The Option Investor Newsletter Thursday 12-21-2000 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/122100_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-21-2000 High Low Volume Advance/Decline DJIA 10487.30 +168.40 10520.50 10299.20 1.42 bln 1680/1234 NASDAQ 2340.12 + 7.34 2423.71 2288.16 2.69 bln 1799/2240 S&P 100 668.58 + 7.08 674.71 656.68 totals 3479/3474 S&P 500 1274.86 + 10.12 1285.31 1254.07 50.0%/50.0% RUS 2000 447.03 + 3.23 450.31 440.78 DJ TRANS 2789.82 + 60.05 2810.63 2728.58 VIX 34.42 - 1.28 37.72 33.41 Put/Call Ratio 0.72 ************************************************************* On the eighth day... Finally a positive close on the Nasdaq. Unfortunately about the only positive thing was the closing number. After a rocky start with a dip below 2300 to 2288 the Nasdaq did manage a rally which held over 2400 for over two hours. Many stocks rallied back to yesterdays highs only to be hit by waves of selling again before the close. The Nasdaq rally failed on heavy volume of 2.6 billion shares as persistent tax selling kept the pressure on techs. The Dow rallied on the back of financials and the hope of an inter- meeting rate cut to gain +168 points. Warnings by tech stocks, telecoms and even paper stocks kept investors guessing about who would be the next big cap to fall. Lucent made it four in a row today with their fourth earnings warning in four quarters. While nobody was surprised the warning knocked the stock back to $12.19 and a new 52-week low. The CEO was on CNBC this afternoon and of course was saying the worst is over. Analysts called it the kitchen sink warning since they cut estimates to as much as a -.30 loss instead of the breakeven quarter analysts had expected. Lucent said they were going to reduce costs by over $1 billion by aggressive cost cutting and forced reductions in staff. They also estimated that revenues would drop about -20%. How much lower can it go? IBM dropped another -4.44 to $81.44 on worries that an earnings warning was imminent. As one of the few remaining big caps still mum on results they are number one on the guess parade. After affirming earnings estimates yesterday HWP fell another -1.06 proving that investors have no confidence even in positive press. CSCO rallied back +2.38 to $38.88 after being decimated by the Foundry warning on Wednesday. Volume was huge at 121 million shares. They are still rumored to be a warning candidate so the bounce today was probably fueled by investors in denial that CSCO could actually trade at $37. Since they announce earnings a month later than the rest of the pack any warning could come in late January so there may still be some weakness ahead. Don't get me wrong I was glad to see any bounce in CSCO since it is the current Nasdaq leader much like GE is the proxy for the Dow. CSCO has lost -$313 billion in market cap or almost half its total capitalization since March. For comparison INTC has lost -$282 billion and ORCL -$97 billion. 3Com announced earnings after the bell today that beat the lowered street estimates by a nickel. COMS had already warned for all the standard reasons. Since spinning off the PALM IPO earlier in the year COMS has dropped to $7.19 today, a new 52-week low. Speaking of PALM the weak revenue numbers in their earnings report yesterday short circuited the entire PDA sector today. PALM lost -12.38, HAND -10.19, RIMM -9.06. Fears of slow post holiday sales was causing the problems. Harmonic Lightwave warned after the close that they would miss earnings due to slowing purchases by telecom companies. That is not new news but they did make a statement that could ripple through the sector again tomorrow. They said AT&T was not accepting any deliveries for this quarter which carried across the sector could cause even more earnings problems. Many of these companies try to fill the pipe at the end of the quarter and the inability to deliver product keeps revenue from being recognized. After the close Ford warned that slowing sales...fill in the blanks. Northrup Gruman (NOC) announced after the close that they were buying Litton Industries for about $4 billion in cash. LIT shares closed at $62 and the purchase price is $80 or about a 30% premium. There were several Fed friendly economic reports today starting with the Philadelphia Fed Survey dropping significantly. The report came in at a -6.1 which was far below the 3.8 consensus estimate. The decline in manufacturing activity indicates the Fed's work is done and the economy it slowing. Would somebody tell Grinchspan please! Weekly jobless claims resumed their upward climb with news of layoffs in the news daily. The number for the week rose +34,000 to 354,000. The 3Q GDP final revision came in at only +2.2% which was the weakest gain since 1996. Consensus estimates were for +2.4%. This was far less than the +5% rate from earlier this year. The volume on the Nasdaq was the fifth largest ever at 2.6 billion shares. This was due to traders closing trades and going flat before the long holiday weekend. With sellers in control there is no burning desire to be long. The typical bullish holiday sentiment was scarce with caution being the predominant emotion. I spoke with Dick Arms today and he indicated that according to his indicators the Nasdaq was the most oversold it had been since he had been keeping records. Still nothing prevents it from going even deeper on the next round of warnings. The remaining high dollar stocks were being sold at any price at the close with BRCM -13, PMCS -14, SDLI -11, BRCD -9 as prime examples of the tax selling rush. Until these previous leaders find a bottom much like CSCO and SUNW did today, the Nasdaq will continue lower. Volume on Friday, the last trading day before Christmas, is typically light even in bullish years. About the only thing you can take for granted is the expected volatility. The VIX spiked to almost 38 this morning for only the second time this year. The other day was the April 14th bottom. On a side note there was a mass sell off of defensive drug stocks at the close. PFE, MRK, SGP and BMY, all of which had seen decent gains while the Nasdaq was crashing, saw huge "sell on close" orders. Without any significant drug news after the bell analysts were guessing that maybe the tide is about to turn from defensive stocks and back to tech stocks. It is just a guess but without any negative news it sounds good to me. The trading strategy for Friday is "enter at your own risk." There has not been a trend change yet. The failed rally on the Nasdaq looked like business as usual and could accelerate if more traders decide to go flat over the weekend. Should we get another downdraft in the morning there is likely to be some bargain hunting Christmas shoppers as well as another round of short covering. Next week is going to be a toss up with a probable bullish bias as the tax selling comes to a close. Still when trading a trend it is always a good idea to actually wait for a trend to appear. Friday's intraday trading could be the turning point but consider your entry points carefully! Good luck and don't buy too soon. Jim Brown Editor ******************** TIME IS RUNNING OUT ! 2001 Renewal Offer!!! Our best offer ever!! ******************** Long time readers know that each December we offer our subscribers an extra value package as a thank you for their support. The package this year contains: 1.) Two of our 2001 Option Expiration Calendar Mousepads (one for home and one for your office) 2.) The expanded 2001 Stock Traders Almanac 3.) A one month subscription to www.IndexSkybox.com 4.) A three month subscription to www.SplitTrader.com 5.) And of course the annual subscription to OptionInvestor.com This package has a retail value of almost $519 which includes $169 of free merchandise in addition to the annual subscription to the Option Investor Newsletter. The total price for this offer is still only $349 which is the regular annual subscription price for the newsletter. The additional $169 of merchandise and subscriptions are free as an added value! Click here for more info: http://secure.sungrp.com/01renewal.asp The terms of the offer are simple. Just renew your OptionInvestor subscription for the annual rate of $349 ($29.08 mo) by Dec-31st and you will get all the free stuff. The supply of mousepads and almanacs is limited so renew now to avoid any delay. You know the newsletter is the best source for option plays, timely market commentary and educational articles. Don't wait until the supplies are gone! Renew now! http://secure.sungrp.com/01renewal.