The Option Investor Newsletter Sunday 12-24-2000 Copyright 2000, All rights reserved. 1 of 5 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/122400_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 12-22 WE 12-15 WE 12-8 WE 12-01 DOW 10635.56 +200.60 10434.96 -277.95 10712.91 +339.37 - 96.69 Nasdaq 2517.02 -136.25 2653.27 -264.16 2917.43 +272.14 -259.09 S&P-100 684.23 - 5.25 689.48 - 37.58 727.06 + 31.07 - 15.17 S&P-500 1305.95 - 6.20 1312.15 - 57.74 1369.89 + 54.66 - 26.54 W5000 11981.50 -112.40 12093.90 -572.60 12666.50 +629.10 -316.20 RUT 462.99 + 4.96 458.03 - 21.04 479.07 + 22.23 - 15.03 TRAN 2849.93 +151.25 2698.68 -181.27 2879.95 +116.80 - 86.74 VIX 31.52 + .32 31.20 + 5.07 26.13 - 5.46 + 2.01 Put/Call .61 .94 .59 .61 ****************************************************************** History returns with a roar! By Jim Brown With an explosion of good will and holiday euphoria the markets roared open at the bell and never looked back. On what is typically a low volume trading day the normally bullish sentiment returned with a vengeance. Santa Claus came early with a +176 point gain on the Nasdaq and +148 gain on the Dow. Almost nothing was spared the outpouring of investor Christmas money with many stocks gaining +20% to +30%. Is it the rally everyone has been waiting for or just a holiday aberration? Several factors will help us decipher this puzzle. There was no material good news between Thursday's close at the low of the day and the gap open on Friday morning. There was still a flood of earnings warnings but no high flyers. Warning Friday was UAL, LZB, DNY, STTS, CRO, AVCT, CRN, GLK and MDS to name a few. You probably don't recognize most of those symbols and maybe that is the reason the market did not drop. Actually many of those stocks finished positive for the day! Some of the news that prompted the strong market was positive talk by analysts on some of the biggest tech stocks. John Jones at Salomon Smith Barney came out on IBM saying the earnings warning worry was way over done. He feels they will make their quarter and called them the super star of the tech sector. IBM rallied off Thursday's 52-week low of $80 for a +7.44 gain and added +38 points to the Dow. Other major Dow movers included AA +3.06, CAT +1.88, XOM +2.06, HWP +2.81, IP +2.69 and MSFT +3.0. Notice anything about the big gainer list? AA, CAT, XOM, IP are not tech stocks. That means there was not a total sell out in favor of the Nasdaq. We should be encouraged about that. Investors in those stocks are normally longer term investors and that means breadth is alive and well. Other analysts made positive comments about SUNW, ORCl HWP and EMC which helped the promote the positive tech sentiment. The Nasdaq was not without some real superstars with stocks that closed at the lows Thursday on heavy volume rocketing double digits on Friday. Check out these gains, JNPR +29, CHKP +25, QLGC +18, CIEN +17, BRCM +16, BRCD +16, EMLX +15, NTAP +14. Almost anything tech rallied back to recover yesterday's losses and then some. Did I miss some news item about a magic economic recovery? Did the Fed cut rates over night? Not to my knowledge. The miraculous gains were the combination of several factors. First the January effect is still alive and well. The outflow of cash from stock funds, -$9.5 billion this week alone from equity funds, will stop abruptly next week. Retirement funds, Christmas bonuses and gifts will begin flowing toward the markets. Funds that have been hoarding cash for year end redemption's will start to breath easier and put some of that cash to work with expectations of more to come. Another factor was the end of tax selling. Not really but the biggest chunk anyway. Funds faced with skeleton work forces next week dumped stocks this week when it became apparent that the Santa Claus rally was not going to make an appearance. Most of the heavy volume on Thursday was funds cleaning house. With only five trading days left in the year time was running out. The Nasdaq was also simply way oversold and the apparent final capitulation Thursday afternoon was the signal for bargain hunters to start shopping. You won't see anybody complaining today but let's look at the numbers. I said on Thursday night we would probably get a short covering rally on Friday and the shorts ran for cover after the opening gap failed to roll over as it has so many times in the past. We got the relief bounce, it held and the highly profitable shorts started covering with wild abandon. The spiking stocks drew buyers fearing a runaway which fueled the gains. You know it was short covering when stocks like JNPR gain +$29 in one day from a close of $89. That is a +31% gain. CIEN +29%, CHKP +22%, QLGC +29%, BRCM +21%, BRCD +24%. Do you think funds were throwing money at stocks up +25% for the day? Not hardly. The fear from the shorts was that the holiday history lesson would repeat itself next week as well with a continued rally and they just wanted to be flat before the close. One of the most spectacular performances was by SUNW which posted a +$5 gain or +18%. A new pick on Wednesday night at $27.44, SUNW gapped open and only briefly hesitated on the JDSU scare before closing at the high of the day. Good volume and a steady climb all day. After the opening gap the Nasdaq ran up to 2500 and stopped dead for the rest of the morning. The midday dip you will see on the chart was due to JDSU. DB Alex Brown made some negative comments to their sales force about JDSU and the possibility of a warning and the rally came really close to self-destructing. JDSU dropped from $48 to $37 on the news before a qualification took the sting out of the rumor. CIEN dropped from $77 to $67 in sympathy as well as drops in the other big caps also. It was the fear that every daytrader feels just when they get all their trades in place and profitable and suddenly the balloon bursts. Fortunately it turned into a buying dip and there were plenty of buyers ready to take a chance after seeing those same stocks run away from them at the open. Intel also failed to take part in the rally after Banc of America Securities and Wachovia Securities both expressed concern that Intel will miss its already lowered estimates. Even with the +7.6% gain today the Nasdaq finished the week down -136 points, and -38% for the year. The two-day Dow rebound however added +200 points for the week. With the Nasdaq closing over 2500 analysts could not say enough good things about the future. The economic reports provided no smoking inflation gun with Personal income up +0.4% and Spending up +0.3%. Durable Goods rose +2.3% in November compared with a drop of -6.5% in October. No major surprises and the economy is still slowing. This seems to continue the feeling that the Fed will make an inter-meeting rate cut the second week of January. The Fed funds futures are slowly factoring in almost a 44% chance. Adding to the pressure on the Fed is the anemic earnings forecast for next year. First Call said that based on the current consensus estimates for the S&P 500 companies, earnings growth is expected to be up only +5.9% for the current quarter and +6% for the first and second quarter of 2001. Compared with the +24% growth rate from earlier this year that is a recession! Granted it is not negative growth but the impact to the economy will feel like a recession. This is what is prompting the analysts to expect a rate cut. The Nasdaq has priced in this earnings drought and is now prepared to rally on the expectation of better times ahead. The tech market tends to anticipate the results of rate cuts by two to three quarters in advance. This is all analyst speak and expectations can change faster than bids in a falling market. Let the Fed say anything next week that even remotely suggests they will wait for the next Fed meeting and storm clouds will instantly appear. The economic calendar next week is devoid of anything meaningful so there will be nothing material to take investors eyes off the market. Next week should be exciting. Tuesday we will see if the rally has legs or it is just another one day wonder. The week is normally up but we went from seriously oversold to some absurd gains in only one day. The VIX is still hovering around 32 which considering the monster rally on Friday is disturbing. It means there is still a lot of uneasiness in the market. The -60 point drop in the Nasdaq on the JDSU rumor illustrates this point. The last major tax selling day is Tuesday with the last three days of the year reserved for window dressing portfolios for those year-end statements. With no economic reports to speak of, all eyes will be focused on the December Non-Farm Payroll Report the following Friday. This would be the trigger for an interim rate cut. Earnings challenges for next week should be slim, but the following week could be a killer. Historically 43% of the earnings warnings for the fourth quarter occur in January. The first week is normally when companies get their first look at the year-end books and decide to confess early and avoid the rush. Still, in spite of the clouds still on the horizon, the week after Christmas is historically up. If you are in the market then tighten up those stops. Expect some profit taking on those rockets from Friday. If you are on the sidelines then spend some time this weekend deciding what you are willing to pay for the stocks you want next week. Set some limit orders and hope for a profit taking dip to get a fill. If you sat by Friday in frustration as stocks ran away from you, be patient. You may get another chance. A JDSU warning next week or somebody similar and we could be right back where we started again. There is only seven days left to take advantage of our special annual renewal offer and get all the free stuff. Don't wait any longer! http://secure.sungrp.com/01renewal.asp I would like to take this opportunity to wish everyone a very Merry Christmas. Take some time out from your investing pursuits and reflect on why you are doing it. Most of us will never benefit from the accounts we are building. The benefits will go to our families and that may be the best reward of all. We all need to remember who we are working for and if the truth be known those same family members would probably rather have us spend more quality time with them now instead of promises about later. Just a thought. The markets are closed for the holidays. That is not just a coincidence. Trade smart, choose your entry points carefully! Jim Brown Editor ******************** ONLY SEVEN DAYS LEFT 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=1221 ************************************************************** ************** EDITOR'S PLAYS ************** Another fun week for longs. I was stopped out of all my naked puts on Monday when the market rolled over at the open. I patiently waited until Thursday to put them back on and found myself hesitant to pull the trigger at the close. With the stocks I was watching dropping like a rock I chose to stay on the sidelines. The gap open on Friday killed call players but I was able to put my naked puts back on and capture some decent gains from the rest of the day. I was still expecting a pullback at the close so I limited my positions. As I was sitting and watching the +$15, $20, $25 gains on the fast moving techs I started looking for some stocks that had not run out of sight that I could play calls for January. With premiums on the fast movers approaching the price of margin on the stock I refuse to pay those prices. Naked puts on cheaper stocks do not carry the risk/reward ratio of the fast movers so calls are the answer. I am going to list some of what I would call lottery plays for January. These stocks have been so beaten up that any buying interest should provide an upward move. I am not making any claims as to the value of the stocks or the companies, just that there is likely to be some money move into the cheaper stocks in the next week or two. If that happens we could see some decent profits. Do your own research and decide if any of these work for you. The Internet sector and stocks like KANA and LBRT have been so decimated that they are likely to see investors in denial come back into them simply because of the appearance of value. CMGI, SFE, ICGE are $5 stocks but their image is much higher. If the Nasdaq rallies these cheap stocks will benefit from association. Just keep your stops tight because $5 stocks can still get cheaper! I like VOD which has had a solid bottom at $34 for four months with several bounces back to $40. PHG has strong support at $32 and is rolling to $40 and back. KANA pulled a dead stop at $9 three days ago and gained on Friday. RFMD put in a higher low at $23 and could run +$10. FNSR has strong support at $25 and could run +10 easily. LBRT made a higher low and has been up two days. These are highly speculative plays and you should not put a lot of money into any one play. Treat them as a lottery play and set your stops at about half your cost. They are much cheaper than CIEN, BRCM and BRCD but CHEAP is not the same thing as GOOD. They can be good plays but only time will tell. Good Luck, good trading! Jim Brown ************************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=1213 ************************************************************** **************** MARKET SENTIMENT **************** Santa Rang The Rally Bell By Austin Passamonte Santa Claus rang Friday's closing bell at the big board and he sure picked the right day for sledding into town. One more session like Wednesday would've found Santa getting his bell rung while trying to escape from the floor instead. Mobs of angry traders might have shot his reindeer and pilfered the sled of its bag filled with toys. Just kidding. Everyone loves Santa. Especially when the NASDAQ is back over 2,600 and the SPX above 1300. Did you ever think those would be upside targets to strive for by year's end? Believe it or not we are now poised for a serious rally up the charts, one that could actually last beyond two sessions. Will it? We didn't say that; we said it COULD. Time to dial up the charts and see what's cookin': Offering a break from the tedium of put-plays and their massive profit returns, we now have bullish divergence on the S&P 500 daily chart. See how price action made lower lows while stochastic slow bar values (red line) held fast? That indicates we should test/exceed the previous highs right before this setup developed, which would be +/- 1435 from early November. The 20-DMA at 1333 and descending trend line at 1370 area offer the