to be completed during the fourth quarter of this year. Deregulation in the energy sector has spurred competition and consolidation among leading firms. The shifting landscape of the once stodgy sector has captured Wall Street's attention. Along with industry consolidation, CGP is directly benefiting from the flight of beaten down tech investors into the energy sector, who are looking for growth with less risk and lower volatility. That sector rotation boosted CGP out of its 10-week base and above resistance at the $80 level late last week. Since breaking above $80, the stock has continued climbing to new highs this week and looks poised to extend its recent rally as resistance is nonexistent above current levels. New entries could be had a current levels if the energy sector continues advancing early tomorrow. Use CGP's competitors in KMP and WMB as references when confirming sector direction. Additionally, a pullback to support at $82, or lower near the pivot point at $80 could provide additional entry opportunities. However, be aware that we have set our stop at $80 and would drop coverage on CGP should the stock settle below that level. BUY CALL DEC-80 CGP-LP OI=512 at $5.13 SL=$3.00 BUY CALL DEC-85 CGP-LQ OI=237 at $2.06 SL=$1.00 BUY CALL JAN-85*CGP-AQ OI=241 at $4.63 SL=$2.75 BUY CALL JAN-90 CGP-AR OI=105 at $2.56 SL=$1.25 BUY CALL MAR-85 CGP-CQ OI=159 at $6.75 SL=$4.75 http://www.premierinvestor.net/oi/profile.asp?ticker=CGP LOTTERY: GADZ - Gadzooks $21.13 +1.50 (+1.00 this week) Dallas-based Gadzooks is a specialty retailer of casual apparel and related accessories for young men and women principally between the ages of 14 and 18. The company currently operates 376 mall-based stores in metropolitan and middle markets in 35 states. Since breaking above triple-top resistance at $19 late last week GADZ has been on a tear. The stock's advance this week is quite a feat considering the overall market conditions. The fuel behind GADZ's recent rally was the company's bullish earnings report and upbeat guidance delivered in mid-November. We're looking for the recent upgrades and earnings-driven momentum to continue to carry GADZ higher into the holiday shopping season. New entries can be found at current levels early tomorrow if GADZ continues to display relative strength in this weak market. Make sure to confirm a continuation of the recent heavy volume before entering on strength. Additional entries might be found on a low-volume pullback to support just below at $21 or lower at the $20 level. We have set our stop for GADZ at $19.50. BUY CALL DEC-20*EQK-LD OI=154 at $2.06 SL=$1.00 BUY CALL JAN-20 EQK-AD OI= 40 at $3.13 SL=$1.50 BUY CALL MAR-20 EQK-CD OI= 14 at $4.38 SL=$2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=GADZ ************* NEW PUT PLAYS ************* AGGRESSIVE: AGIL - Agile Software $44.88 -5.69 (-7.06 this week) Agile develops and markets product content management software, which is software that enables companies to collaborate over the Internet by interactively exchanging information about the manufacture and supply of products and components. Agile's collaborative suite of software products is designed to improve the ability of all members of the manufacturing supply chain. Since their start in 1996, they have licensed their products to approximately 300 customers including Gateway, Texas Instruments, Lucent Technologies, and Solectron. AGIL's sharp fall on November 17th was in direct correlation to an earnings' sell-off, while today's breakdown corresponds to the NASDAQ's strong transgression below 2800. After hours on November 16th, Agile Software reported positive 2Q earnings. The company beat consensus estimates by one cent. However, sequential revenue growth did slow, from 46% 1Q to only 28% 2Q. Plus, the software maker didn't raise its revenue guidance for the next two quarters as much as analysts would have liked. The B2B jitters and a relatively inevitable post-earnings decline put AGIL in a precarious position for the next morning's trading. That Friday (11/17) AGIL fell sharply, slipping to $48.38 at one point, before resurfacing for a $8.50, or 13.3% loss. Volume was heavy at 3.8 times the ADV! The losses continued into Monday's session with another $4.57, or 8.3% cut; however, the volume on the decline was only average. In the following days, the stock managed to find some stability primarily between $50 and $54, with $48 keeping AGIL afloat during rough trading. But today, AGIL suffered a significant breakdown and chaperoned the NASDAQ down into the dark abyss of "where's the bottom?". Coming off a strong opening above the 10-dma at $55 on Monday, AGIL fell on hard times as the selling accelerated into today's session. The bearish performance left AGIL just a fraction away from today's intraday low. You might consider entering on downward momentum if AGIL demonstrates continued weakness below $45; but expect some support at the $40 level. If you'd rather be more aggressive and play it from the top end of the spectrum, then look for an oversold bounce to take AGIL up to the 5-dma, which is currently at $49.55, and then take entry on a rollover. Our stop is firmly set at the $50 mark in light of the stock's attractive price and existing analysts ratings. BUY PUT DEC-55 