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=1210 ************************************************************** **************** MARKET SENTIMENT **************** Last Chance To Dump The Truck By Austin Passamonte Thursday had all the makings of a relief rally short-squeeze. Massive selling pressure all week, especially Wednesday. A soaring VIX well outside its daily Bollinger band. Fire-sale bargains laying all around us. Rumors of a rate reduction before January 30th. Chart signals looked good. Price action struggled, paused and shot up the charts like we've witnessed so many times before. The rally was underway! Underway until the dump trucks arrived filled with tax-loss lumps of coal. Each time buyers pushed prices up they were met with another round of sellers very glad to see them. Thankfully we use firm stops. This could be our fate once again tomorrow. Friday is likely to be the last high-volume session for year 2000. It promises to be a tug-of-war between buyers looking to catch the next bottom, the last remaining tax-loss sellers and maybe some shorts covering before the long weekend mixed in. Who will win? Any further bearish news could cause buyers to walk away until their hangovers subside. Any hint of bullish news might cause this short-squeeze tinderbox to ignite. No apparent news may result in a struggle to prevail amongst the two. We expect any general mood of the day to accelerate into the close. A strong uptrend would likely result in massive short covering and power a strong rally into the close. A weak & struggling session may find buyers packing up the mini-vans early for a weekend away from further pain. That would leave market fate in the hands of remaining bears. The VIX has spiked to levels demanding our attention. Today's failed rally was not enough to relieve its bullish sentiment. We've seen relentless selling for seven straight sessions in the NASDAQs before today. Next week's light volume, historical bullishness and technical analysis points to a higher market then. It could easily begin tomorrow, but one last round of selling may postpone flagrant green across the boards. Friday promises to be a very tradable day, if just for one session. Make sure you enter in the direction market action is headed, rely on tight stops and small profit targets. Higher price levels could be around the corner, but that corner could extend beyond Christmas day. Be patient and trade the right direction: With prevailing trend. ***** VIX Thursday 12/21 close: 34.70 30-yr Bonds Thursday 12/21 close: 5.44% 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 (12/21/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 705 - 690 7,229 5,333 1.35 685 - 670 1,864 9,842 .19 OEX close: 668.58 Support: 665 - 650 806 5,466 6.78 640 - 620 13 10,818 832.15*** Maximum calls: 730/4,911 Maximum puts : 640/7,279 Moving Averages 10 DMA 702 20 DMA 706 50 DMA 720 200 DMA 771 NASDAQ 100 Index (NDX/QQQ) Resistance: 65 - 63 35,085 31,775 1.10 62 - 60 24,698 44,074 .56 59 - 57 9,513 13,878 .69 QQQ(NDX)close: 56.06 Support: 55 - 53 4,986 19,652 3.94 52 - 50 4,852 15,577 3.21 49 - 47 1,166 9,087 7.79 Maximum calls: 70/53,810 Maximum puts : 60/24,246 Moving Averages 10 DMA 64 20 DMA 65 50 DMA 73 200 DMA 88 S&P 500 (SPX) Resistance: 1350 32,846 34,849 .94 1325 4,082 5,656 .72 1300 2,217 18,997 .12 SPX close: 1274.86 Support: 1250 1,445 12,984 8.99 1225 73 13,815 189.25*** 1200 181 10,682 59.02*** Maximum calls: 1350/32,846 Maximum puts : 1350/32,849 Moving Averages 10 DMA 1330 20 DMA 1334 50 DMA 1363 200 DMA 1435 ***** CBOT Commitment Of Traders Report: Friday 12/15 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 +179 -283 -2089 -770 Total Open Interest % (+2.24%) (-3.13%) (-5.50%) (-2.64%) net-long net-short net-short net-short NASDAQ 100 Open Interest Net Value -1438 -3324 +1316 +2120 Total Open Interest % (-4.45%) (-13.52%) (+2.11%) (+3.23%) net-short net-short net-long net-long S&P 500 Open Interest Net Value +80633 +76502 -90398 -86468 Total Open Interest % (+29.41%) (+42.45%) (-11.61%) (-12.36) net-long net-long net-short net-short What COT Data Tells Us: The disparity remains between the Commercial positions and Small Specs on the S&P 500. Commercials have increased their net-short positions on the DOW while the Small specs have turned net-long. Data compiled as of Tuesday 12/12 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/122100_1.asp ************** TRADERS CORNER ************** Little Holiday Cheer Here In Bear Country By Molly Evans It's happened all rather quickly. Stocks and indexes that not long ago were thought to be invincible are lying in the gutters. A quick thumbing through charts tells the tales. Afterall, a picture is worth a thousand words, right? Not to beat a dead horse, we've discussed this all before and at this point, there's little need to talk about the reasons the markets are being sold. I find it so annoying that all the "experts" of the moment are being given airtime to expound their belief that the U.S. is headed for a recession, that earnings will continue to fall short, and whatever else they're saying these days. This is not forecasting. All it is - is taking the headlines of today and yelling "FIRE" after only the asphyxiated remain. Where were they six months ago? Would the media not give them the time of day then? They probably wouldn't and we probably wouldn't have been listening anyway. Where We've Been and Where We've Landed I snuck into my husband's stash of Christmas presents for me this evening, knowing I'd likely find a good investment book to help me with my article tonight. I was not disappointed. That Dr. Dan, what a great guy! I'm flush for articles for at least another year now. The one I'm thumbing through at the moment is "The Psychology of Investing" by Lifson and Geist, copyrighted 1999. Chapter 11 is entitled, "The Stock Market Hysteria Still to Come." It is obvious that that the author, Basil Chapman, wrote his commentary much prior to 1999. "What happens over the coming few years should mirror well the emotions and values of the country as they change dramatically. In the next and final up phase of this mega bull market, the atmosphere will be charged with excitement. We will accept as normal the glorification of making money, as stocks make people wealthy beyond their wildest dreams. Banks will be vying with one another to handle the public's "portfolio." Eventually, as the stock market pushes into the stratosphere, bread-and-butter money is going to find its way into stocks and options-from bricks to paper." As I watched the time and sales tape whirl today (Wednesday), I saw what I believe to be hopes and dreams killed in a sea of numbers within a red box. As the lower lows just kept coming, I realized these were people's margin accounts being sold out. No one wants to sell the low of the day. But then, another low comes and panic sets in, "Where is THE low?" We honestly can't know this. As Mr. Chapman asserts, "Intraday traders will probably see swings so large that entire fortunes will be made and lost in just one session." Indeed. So how low can this market go? Isn't that what everyone wants to know? Our readers want to know how long they can play their puts while the contrarians want to be the first to be long before that inevitable bounce and short squeeze rally gets underway. Only a fool would try to call a bottom now. We'll see it in a rear view mirror. The Nature of the Beast It's been quite some time since the investing public has seen and survived a true bear market. Consider that 85 percent of the money currently in the market has been here since only 1994. That's novice money. For those who do remember a bear, their recollections must be brief as the bears of '87 and '90 were only two or three months in duration. Normal bear markets have a far different profile. This is the 30th bear market in the last 100 years. The average duration of the previous 29 was fourteen months, but some lasted for several years. Just this afternoon on CNBC, Darby Mullany reported that it would take six years from this point at an eleven percent yearly appreciation for the Nasdaq to see its highs of this year. The eleven percent comes from the average S&P gains over the last eighty years or so. However, I've compiled a chart with returns for the last ten years: The Nasdaq has a much better record than that. We just can't predict the future though. Back to the bear. Bear markets normally consist of two to three legs down, interrupted by fierce but failed rallies. They don't end until all the excesses are wrung out and stocks are extremely undervalued, underbought and might I add, hated. In reference to the Nasdaq, our first leg down was in March. This first leg serves to beat out some of the froth and takes PE values down a few notches to where everyone feels