next two overhead resistance points. Excellent places to exit one trade or enter another as they break or hold. We'll keep our eye on these. (Daily Chart: NDX) No divergence in the NDX/QQQ, but daily stochastic & MACD signals are turning positive as prices release from the lower Bollinger band. Three main points of overhead resistance are seen but could be mere speed bumps along the way. We think the 70 range by Friday next is possible. Here's a test for you: Where are stochastic values from late November until now versus index price levels over the same period? Are they both making lower-lows, higher-lows or do we now see early divergence? The Dow has two descending trend lines and it's upper Bollinger band to clear before testing 11,000. Hey, the upside seldom unfolds fast as downside moves do! Put-plays are easier than call plays when it comes to quick execution, without question. Speaking of put plays, the Drug index may have seen an end of its ascension for now. Bearish divergence, failing stochastic values and the threat of breaking out from the long-term ascending channel (bear flag) will also merit watching for bearish plays. Friday was a good start to what may be our next market reversal. we're not ready to call a long-term bottom just yet but welcome any strong move the market is willing to offer. High-odds are we will enjoy a very tradable rally at the least. Tax selling is probably over. Any traders left holding onto losers have seen prices improve over the last two sessions and it's very tough to cut losses when they are bouncing. Something to do with greed. Maybe INTC will return to $70 after all and let them out at breakeven... no sense in dumping it now. Bad news is being discounted. Massive selling across every sector has slain so many stocks in sympathy that by the time their turn comes around to warn, they've already been cut off at the waist. Expectations for the "January effect" are alive & well. Cash on the sidelines will go to work. New Year's resolutions to make more money will bring fringe players back to the table. Falling oil prices are seen as a market boon. Will they remain lower? We'll watch the energy future's market and COT data for clues about what the commercials are doing over there. They are hedging against lower prices for Crude Oil and Natural Gas with net-long positions at this time. Unlike equity commercials who speculate, energy commercials are large producers and manufacturers predominantly concerned with locking in fixed prices. Therefore, they tend to stake positions in the opposite direction of expected market action. Interest rate cuts? Yep, it's a lead-pipe lock and traders will rally in anticipation. We wonder what a pre-FOMC rally that blows all markets back up the charts will do for rate-reduction chances. Does the Fed really ignore the stock markets? Would the NASDAQ at 4,000 and Dow at 11,200 cause them to drop rates immediately or sit back one more time? Will a powerful rally boost chances for an inter-meeting action? Hmmm. Let's deal with this rally first. Keep in mind that the overall trend is still down and if we rally it will be bucking the trend. Don't think for a minute that a solid bottom is in place without further proof. What proof? Here's what We're looking for: 1. Higher subsequent highs than the last rally reached. If we fail to break the descending trend lines and turn them into support, new market lows await us on the downside. 2 Interest rate cuts. We will have no confirmed bottom until at least the first cut is officially announced and there is no promise when. It could surprise us next week or wait beyond the next meeting if markets show new-found signs of life. 3. COT report. We want to see the S&P 500 historical short covered and resting on net-neutral. When the big boys signal money is flowing positive, we can too. This week's report is mostly unchanged by official compilation after Tuesday's close. There were reports of large SP00S blocks trading to the long side late Wednesday and Thursday after data was compiled. Next Friday's report will paint a clearer picture as to where interest lies then. The COT report will not let you catch the very bottom tick of any market turn ever, so don't even worry about that. Settle for knowing a bottom is in place and ride the next 1,500 NDX points up once it occurs. We're expecting a sustained rally, but prepared for whatever the market chooses to do and strongly encourage the same for you. ***** VIX Friday 12/22 close: 31.52 30-yr Bonds Friday 12/22 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. Saturday (12/23/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 725 - 710 8,451 3,401 2.48 705 - 690 9,426 5,268 1.79 OEX close: 684.23 Support: 680 - 665 2,612 10,572 4.05 660 - 640 364 11,180 30.71*** Maximum calls: 730/5,013 Maximum puts : 600/10,245 Moving Averages 10 DMA 698 20 DMA 705 50 DMA 719 200 DMA 771 NASDAQ 100 Index (NDX/QQQ) Resistance: 70 - 68 69,785 18,702 3.73 67 - 65 86,834 20,093 4.32 64 - 62 26,833 34,905 .77 QQQ(NDX)close: 60.50 Support: 59 - 57 12,976 14,290 1.10 56 - 54 23,551 15,860 .67 53 - 51 1,061 12,163 11.46 Maximum calls: 70/50,380 Maximum puts : 60/21,822 Moving Averages 10 DMA 63 20 DMA 65 50 DMA 72 200 DMA 88 S&P 500 (SPX) Resistance: 1375 11,227 10,035 1.12 1350 35,221 34,638 1.02 1325 5,339 5,887 .91 SPX close: 1305.95 Support: 1275 600 12,785 21.31*** 1250 1,356 16,968 12.51 1225 93 13,560 145.81*** Maximum calls: 1350/35,221 Maximum puts : 1350/34,638 Moving Averages 10 DMA 1323 20 DMA 1333 50 DMA 1363 200 DMA 1434 ***** CBOT Commitment Of Traders Report: Friday 12/22 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 -588 +179 -1646 -2089 Total Open interest % (-7.52%) (+2.24%) (-8.22%) (-5.50%) net-short net-long net-short net-short NASDAQ 100 Open Interest Net Value +3385 -1438 -4239 +1316 Total Open Interest % (+19.05%) (-4.45%) (-8.24%) (+2.11%) net-long net-short net-short net-long S&P 500 Open Interest Net Value +66148 +80633 -81998 -90398 Total Open Interest % (+36.56%) (+29.41%) (-11.60%) (-11.61%) net-long net-long net-short net-short What COT Data Tells Us ---------------------- Indices: The disparity remains between Commercial positions and Small Specs on the S&P 500. Commercials and Small Specs have reversed their positions on the NASDAQ 100 with the Commercials now moving to a net-short position and the Small Specs moving to a substantial net-long position. Interest Rates: Commercials are still heavily short T-Bond and T- Note futures. (Bearish) Currencies: Commercials heavily short Euro futures. May consider it artificially propped. (Bearish) Energies: Commercials are net-long Crude Oil and Unleaded Gas while net-short Heating Oil & Natural Gas. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. Crude Oil and Unleaded Gas (Bearish), Heating Oil and Natural Gas (Bullish) Metals: Commercials are moving from net-long towards neutral in Gold, could be under distribution. Silver, Copper and Platinum are net-short. Bonus:(Soybean Meal - Huge commercial net shorts. Futures traders may consider selling distant-month call credit spreads!) Data compiled as of Tuesday 12/19 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/122400_1.asp *************************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=1204 ************************************************************ *************** ASK THE ANALYST *************** What's Working? By Eric Utley The bear market in tech stocks has changed the game for many of us. And until tech reasserts its leadership role, there are other ways to take money out of the market. Although less sexy and volatile, the cyclical stocks are making a huge comeback and stand to continue advancing as Doc Greenspan and his bunch begin lowering interest rates. In this week's column, I've provided a list of names to start your search for profit opportunities in the cyclical space. Additionally, many readers have asked about the phenomenon revolving around stocks' inclusions into major indices, most notably the S&P 500. If you're not aware, Standard & Poor's regularly makes changes to its many indices including the aforementioned, Small Cap and Mid Cap indices. The premise behind Standard & Poor's changes is the index funds which mirror its indices are required to buy an equity ahead of its inclusion. The furious buying that accompanies a stock's inclusion into an index can be capitalized upon by traders ahead of the indexers. The index funds generally start buying like mad about an hour before the close on the day in which a stock is to be included into a particular index. I've witnessed the index-effect on many occasions and have traded the event a few times. It's by no means a sure way to make money - that doesn't exist. But it's another strategy to be aware of. If you'd like to study the event, watch shares of Applied Micro Circuits (AMCC) near the close of trading on Friday, December 29th. AMCC is scheduled to replace J.P. Morgan in the S&P 500 after the close of trading on Friday. Morgan is being acquired by Chase Manhattan Bank. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- The Cyclical Story Please advise the names of some solid cyclical stocks which I can follow closely for investment. Your remarks on each stock and its behavior pattern will be greatly appreciated. - Thanks, Sunil I'd be interested in reading about your take on cyclicals. - Thank you, Paul The recent shift in the capital markets from the tech sector and into the interest rate sensitive names has prompted several requests from our readers for a strategy to capitalize on the move. The major move in shares of deeply cyclical companies began about three months ago - in early October. I failed to direct our readers to the shift taking place at that time. However, I don't believe the rotation out of tech and into the cyclical names is complete. As I regularly write, the market tends to discount economic events six or nine months into the future. And I don't feel the market is done discounting. But before we go on, let me make three quick points: 1 - I'm not bearish on tech, over the long-term. Historically, the tech sector has outperformed and that trend WILL continue. The greatest risks are found in tech and it follows that the greatest rewards accompany that risk. However, for the next six months or so, tech could remain dormant. Does that mean you can't trade tech? No! You can, but it takes discipline. Can you still invest in tech? Yes! Investing in the best of tech will likely yield the highest returns two or three years out. 2 - Have you heard the Muppets on CNBC talk much about the stealth rally in select sectors such as Savings and Loans or Paper Stocks? No! Why? Because institutions are busy accumulating stock in the aforementioned sectors. When will we hear about the boom in cyclicals on CNBC and in the general financial media? About six or nine months out when shares are trading near record highs and the pros are looking to dump stock on retail investors and rotate back into the tech sector as the economy picks up. 3 - There's been talk recently that the U.S. economy is headed into a recession. I don't believe most of what I hear. First, I don't think Doc Greenspan - the grinch he is - will let growth contract at a detrimental rate. Second, I don't believe we'd be witnessing such major advances in sectors such as Savings and Loans and Regional Banks if the U.S. economy was truly headed into a major recession. Growth might slow or even contract, but in the bigger scheme of things, the market is telling us that everything's gonna be alright! Back to business. The general premise behind the Cyclical Story right now is that the Fed is expected to begin easing interest rates in order to stimulate growth in the U.S. economy. The companies that benefit first from an interest rate cut are those that are most dependent on the business cycle - hence the name cyclical. We know the Fed is going to cut rates soon because the market has been telling us that in the form of rallies in paper stocks and select financials, among many others. As you glance over the charts of the companies below, you'll notice that shares are trading at or very near 52-week highs. That said, it's obvious that the moves in these groups of stocks have already begun, but they still have room to climb. Since the major move has already begun, it may be prudent at this time to wait for a pullback, which is exactly what the big institutions will be doing. Watch for bounces off key support levels and confirm with strong volume coming in on the reactions. You're not going to see explosive rallies that may have been enjoyed in the past in the tech names. But what we're likely to see is a gradual accumulation in shares of companies that will immediately benefit from a lower cost of capital. As you research the names that follow, keep in mind this is in no way a recommendation to go out with guns blazing and load up on these stocks. The following names are merely a starting place to look for ways to put capital to work for the next two or three quarters. Do your own research. Delve into sectors, and compare and contrast competitors. And as always, use discipline with any market operation! I'd also like to make clear that this is only one man's opinion based on observation. My role here is to relay what I see in the market in an attempt to educate our readers and help them make money. In the end, it's up to you the reader to gather all the data and make an informed decision and use discipline. Finally, I'd like to see a few more cyclical names make it onto the request list in the coming weeks. I know I can count on Sunil to provide a few!!! The following list encompasses a wide variety of sectors ranging from machinery makers to chemical makers to regional banks. The following names appear in no particular order: FED DSL WM GSB NDE BNKU AMFH ASFC GPT DME CF SIB CFB WFSL BOH PVN COF SLM HI OLN DD DOW PPG CBT ROH ICI UK EMN DE JAC CAT TEX IR IP BCC WY MEA TIN BOW PG ---------------------------- Applied Materials - AMAT Now that AMAT broke support at 38.5 what would be the next support level and recommended entry point if a bounce was to occur with volume? I have been monitoring this and would like to go long but would appreciate your technical opinion. Would leaps be a good choice? - Thank you, Joe Thank you for writing in, Joe. In my very humble opinion, I think $40 was the key support level for shares of Applied Materials to trade above. The $40 support level had held for quite some time until early last week when the sellers gained enough momentum to drive shares below that