AUG-XK OI= 7 at $12.25 SL=9.00 BUY PUT DEC-50 AUG-XJ OI=20 at $ 8.63 SL=6.00 BUY PUT DEC-45*AUG-XI OI=10 at $ 5.38 SL=3.25 http://www.premierinvestor.net/oi/profile.asp?ticker=AGIL ITWO - I2 Technologies $101.69 -11.50 (-11.31 this week) ITWO is a global provider of intelligent eBusiness solutions for supply chain management and enhanced business applications. On June 12, 2000 ITWO merged with Aspect Development (ASDV) to create one of the largest software providers for eBusiness and eMarketplace solutions. TradeMatrix, its Internet marketplace, provides an open digital community powered by i2's advanced optimization and execution capabilities that help manufacturers plan production and other related operations. While ITWO managed to hold up during the NASDAQ weakness in September and October, November has turned out to be a tough month indeed. During this time, ITWO has fallen below all its major moving averages, on the backs of the 5 and 10-dmas. Valuation concerns have plagued the B2B Sector, as Internets across the board, deemed priced to perfection, were discounted for a less than perfect economy. During October, ITWO had been in a wide trading range, from $145 support to $192 resistance. With that support broken, shares of ITWO fell on strong volume, and the possibility of more downside appears highly likely. Today, the company announced that its shareholders have approved an increase in shares to complete a 2-for-1 stock split set for next week, on December 5th. This news had little effect, as the stock dropped over 10 percent on 125% of ADV despite the announcement. While normally we would be cautious about a possible pre-split run-up, weak techincals and negative sentiment in the B2B sector as well as the NASDAQ make the probability of such a move to be low. Just in case, we are setting a stop at $111. A close above this level could suggest a break in ITWO's downtrend. A failed rally above the 5 and 10-dma are aggressive targets to shoot for in entering this put play. There is also resistance at $105 and $110 but confirm a rollover with volume. Support for ITWO can be found at the psychologically important $100 level. A break below this point, with continued selling strength, will allow conservative traders to enter this play. In either case, confirm direction and sentiment with Merrill Lynch's B2B HOLDR (BHH) before initiating a play. BUY PUT DEC-105 QYJ-XA OI= 418 at $13.00 SL=9.75 BUY PUT DEC-100*QYJ-XT OI=1132 at $10.13 SL=7.00 BUY PUT DEC- 95 QYJ-XS OI= 43 at $ 8.13 SL=5.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ITWO ********************* PLAY OF THE DAY - PUT ********************* VRTS - Veritas Software $99.03 -6.97 (-1.85 this week) As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Most Recent Write-Up Just when the bulls thought it might be safe to come out and play, they got hit with another Technology selloff this week. Friday's weak rally continued through the first hour of trading yesterday before the bears came out in force again. The NASDAQ continues to trace new yearly lows and VRTS couldn't dodge the selling pressure, giving up nearly $7 in today's session. Resistance has solidified at $108, keeping our stop at $109 solidly in place. If the selling continues, a test of last week's low of $91 looks like an easy downside target and aggressive traders will use any relief rally as an opportunity to initiate new positions for the next leg to the downside. More conservative entries can be had as the selling picks up steam, pushing VRTS below intraday support near $97. Volume has picked up above the ADV again, and this confirmation of bearish sentiment will likely continue to confirm downside moves. Comments VRTS broke back below the psychological level of $100 and just might be fixin' to close that gap from last Friday. The stock closed last Wednesday at $93.38 and gapped up to $98.63 the day after Thanksgiving. If the negative sentiment continues tomorrow on the NASDAQ, VRTS will likely slide with it. Look for entries on breaks below $97. If the stock finds some relief from the selling, a rollover near resistance at $104 would provide a good entry. BUY PUT DEC-105 VUQ-XA OI= 539 at $12.00 SL=9.00 BUY PUT DEC-100*VUQ-XX OI=2183 at $ 9.13 SL=6.25 BUY PUT DEC- 95 VUQ-XW OI=2743 at $ 6.63 SL=5.00 http://www.premierinvestor.net/oi/profile.asp?ticker=VRTS ************************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=1067 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ The Nasdaq sell-off continues... Technology stocks were drubbed again today amid new valuation concerns. Monday, November 27 Industrial stocks rallied Monday as retailers announced favorable sales results and investors rotated money into defensive issues. The Dow closed up 75 points at 10,546 while the Nasdaq finished down 23 points at 2,880. The S&P 500 index closed up 7 points at 1,384. Trading volume on the NYSE hit 925 million shares, with advances beating declines 1,563 to 1,287. Activity on the Nasdaq reached 1.6 billion shares, with declines beating advances 2,260 to 1,795. In the bond market, the 30-year Treasury dropped 15/32, pushing its yield up to 5.69%. Sunday's new plays (positions/opening prices/strategy): Micron MU DEC35C/DEC37C $2.00 debit bull-call Pfizer PFE DEC47C/DEC45C $0.38 