they are a tremendous value again. A rally ensues and lasts long enough to convince all that the first leg was just a swoon and it's safe to come back onboard. When it becomes evident that the problems that caused the first leg down were in fact real, not a just an internal market correction, the second phase begins. Companies report earnings shortfalls, economic numbers point to less favorable conditions and more sellers show up at the door. This takes the market to lower lows and isn't able to bounce until it's very oversold on this leg. The problems are much more widely recognized and consequently the market is more broadly sold off. As previously stated, bear markets are interrupted by fierce, though failed rallies. These amount in large part to "short-squeezes" as those who have shorted stock begin to see their trades turn against them as buyers, seeing all that dollar value at penny prices, rush in to scoop up the perceived bottom. The shorters feel the same pain those on the long side were feeling on the previous decline and a buying frenzy ensues. But then, the problems don't seem to go away. No one wants to be the last one in so they buy quick and await their rewards for having picked the bottom. The money quickly runs out though; not everyone is convinced that there was enough impetus for a bull market to start all over again. The selling machine begins to churn once more. At this, investors truly do panic as they witness the resumption and relentless plunging of their accounts. They've suffered massive losses by now and go in to try and salvage what little there is left. Stocks become undervalued at this point but the investing public simply doesn't care anymore. They've seen all the rallies fail and lack the gumption to get back on the scene. Only the corporate insiders, institutions and pros are there to buy the bottom. This is the way bear markets have played out in history. Will it be that way this time too? Sentiment is still quite high. The American Association of Individual Investors (AAII) reported that the percentage of bulls edged up to 60% again. Only one third of those surveyed were bearish as of December 15th, this despite a more than 50% tanking of the Nasdaq over the past 16 weeks. The American public might be a little nervous but deep down it expects to be bailed out. The 100-point rally on no good news prior to the Fed meeting on Tuesday is pretty good evidence of this belief. They've witnessed capitulation days before; they know if they can hang on just a little longer, they'll get their just reward. And that's why we've gone sixteen weeks without relief thus far. As Sy Harding states in his "Riding the Bear" book, "Whether investors will be made more wealthy or have large losses from participation in the stock market depends not on how large their paper profits are in the bull market, but on how much they give back in the subsequent bear market." I don't mean to sound trite but the best plan is, of course, to trade nimbly and cut losses quickly. From our homes to yours, wishing you all a very Merry Christmas. MKE *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1201 ************************************************************ 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: ***** G $33.00 +0.50 (-0.81) The painful sell-off in the broad markets yesterday caused serious technical damage to our G call play. The stock crashed through all of its major moving averages en route to closing at the $32.50 level. And although it rebounded today, G was unable to hold onto much of its gains as it rolled over near its 10-dma at $33.50. Instead of waiting around to see G sink further, we're cutting our losses quickly. Use any bounce or short covering rally to exit existing positions early Friday morning. PUTS: ***** SBC $44.88 +0.81 (-8.81) More problems at AT&T have brought the sellers right back to the telecom sector. The potential capitulation for SBC on Tuesday after their warning was quickly discarded as shares fell further after comments from Ma Bell. Essentially, AT&T reported on Wednesday after the close that they would miss revenue estimates. This is nothing new to those following the long distance business. Fierce competition has caused prices to fall, thus hurting the top line. SBC traded down under $43 Thursday morning on the news, but did rebound relatively quickly to trend up during the afternoon. Like we mentioned last update, the value players may be lurking in the shadows after the recent carnage. Since we are sitting on hefty profits it is prudent to walk away ahead of any potential relief rally. Use any weakness ahead of the holiday to exit existing positions. ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1177 ************************************************************** 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 12-21-2000 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/122100_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=1220 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** IVGN $76.00 -2.56 (-2.75) Despite closing down $2.67 or 3.29% yesterday on average volume, we added IVGN to our call play list due to its strong intermediate-term uptrend, support close below from the 50-dma (now at $72.20) and its position in the Biotech space as a pick and shovel play. While the stock did give back another 3.26% today, trading volume was light, less than half the ADV, and the bounce off the minor support level of $74 was encouraging. Another bounce off this point or the 50-dma could allow aggressive traders to enter this play, but make sure IVGN closes above our stop price of $72. For the more risk averse, an entry on strength can be had on a break through the minor resistance level of $78. From there IVGN would be poised to take challenge more formidable resistance from the 5 and 10-dma, now at $78.82 and $80.41 respectively. Confirm breakouts and bounces with volume and keep a watch on IVGN's competitors AFFX, CRA and QGENF when making a play. LH $163.75 +3.00 (+6.69) A lone bright spot in the broad-based market weakness has been the Medical stocks. As the #2 clinical laboratory service, LH has seen strong buying interest continue to propel shares higher over the past month. We need to be careful going forward though. Earlier this week, the stock rolled over (due to normal profit taking) at the upper Bollinger band, and daily Stochastics are looking a bit top-heavy. The bright side of the picture is that the two days of profit taking produced another attractive entry point as the stock bounced at $157, just above the 10-dma ($155.13), and recovered all of its losses today. LH looks to be forming another higher low, before charging to new highs again. As long as technology stocks remain out of favor, look for Medical stocks to continue to shine. The bounce that occurred in today's trading session was confirmed by positive moves in competitors DGX and PPDI, so we want to continue to monitor these stocks as a way to measure sentiment in the sector. New entries can still be considered as LH bounces from support between $158-160. Our stop still rests at $158, and any close below this level will spell the end of our play. The upper Bollinger band is converging with the top of the ascending 8-month channel, near the $170 level. While new positions can be considered on a breakout over $165, use caution, as the stock will likely undergo some profit taking again as it approaches the top of the channel. SGP $57.88 -0.63 (-0.06) Yesterday's strong charge to the $60 mark was no doubt a bullish move, but today's action leaves us on alert. SGP failed to rally with the DOW and instead, channeled in a tight range at the $57 support level. Granted, SGP continues to demonstrate strength at these higher price levels and edge fractionally higher to set new 52-week records, but time is money. Lower entries are still considered viable at the current level and corresponding the 10-dma ($57.45), but wait for a big surge of momentum to propel SGP through the formidable resistance line at $60 before taking positions. There was good news swirling around Schering-Plough with announcements of an European approval for its new combination treatment for patients with chronic Hepatitis C. Legal certification of that approval will likely take about four months. Today the company also announced it submitted a New Drug Application (NDA) to the FDA, seeking clearance to market its nonsedating antihistamine desloratadine in a rapidly disintegrating tablet formulation. ******************* PLAY UPDATES - PUTS ******************* PMCS $69.50 -14.38 (-14.38) PMCS is having a terrible week, which is providing huge profits for our put play. The stock