key level. Do shares of Applied have more downside from their current levels? Maybe. In the current bear market for tech stocks it is so difficult to pick the bottom. The fact that Applied is a chip stock, I think, makes it even more difficult. The semiconductor sector is suffering from inventory issues right now, and until those problems are clearly resolved and demand picks up again I don't see a real catalyst to lift shares of Applied from their downtrend. However, if you're going to attempt to trade from the long side in Applied, I do feel you're on the right track, Joe, in looking for bounces off major support levels. In a bear market, it is NOT very wise to buy breakouts because they are likely head fakes or bull traps. Furthermore, it's absolutely critical to set extremely tight stops when attempting to trade any relief rallies! If your time horizon is three of four years out you can probably pick up some shares or leaps on Applied here and make some money down the road. The safer play, as opposed to buying bounces of support levels, is to wait for shares of Applied to break their downtrend. But we need to see a pickup in the chip business before entering on such a move! Let's take a look at some support levels and the downtrend I keep referring to on the charts below. Long-Term AMAT ---------------------------- Triad Guaranty - TGIC Can you comment on either of these, please: Insight - NSIT Triad Guaranty - TGIC. - Thanks, Dave I'm glad you requested Triad, Dave, as it represents one of the many stocks that will benefit from a friendlier Fed. In fact, shares of Triad could have been included in the list of cyclical stocks that I provided above. Shares of Insight, on the other hand, aren't faring so well. But let us focus on the positive for now and that means taking a closer look at Triad. Triad is a holding company that provides insurance coverage to mortgage bankers, brokers and savings and loans. Mortgage interest rates dropped to a one and a half year low last week, which follows our premise that interest rates in general are coming down and that means bigger profits for the likes of Triad. As you can see on the chart below, shares of Triad have been anticipating an easier interest rate environment for quite some time. The risk here is the stock has discounted a lot of the good news we'll be hearing six or nine months down the road about the pick-up in the economy. But as I mentioned before, I still think these types of stocks have room to run. For shares of Triad, their all-time high lies around the $42 mark, which provides you with a price objective if you choose to get into the stock now. And as far as entry points go, I think it would be prudent to wait for a pullback especially after the stock's big ramp last week. As you can see on the chart below, shares of Triad are on autopilot. ---------------------------- Emulex - EMLX If people are questioning valuations in the current environment, why do EMLX and BRCD continue to have such strong buying after every dip? It seems people would say it sold down for a reason and isn't worth the high pe ratio? - Thanks, Tom You bring up a very interesting conundrum, Tom. Why are shares of Emulex still flying high while the rest of tech has been whacked? Especially given the stock's lofty triple digit multiple! What's more, when you look at Emulex's competitors in Celestica, Foundry and Brocade all of their share prices are well off their 52-week highs. Emulex's share price is a mere $20 off its 52-week high. But why? I can think of two related reasons why shares of Emulex are still sailing. First, the stock may be benefiting from end of the quarter window dressing. I tried to explain in detail a few weeks ago of the tendency of portfolio managers to "run" stocks up into the end of each quarter in order to make their funds look better positioned. If I recall correctly, Emulex was on the list of likely candidates of window dressing. Second, there may be a few large funds dealing in shares of Emulex, who are willing to defend their long positions against the bears and keep the stock's chart looking strong. The agenda behind such a strategy is, again, to keep a fund's performance looking better and dressing the portfolio. The danger with shares of Emulex right here is whether the bulls have enough staying power (capital) to fend off any bear attacks that may ensue. It just doesn't make sense that shares of its competitors are getting whacked while shares of Emulex are trading near their 52-week high. Then again, if it weren't for last Friday's move, shares of Emulex would look a lot worse. Also worth noting is the peculiar pattern near the right edge of the chart below. It would appear the shares of Emulex may be tracing a head-and-shoulders top, which may result in its eventual correction like virtually every other tech stock. ---------------------------- Network Appliance - NTAP I'm a bit concerned with the recent weakness in EMC which may carry over to NTAP. NTAP appears to have substantial support at $62. Looking to climb. Your take? - Jeff Before the downgrade on shares of EMC, Network Appliance was having its own problems with that very competitor. There were concerns raised during NTAP's last conference call that it would face increased competition from EMC, which could result in pricing pressures and lower margins. Those concerns resulted in a swift drop from the $150 peak that shares of Network Appliance reached in mid-October. Since that time, the stock has become a target of the bears. Whether or not the bears remain in control of Network Appliance remains to be seen. Although the chart is looking a little more positive, shares are still trading in a precarious technical position. NTAP has the possibility of tracing an ugly double bottom with the first leg set at the $45 level in late November and the second set last week around $51. The fact the second bottom was somewhat higher than the first may lend to the possibility the bulls have regained some control over the stock. At this point, Jeff, I think it is critical for shares of Network to hold its ascending trend line and not so much the $62 level. If they don't, support at $51 is equally critical. In addition, before the repair work can really begin, shares of Network need to break above their descending trend line! ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of December 25, 2000 Monday ====== None Scheduled Tuesday ======= Existing Home Sales Nov Forecast: 5.10M Previous: 4.96M Consumer Confidence Dec Forecast: 128 Previous: 133.5 Wednesday ========= Leading Indicators Nov Forecast: -0.20% Previous: -0.20% Oil & Gas Inventory 15-Dec Forecast:291.8MB Previous: NA Thursday ======== Initial Claims 23-Dec Forecast: NA Previous: NA Help-Wanted Index Nov Forecast: NA Previous: 79 Consumer Confidence Nov Forecast: 133.5 Previous: NA Existing Home Sales Nov Forecast: 5.1M Previous: NA Friday ====== Chicago PMI Dec Forecast: 43.50% Previous: 41.70% Online Help Wanted Idx. Dec Forecast: 122.8 Previous: NA ECRI Weekly Idx. 22-Dec Forecast: -3.3% Previous: NA Week of January 1st ==================== Jan 02 Auto Sales Jan 02 Truck Sales Jan 02 NAPM Index Jan 03 Construction Spending Jan 04 Initial Claims Jan 04 Factory Orders Jan 04 NAPM Services Jan 05 Nonfarm Payrolls Jan 05 Hourly Earnings Jan 05 Unemployment Rate Jan 05 Average Workweek Jan 05 New Home Sales ************************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=1180 ************************************************************** 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. 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The Option Investor Newsletter Sunday 12-24-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/122400_2.asp ************** TRADERS CORNER ************** Making A List And Checking It Twice By Lynda Schuepp A couple of weeks ago, I made my Christmas list of stocks I thought that would lead us out of oblivion, if and when that happens. I have held out a lot of cash waiting for the bottom to come. I'm not ready to dump all my money back into the market, because I think we won't see a rapid reversal of this severe downtrend. In fact, I suspect we will have a long sideways market (with an upward bias). It really doesn't matter if I'm wrong or right, because you have to deal with what the market gives you at the time. Always be ready to change your strategy when the market delivers you something other than what you expected. Out of a list of ten stocks, I picked the best two out of my ten to invest in on Thursday. The two I picked were Siebel and I2 Technologies. Siebel Systems has had remarkable earnings growth. Yes, they actually have earnings and have had earnings growth from $.01 in 1995 to $.48 (estimated) for 2000. Siebel Systems, Inc is a provider of e-Business applications, enabling organizations to sell to, market to, and service their customers across multiple channels, including the Web, call centers and retail and dealer networks (source is Yahoo finance). Institutions own 82% of the float and their buying is up 9% over last quarter. Let's face it, E-business is here to stay, and the guys with the best software will get a lion's share of the business. I'm more interested in the infrastructure than the retailers. That's why I like Siebel. I TWO, like Siebel, also has a nice pattern of earnings growth ($.01 in 1995 to $.23 estimated in 2000). i2 Technologies, Inc. is a global provider of intelligent e-Business solutions that help enterprises optimize business processes both internally and among trading partners. Institutions own 50% of the float and their buying has also increased 9% from the previous quarter. (source =yahoo finance). Now for my strategy: I could have simply bought calls on the two stocks, but you will recall that volatility was VERY high on Thursday. VIX was as high as 37! We hadn't seen those levels since October. Because of the high volatility, the calls were very expensive. My fear is that I would buy them and they wouldn't move, and volatility would go back down and I'd be out of luck. Instead, I purchased 1000 shares of each and decided to see if I could sell some premium against them. I was tempted to sell the calls at the end of day but decided to hold off on selling calls on Thursday, because I liked the volume and the price increases at the end of the day. Friday, the market popped at the open and my two stocks climbed. I was tempted to just hold on, but I decided to take a cautious approach, articularly over a long weekend. I bought ITWO at 45 and SEBL for 61 on Thursday. After looking at the call premiums, I decided to sell the January 50 calls against ITWO and the January 70 calls against SEBL. I sold the ITWO 50 calls for 7.375 and the SEBL 70 calls for 9. Let's do the math here and review this conservative play. ITWO Price paid 45, the January 50 calls sold for 7.375. Breakeven = 45 minus 7.375 or 37.625. Maximum profit would be 12.375 (50 minus 45 plus 7.375). About 28% return for 4 weeks or about a 360% annualized return. SEBL Price paid 61, sold the January 70 calls for 9. Breakeven is 52 (61-9). Maximum profit would be 70 minus 61 plus 9 or 18 points or about 370% annualized return. Hindsight is everything, so if the market heads off for the races I will make paltry returns when compared with a straight directional play like buying a call, but if the market goes sideways, I get to keep, the stock and the premium. I'm not anticipating that ITWO and SEBL will go lower than 37.625 or 52 respectively, which are my break-evens. As you can see, covered calls can give you a nice range to play with. Remember you can always get in the play again. If signals indicate that we are off to the races, you can be sure I will make more directional plays, but until that is confirmed I'll go my "Merry" way, with my conservative returns and thank Santa for a Merry Christmas. Merry Christmas to all. ************************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=1214 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* NOK - Nokia $43.69 (-3.31 last week) See details in sector list Put Play of the Day: ******************** HAND - Handspring $36.06 (-11.50 last week) See details in sector list *************************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=1205 ************************************************************ ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS SGP $56.63 (+1.31) The drug sector remains strong across the board and the market is faring better, but SGP's upward momentum simply faded. It's unfortunate the bulls couldn't take SGP through the formidable resistance line of $60. But we're not going to fight the trend. Two sessions of weakness resulted in SGP's violation of the trailing 5 and 10-dmas, which previously offered support. The bearish close near our protective stop of $56, which parallels SGP's former resistance/support level, provided enough evidence for us to drop SGP this weekend. If you're still interested in more defensive-type plays, then take a look at our write-up on JNJ. FRE $64.44 (-1.94) When picked up coverage on FRE around the $66.50 level the stock quickly moved up to the $70 level. After such an impressive move over the past two weeks we had expected a pullback in order to consolidate some of FRE's gains. However, we didn't anticipate the news last Friday of mortgage rates slipping to their lowest levels in a year and a half. That news prompted a sharp sell-off in FRE last Friday. And although the buyers stepped in latter in the day and FRE bounced off our stop at $62, we are dropping coverage on the play this weekend. We'd use any strength early next week to exit existing positions. PUTS SANM $71.75 (-1.34) Was Friday's action on the NASDAQ the start of a "Santa Claus" rally or just a quick sleigh ride to the rooftops? While the outcome is important and weighs on many traders' minds, there's no question that our play on SANM is over. Today's 16.8% jump through the 5-dma ($66.65) and bullish close above our $69 stop warrants an immediate drop from our put list. Other stocks in the sector like SLR, TEK, and A also saw gains going into the holiday weekend. IBM $89.00 (+1.19) It was only a matter of time before investors found IBM's depressed price levels too tempting to pass up and analysts came forward with positive comments about the bellwether. After all, the strong decline brought IBM to two- year lows and rivaled more recent support at $85 and $90. But let's not cry over spilled milk here. The put play on IBM reaped handsome rewards from the moment we entered near the $95 level. If