credit bear-call Unibanco UBB JAN25C/JAN25P $3.62 debit straddle Voicestream VSTR DEC130C/D100P $4.00 credit strangle ECI Telecom ECIL DEC22P/DEC25C $0.00 debit collar Micron rallied briefly but eventually retreated on concerns of a slowdown in earnings among technology companies. Semiconductor stocks were particularly weak on the heels of negative analyst comments and the recovering issue ended down almost $4 at $37.12. Unfortunately, analysts now expect further selling in the group. In contrast, Pfizer rallied with other stocks in the drug sector. Our original plan was to open the position with a $0.38 credit, but with the Presidential election activity (Sunday night's vote certification) favoring George W. Bush, we adjusted our initial target slightly higher, as pharmaceutical stocks are expected to perform well in a Republican controlled government. The credit we achieved was $0.50 but we will record the suggested target of $0.38. Now we must monitor the issue for a close above $45 on heavy volume, which will be the first indication that a change of character has occurred. UBB and VSTR both traded in a small range, limiting our ability to achieve a favorable entry. ECI Telecom rallied in early trading, but the option premiums were adjusted lower and there was no opportunity for a bullish collar. Portfolio Plays: The market rallied Monday morning as investors speculated that the contest for the Presidency was nearing an end. However, the optimism quickly faded as technology shares faltered on concerns over the industry's earnings growth. Losses in infrastructure leaders Cisco Systems (CSCO) and Juniper Networks (JNPR) helped drag the Nasdaq lower and Salomon Smith Barney sent chip stocks reeling with comments that Broadcom (BRCM) shares were unlikely to recover anytime soon. The massive sell-off in the technology group has left many leading companies undervalued, but a belief that most issues are still too expensive is leading to a major rotation to defensive blue-chips. Shares of Wal-Mart (WMT), 3M (MMM) and Home Depot (HD) led the gainers on the Dow and Boeing (BA), Caterpillar (CAT), and American Express (AXP) joined the upside activity. The industrial group also got a boost from Merck (MRK) on speculation that pharmaceutical companies stand to benefit from a Bush win because of his hands-off approach to regulation of the sector. Among broad market issues, investors sought biotechnology, precious metals, bank and cyclical stocks but avoided oil service, utility, chemical and brokerage shares. Retail companies were also among the top performers, as holiday shoppers started the Christmas season with a bang. Our portfolio enjoyed a number of winners in the biotechnology sector and the group followed shares of Vertex Pharmaceuticals higher as investors reacted to news of the company's progress with a new product. Shares of Vertex (VRTX) rallied almost $9 after the company said its VX-175 treatment for people infected with the AIDS virus has advanced into the third phase of patient testing. A Vertex spokesman also said that Glaxo Wellcome (GLX), which has a deal with Vertex to sell their protease inhibitor, might apply for marketing clearance for the drug in 2002. Our bullish credit spread has successfully recovered after a recent downward adjustment to the DEC-$65 Put. Other companies in the group also rallied including Invitrogen (IVGN) and Pharmacyclics (PCYC). In the healthcare sector, Medquist (MEDQ) continued to move higher and our recent synthetic position is now offering a favorable early-exit profit. Cardinal Health (CAH) was another bullish issue and consumer product companies Carter Wallace (CAR) and Johnson & Johnson (JNJ) also experienced upside activity. In the retail group, Home Depot (HD) was a solid performer, up $1.25 to $38 and the issue appears to be establishing a solid base near $37. On the downside, Safeway (SWY) succumbed to profit-taking after a week of advances, but Quaker Oats (OAT) managed to avoid further selling in the absence of a potential merger partner and that may be an indication that selling is over for now. One play that continues to plague our bullish portfolio involves Broadcom (BRCM), and if you didn't exit the position (or short the stock) when it moved below near-term support near $150, there is little to do except sell additional premium and wait for the eventual recovery. Our long-term position in Microsoft (MSFT) continues to offer excellent opportunities for adjustment as the share price hovers near $70. Today there was additional bullish activity after the company filed an appeal in an attempt to reverse an order by a U.S. District Court judge that the software giant be broken into two parts. MSFT shares moved higher after the company denied it held a monopoly or had violated antitrust law, and also asked an appeals court to throw out a lower court ruling that would break it into separate companies. In a 150-page brief ahead of oral arguments set for February, Microsoft said District Judge Thomas Penfield Jackson ruled incorrectly that its business practices were anti-competitive. Jackson ordered on June 7 that Microsoft be broken up and also set other remedies, all of which have been suspended pending appeal. Today the leading software maker told the appeals