has been falling in tandem with the semiconductor sector this week, and the brief Nasdaq rally early in the day did little to boost the stock or sector. It is going to take more than one day of a rally to re-establish strength in the semiconductor stocks. There have been many downgrades of this sector, but the most devastating ones occurred this week. A Merrill Lynch downgrade of CSCO cited slowdowns in corporate IT spending, and CSFB stated that they saw weakness in demand along all stages of the OEM cycle. PMCS has a P/E of over 200, and investors are not venturing back into stocks they perceive as potentially overvalued. Volume is about 30% higher on the down days. PMCS tried to rally past $83.75 during the mid morning rally, but fell back sharply, closing way below the 5-dma of $88.14. A possible entry point might be a failed rally off $72.25, or the next resistance level at $77.63. Set stops at $81, as this could indicate a reverse of the down trend. ARBA $48.88 +0.63 (-19.25) ARBA made a new 52-week low yesterday, with a break below its previous near-term bottom at $51.75, as a weak session for the NASDAQ resulted in a drop of $12 or over 20 percent on over 162% of ADV. Negative comments from Goldman Sachs and Thomas Weisel made about peer CMRC certainly added fuel to the fire sale. Today the stock continued to trade deeper into negative territory, making a new 52-week intra-day low of $43.56, despite closing up fractionally on 130% of ADV. Resistance levels abound, at $50, $51.75 and $53, with a failed rally above these levels allowing for aggressive entry points. With the stock deeply oversold, a pause while the 5-dma catches up with current prices is a possibility so exercise patience when targeting an entry. For traders looking to enter on weakness, a break below today's lows on strong selling volume, confirmed with negative direction in Merrill Lynch's B2B HOLDR (BHH) would be the target to shoot for. To protect what are now substantial profits, we are moving our stop price down from $66 to $52. CELG $34.44 -2.19 (-10.31) A steep fall for the Biotech sector helped our put play on Wednesday, as CELG fell $5.44 or almost 13 percent on almost twice the ADV. Today, the stock attempted to rally but without conviction, CELG closed down another 6%. While we are keeping our stop price at $45 for now, there is overhead resistance at $43, $41 as well as $40. A technical bounce from oversold conditions could lift the stock to these levels allowing aggressive traders, who are willing to take a little risk for higher returns, to take a position. At this point, there appears to be strong support at $33. If the sellers return, taking CELG below this level with conviction, this will allow conservative traders a chance to jump in. With little to no news from the company lately, sector sympathy will play an increased role in the movements of CELG so confirm sentiment with that of the AMEX Biotech Index (BTK) and Merrill Lynch's Biotech HOLDR (BBH). AMCC $53.88 -2.25 (-13.63) Despite a weak rally this morning, it is clear that the NASDAQ bears are still in charge. The only issues that had any luck holding onto their intraday gains were over on the "old-economy index", as technology continued to reel under the onslaught of earnings warnings. AMCC managed to briefly top $62 in the midst of the rally, but gave its gains (and then some) back as it became clear there was just no compelling reason for investors to keep buying. After the bottom fell out, AMCC declined right up to the last 30 minutes before seeing some weak buying that lifted the stock off its low of the day, near $52. We are once again ratcheting our stop down to keep from giving back our gains, and it now sits at $62, right at today's high. A failed rally near our stop or a breakdown through the $52 intraday support level will provide new entry opportunities for aggressive and conservative investors respectively. Volume continues to be heavy, 50% above the ADV in today's session, giving the bulls hope that the bottom may be near. But in the meantime, we will continue to follow the descending trend. Use the broader Networking (NWX.X) and Semiconductor (SOX.X) indices to gauge market sentiment and trade accordingly. Trading contrary to the broader sectors is not prudent in this market environment. EMC $59.25 +3.63 (-8.88) Was that a bottom forming, or did we just get another entry point on our very profitable put play? After 7 big losing days, EMC was overdue for a bounce, having traversed the entire distance between its upper and lower Bollinger bands in 2 weeks. By yesterday's close, the enterprise storage leader had seen a whopping 39% reduction in its value, and this came in the absence of any negative news from the company. In just the past week there have been downgrades from the likes of AG Edwards, Prudential and Bear Stearns, adding to the bearish sentiment. Trading volume was heavy again today, nearly doubling the ADV as buyers finally came back in large enough numbers to push our play to its first positive close in well over a week. The bears didn't go into hibernation though, as they came out to sell the rally shortly after the noon hour. While EMC managed to hang onto the lion's share of its gains today, it looks susceptible to further losses as it is becoming increasingly clear there will be no Santa Claus rally. Just in case the bulls do pull a magic rabbit out of their collective hat, we moved our stop from $69 down to $62 last night. After all, there is no sense giving back our fat profits on this play. Aggressive traders can look for new entries to materialize on a rollover near the $62 level, while more conservative players will want to wait for a break below support at $54 before opening new positions. In either case, use the direction of the NASDAQ and other storage stocks like NTAP and BRCD before putting your money at risk. Trade with the trend. IBM $81.56 -4.44 (-6.25) Investors took yesterday's downgrade by Merrill Lynch to heart! The grim sentiment surrounding the tech sector and IBM's "mum's the word" attitude about 4Q earnings paved the way for additional losses. The looming concern about big cap leaders, IBM and CSCO, announcing their own 4Q warnings kept the marketplace on edge. As a result, IBM continued to get pounded and hit a 52-week low for the second consecutive session, falling to $80.06 in late afternoon trading today. The faltering tech sector and growing nervousness amongst investors continues to provide an optimum environment for IBM to move lower. The current price level rivals the lows IBM saw in the early part of 1999. Another significant move to the downside portends a bleak future for IBM over the short-term; especially with earnings expected around January 16th. An earnings warning would certainly be a nice topper for this put play! Let's keep our fingers crossed for such a profitable event to transpire in a declining market! Consider an aggressive entry after a high-volume rollover near the 10-dma ($90.56) and our recently adjusted $90 protective stop. A bit more modest, but still risky, is to look for entry opportunities around the 5-dma ($87.20) line on a strong downdraft. Of course, a breakdown below the $80 mark offers better confirmation, although your risk portfolio will determine the overall strategy. SANM $61.44 -0.50 (-11.66) SANM exhibited more weakness while some of the other electronic manufacturing stocks, like SLR and TEK, kept afloat in recent sessions. SANM took a sharp $4.06, or 6.1% hit on Wednesday. It sunk lower along side the test and measurement company, Agilent Technologies (A), who until recently was a beacon of light among the techs. In comparison to yesterday's volume of 3.3 times the norm at 14.2 mln shares exchanging, today's action was rather mild, but respectable enough for SANM to experience an almost eight (8) point spread intraday. That type of intraday volatility offers quite a variety of entry points for the more aggressive trader. Perhaps CIBC's new Strong Buy coverage generated some short-lived excitement, although the positive coverage didn't incite a genuine buying spree. Nonetheless, the bears couldn't move SANM below the $60 support. In response to SANM's trading behavior, we've lowered our protective stop to $69 to minimize the upside risk. The new exit point is now far below the espied 10-dma ($75.67), but aggressive entries might, however, be found on high-volume rollovers at the 5-dma ($66.92). Conservative traders may want to keep in cash until there's more downside action and only then, consider buying into the downward momentum. ************************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=1211 