you still have open positions, consider exiting on any intraday weakness next week. It's true there's still the possibility of IBM or another blue chip like CSCO warning ahead of earnings and knocking the markets off-kilter, but Friday's upswing was too powerful for us to ignore. IBM rose as high as 9% intraday. We're not waiting for another burst of momentum to push the stock through our protective stop of $90 before exiting. Instead, we're considering the whole picture and erring on the side of caution. AMCC $65.69 (-1.81) A brief, but profitable play, AMCC caught the updraft in the NASDAQ on Friday and rallied sharply, ending the week nearly unchanged. It doesn't matter whether you attribute the solid bullish performance to a belated Santa Claus rally, an end to the tax-loss selling, or an overdue bounce in the Semiconductor and Networking stocks, the fact remains that the stock rallied right through our $62 stop early in the morning. Despite some mid-day profit taking that tested support near $59, AMCC ended the day by rallying through the $65 level to close very near its high of the day. Adding to the strength of the move was volume solidly above the ADV, and this buying volume strengthened right up to the end of the day. AMCC has provided some nice profits for aggressive put buyers over the past week, especially those that have traded in and out of positions on short-term strength and weakness. Breaking above the 2-week descending trendline was the straw that broke this camel's back, as it looks like this may be the end of the party for the bears. We will gladly take our profits and move on to new plays as we place AMCC back on the bench. EMC $68.25 (+0.13) On Thursday, we posed the question of whether the rebound in shares of EMC was the end of the current move or just the next buying opportunity for our very profitable put play. Friday gave us the answer, and it clearly spelled the end to our play, as the bulls continued their buying spree, propelling EMC higher by nearly 15% on volume 20% above the ADV. Our tight $62 stop was taken out at the open, and the day's continuous uptrend confirmed the wisdom of using stop losses. Those of you that have been in the play from the beginning saw some juicy profits materialize over the past 2 weeks, so hopefully you let your stops take you out of the play in the morning, keeping the lion's share of those profits in your trading account. If not, take advantage of weakness on Tuesday to exit the play, as it looks like the tide has turned for stocks in the Storage sector. ARBA $54.61 (-12.52) As a highly volatile stock this past year, we have been able to reap substantial profits in ARBA, both to the upside and to the downside. With the year drawing to a close, we are taking our gains off the table on our most recent foray into this B2B leader. It appears that the stock has found a temporary bottom at the $43-44 area. Now deeply oversold, a rallying NASDAQ could lift ARBA higher. With the stock having closed higher than our stop price of $52 and the 5-dma now at $54.24, we are no longer recommending this put play. Thank you ARBA for making our holidays a happy one! RBAK $53.25 (-33.25) It appears that our put play in RBAK has been put to a quick end. When we started this play on Thursday, we mentioned a break below its 52-week low as a possible conservative entry point. Gapping up at the open the stock headed higher and never looked back. We also mentioned aggressive targets at $40 and $44 but the strong volume to the upside and pullbacks on low volume gave no confirmation of a signal to enter. The close above our stop price of $44 suggests a possible reversal of RBAK's downtrend. With no entries made, we are dropping coverage and in this case, the best play was the one that was never made. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** COST - Costco - $37.38 (+2.38 last week) Costco Wholesale Corporation operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will provide high sales volumes and rapid inventory turnover. Costco's warehouses generally operate on a seven day, 68-hour week, and are open somewhat longer during the holiday season. Our reasons for choosing this play are primarily technical. Costco's weekly chart shows a strong rally last fall and winter, a steep drop in April with the indexes, and a subsequent six month period of tight consolidation. From June to December, Costco has been trading between $30 and $38, forming a strong base of support which did not falter during the severe sell- offs we experienced this fall. It appears poised to breakout from its tight trading range on strong volume, as the retail specialty sector is looking up. A positive news release regarding a deal with McKesson, which is expected to generate $2.2 billion in revenue over the next four years, as well as an upgrade from Merrill Lynch helped to boost the stock last week. Costco has been making a series of higher lows over the last two weeks, with strong support at the 50-dma of $34.51. We want to see Costco break above heavy resistance at $38.46, which would mean a move out of the flat daily trading channel. A breakout above this level could easily push Costco above $40, to the next resistance level at $45. Conservative traders should wait until the stock clears this level on strong volume before initiating positions. Aggressive traders might want to initiate positions on a bounce off the support at $36.61, but only if it is accompanied by strong volume and a market rally. Set stops at $34, and watch for strength in the retail sector before initiating positions. BUY CALL JAN-35 PRQ-AG OI=7172 at $3.87 SL=2.50 BUY CALL JAN-40*PRQ-AH OI=2143 at $1.25 SL=0.75 BUY CALL FEB-35 PRQ-BG OI= 5 at $4.75 SL=3.00 BUY CALL FEB-40 PRQ-BH OI= 125 at $2.38 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=COST LVLT - Level 3 Communications Inc $32.81 (-1.94 last week) Level 3 Communications is a global telecommunications and information services company that is building an international fiber-optic network based on internet protocol (IP). Their focus is primarily on the business market. Services include local, long distance, and data transmission as well as other enhanced services. Currently they serve 20 cities in the US and Europe. LVLT also has its hands in the coal mining business. Are you searching for a silver lining within the telecommunications service industry? Well, you might want to take a look at the CLECs, competitive local exchange carriers, which are emerging as potential gorillas. A leader in this industry niche is Colorado's Level 3 Communications. Just recently on December 13th, the company came forward and said it'll raise its estimate for 2001 sales on higher capital spending. This bold move is quite a contrast to the bulk of other communication companies who are scaling back or postponing capital spending. Plus, there was Thursday's dismal announcement by AT&T that it'll raise revenue-loss percentages in the consumer business from 11% to 14-16%, which boosted investor confidence in the CLECs. Despite being debt-laden, the likes of Level 3 Communications, Global Crossing (GX), and MetroMedia Fiber Network (MFNX) are expanding their networks and gaining market share much quicker than anticipated. But let's get to our specific play on LVLT. We're starting coverage based purely on the feasibility of a technical bounce. During the high-volume decline on Wednesday and Thursday, LVLT tested lows at $28 and $26.88, respectively. The double bottom portends that a technical rebound may be in the cards. If Friday's impressive $3.94, or 13.6% is a prelude to next week's action, then back up the trucks. Alright that may be too aggressive, so until we see more technical developments, let's keep the motors running in neutral gear. The stock's current price level sits at the converged 5-dma ($31.98) and 30-dma ($32.96) lines. A strong upside move off this level and through the 10-dma ($35.01) warrants an entry even for the very conservative. And the nice part of this play is the inexpensive option prices! Nonetheless, money is money. Protect profits with stop losses. We'll exit if LVLT retests its recent bottoms and closes under $27. On a breakout, be prepared for opposition at the 50-dma ($38.31), which could be a tough line to penetrate even in an advancing marketplace. BUY CALL JAN-30 HGY-AF OI= 574 at $5.75 SL=3.75 BUY CALL JAN-35*HGY-AG OI=2971 at $3.13 SL=1.50 BUY CALL JAN-40 HGY-AH OI=1897 at $1.69 SL=0.75 BUY CALL FEB-35 HGY-BG OI= 7 at $4.50 SL=2.75 BUY CALL FEB-40 HGY-BH OI= 25 at $2.94 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=LVLT NOK - Nokia $43.69 (-3.31 last week) Nokia is the world leader in mobile communications. Backed by its experience, innovation, user-friendliness and secure solutions, the company has become the leading supplier of mobile phones, and a leading supplier of mobile, fixed and IP networks. By adding mobility to the Internet, Nokia creates new opportunities for companies, and further enriches the daily lives of people. In a market deluged by earnings warnings, Nokia has offered much needed reassurance to investors starved for optimistic forecasts. Earlier in December, Nokia's CEO stated the company had extended its revenue growth targets of 25 to 35% from 2002 to 2003. In addition, Nokia's Chairman stated they expect growth to be at the high level of 25 to 35% for the first half of 2001. Nokia is benefiting immensely from the growth in handheld mobile networks, as well as the WCDMA market. The company believes that there will be as many web connected handsets as PCs by 2002, and that the PC market's loss is their potential gain. Nokia's market share is over 30%, and, most importantly, they expect 70 to 80% of this year's cellular phone buyers to upgrade to a new unit in subsequent years. With all this good news, Nokia has demonstrated superior technical strength, holding above the 50-dma of $42.05 since mid November, until the severe sell-off last week. The stock has now rebounded from ascending support dating back to mid October, and is poised to bounce higher, market conditions permitting. Conservative traders may want to watch for a move above the 10-dma of $45.92 on strong volume. A breakout above $47.29 would be very bullish, and likely lead to a move above $50, which we saw earlier in December. More aggressive traders might wait for a pullback to $42.50. Watch the cellular telecommunications equipment sector, particularly QCOM, for strength before initiating positions. Set stops at $38.00 and exit positions is NOK closes below that level. BUY CALL JAN-40 NAY-AH OI=20924 at $5.50 SL=3.50 BUY CALL JAN-45*NZY-AI OI=22440 at $2.44 SL=1.25 BUY CALL FEB-40 NAY-BH OI= 651 at $7.00 SL=5.00 BUY CALL FEB-45 NZY-BI OI= 778 at $4.50 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NOK RFMD - RF Micro Devices, Inc. $26.63 (-0.63 last week) RF Micro Devices, Inc. is a leading supplier of radio frequency integrated circuits (RFICs) for the wireless, broadband and cable communications industries. RFMD designs and manufactures components for many communications applications, from cellular to CATV. The ever-expanding RFMD(TM) product line includes power amplifiers, linear amplifiers, LNA/mixers, quadrature modulators/demodulators, upconverters, front ends, attenuators, switches and transceivers. While shares of RFMD are still down for the year, it appears that the stock is determined to close out 2000 on a bullish note. Earlier in the month, RFMD was added to Standard & Poor's MidCap 400 Index, giving the company a much-needed thumbs-up and increasing investor awareness. Also, an alliance with Qualcomm has been highly successful, with its second co-developed product recently announced since its inception in February. Continued success could see the company play an important role in the deployment of next generation CDMA technology. This would be a positive development indeed, in light of QCOM's recent success in China. What's more, a new product announcement in the form of Gallium Arsenide-based amplifiers for third-generation applications all but confirms RFMD's ever-increasing role and importance in the emerging next-generation CDMA space. Connecting the highs since March, we can see that RFMD has not only broken above an intermediate term downtrend line, but has also found support at that level. On Friday, the stock rallied $2.81 or almost 12 percent to end the week. While volume was light, the direction was right and with support from the 5 and 50-dma at $25.65 and $23.18 respectively, consider entries on bounces off these levels as well as $25 and our stop price of $22. However, a strong move to the upside leading to a break through resistance at $27 could provide for a safer entry. Confirm sentiment with peers such as BRCM, CNXT and TQNT as well as the Philadelphia Semiconductor Index (SOX). BUY CALL JAN-20 RFZ-AD OI= 236 at $7.75 SL=5.75 BUY CALL JAN-25*RFZ-AE OI=1014 at $4.38 SL=2.75 BUY CALL JAN-30 RFZ-AF OI=1976 at $2.25 SL=1.00 BUY CALL FEB-25 RFZ-BE OI= 669 at $5.75 SL=4.00 BUY CALL FEB-30 RFZ-BF OI=1325 at $3.75 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RFMD TXN - Texas Instruments $47.63 (+0.63 last week) Texas Instruments Incorporated is a global semiconductor company and the world's leading designer and supplier of digital signal processing and analog technologies, the engines driving the digitization of electronics. TI is a leader in the real-time technologies that help people communicate. We are moving fast to drive the Internet era forward with semiconductor solutions for large markets such as digital wireless and broadband access. TI envisions a world where every wireless call, every phone call and every Internet connection is touched by a Digital Signal Processor (DSP). Since hitting a bottom of $35 in mid-October, TXN has been in a basing pattern, but it appears now that the stock may be ready to break out to higher ground. A cross-licensing agreement with Qualcomm has recently put some excitement back into shares of TXN. As part of the deal, the two companies would share information in their respective patent portfolios, allowing them to produce and supply integrated circuits across all wireless standards. This puts TXN in a select group of companies that are in a position to benefit from the highly anticipated third generation of CDMA-driven technology. In such a scenario, what could happen is that larger companies would deal directly with Qualcomm to purchase 3G CDMA chipsets, leaving TXN in a position to sell to the remaining companies. TXN also appears to have an advantage in dealing