court that Windows is not a monopoly if the market is properly defined, and the company also challenged the finding that it had tried to monopolize the Web browser market. All of the activity is providing an excellent venue for speculation and our position will benefit from any new interest in the company's long-term call options. Tuesday, November 28 Technology stocks were drubbed again today amid new valuation concerns. The Nasdaq closed down 145 points at 2,734 and the Dow was dragged down 38 points to 10,507. The S&P 500 finished 12 points lower at 1,336. Activity on the Nasdaq was moderate at 1.89 billion shares exchanged, with declines beating advances 2,939 to 1,082. Trading volume on the NYSE reached 1.02 billion shares, with declines beating advances 1,689 to 1,158. In the bond market, the 30-year Treasury rose 9/32, pushing its yield down to 5.67%. Portfolio Plays: Technology stocks moved lower today as investors continued to rotate funds into defensive areas of the market. The bullish activity in safe-haven sectors kept the Dow positive for most of the morning, but the Nasdaq slid to new lows for the year. Technology companies have yet to escape from recent selling pressure as the Wall Street works to digest reduced revenue expectations for the future and chip stocks were once again the target of bearish comments. Merrill Lynch said it remains cautious on the group as it is still at risk from a potential inventory correction and it will likely take months to absorb the slowdown in demand. On the bright side, some networking stocks showed strength after CS First Boston analysts issued an optimistic outlook for Cisco (CSCO). The report said that Cisco is not seeing the impact on its current growth rate from the slowing in capital spending that many other companies are experiencing. At the same time, Internet issues struggled as shares of e-tailers slumped after a recent recovery. On the Dow, drugs stocks were among the few net gainers along energy shares and some financial issues. American Express (AXP) and Citigroup (CIT) were among the bullish bank stocks and Alcoa (AA) and International Paper (IP) led the industrial category. In the broader market, retail stocks consolidated from recent gains, which were fueled by optimism about the holiday season and brokerage shares edged higher after Goldman Sachs upped its outlook for Lehman Brothers to "market outperformer." The general consensus among investors is that nobody can buy with confidence, as each rally is met with heavy selling and until that trend changes, the stock market will continue to suffer. Today was indeed an ominous sign for technology issues as the Nasdaq once again closed at a new yearly low. Fortunately, we also have a large number of plays in the industrial group and many of those positions enjoyed positive activity, even as the broader market moved lower. The pharmaceutical sector was among the few favorable groups and positions in Curagen (CRGN) and Pharmacylics (PCYC) continued to recover from the recent sell-off. In consumer products, Johnson & Johnson (JNJ) was a big winner, rallying $2.75 to a new high near $100. The move is important because JNJ broke-out of a recent trading range and is now expected to test its yearly highs. Our position at $90 is at maximum profit and it can be closed early to lock-in gains. Carter Wallace (CAR) edged higher and those of you in the bullish diagonal spread will have to repurchase the short option to remain in the play. The current return is over 100% and that may be enough to warrant an early exit. Our new play in Medquist (MEDQ) has been very impressive and today the issue moved up $1.25 to a recent high near $18. The bullish play is now offering a $1.00 return and that's a great one-week profit. Quaker Oats (OAT) enjoyed a nice bounce, recovering from the cancelled plans for a potential merger and for now, the bullish position at $80 appears intact. However, we will monitor the issue closely for signs of technical failure. Home Depot (HD) was among the few retail issues to advance in today's session and the trading range near $40 appears to be well-established. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our readers asked for some credit-spread candidates in the medical, healthcare and pharmaceutical groups. These industries are all performing well in the recent bearish market conditions and one of these positions may meet your criteria for portfolio suitability. ****************************************************************** FRX - Forest Laboratories $135.88 *** Bracing for a Rally? *** Forest Laboratories develops, manufactures and sells both branded and generic ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over the counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly, or detailed, to physicians by Forest Pharmaceuticals, Forest Therapeutics and Forest Specialty Sales forces. Their products include Celexa, for the treatment of depression; the respiratory products Aerobid, Aerochamber and Tessalon; Tiazac, Forest's once-daily diltiazem for the treatment of hypertension and angina; Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants, and Cervidil, used for the initiation or continuation of cervical ripening. There's little news to explain today's bullish activity