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: JNJ - Johnson & Johnson $101.00 +0.38 (+2.44 this week) Johnson & Johnson is one of the world's largest and diversified makers of healthcare products. JNJ has three distinct business segments serving the consumer, professional, and pharmaceutical markets. As a consumer you're probably most familiar with their over-the-counter brands like Tylenol, Band-Aids, and "no tears" baby shampoo. But Johnson & Johnson reaches beyond that realm and expands all aspects of its product lines through acquisitions. The Johnson & Johnson healthcare giant experienced a solid run through the psychological century mark this week and is now headed straight into its 4Q earnings release. The company is bullishly predicted to disclose double-digit gains on January 23rd, BEFORE the market. From a broader perspective too, the health-care sector tends to be a protective shelter during slumps in technology stocks; and furthermore, health-care stocks aren't generally hurt by an economic slowdown. Think about it. First, there's the obvious "defensive play" scenario of why the industry leaders: JNJ, MRK, SGP, PHA and AHP can hold their own amid volatile shifts in the marketplace. And second, consumers may put off buying that shiny new car or bigger house, but let's be realistic, no one can afford not to take care of medical problems. The increasing aging population is also a major factor. For instance, JNJ's arthritis medicine, Remicade, has won widepsread use in battling a disease that afflicts primarily the elderly population. And so we have a company who boosts a solid business model and a great performing stock. To boot, JNJ is currently trading above the historical split-level of $90; although the last time JNJ split its stock was in 1996. Honestly, this isn't currently considered a factor in regard to our call play on JNJ, but rather, a fine point. We're initiating coverage on sector strength, stock-specific performance, and the potential of a run into earnings next month. The 5 and 10-dmas at $98.49 and $99.59, respectively, offer a more enterprising level of entry, while a momentum breakout above the $102 resistance provides a more discriminating approach for the conservative types. Take entries into this steady mover only after confirming an advancing marketplace and bullish internals. Our stop is set at the $98 level to avoid getting trapped in a flat trading channel. BUY CALL JAN- 95 JNJ-AS OI= 7395 at $8.00 SL=5.75 BUY CALL JAN-100*JNJ-AT OI=11334 at $4.38 SL=2.75 BUY CALL JAN-105 JNJ-AA OI= 9550 at $1.94 SL=1.00 BUY CALL FEB-100 JNJ-BT OI= 136 at $5.75 SL=3.75 BUY CALL FEB-105 JNJ-BA OI= 133 at $3.50 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=JNJ LONG TERM: QQQ - NASDAQ 100 Index Trust $56.06 +0.34 (-7.81 this week) The NASDAQ 100 Index reflects NASDAQ's largest companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale and biotechnology. Launched in January 1985, the NASDAQ 100 represents the largest and most active non-financial domestic and international issues listed on The NASDAQ Stock Market based on market capitalization. Well, the QQQs are back on the play list once again. They are looking attractive at current levels of $56. The NASDAQ is extremely oversold from a technical standpoint and after the recent sell off, it's due for a relief rally. While concerns over the economy and earnings prospects loom over the entire market, long term entry points abound. The premise of this play is to take advantage of the oversold condition and the expectations that we are going into an environment of easing interest rates. This trade can be put on with February or March contracts as to avoid the exponential time decay of front month contracts. Keep stop loss orders however. To obtain entry in the QQQ calls, look for bounces from support at $54, where buyers showed up today. The downside risk is $50, the site of our stop loss. As a point of reference, when the QQQs began trading in March 1999, they opened at $50. A break below this level would be of concern. Overhead, sellers have been showing up at $58. A break above this level could bring clear sailing to $62. BUY CALL JAN-55 QQQ-AC OI= 4330 at $5.38 SL=3.50 BUY CALL JAN-56 QQQ-AD OI=12325 at $5.00 SL=3.25 BUY CALL FEB-58 QQQ-BF OI= 72 at $5.75 SL=4.00 BUY CALL FEB-60*QQQ-BH OI= 1330 at $4.88 SL=3.25 BUY CALL MAR-60 QQQ-CH OI= 9849 at $5.88 SL=4.25 http://www.premierinvestor.net/oi/profile.asp?ticker=QQQ AOL - America Online $37.66 +0.41 (-11.30 this week) Founded in 1985, America Online is the world's leader in interactive services, Web brands, Internet technologies, and e-commerce services. Through its strategic alliance with Sun Microsystems, the company develops and offers easy-to-deploy, end-to-end e-commerce and enterprise solutions for companies operating in the Net Economy. This Long Term Call Play, which we were stopped out of on the 18th, is being initiated again. AOL fell this week on news of a TWX earnings warning, citing weaker advertising revenues at its cable networks in the 4th quarter. On Wednesday, AOL-TWX reiterated that their merger will close at the end of the year or in the early days of January. AOL also warned federal regulators that it would face a substantial burden if it was unable to close the merger by year-end. Valuations are attractive for AOL at these levels and in the long term view, AOL has much upside potential once the merger is completed. Option premiums are relatively cheap, even out into February and March. Look for entry on bounces from intraday support at $35. On the upside, a breakout over $40 would also be encouraging for an entry. A breakdown and close below support at $35 and we would not initiate any new positions. Keep stops tight as the market remains very volatility. BUY CALL JAN-35 AOE-AI OI= 5845 at $5.60 SL=3.75 BUY CALL JAN-40 AOE-AH OI=20866 at $2.95 SL=1.50 BUY CALL FEB-40*AOE-BH OI= 559 at $3.90 SL=2.50 BUY CALL FEB-45 AOE-BI OI= 1586 at $2.35 SL=1.25 BUY CALL APR-45 AOE-DI OI= 5359 at $3.40 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=AOL LOW VOLATILITY: BBT - BB&T $36.94 +0.81 (+3.19 this week) BB&T is a fast growing, highly profitable financial holding company with $57 billion in assets. Its bank subsidiaries operate more than 800 branch offices in the Carolinas, Virginia, West Virginia, Kentucky, Georgia, Maryland, and Washington, D.C. BBT's upward trend is rather impressive in light of the recent market environment. The rally in shares stems from the fact the Fed is on the verge of lowering interest rates. And although shares of BBT have been discounting an ease in interest rates for quite some time, we feel the stock has more upside in the coming months. As for entry points, the $37 level should prove to be a critical hurdle for BBT to clear. It marks the stock's high from October of 1999, and would provide a solid entry point if BBT breaks above. Thereafter, it should be smooth sailing up to the $40 level - BBT's all-time high. Additionally, pull backs to support at $36 and lower near the 10-dma at $35 would provide entry possibilities. Just make sure the buyers step in with big volume before entering on a pullback. Speaking of volume, the trading activity in shares has been rather robust over the past week as BBT has pushed higher, which bodes well for our play. We've set our stop near the 10-dma at $35 and would drop the play if shares closed below that level. BUY CALL JAN-35*BBT-AG OI=668 at $2.69 SL=1.50 BUY CALL JAN-40 BBT-AH OI= 30 at $0.56 SL=0.00 High Risk! BUY CALL FEB-40 BBT-BH OI= 0 at $1.06 SL=0.00 Wait for OI! BUY CALL MAR-40 BBT-CH OI=164 at $1.38 SL=0.75 http://www.premierinvestor.net/oi.profile.asp?ticker=BBT SLC - Sun Life Financial Services $25.19 +0.88 (+2.25 this week) Sun Life Financial Services of Canada is the new holding company for Sun Life Assurance Company of Canada. Sun Life is the new identity of a select group of companies providing individuals and corporations with a diversified range of products and services, meeting their needs for wealth accumulation and management as well as protection. Shares of Canadian-based Sun Life have established a solid up-trend recently. The company is benefiting from a shift in the Canadian financial services landscape and investors have welcomed the change. The stock has been sailing higher using its 10-dma as support since mid-November. The 10-day is now located at the $23.50 level, which is also the site of our protective stop. New positions can be added on a pullback to that level. However, make sure the buyers step in with strength at $23.50 before entering on a dip. Bounces off support near $24.50 and $24 could also be considered for entries. Also, new entries could be