with Ericksson and Nokia. Already customers, the two cell phone giants could also rely on TXN for CDMA chipsets. Such demand would no doubt have a positive effect on TXN's top and bottom line. Recently, Prudential Securities reiterated their Strong Buy rating and despite lowering estimates, traders bid the stock up on the news. Support levels abound, with the 5-dma at $46, $45, the 50-dma at $44.67, $43 and our stop price at $42. For an entry on strength, wait for TXN to take out its 10-dma at $47.91 before making a play, but be aware of resistance overhead at $48, 49 and $50. Target your entries based on your risk tolerance levels and make sure that TXN closes above our stop price as a close below will result in our dropping this call play. Look to the Philadelphia Semiconductor Index (SOX) and Merrill Lynch's Semiconductor HOLDR (SMH) for guidance when considering new plays. BUY CALL JAN-40 TXN-AH OI=25417 at $9.38 SL=6.50 BUY CALL JAN-45 TNZ-AI OI= 6868 at $5.75 SL=4.00 BUY CALL JAN-50*TNZ-AJ OI=12860 at $3.13 SL=1.50 BUY CALL FEB-45 TNZ-BI OI= 495 at $7.63 SL=5.25 BUY CALL FEB-50 TNZ-BJ OI= 826 at $5.13 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=TXN ***************************** NEW LOW VOLATILITY CALL PLAYS ***************************** VOD - Vodafone Group Plc $34.44 (-3.06 last week) Vodafone is primarily concerned with the development and provision of mobile communications. Following the EU's clearence to proceed with the agreed acquisition of Mannesmann, Vodafone is now the largest mobile telecommunications company in the world, and one of the top ten companies in the world. Vodafone has a controlling interest in 13 of the 25 networks in which it is a shareholder. In April 2000, the Group had over 53 million proportionate customers worldwide. We are initiating a call play on VOD primarily based on its technical outlook. From September to present, the stock has found support at the $33.50 level numerous times, resulting in strong bounces of anywhere from 5 to 10 points. This has played out a number of times in the past few months and with the low option prices, such a play would have resulted in significant gains. For aggressive traders looking for the best price, a pullback to $33.50 is the target to shoot for, but make sure that there is buying to support the bounce. For those looking for confirmation of upward momentum before entering, wait for VOD to break through $35 with conviction, but be aware that the stock could encounter resistance from the 5-dma at $35.41. Because past performance does not necessarily guarantee future results, we are placing a protective stop at $33. A close below this point would be a violation of key support and signal the possibility that the stock could head lower. BUY CALL JAN-25 VOD-AE OI= 1822 at $10.00 SL=7.50 BUY CALL JAN-30*VOD-AF OI= 4400 at $ 5.50 SL=3.50 BUY CALL JAN-35 VOD-AG OI=12249 at $ 2.06 SL=1.00 BUY CALL FEB-30 VOD-BF OI= 1 at $ 6.00 SL=4.00 BUY CALL FEB-35 VOD-BG OI= 50 at $ 2.88 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=VOD NKE - Nike, Inc. $51.19 (+3.56 last week) At Nike, there's more to shoe performance than an eye-popping creative silhouette or the flashy colors of a shoe. Years of intensive research and testing back up Nike's leading-edge design and innovation. Where that research and testing gets done is in the Nike Footwear Advanced Research and Design department housed on the first floor of the Mia Hamm building on the Nike World Headquarters campus in Beaverton, Oregon. Two of the departments are the Nike Sports Research Lab and the Materials & Mechanical Test Lab. Shares of Nike have been on the run lately, with the success of its new products, a stellar earnings report and an improving fundamental picture for the footwear sector. NKE's new line of shoes, the "Shox", has been greeted with an excitement level not seen since its heyday of the Michael Jordan era. As well, NKE's foray into the world of golf has been highly successful, thanks to an endorsement deal with Tiger Woods. The addition of David Duval this week will also help marketing efforts. A better than expected earnings report gave analysts reason to believe that Nike's still got game. What's more, the footwear sector has been hot despite a slowing economy and the outlook for 2001 appears bullish. All these factors have allowed the stock to break a downtrend that has been in place since May of 1999. At this point, look for pullbacks to support at $50, the 5-dma at $48.76 and our stop price of $48 as possible entry points but confirm bounces with buying volume. For an entry on strength, wait for momentum to carry NKE above $52, confirming direction with peers such as FTS, RBK and Z. BUY CALL JAN-45 NKE-AI OI=1020 at $7.38 SL=5.25 BUY CALL JAN-50*NKE-AJ OI=1702 at $5.00 SL=3.00 BUY CALL JAN-55 NKE-AK OI=1610 at $1.88 SL=1.00 BUY CALL FEB-50 NKE-BJ OI= 262 at $5.38 SL=3.50 BUY CALL FEB-55 NKE-BK OI= 84 at $3.25 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=NKE *********************** NEW LONG TERM CALL PLAY *********************** C - Citigroup Inc. $50.06 (+2.00 last week) The creation of Citigroup brings together organizations that are extraordinary in their individual capabilities and in the ways they enhance and complement each other. Together, they offer customers a range of quality products and services unmatched in the financial services industry. Citigroup serves a broader spectrum of customers, in more places and by more means of access and delivery, than any other financial organization. With all of Citigroup's divisions working together to provide their customers with the best service and products, they are forming a model for the industry's future. We are adding C as a Long Term Call Play based on expectations of future rate cuts favoring the financial sector and the potentially bullish resolution of a key technical formation. Connecting the highs and lows since October reveals a series of higher lows and lower highs culminating in a symmetrical triangle pattern. Like a spring coiling up, at some point it will break one way or the other. The likelihood of an easing interest rate environment could mean a break to the upside and a protracted rally. While there are lingering credit concerns among the larger banks, we feel that much of the bad news has already been factored into the stock price, allowing the financials to rally on an improving fundamental backdrop. While the tightening trading range is still quite tradable, this is really a longer term play and as such, we recommend options that go out several months, allowing traders the opportunity to capture the bulk of a possible significant upside move. Look for a bounce off $50, the 5-dma at $49.28 and our stop price of $47 as aggressive targets of entry. A break above the 10-dma at $50.37 could result in a quick trip to $53. When making a play, confirm sentiment in the financials with the AMEX Banking Index (BIX). BUY CALL JAN-45 C-AI OI= 2687 at $6.25 SL=4.25 BUY CALL JAN-50 C-AJ OI=21562 at $2.75 SL=1.25 BUY CALL FEB-50*C-BJ OI= 417 at $3.63 SL=1.75 BUY CALL FEB-55 C-BK OI= 713 at $1.63 SL=0.75 BUY CALL MAR-55 C-CK OI= 7275 at $2.38 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?symbol=C ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. 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The Option Investor Newsletter Sunday 12-24-2000 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/122400_3.asp *************************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=1206 ************************************************************ ****************** CURRENT CALL PLAYS ****************** JNJ - Johnson & Johnson $101.50 (+2.94 last 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 healthcare sector continues to offer a safe haven for investors seeking shelter from the volatile technology stocks. Additionally, an "economic slowdown" doesn't generally hurt the drugmakers' bottom-lines, which makes all the difference in the world to investors. The rationale is simple. Consumers are much more inclined to put off making a major purchase than not buy necessary medical products. The increasing elderly population also adds to this sector's potential for higher revenues over the long-term. In other words, earnings numbers! Johnson & Johnson is confirmed to report its own earnings on January 23rd, BEFORE the market. Bullish sentiment is strong and it's predicted that the company will disclose double-digit gains along with a positive forecast. This week, JNJ established a solid uptrend line through the ever-so psychological century mark and is precariously poised for an upside breakout. Other industry leaders like MRK, SGP, PHA, and AHP are also demonstrating strength at their respective trading levels amid the volatile shifts in the marketplace. JNJ's immediate resistance is at the recent intraday high of $102, followed by the $103 52-week record high. A double whammy, so to speak. Lower and more risky entries might be found at the 5 and 10-dmas at $100.18 and $99, respectively. However keep in mind, we have our protective stop set at $98 and will exit on a close below that mark. A less venturesome entry, but one that can reap hefty profits too, is to take positions on a momentum breakout above the $102 and $103 resistance. In these uncertain times, it's very important to confirm an advancing marketplace backed by bullish internals before going long. Remember too, watch not only a stock's specific performance, but also that of the whole sector. Stay disciplined. BUY CALL JAN- 95 JNJ-AS OI= 7414 at $8.38 SL=6.00 BUY CALL JAN-100*JNJ-AT OI=11315 at $4.63 SL=2.75 BUY CALL JAN-105 JNJ-AA OI= 9843 at $2.06 SL=1.00 BUY CALL FEB-100 JNJ-BT OI= 136 at $6.25 SL=4.25 BUY CALL FEB-105 JNJ-BA OI= 369 at $3.63 SL=2.00 http://www.premierinvestor.net/oi/profile.asp?ticker=JNJ LH - Laboratory Corp. of America $165.94 (+8.88 last 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. Like the Energizer Bunny, LH is the stock that keeps going and going. While nothing compared to the seemingly irrational rally in shares of competitor DGX on Friday (see the new Put play this weekend), LH did manage a solid gain of $2.19 to close out the week at a new all-time closing high, just below $166. Vigilant traders were rewarded with an attractive entry point as the stock bounced near $161 shortly after the noon hour, before rallying sharply into the close. Increasing volume confirmed the strength of the move, although the daily volume came in at less than half the ADV. Having McDonald Investments initiate coverage with a Buy rating Wednesday evening may have been partially responsible for the nearly $9 gain over the past 2 days, priming our play for yet another upside breakout. The upper Bollinger band and upper channel line are now converged near $170-171, giving us plenty of upside room to initiate new positions on a rally through the recently formed $167 resistance level. Intraday pullbacks may provide a better entry point for aggressive traders; target shoot the $161-162 level if this fits your risk profile. More significant support sits near $158-159, and with our stop at $158, any solid bounce from this level could provide an outstanding entry point for any gun slinging dip-buyers out there. Just make sure that buyers are stepping forward to buy the stock before opening your positions and check that competitor PPDI is showing a positive trend as well. BUY CALL JAN-165 LH -AM OI=1015 at $11.88 SL= 9.00 BUY CALL JAN-170*LH -AN OI= 17 at $ 9.38 SL= 6.50 BUY CALL FEB-150 LH -BM OI= 0 at $19.00 SL=13.75 Wait for OI! BUY CALL FEB-160 LH -BN OI= 0 at $16.75 SL=12.00 Wait for OI! SELL PUT JAN-155 LH -MK OI= 500 at $ 5.75 SL= 8.00 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=LH IVGN - Invitrogen Corporation $79.38 (+0.63 last week) Invitrogen develops, manufactures and markets research tools in kit form and provides other research products and services to corporate, academic and government entities. These research kits simplify and improve gene cloning, gene expression and gene analysis techniques and are used for genomics and gene-based drug discovery, among other molecular biology activities. Founded in 1987, Invitrogen is headquartered in San Diego, California and has operations in Huntsville, Alabama, Groningen, Netherlands, and Heidelberg, Germany. Biotech companies face many pressures internally as well as externally. With a plethora of firms developing a myriad of treatments, competition is fierce in acquiring talented and accomplished researchers, in raising funds and in clinical trials to meet FDA approval, not to mention the possibility that a better solution could be just beyond the horizon. Internally, the cash burn rate plays a large role in how a company is able to compete, what strategies it may or may not pursue and how it can position itself in the market. But no matter what happens, there are certain tools of the trade, which are necessary, and to the company sells them comes great rewards. It is with this in mind that investors have given IVGN a rich valuation, with a solid uptrend line since May despite a tumultuous market during that time. The completion of the Human Genome Project has only served to help the stock move ever higher, since that data has inspired increased research efforts, leading to increased sales. As well, the pick and shovel business model has made IVGN a profitable and cash flow positive company, an enviable position in the high cash burn rate Biotech space. With strong support at the 50-dma at $72.62, we have placed our stop price just below, at $72. A bounce off this level as well as $74, $75, $76 and the 5-dma at $78.95 could be aggressive targets to shoot for. For the risk averse, a break through the 10-dma at $80.15 on volume would be the signal to jump in. In both cases, correlate entries with positive direction in peers such as ABI, AFFX and CRA. BUY CALL JAN-75 IUV-AO OI=475 at $11.00 SL=8.25 BUY CALL JAN-80*IUV-AP OI= 58 at $ 8.38 SL=6.00 BUY CALL JAN-85 IUV-AQ OI=454 at $ 6.38 SL=4.50 BUY CALL FEB-80 IUV-BP OI=618 at $11.25 SL=8.25 BUY CALL FEB-85 IUV-BQ OI= 26 at $ 9.13 SL=6.25 SELL PUT JAN-70 IUV-MN OI= 31 at $ 4.00 SL=6.00 (See risk of selling put in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=IVGN ************************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=1182 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-24-2000 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/122400_4.