in FRX but the issue moved to the top of a recent trading range amid solid buying pressure and excellent volume. Some traders say the rally may be related to the recent announcement that Forest Laboratories will replace Seagate Technology (SEG) on the widely tracked S&P 500 Index. Seagate is being acquired by Veritas Software (VRTS), which is already part of the S&P 500 Index, but the date for the index exchange has not been set. The S&P 500 is tracked by fund managers and changes to the index are generally followed by heavy trading in shares of the companies affected as funds holdings are adjusted to match the popular market gauge. Regardless of the reason, FRX appears to be bracing for a rally and those who favor the drug manufacturing sector can use this position to speculate conservatively on the future movement of the issue. PLAY (conservative - bullish/credit spread): BUY PUT DEC-115 FRX-XC OI=43 A=$0.62 SELL PUT DEC-120 FRX-XD OI=501 B=$1.00 INITIAL NET CREDIT TARGET=$0.50 ROI(max)=11% ****************************************************************** BAX - Baxter International $84.94 ** New Trading Range? *** Baxter International is engaged in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the healthcare field. The company manufactures products in 29 countries and sells them in over 100 countries. Baxter develops, manufactures and markets products and technologies related to the blood and circulatory system. Baxter operates through three segments: I.V. Systems and Medical Products, which develops technologies and systems to improve intravenous medication delivery and distributes medical products; Blood Therapies, which develops biopharmaceutical and blood collection and separation products and technologies; and Renal, which develops products and provides services to treat end-stage kidney disease. Baxter has received favorable coverage from analysts in recent weeks, boosting the company's fundamental outlook as investors look to alternative growth issues in the wake of the recent technology sell-off. Baxter was reiterated a "strong buy" by analysts at CIBC World Markets with a price target of $90. ABN also holds a bullish recommendation for the company with a per share target of $88. U.S. Bancorp Piper Jaffray just upped its price target to $95, after revising the company's 2001 sales and earnings progression to reflect foreign exchange components. In addition, the company said on Monday that it is offering to buy back up to $950 million of its debt securities. Officials said the tender offer is expected to provide BAX with the flexibility to issue non-U.S. dollar denominated debt to match its current liabilities and assets. Today's rally to a recent high suggests the trend will continue and the previous trading-range bottom near $80 should provide adequate support for any future corrections. PLAY (conservative - bullish/credit spread): BUY PUT DEC-75 BAX-XO OI=8 A=$0.31 SELL PUT DEC-80 BAX-XP OI=50 B=$0.88 INITIAL NET CREDIT TARGET=$0.62-$0.69 ROI(max)=14% ****************************************************************** UNH - UnitedHealth Group $116.38 *** Solid Earnings! *** UnitedHealth Group forms and operates markets for the exchange of health and wellbeing services. The company provides a broad spectrum of resources to help people improve their health and well being through all stages of life. The company's Health Care Services segment consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare coordinates network-based health and well-being services on behalf of local employers and consumers in six broad regional U.S. markets. Ovations is a business dedicated to advancing the health and well-being goals of Americans in the second half of life, age 50 and older. The company's Uniprise business is devoted to serving the needs of large organizations. UNH's Specialized Care Services is a portfolio of specialized health and well-being companies. The company's Ingenix business operates in the field of health care data and information, analysis and application. Managed care stocks have been "on the move" again this week amid speculation of a George W. Bush presidential victory and relief that the government will be controlled by a Republican majority. A Republican victory is viewed as more favorable by the managed care sector because the GOP is expected to favor the industry in controversial legislation known as the patients' "bill of rights." The industry has fought passionately over a key provision in the bill that threatens to increase patients' rights to sue their health maintenance organizations for improper denial of care. Managed care issues have also performed well recently because several companies in the group have exceeded quarterly earnings expectations. UnitedHealth is one of those select companies and from a trend and momentum viewpoint, the bullish trend suggests there may be additional upside potential in the near-term future of this issue. PLAY (conservative - bullish/credit spread): BUY PUT DEC-100 UNH-XT OI=117 A=$0.56 SELL PUT DEC-105 UNH-XA OI=160 B=$1.00 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=12% ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1077 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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