found if SLC continues climbing towards blue sky. Watch for a break above its intraday high at $25.25 on heavy volume. BUY CALL JAN-25*SLC-AE OI=13 at $1.44 SL=0.75 BUY CALL FEB-25 SLC-BE OI=35 at $1.81 SL=1.00 BUY CALL MAY-25 SLC-EE OI=59 at $2.88 SL=1.50 http://www.premierinvestor.net/oi.profile.asp?ticker=SLC USB - U.S. Bancorp $29.75 +0.75 (+3.38 this week) U.S. Bancorp is a multi-state bank holding company which offers full-service brokerage services at approximately 100 offices. Providing banking services through its subsidiaries, the company is engaged in consumer banking, commercial lending, financing of import/export trade, foreign exchange, and investment services. USB also has various non-bank subsidiaries engaged in financial services such as trust, commercial and agricultural finance, data processing and leasing. Benefiting from the recovery in Financial stocks, helped by anticipation of a more friendly interest rate environment, shares of USB have been on a nice upward trend for the past month. Adding better than 38% since the stock bounced at the 200-dma (then at $21.50) in late November, USB really made a strong technical move this week. Helped by the Fed's change to an easing bias with respect to interest rates, USB broke above the $27 resistance level on Monday, and since then has moved up to begin testing the $30 resistance level. Confirming the recent up-trend, volume has been more than 50% above the ADV all week, with nearly 5 million shares trading hands in today's session. Pullbacks over the last month have been halted at the 10-dma (currently $27.44), and as long as the positive environment for Financial stocks continues, traders should be able to initiate new positions near this level as we head into the end of the year. The stock has been riding its upper Bollinger band all week, and we would recommend waiting for the pullback before jumping into the play. Don't forget to check the health of the Banking sector (BKX.X) for confirmation that the bullish trend is intact. BUY CALL JAN-30* USB-AF OI=5878 at $1.38 SL=0.75 BUY CALL JAN-32.5 USB-AZ OI= 20 at $0.56 SL=0.00 BUY CALL FEB-30 USB-BF OI= 759 at $2.00 SL=1.00 BUY CALL FEB-32.5 USB-BZ OI= 278 at $1.06 SL=0.00 BUY CALL MAR-30 USB-CF OI= 10 at $2.63 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=USB ************* NEW PUT PLAYS ************* AGGRESSIVE: BLDP - Ballard Power Systems $58.50 -3.88 (-10.25 this week) Ballard Power Systems, Inc. was founded in 1979 to conduct research and development in high energy lithium batteries. In 1983, Ballard began developing proton exchange membrane (PEM) fuel cells. Today, these systems have evolved into pre-commercial prototypes proving the practicality of the Ballard fuel cell and fuel cells are widely viewed as viable alternatives to conventional technologies. Ballard's focus is now on working with its strategic partners to develop competitive products for mass markets by reducing cost and implementing high volume manufacturing processes. For reasons both fundamental and technical, we are adding BLDP to our put play list. Recent changes proposed in California's Zero-Emission Vehicles program have afflicted the stock price, as the possibility that regulators will decrease the number of mandatory fuel cell powered cars has driven fear deep in the hearts of investors. While BLDP's CEO attempted to put a positive spin on this, traders are not buying and with that, the stock traded down sharply on the news. As well, recent downgrades from CS First Boston, from Strong Buy to Buy, and Bear Stearns, from Buy to Neutral, have not helped the stock. Add to that a President-elect who is perceived to be more friendly towards conventional fuel source companies and it is clear that the fundamental picture does not favor upside movement anytime soon. The technical picture is just as bleak, with the stock moving deeper into the red on the back of the 5-dma (now at $64.42). Already well below all its major moving averages, BLDP has broken a number of key support levels, $70, $65 and most recently $60. These levels should serve as formidable resistance going forward, with a failed rally above these points serving as aggressive targets for entry. We are placing our protective stop at $65 so make sure that BLDP continues to close below this price to ensure that downside momentum remains intact. If the selling continues tomorrow, wait for BLDP to take out today's low of $57.25 for a more conservative entry. In either case, confirm direction with volume and sector sympathy with peer FCEL. BUY PUT JAN-65 DFQ-MM OI=504 at $10.25 SL=7.00 BUY PUT JAN-60*DFQ-ML OI=123 at $ 7.38 SL=5.25 http://www.premierinvestor.net/oi.profile.asp?ticker=BLDP RBAK - Redback Networks $37.25 -10.25 (-45.75 this week) Founded in 1996 and headquartered in Sunnyvale, Calif., Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable operators, and service providers to rapidly deploy broadband access and services. The company's market-leading Subscriber Management Systems (SMSs) connect and manage large numbers of subscribers using any of the major broadband access technologies such as Digital Subscriber Line (DSL), cable, and wireless. To deliver integrated transport solutions for metropolitan optical networks, Redback's SmartEdge multi-service platforms leverage powerful advances in application-specific integrated circuit (ASIC), IP, and optical technology. This is one week that investors of RBAK would like to forget. With continued weakness in Tech stocks as well as some strategic moves by competitors and another round of earnings warnings, shares of the former high-flyer have been cut by more than half in the past four trading sessions on accelerating volume. With fellow Networker FDRY and large customer of Networking companies AT&T both issuing earnings warnings, it's no wonder that RBAK and its peers have been trading sharply lower. What's more, Ciena announced on Tuesday that it would acquire privately held optical firm Cyras and in doing so, put itself in a position to be a direct and formidable competitor to RBAK. With CSCO looming overhead and CIEN not far below in the metropolitan optical networking food chain, the risk profile of investing in RBAK has certainly increased. This caused a mass exodus of shareholders, despite soothing words from WR Hambrecht, who reiterated their Buy rating and $120 price target, saying that the selling was overdone. CE Unterberg also initiated coverage with a Buy rating but for traders, the negative price/volume action speaks louder than words. At this point, there is resistance overhead at $45, our stop price of $44 and $40, with a failed rally above these levels serving as aggressive entry points. In doing so, confirm a rollover with the return of selling volume. If the bears continue to be in full control of RBAK, look for a break below today's lows of $36.93 as a possible target to take a position. When making a play, look to the AMEX Networking Index (NWX) for guidance as well as companies in the DSL sector such as CMTN and GSPN. BUY PUT JAN-45 BUK-MI OI=143 at $12.00 SL=9.00 BUY PUT JAN-40*BUK-MH OI=811 at $ 8.63 SL=6.00 http://www.premierinvestor.net/oi.profile.asp?ticker=RBAK HAND - Handspring $33.94 -10.19 (-13.63 this week) HAND is a provider of handheld computers, and is best known for its Visor Handheld computer, based on the popular PALM operating system. The company's platform is known as Springboard, and provides the advantage of an open expansion, which can be used to integrate modules such as a digital camera, an MP3 player, a two-way pager, a global positioning module and content such as books and games. Since the Visor's introduction, more than 2500 developers have signed on board to receive support in developing these modules, adding to the unit's rapid adoption. While it took a little bit longer than the PC sector, it looks like the speculative bubble in the Handheld stocks has finally popped. After rolling over near the $100 level in October, HAND has been trading in a sharply descending channel, pressured by the deteriorating sentiment on the NASDAQ. It seems nothing related to technology is safe from the selling pressure, and this point was driven home when PALM announced earnings last night. Although they beat the street by a penny, the revenue number didn't sit well with investors and they sold the stock mercilessly today, slashing 32% from the stock. HAND felt the guilt-by-association selling, as it gave up more than $11 on volume more than double the ADV. Today's decline pushed HAND solidly below its $40 support level, and if conditions don't improve, the stock could soon be challenging its IPO price near $27. The severity of the recent decline