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=1215 ************************************************************** ************* NEW PUT PLAYS ************* SFA - Scientific-Atlantic Inc $34.75 (-10.63 last week) Scientific-Atlanta provides products and services for advanced communications networks that deliver voice, data and video. The company is one of the largest makers of set-top boxes (those cable boxes that sit on your TV), which accounts for about 40% of sales. SFA is currently moving out of the satellite networking business and focusing on digital broadband equipment to fuel growth. The proverbial saga of interactive TV continues to take the road of "all talk and no action." This distinctive niche, shadowed by a Telecom industry already plagued by spending slowdowns, has fallen hard. Take a look at other stocks in the sector: Liberate Technologies (LBRT), TiVo (TIVO), and Gemstar-TV Guide International (GMST), for instance. All have experienced slow suicides in the new millennium; although the strongest of the lot, GMST, demonstrated some spunk in Friday's session. But overall, the only event that's likely to rekindle the fallen stars is for a major cable television operator, such as the battered and beaten AT&T, to announce actual deployment of the advanced set-top boxes and to provide the interactive services. This isn't expected to happen until 2002. And at the moment, SFA is floundering helplessly below previous support. At the beginning of last week, SFA broke rank with the 10-dma and slid through the $45 level. The real kicker came when the $40 level also failed to sustain the troubled stock on Wednesday. The bearish move by CIBC World Markets to cut SFA's price target from $90 down to $50 incited a high-volume downswing in Friday's session; in spite of the rebounding broader markets. That type of behavior is definitely bearish and indicates investors are losing confidence in the company. The depressed shares now sit just 10.34 points away from reaching a new 52-week low - a tragic tale for a stock that saw a pinnacle of $94 on August 11th. Anyway, let's play the downtrend for all it's worth. Look for strong volume to continue leading SFA into the lower trading realms. Aggressive entries might be found on rollovers at the 5-dma ($38.41), which is just below our protective stop at the $40 mark. A conclusive break through Friday's intraday bottom of $33.03 offers better confirmation as well as lessens the chance of a technical bounce. So if you prefer to err more on the side of caution, be patient for heavy downside action to move SFA lower before taking positions. BUY PUT JAN-45 SFA-MI OI=3900 at $11.63 SL=8.75 BUY PUT JAN-40 SFA-MH OI= 602 at $ 8.00 SL=5.75 BUY PUT JAN-35*SFA-MG OI= 220 at $ 4.75 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=SFA INTU - Intuit Inc $35.25 (-13.00 last week) Intuit develops and markets financial software products and related Web services. Their flagship products are Quicken, the #1 personal finance program in the world, and TurboTax used for tax preparation. Founder Scott Cook maintains a 12% stake in the company. Typically, this player follows the Nasdaq's trend lines like an obedient puppy. But sometimes relentless market pressure and/or a company-specific event can send a stock into a downward spiral of its own. This appears to be the case with INTU. When the NASDAQ rebounded off the 2300 level on Friday, INTU deviated from its characteristic pattern and faltered. It's very possible that the news of its completed acquisition of EmployeeMatters on Thursday evening provoked the sharp decline. Intuit acquired the human resource management company in a registered stock transaction, valued at approximately $41 mln, including assumed liabilities. Intuit said it expects no material impact in fiscal 2001 revenue growth, but honestly, that doesn't always make a difference to traders. It's not unusual for the parent company to drop on acquisition news while the Street digests the purchase. Not only did INTU drop, but it also violated a firm support level. Friday's breach of the $40 level and the 5-dma ($40.41) created a climate for devastation. The technical breakdown occurred on double the average volume, which indicates the strong selling may extend into next week. But again keep in mind, Friday's action was not in-line with neither the Nasdaq nor the sector. Others in the software field such as CHKP, ERTS, and AGIL all saw significant advances. These factors make the play on INTU even that much more risky. So accordingly, it may be wise to keep stops tight for protection - we're setting a defensive stop at the $39 level. If we're afforded an entry into subsequent downdrafts, there is some light support at $35, bolstered by more chronicled support at $30. As we've seen with many of the tech stocks lately, previous support levels are failing at a rapid pace. Still the more conservative approach is to buy into weakness as INTU moves through $35 on strong volume. A more aggressive design is to enter on a failed attempt to move through the 5-dma. Take a look at a daily chart and you can visually confirm how this technical line is serving as a ceiling on the decline. If you take the more aggressive route, make sure the sellers are in control before jumping into the play. BUY PUT JAN-40 IQU-MH OI= 495 at $7.00 SL=5.00 BUY PUT JAN-35*IQU-MG OI= 306 at $3.88 SL=2.50 BUY PUT JAN-30 IQU-MF OI= 304 at $1.75 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=INTU DGX - Quest Diagnostics $138.00 (+10.50 last week) Quest Diagnostics was the result of a 1996 Corning spin-off, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Are there any bears out there who are up for an aggressive put play? If so, we may have just the ticket. DGX operates in the same space as LH (current Call play) and PPDI, and the three stocks tend to trade as a group. While LH has been gradually marching higher, DGX rallied sharply over the past 2 days, tacking on nearly $20 or 17%. While momentum stocks in the red-hot Networking sector can routinely move like that, it is highly unusual for a medical stock with a PE north of 100 and a pedestrian, single-digit growth rate to do so. Friday's nearly $14 surge pushed the stock up to close at $138, clearly outside the upper Bollinger band, making the stock ripe for a pullback early next week. While it is unusual for us to offer both a Call play (LH) and Put play (DGX) on two stocks that are so similar, the move in shares of DGX looks unsustainable on a purely technical basis, especially given the lack of news and light volume on Friday. Combined with the highs in early September and mid-October, both near $140, DGX looks like it is about to complete a triple top and should roll over sharply from the vicinity of Friday's close. In order to give our play some room for just a little more irrational exuberance, we have placed our stop at $145, and we will look for a rollover to commence near the $140-141 level before initiating new positions. This is an aggressive, high-risk play, and we need to wait for both the stock and the broader market to roll over before initiating new positions. BUY PUT JAN-130*DGX-MU OI=0 at $ 6.25 SL= 4.25 Wait for OI! BUY PUT FEB-140 DGX-NY OI=3 at $15.63 SL=11.25 http://www.premierinvestor.net/oi/profile.asp?ticker=DGX *************************** NEW LOW VOLATILITY PUT PLAY *************************** VZ - Verizon Communications $48.13 (-7.19 last week) Formed by the merger of Bell Atlantic and GTE, VZ is one of the world's leading providers of communications services. As the largest provider of wireline and wireless communications in the United States, VZ has 95 million access lines and 26 million wireless customers. Outside the United States, Verizon affiliates serve 6 million wireless customers and operate 4 million access lines in 40 countries throughout the Americas, Europe, Asia and the Pacific. Telecom stocks, whether wireless or landline, have come under renewed pressure in the past week, and despite reassuring investors that they are on track to meet current earnings estimates, VZ hasn't been able to dodge the sellers. Kicking off the latest round of selling was SBC Communications, warning Tuesday of an earnings shortfall, followed closely by the stunning news that AT&T would slash its quarterly dividend for the first time in the company's history. This double-whammy rocked the sector and kicked VZ into a sharp decline. Adding to the downside pressure is news that the company is the leading bidder in the current FCC wireless auction. While it looks good on the surface, investors are worried that the exorbitant prices being paid for the licenses will make it increasingly difficult for wireless providers to recoup their costs while continuing to grow revenues. Tuesday's news pushed VZ solidly below the $55 support level, and when Wednesday's decline violated the $52 support level, it opened the door for more losses. Even as the broader markets rallied on Friday, VZ fell as low as $46.50 before managing to stage a mild rally above $48 in the final 30 minutes of trading. The negative climate for stocks in this sector should continue to pressure VZ, and we are looking for the sellers to push the stock down to the $44 level and possibly the long-term support level near $40. We have placed our stop at $51, to terminate the play early if buying pressure lifts the stock out of its current doldrums. This event looks rather unlikely though, and would consider a failed rally near this level to be a nearly ideal entry point. More conservative players will want to wait for strong selling volume to drive VZ below Friday's low at $46.50 before initiating new positions. Before jumping into the play, look for continued weakness in other major Telecom players such as T, WCOM, PCS and SBC to confirm that the downward trend is intact. BUY PUT JAN-50*VZ-MJ OI=11204 at $3.75 SL=2.25 BUY PUT JAN-45 VZ-MI OI= 9064 at $1.38 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=VZ ***************** CURRENT PUT PLAYS ***************** PMCS - PMC Sierra $79.25 (-8.25 last week) PMC Sierra is enabling the world's broadband communications revolution. The company derives its success by providing broadband semiconductor technology that has become an essential part of the global networking backbone. PMC Sierra is helping to allow network equipment manufacturers meet the requirement for products to break the bandwidth bottleneck, with their standard semiconductor architectural solutions. PMC Sierra rallied with the Nasdaq on Friday, however, it is likely that this may be a bull trap for certain semiconductor stocks. While the rally was broad based, certain sectors exhibited significantly more strength than others. PMCS was highly oversold, having lost 50% percentage of its market value in two weeks. However, we feel that the selling may not be over yet. Remember, one day does not make a trend, and PMCS and the other semiconductor stocks must be able to cross their major moving averages, and overcome the stigma of multiple downgrades, earnings warnings, and bad news which has plagued the sector for months. We need to hear that inventory levels are dropping, and that demand for semiconductor chips is increasing before true recovery can occur. Considering the double digit gains exhibited by many Nasdaq stocks on Friday, PMCS's Friday gain was not that impressive. In addition, Friday's volume was lower than that exhibited on down days, and not indicative of heavy buying. If PMCS cannot close over the 5-dma of $83.31 then the most likely path for the stock remains downward. PMCS was unable to penetrate resistance of $80 at the close and continued rollovers at that level would provide solid entry points. However, remember that it is risky to buy puts if the Nasdaq is trending up and with that our upside protective stop remains at $81. That said, watch for overall weakness in the Nasdaq, as well as weakness in the semiconductor sector (SMH, SOX.X) and stocks like BRCM before taking a position. Addtional enties can be taken if PMCS falls below support at the $70 level on heavy volume. BUY PUT JAN-80 SDL-MP OI=574 at $13.38 SL=10.00 BUY PUT JAN-75*SDL-MO OI=729 at $10.75 SL= 8.00 http://www.premierinvestor.net/oi/profile.asp?ticker=PMCS HAND - Handspring $36.06 (-11.50 last 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. Is consumer demand for handheld PCs coming to an abrupt end? Not likely, but similar to the decline that has affected the box-makers, investor enthusiasm for Handheld stocks seems to be waning in the face of the economic slowdown that is expected to produce weak holiday sales of these popular devices. Shares of HAND began to decline from their highs near $100 in late October, and since then the stock has been locked in a persistent downtrend along with just about every technology related issue. The latest rally attempt failed 2 weeks ago and the stock rolled over right at the descending trendline, near $66. Since then, sellers have definitely been in charge pushing shares ever lower on volume significantly over the ADV. The bottom that had been forming near $44 earlier this week was shattered by the earnings report from HAND's competitor, PALM. Although they beat the street by a penny, the revenue number didn't sit well with investors and they sold the stock mercilessly on Thursday, 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. Despite a solid rally on the NASDAQ on Friday, HAND just couldn't manage to capitalize on it and ended the day right where it began, at $36. Our $40 stop is still intact and any failed rally intraday rally near this level looks like an ideal level for initiating new positions. 