has pushed HAND through its lower Bollinger band , and combined with the fact that Stochastics are now oversold, a relief bounce is not out of the question. While new positions can be considered as HAND declines below the $33 level, a more prudent approach may be to wait for a bounce before playing. We are placing our stop at $40, as this level should provide solid resistance in the event of a relief rally. Aggressive traders can enter new positions when the bulls run out of enthusiasm and the stock rolls over at or near this level. Competitors PALM and RIMM are also in bearish trends, so confirm weakness in these stocks before initiating new positions. BUY PUT JAN-45 HQA-MI OI=347 at $14.00 SL=10.50 BUY PUT JAN-40*HQA-MH OI=674 at $10.38 SL= 7.50 http://www.premierinvestor.net/oi/profile.asp?ticker=HAND ********************** PLAY OF THE DAY - CALL ********************** LH - Laboratory Corp. of America $163.75 +3.00 (+6.69 this week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Most Recent Write-Up A lone bright spot in the broad-based market weakness has been the Medical stocks. As the #2 clinical laboratory service, LH has seen strong buying interest continue to propel shares higher over the past month. We need to be careful going forward though. Earlier this week, the stock rolled over (due to normal profit taking) at the upper Bollinger band, and daily Stochastics are looking a bit top-heavy. The bright side of the picture is that the two days of profit taking produced another attractive entry point as the stock bounced at $157, just above the 10-dma ($155.13), and recovered all of its losses today. LH looks to be forming another higher low, before charging to new highs again. As long as technology stocks remain out of favor, look for Medical stocks to continue to shine. The bounce that occurred in today's trading session was confirmed by positive moves in competitors DGX and PPDI, so we want to continue to monitor these stocks as a way to measure sentiment in the sector. New entries can still be considered as LH bounces from support between $158-160. Our stop still rests at $158, and any close below this level will spell the end of our play. The upper Bollinger band is converging with the top of the ascending 8-month channel, near the $170 level. While new positions can be considered on a breakout over $165, use caution, as the stock will likely undergo some profit taking again as it approaches the top of the channel. Comments LH delivered for us earlier in the week and we're looking for the leader to take us higher into the weekend. If shares of LH do pullback tomorrow as detailed above, we'd look to enter on any dip. Look for buyers to show up near $161 or lower near the $160 level. If LH continues to climb into the weekend, consider shooting for entries on an advance past the $165 level. The more conservative traders might look for entries on a strong rally past $167 on strong volume after confirming strength in DGX and PPDI. BUY CALL JAN-165 LH-AM OI=515 at $11.88 SL= 9.00 BUY CALL JAN-170*LH-AN OI= 11 at $ 9.50 SL= 6.50 BUY CALL FEB-170 LH-BN OI= 0 at $15.88 SL=11.50 Wait for OI! http://www.premierinvestor.net/oi/profile.asp?ticker=LH *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1202 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Dow Stocks Lead The Way... The stock market ended higher today as blue-chip technology issues rebounded from a string of losing sessions. Wednesday, December 20 The stock market slid precipitously today amid growing concerns over the slowdown in corporate earnings. The Nasdaq sunk to its lowest level in over a year, closing at 2,332 after downgrades on a number of leading technology issues renewed worries of a hard landing for the U.S. economy. The Dow closed down 265 points at 10,318 and the S&P 500 index ended down 40 points at 1,264. The trading was fast and furious with volume on the NYSE at over 1.4 billion shares, with declines beating advances by 1,941 to 1,014. Trading volume on the Nasdaq reached 2.84 billion shares, with declines beating advances 3,298 to 828. Bonds rose sharply with the flight to quality and the 30-year U.S. Treasury rose 1 2/32, while its yield fell to 5.40%. Tuesday's new plays (positions/opening prices/strategy): Conseco CNC FEB12C/FEB10P $0.38 credit synthetic NS Group NSS APR10C/APR7P $0.06 credit synthetic Tektronics TEK JAN40C/JAN27P $0.62 credit synthetic The bearish market activity provided a number of excellent entry opportunities in our new positions. Both Conseco and Tektronics traded significantly lower at the open, and the initial premiums in those plays were higher than expected. Our first instinct was to switch to the JAN-25P in the TEK position, as it traded closer the value of the long option (JAN-40C) however, we will track the original play as offered. The synthetic position in NS group did not meet our target credit, but there will likely be additional entry opportunities in coming sessions. Portfolio Plays: Stocks moved lower today with all of the major indices falling below key support levels as investors unloaded issues in almost every sector. Tax-loss selling increased the downward pressure and rumors of an impending market-wide capitulation was common among floor traders. Among technology companies, Cisco Systems (CSCO), Hewlett-Packard (HWP) and Intl. Business Machines (IBM) were hammered after Merrill Lynch analysts slashed their ratings on the bellwether issues citing among other things, an imminent slowdown in corporate IT spending. At the same time, analysts at Credit Suisse First Boston lowered their growth forecasts for the semiconductor sector to reflect a worsening situation with inventories and the overall macroeconomic environment. On the Dow, J.P. Morgan (JPM), American Express (AXP), Citigroup (C), Home Depot (HD) and International Paper (IP) led the blue-chip average lower. In the broader market, defensive issues in the drug and consumer product segments edged higher but concerns of an impending economic slowdown weighed heavily on most sectors. Our portfolio experienced the same type of bearish activity as the broader market and there were few positive events to review. One of the Reader's Request positions made the news when AT&T (T) reported it sees top-line growth at 2% to 3% in the 4th quarter and will reduce its quarterly dividend to $0.03 from $0.22 to help bolster cash reserves. The stock fell below $19 in regular trading and slumped further in the after-hours session. Another play in that category, the synthetic position in Pepsi Bottling (PBG) was negatively affected by the slump in sector shares. The downward move came in sympathy with another leading issue in the group as Coca-Cola (KO) reported it expects fiscal year 2000 unit case volumes to increase by about 4%, which is about a percentage point below what many analysts were projecting. The downside potential for this stock is substantial, so be sure to establish definite loss-limit points or a minimum cost basis for the issue. Among industrial issues, AMR Corporation (AMR) and Safeco (SAFC) were the only bullish plays in the portfolio. In the technology group, Qualcomm (QCOM) has performed terribly since being listed as a credit spread candidate. The issue has moved down to a new trading range near $75 and that is below our break-even basis in the bullish play. A few readers chose to exit the position on Tuesday's rally to $92, but those that remained in the play are now facing a difficult decision: hold, adjust or exit. Since I have recently received some requests for ways to make adjustments to a credit spread, I decided to publish this article regarding the use of protective STOPS and other spread-closing techniques. "Bull-put" credit spreads are one of my favorite strategies and there are a few ways to limit potential losses or even capitalize on a reversal (or transition) to a new downward trend. There are three common methods to exit or cover a losing credit spread and the alternatives range from "legging-out" or rolling into another spread to "shorting" the underlying issue. First, you can simply close the position at a debit and register the loss. There is also Jim's popular technique; covering the short position as the stock moves through the sold strike. This is a great method for bailing out on an issue that has reversed course but you must also be prepared to buy it back in the event of a recovery. Another option is to attempt to "roll-out" of the spread for small profit (or at least break-even). To roll-out of a credit spread, place an order to close the short option anytime the stocks trades (and preferably closes) below technical support or a well-established trend line (moving