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. Despite the fact that competitors RIMM and PALM managed solid gains on Friday, HAND just couldn't attract enough buyers, making it the weakest stock in the sector. Weakness in these other stocks should translate to even more weakness in our play, and should provide solid confirmation that the near-term direction is still down. BUY PUT JAN-45 HQA-MI OI=298 at $12.00 SL=9.00 BUY PUT JAN-40*HQA-MH OI=776 at $ 9.13 SL=6.25 http://www.premierinvestor.net/oi/profile.asp?ticker=HAND BLDP - Ballard Power Systems $64.00 (-4.75 last 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. Recent shifts in the fundamental picture, combined with deteriorating techincals suggesting further downside ahead has led to the addition of BLDP to our put play list. In California, legislators in the California Air Resources Board (CARB) are meeting on January 25th to vote on a new proposal to make changes to the original Zero-Emissions Vehicles program, which will decrease the mandatory number of clean air vehicles for sale by the year 2003 from 10 percent down to 2 percent. If such a change goes through, makers of fuel cell powered cars such as BLDP will find themselves suffering a major setback in the form of a significantly smaller market. Electric power as well as natural gas power are putting pressure on battery makers too, along with hybrid vehicles, which run on gasoline and batteries. This has caused much concern from investors and analysts alike, as the stock has recently been downgraded by CS First Boston from a Strong Buy rating to a Buy rating, and by Bear Stearns, who dropped the stock from a Buy to a Neutral rating. With the Election uncertainty now resolved, BLDP also finds itself in a less than favorable political climate, with a President-elect who is expected to favor traditional fuel companies such as coal and oil. Closing below the key support level of $60 this past Thursday, the stock enjoyed a bounce from deeply oversold conditions, but it appears that technical damage has been done. A failed rally above the 10-dma at $68.45 as well as our stop price at a key resistance level at $65 could provide aggressive targets but confirm a rollover with volume. A break below the 5-dma at $63.47 on volume should provide enough negative momentum to take the stock quickly to $60, allowing for a more conservative entry, but make sure that peers such as FCEL are moving lower when initiating a play. BUY PUT JAN-65 DFQ-MM OI=504 at $7.13 SL=5.00 BUY PUT JAN-60*DFQ-ML OI=146 at $4.75 SL=3.00 http://www.premierinvestor.net/oi.profile.asp?ticker=BLDP CELG - Celgene Corp. $36.06 (-8.69 last week) Celgene is a pharmaceutical company with a major focus on the discovery, development and commercialization of small molecules for cancer and immunological diseases. Celgene's medical research and development team is working to extend the boundaries in the areas of small molecule immunotherapeutic and biocatalytic chiral chemistry by developing pure versions of existing drugs. Recent violations of a long-term up-trend line as well as key horizontal technical support levels has led to further selling in shares of CELG. It appears that recently, lack of news has been an enemy for the company. In late November, the stock enjoyed a brief rally, with excitement surrounding its presentation at the American Society of Hematology (ASH) meeting, a forum that has led to the announcement of blockbuster drugs in the past. While the news was for the most part good, the data presented was merely a variation of a now worn-out theme. With over 90 percent of CELG's revenues generated from sales of its cancer drug Thalomid, every new use found for it has resulting in the prospect of higher earnings, leading to analyst upgrades and investor enthusiasm. With over 40 different applications for Thalomid so far, it's no wonder prospects were exciting and optimistic. A recent development however, has turned this sentiment against the company. Campath, a new drug developed by IXLO and MLNM, appears to have the potential to cut into sales of Thalomid, has been a factor resulting in severe technical damage to the stock. Breaking an up-trend line from December of 1999, the stock has headed lower, breaking through key support levels of $45, $43 and most recently, $40. At this point, bounces off these resistance levels and the 5-dma at $38.86 could provide for aggressive entries but make sure CELG closes below our stop price of $45. For a more conservative entry, wait for CELG to fall below $35 on strong selling volume. As mentioned, company-specific news has been thin so sector sympathy will most likely play an increased role in CELG's movements. Confirm direction with that of the Amex Biotech Index (BTK) and Merrill Lynch's Biotech HOLDR before pulling the trigger. BUY PUT JAN-40 LQH-MH OI=253 at $7.00 SL=5.00 BUY PUT JAN-35*LQH-MG OI= 91 at $4.50 SL=2.75 BUY PUT JAN-30 LQH-MF OI=141 at $2.06 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=CELG *************************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=1207 ************************************************************ ***** LEAPS ***** Merry Christmas! By Mark Phillips Contact Support Santa Claus finally showed up on Wall Street on the last trading day before Christmas (the jolly old man even rang the closing bell), and gave the bulls a broad-based rally to kick off their holiday weekend on the right foot. Even though it is normally a light volume day, the NASDAQ traded a hefty 2.2 billion shares while the NYSE handily topped a billion shares, with both indices posting solid triple-digit gains to close at their respective highs of the day. Merry Christmas! Even our old nemesis/friend the VIX remained friendly to the bulls, holding above the 30 level for the sixth day in a row, and closing out the week at 31.62. While this marks a significant drop from the 37.72 intraday high on Thursday, it is still in the buy zone for long term positions. What we need to see now is whether the markets are stabilizing for a long recovery in 2001 or if it is yet another head fake for the bulls. The days surrounding Christmas typically have a bullish bias, and given the normally light volume in the week ahead, the prudent course of action may be to wait until after the New Years holiday before jumping heavily into new positions. A one-day rally does not change the fact that we have been in a persistent bear market for the past 9 months. While the oscillators favor a continuation of the rally in the week ahead, prudence and caution are still the best course of action. For myself, I have had a full year of trading - with winners and losers, and I'm looking forward to the week ahead. Not because I expect to make some great trades, but because I don't. Family and friends began arriving on Wednesday, and I am looking forward to taking the next week off to spend time on the things that are really important to me. The markets will still be here after the New Year, and are unlikely to run away in the week ahead. The economy is still weak, and earnings warnings are still looming on the horizon ahead of the January earnings cycle. This looks like a recipe for more attractive entry points in the weeks ahead, but it is not the time to back up the truck and buy everything with a four-letter symbol on Monday. The week between Christmas and New Years is normally a light volume affair, and we will be better served by waiting for the confirmation of heavy volume after the holidays. If you absolutely can't stay away from the markets this week, instead of actually opening new positions, consider doing some planning for what you want to buy in 2001. A concrete game plan, properly executed, will serve us well in the year ahead, and now is the time to start laying the foundation of that plan. LEAPS investing is best applied by finding a bullish trend and hopping on board for an extended upward move, and it is hard to find uptrending stocks at this point in the game. There are HINTS of recovery in some of our plays, but it won't hurt to give them another week to mature before putting our cash at risk. As Jim is fond of saying, "Cash is King". As you can see from the Drops this weekend, all is not rosy in Technology-land, as one of our long-time favorites, JDSU, finally got the axe for poor performance. 2001 is likely to be a very profitable year for LEAPS investors, but good entry points and money management rules will be the hallmarks of those that do well. Take the time to develop your trading plan in the week ahead. The dividends it pays will become apparent as the profits mount in your account next year. Enjoy your family, recharge your batteries and get ready for an exciting year ahead. Happy Holidays Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $32.13 238.16% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $16.63 -49.24% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $10.25 - 6.82% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 9.50 -42.86% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $ 8.13 -46.30% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 4.25 -84.55% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 2.40 -87.12% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 7.30 -58.29% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $14.00 50.05% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $25.38 371.65% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $17.00 115.87% JDSU 04/16/00 JAN-2002 $ 80 YJU-AP $39.63 $ 5.88 -85.18% 08/27/00 JAN-2003 $130 VEQ-AF $55.25 $ 5.63 -89.82% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 8.63 -50.00% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $13.00 -26.76% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $10.25 - 0.58% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 9.25 -24.49% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $38.38 124.02% JAN-2003 $ 70 OZG-AN $23.13 $46.75 102.12% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $ 2.75 -86.75% JAN-2003 $ 60 VTQ-AL $25.38 $ 4.75 -81.28% FRX 08/13/00 JAN-2002 $ 95 WRT-AS $31.38 $39.38 25.48% JAN-2003 $100 VFB-AT $37.38 $45.13 20.72% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $34.13 51.67% JAN-2003 $ 70 VLM-AN $29.63 $41.88 41.33% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $13.00 - 5.45% JAN-2003 $ 50 VXT-AJ $18.38 $18.00 - 2.04% ADBE 10/29/00 JAN-2002 $ 80 YEJ-AP $23.50 $17.13 -27.13% JAN-2003 $ 80 VAE-AP $30.75 $24.50 -20.33% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $14.13 -18.12% JAN-2003 $ 70 VNG-AN $25.00 $21.75 -13.00% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 9.00 -31.43% JAN-2003 $ 45 VGY-AI $17.25 $13.13 -23.91% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $17.50 3.70% JAN-2003 $ 60 OAE-AL $19.88 $20.75 4.40% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 8.25 6.45% JAN-2003 $ 35 VOR-AG $11.13 $12.13 8.94% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $10.88 -28.12% JAN-2003 $ 75 VZQ-AW $19.25 $14.13 -26.62% Spotlight Play ORCL - Oracle Corp. $31.88 Added only 2 weeks ago, ORCL is already proving itself to be a solid play. The company announced earnings on December 14th that beat estimates by a penny, accompanied by stronger than expected growth in the company's key application software segment. While the stock had suffered ahead of the news due to the broad-based technology weakness, the positive report halted the stock's decline right at the 30-dma ($27). Since the news, the stock has been trading in a range between $27-32, clearly defining the near-term support and resistance necessary for initiating new positions. After years of playing second fiddle to the likes of MSFT, CEO Larry Ellison is now being vindicated in his view that, "the network is the computer". While PC related stocks are continuing to weaken , Ellison is pointing to strengthening sales of ORCL's e-Business software suite as evidence that his long-term vision is finally coming to pass. Some pundits are even calling this the watershed event where demand for Internet application software will continue to grow at the expense of traditional operating system software, such as Microsoft Windows. If this in fact is an emerging trend, shares of ORCL are downright cheap and should undergo a nice upward move over the next several months. The $27 support level still looks great for initiating new positions, although more conservative players will want to wait for a volume-backed breakout above the $32 resistance level before playing. BUY LEAP JAN-2002 $35.00 WOK-AG at $ 8.25 BUY LEAP JAN-2003 $35.00 VOR-AG at $12.13 New Plays WMT - Wal-Mart Stores $52.50 After the rampant excitement that propelled shares of WMT to new all time highs a year ago, its shareholders have had a rough year, as the stock has been locked in a persistent downtrend. Defined by the descending trendline (currently at $55) and year-long support at $45, the stock is coiling for a strong move in one way or the other. With declining interest rates on the horizon, retail stocks should begin to recover in the months ahead. Don't run right out and buy LEAPS on Monday though. Friday's rally needs some follow through to get us out of the current bearish market environment, so while we wait for the tone to change, we can patiently look for attractive entry points for the year ahead. Since stabilizing above $45 again in early November, WMT charged up to the descending trendline before profit taking appeared once again, and it was encouraging to see the selling abate this time significantly above the $45 support level. In fact, the 50-dma (currently $48.69) is in ascent mode once again and providing support on the pullbacks. We would look for a pullback to the $49-50 area, or the 50-dma to provide an attractive entry point. In the event of a more significant decline, look for $45 to be rock-solid support. It seems unlikely that we will challenge it again anytime soon, but a failure there would definitely spell the end of our play. With Stochastics back in ascent mode, new entries can be considered as WMT can rally above the 200-dma at $53, but make sure the broader market is in ascent mode first. BUY LEAP JAN-2002 $55.00 WWT-AK at $ 9.63 BUY LEAP JAN-2003 $55.00 VWT-AK at $14.00 Drops FRX $121.00 The need for stop losses is alive and well. Recall our review of FRX 2 weeks ago, where we mentioned the stock's ascending trendline? " Use the ascending trendline, in place since early September to keep you in the play during minor retracements. When the stock fails to bounce at this trendline, we will drop FRX from the playlist." Well, the stock did just that this week, closing on the trendline at $133 on Monday. FRX provided us with nice steady profits over the past 4 months as the stock moved up from the $90 area to rock solid resistance at $140 over the past month. This week's sharp decline came on the heels of the previous Friday's Morgan Stanley downgrade and the company's announcement of a 2-for-1 stock split. This past Tuesday gave us one last opportunity to exit on strength before investors decided they definitely wanted out and the decline began in earnest. By the close on Wednesday, it was clear that a major technical failure had occurred, as our play opened below the trendline and continued down from there. Any open plays should have been stopped out over the past week, but if you are still hanging on, our drop this weekend is your signal to take the money and run, while there are still profits on the table. JDSU $40.94 A long-time OIN favorite, JDSU has been reduced to a mere shadow of its former self. It has been on our playlist since April, and