average) on heavy volume. Of course there are other, more precise signals that can be used but the technique is based on the probability that the stock should continue to move in that direction. After the sold (short) position is repurchased, wait for the stock to lose momentum and sell the long position to close the entire play. It's a difficult technique to perform when emotion enters the formula but it works very well once you become experienced at it. The key to success is using the technique at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. The great thing about spreads; once you understand them, you can turn many losing plays into winning ones with the effective use of STOPS and by rolling out-of and into new positions when the stock moves against you. When you do lose, at least you have reduced your losses by leveraging against another position. In all cases where an attempt to recover a losing position is made, you must be prepared for further draw-downs and have thorough knowledge of the strategy being employed. Thursday, December 21 The stock market ended higher today as blue-chip technology issues rebounded from a string of losing sessions. The Nasdaq closed up 7 points at 2,340 and the Dow finished up 168 points at 10,487. The broader market also rallied with the S&P 500 index rising 10 points to 1,274. Trading volume on the NYSE hit 1.4 billion shares, with declines beating advances 1,684 to 1,241. Activity on the Nasdaq was heavy at 2.6 billion shares exchanged, with declines beating advances 2,238 to 1,808. In the U.S. bond market, the 30-year Treasury fell 1/32, pushing its yield to 5.40%. Portfolio Plays: Industrial stocks rebounded today, battling back from the recent sell-off on strength in retail and consumer stocks. In addition to support from defensive issues, the Dow was also bolstered by bullish activity in Microsoft (MSFT). The software giant rallied after announcing plans to purchase Great Plains Software (GPSI), a supplier of mid-market business applications, in a deal valued at about $1.1 billion. Microsoft officials said the acquisition would offer more efficient software for small business customers and investors applauded the news. Wal-Mart (WMT), J.P. Morgan (JPM), Home Depot (HD), and International Paper (IP) were also among the outstanding blue-chip performers. On the downside, a decline in AT&T (T) shares after Tuesday's profit warning limited the Dow's bullish activity. Technology stocks struggled to rally on strength in bellwether issues, with Intel (INTC) boosting the Nasdaq in early trading. Opposing the trend were Internet stocks and networking issues also struggled after a profit warning from Lucent Technologies (LU). Analysts noted that 420 companies have now warned of lower earnings for the fourth quarter, and the bias for revenues in the first half of 2001 is decidedly pessimistic. Among broader market issues, retail, financial, airline, chemical, oil service and paper stocks advanced while major drug, precious metals, biotechnology and utility stocks generally consolidated. The Spreads portfolio enjoyed a few favorable moves but overall, the bullish activity was not very convincing. With the Nasdaq so far into bear-market territory, down more than 50% from highs earlier in the year, analysts say that any rally will be suspect and continued worries about earnings and the slowing economy are likely to weigh heavily on the group for some time. One positive aspect of the recent volatile market has been the outstanding performance of the Straddles section. In addition to the success of the Advanced Fibre (AFCI) position, which is has provided an $8.00 return on $13.50 invested, Compass Bancshares (CBSS) has also moved into the "profitable" category. Today the straddle traded as high as $4.00 credit on $2.75 invested for one month, and the options don't expire until April. Another position that recently edged into the positive column is British Telecom (BTY) and since the overall play is now profitable, we will watch for an opportunity to pay for the entire original debit with the Put option, leaving the call option risk-free with unlimited upside potential. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** PFE - Pfizer $42.50 *** Revenge Play! *** Pfizer is one of the world's largest pharmaceutical and consumer healthcare companies. The "new" Pfizer was formed earlier this year, following the pooling of interests merger between Pfizer and Warner-Lambert and the company now represents a significant consumer business encompassing many of the world's best-known brands including Halls, Tetra, Benadryl, Sudafed, Listerine, Desitin, Schick, Visine, Ben Gay, Lubriderm, Zantac 75 and Cortizone. The company operates through four main operating units: Pfizer Pharmaceuticals Group, Warner-Lambert Consumer Division, Pfizer Animal Health Group and Pfizer Global Research and Development. We offered this play last month and were disappointed when it expired exactly at the break-even cost basis for the overall position. The recent rally, that thwarted our hopes for a profitable play with December options, has once again failed to produce a "break-out" and today's bearish activity suggests the issue will remain in a trading range for some time. There were a number of potential reasons for the downward move: the delay of an NDA for European approval for Zeldox; publication of favorable data on a competitors' experimental vaccine for treating Alzheimer's disease; and an analysts' recommendation to avoid Pfizer as it is a high P/E drug stock. Regardless of the reason for the activity, the premiums for the (OTM) call options are slightly inflated and the potential for a future rally is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. PLAY (conservative - bearish/credit spread): BUY CALL JAN-46.62 PFE-AT OI=8384 A=$0.75 SELL CALL JAN-45.00 PFE-AI OI=14146 B=$1.12 INITIAL NET CREDIT TARGET=$0.43-$0.50 ROI(max)=30% B/E=$45.43 ****************************************************************** PDG - Placer Dome $10.31 *** Gold Sector Rally! *** Placer Dome and its subsidiary companies, joint ventures and associated companies are principally engaged in the exploration for, and the acquisition, development and operation of gold mineral properties, although significant quantities of silver and copper are also produced. The company's share of gold is derived from mines in Canada, the United States, Australia, Papua New Guinea, South Africa, and Chile. One of our readers suggested a play on the Philadelphia Gold Index (XAU), but we couldn't find any favorable positions in those options so we decided to look for an issue that trades in a manner similar to that average. With the recent bearish trend in broad market equities, Precious Metals stocks have performed very well and based on the bullish technical outlook for PDG, this position provides an excellent opportunity to speculate on the future movement of gold prices. Target a higher premium initially, to allow for a brief consolidation in the underlying issue. PLAY (conservative- bullish/synthetic position): BUY CALL JAN-10.00 PDG-AB OI=23272 A=$0.88 SELL PUT JAN-10.00 PDG-MB OI=10075 B=$0.43 INITIAL NET DEBIT TARGET=$0.00-$0.12 TARGET ROI=20% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $395 per contract. ****************************************************************** - STRADDLES - ****************************************************************** ADCT - Adc Telecommunications $17.00 *** Technicals Only! *** ADC Telecommunications offers a broad range of network equipment, software and integration services for broadband, multi-service networks that deliver Internet, video and voice communications over telephone, cable television, Internet, broadcast, wireless and enterprise networks. The company's broadband, multi-service network solutions enable local access, high-speed transmission and software management of communications services from service providers to consumers and businesses over fiber-optic, copper, coaxial and wireless media. The company also offers network equipment, software and integration services within three major product groups: Broadband Connectivity, Broadband Access and Transport, and Integrated Solutions. This position meets our criteria for a favorable straddle; 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. As with any play recommendation, it should be evaluated thoroughly for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL FEB-17.50 TLQ-BQ OI=222 A=$2.69 BUY PUT FEB-17.50 TLQ-NQ OI=550 A=$3.00 INITIAL NET DEBIT TARGET=$5.50-$5.62 TARGET ROI=25% ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. 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