since picking it, we have watched the stock soar from the $80 support level to just shy of $140, netting some impressive gains on our LEAPS. Although we didn't know it at the time, that party ended on Labor Day, and the stock has been in a long, not-so-slow decline ever since. As with many of our recent Drops, JDSU is a classic example of why we have to play with stops, even when we trade LEAPS. We had high hopes of a bottom forming in the vicinity of $50 and made mention of that in our update 2 weeks ago. Alas, it was not to be, as the decline began anew exactly 2 weeks ago. This time $50 support was completely ignored as the stock fell as low as $37 Friday afternoon. This is an amazing 74% decline from the stock's July highs, and in the same amount of time we have watched the profit percentage on our recommended 2002 LEAP decline from +125% to -85% and there are still no signs of the trend reversing. While we still like the long-term prospects for the stock, we are tired of waiting for this falling knife to reach the earth and stick. Rather than desperately grab at it, we'll remove it from the playlist so there is no doubt that we consider new positions in JDSU to be foolhardy and ill-advised. *********** SPLIT PLAYS *********** Greenspan Snubs The Market By Matt Russ I guess I should have rephrased last week's Split title to "Will Greenspan Set Stock Prices Free?" Of course he "Can" and could have relieved the tension on stocks last week at the FOMC meeting by cutting rates by 25 basis points, but he did not. With the market already pricing in the shift to an easing bias on Tuesday, the disappointment of not receiving an early Holiday rate cut sent the markets tumbling. However, the rhetoric was focused on the slowing economy. While the shift is not an explicit decision, the move to an easing bias can be ascertained from the FOMC's following statement: "The Committee consequently believes that the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." This is quite a contrast from previous hawkish rhetoric citing "heightened inflation pressures." Many previous split candidates fell from the list this week because their prices were halved without their shares doubling. Even with all of the market activity and volatility, we were able to hit on one of our Split Candidates this week. Forest Labs, FRX, announced on Monday a 2-for-1 split payable on January 11th, 2001. Since the news, FRX has sold off with the broader market in a typical post-split announcement depression. But the run-up in anticipation has been highly profitable to split traders. For more information on split trading, visit www.splittrader.com. Current Split Run Plays None Current Split Candidate Plays JNJ LH RE Candidates That Are Not Current Plays AFL CHKP CMVT CAH GENZ LTR RKY UHS VRTS WLP 10 Most Recent Announcements We Predicted FRX - 12/18 (most recent announcement) BRCD - 11/29 MANU - 11/08 MUSE - 10/25 AMCC - 10/11 DNA - 10/05 LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 Major Announcements So Far This Month = 15 HWEN GMCR BOBJ DFXI FSCR HOTT SANM SEIC SCHL AREM GGG EAT FRX DUK STT For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp ************************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=1183 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-24-2000 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/122400_5.asp ************* COVERED CALLS ************* Trading Strategies: A Plan for Success By Mark Wnetrzak There are a number of general guidelines that can help a trader become more successful. These principles have value no matter what type of investments you participate in and they can often help you make more effective choices when selecting a specific position. As a profitable trader, your first obligation is to state your goals and identify a portfolio outlook. What seems like an excellent trade, in terms of potential return, may not be appropriate for all individuals, and each position should be thoroughly evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. In simple terms, if you are planning for retirement, you should probably avoid speculating in short-term call options. In contrast, if you are attempting to achieve immediate capital growth, mutual funds are not the preferred financial vehicle. The most common mistake that a new trader can make is not matching his needs and expectations to a strategy that can eventually accomplish them. In addition, most investors do not fully understand the unique relationship between personal portfolio goals and the methods they utilize to attain those objectives. Unfortunately, this confusion virtually guarantees disappointment because even when a trade returns a favorable profit, it's very hard to duplicate on a regular basis if you don't have clear idea of what you are trying to achieve. The second step to building a profitable portfolio is to list the attributes of the perfect trading strategy. Of course the perfect strategy doesn't really exist but the characteristics of most successful techniques include a favorable risk/reward outlook and ease of implementation. The basic requirements for a successful strategy are also determined by its objectives. For example, with trading systems, you need a market outlook, a strategy with which to profit and a method for timing entry and exit transactions. Then you must decide on a money management system: a set of rules or guidelines for determining potential risk. The ultimate arrangement will be strict yet flexible, with a method for adjustments as the position progresses. The ideal process entails far more than a mechanical system that simply follows a recent trend and waits for a stop order to be executed. Regardless of the attributes of your strategy, it should include two fundamental features: leverage and stability. Leverage refers to the ability to profit quickly and effectively from an accurate assessment of the market's future direction or character. Stability pertains to the reasonable expectation of profit with limited potential of a substantial loss of capital. For professional traders, this concept is very important as it helps identify the boundaries of pure speculation as opposed to conservative, income-generating strategies. After analyzing the most popular trading techniques, you may discover that there are really very few strategies that fit your personal portfolio criteria. For most traders, a careful and deliberate approach that offers a reasonable return along with a moderate element of risk is best. Safety should be a primary factor in determining your choice of strategies and in most cases, the simplest way to find a happy medium is to start with realistic expectations and build a pattern of consistent success before worrying about higher returns. In addition, it is important to be prepared for the enormous amount of mental control that is required to build a successful portfolio. New traders begin with a positive outlook and most have a good idea of how they expect to manage a particular position, but few of them understand how difficult it is to follow a pre-determined plan when emotional elements enter the equation. They have the best of intentions, knowing that an orderly and disciplined method is the easiest way to achieve profits on regular basis, but executing the strategy is where the trouble usually begins. In fact, many experts believe that this step can be one of the biggest obstacles to profitable trading and it's a subject that receives little attention in the popular investing manuals. Next week, we will examine some of the most common problems that traders encounter when they attempt to "follow the game plan". Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return CRK 11.44 12.50 JAN 10.00 2.19 *$ 0.75 7.0% GLGC 21.25 17.50 JAN 17.50 5.25 $ 1.50 6.8% EXFO 32.00 23.38 JAN 22.50 11.25 *$ 1.75 6.1% EDGW 5.63 6.47 JAN 5.00 1.00 *$ 0.37 5.8% BCGI 28.38 27.00 JAN 22.50 7.25 *$ 1.37 5.6% CPRT 18.69 20.25 JAN 17.50 2.19 *$ 1.00 5.3% QTRN 18.38 20.06 JAN 17.50 2.06 *$ 1.18 5.2% HSIC 30.63 33.88 JAN 30.00 2.31 *$ 1.68 5.2% WMS 19.69 19.00 JAN 17.50 3.00 *$ 0.81 4.2% ARQL 33.75 27.88 JAN 25.00 10.00 *$ 1.25 3.8% CVD 11.38 9.69 JAN 10.00 2.00 $ 0.31 2.4% AVID 18.63 16.44 JAN 17.50 2.06 $ -0.13 0.0% RFMD 36.38 26.63 JAN 30.00 8.50 $ -1.25 0.0% MRVT 17.94 12.25 JAN 15.00 4.13 $ -1.56 0.0% GZMO 14.19 9.88 JAN 12.50 2.69 $ -1.62 0.0% *$ = Stock price is above the sold striking price. Comments: Gene Logic (GLGC) appears to have made a successful test of the November low. Exfo Electro-Optical (EXFO) is testing support near our sold strike - it was originally deep ITM. Quintiles (QTRN) has been quite volatile over the last two weeks but it appears to be moving higher overall. Is Friday's rally going to last for Arqule (ARQL)? Of the four positions above that are negative, Miravant (MRVT) may warrant a quick exit, depending on your outlook, as the technicals continue to deteriorate. The other positions; GZMO, RFMD, and AVID, have more favorable technicals and should benefit from an easing of the Bear! However, if they continue to weaken, rolling down or simply exiting the position would preserve capital for another play. NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return MCOM 10.75 JAN 7.50 MQM AU 3.88 120 6.87 28 10.0% MCLD 14.69 JAN 12.50 QMD AQ 3.00 734 11.69 28 7.5% FNSR 27.00 JAN 22.50 FQY AN 5.75 44 21.25 28 6.4% KLAC 31.81 JAN 25.00 KCQ AE 8.13 183 23.68 28 6.1% PHI 17.56 JAN 15.00 PHI AC 3.25 20 14.31 28 5.2% MLHR 26.81 JAN 25.00 MHQ AE 2.88 50 23.93 28 4.9% WMS 19.00 JAN 17.50 WMS AW 2.25 1065 16.75 28 4.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** FNSR - Finisar $27.00 *** Entry Point? *** Finisar is a provider of fiber optic subsystems and network performance test systems that enable high-speed communications over Gigabit Ethernet LANs and Fibre Channel based storage area networks (SANs). FNSR's optical subsystems convert electrical signals into optical signals (light pulses) for high speed, reliable transmission over fiber optic lines. The company sells its optical subsystems to manufacturers of networking and storage equipment that in turn develop and market systems based on Gigabit Ethernet and Fibre Channel technology. FNSR's shares rallied in late November after the fiber-optics systems maker beat analysts' expectations for the second quarter and announced a slew of acquisitions. Finisar has two potentially profitable fiber-optic products in the pipeline, Transviewer and Opticity. The current consolidation appears to have made a successful test of the November low and we favor the long-term support near the sold strike. JAN 22.50 FQY AN LB=5.75 OI=44 CB=21.25 DE=28 MR=6.4% ***** KLAC - KLA-Tencor $31.81 *** Bottom Fishing! *** KLA-Tencor is the world's leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. Their portfolio of products and analysis services is designed to help IC manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final production yield analysis. KLA-Tencor's advanced products, coupled with its yield management consulting practice, allow the company to deliver the complete yield management solutions customers need to accelerate their yield learning rates, reduce their yield excursion risks and adopt industry-leading yield management practices. KLA-Tencor has shown resilience as the semiconductor sector was taken out back and shot. The stock has begun to forge a Stage I base and has recently moved above its 30 dma. Earnings are due near the third week in January - just before expiration. JAN 25.00 KCQ AE LB=8.13 OI=183 CB=23.68 DE=28 MR=6.1% ***** MCLD - McLeodUSA $14.69 *** More Bottom Fishing! *** McLeodUSA provides selected telecommunications services to customers nationwide: Integrated communications including local services are currently available in several Midwest and Rocky Mountain states; long distance and advanced data and Internet services are available in all 50 states. McLeodUSA has recently completed its acquisition of CapRock Communications, a southwestern U.S. facilities-based integrated communications provider, which reported an outstanding quarter in November. Several buy recommendations have spurred investor interest and the recent downtrend has abated. We favor the technical support above our cost basis and the improving technicals. JAN 12.50 QMD AQ LB=3.00 OI=734 CB=11.69 DE=28 MR=7.5% ***** MCOM - Metricom $10.75 *** On The Rebound! *** Metricom is a leading high-speed wireless data company. With its high-speed Ricochet mobile access, Metricom is making "information anytime" possible - at home, at the office, on the road, and on many devices. Metricom recently launched Ricochet(TM) - 128 kbps access with true wireless mobility, in Denver and Detroit. This is further proof that Metricom is delivering on its strategy of bringing Ricochet to pivotal markets across the country. As MCOM continues to expand, its stock has begun displaying heavy accumul- ation suggesting a possible change in character. This position offers a reasonable cost basis for those investors who believe Metricom is exiting its Stage IV downtrend and is moving to a lateral Stage I base. JAN 7.50 MQM AU LB=3.88 OI=120 CB=6.87 DE=28 MR=10.0% ***** MLHR - Herman Miller $26.81 *** Post-Earnings Rally! *** Herman Miller creates great places to work by researching, designing, manufacturing, and distributing innovative interior furnishings that support companies, organizations, and individuals all over the world. MLHR's award-winning products, complemented by primary furniture- management services, generated nearly $2 billion in revenue during fiscal 2000. The Company just reported its 2nd-quarter earnings: Sales, net income, and EPS were all records, exceeding any quarter in the company's 77-year history. It appears Herman Miller has truly enlarged their market opportunity, and their strong backlog bodes well for the 3rd-quarter. Investors applauded the results, rallying the stock higher with a "Hammer" bottom forming on both a daily as well as a weekly chart. JAN 25.00 MHQ AE LB=2.88 OI=50 CB=23.93 DE=28 MR=4.9% ***** PHI - Philippine L. D. Tele $17.56 *** Triple Bottom? *** Philippine Long Distance Telephone Company is the leading Filipino telecommunications provider. With operations centered in the Manila metro area, it maintains about 1.8 million access lines (60% of the country's total). Backed with a nationwide fiber-optic network to accompany its digital microwave backbone, the carrier provides local, long-distance (national and international), data and network services using leased satellite and submarine cable capacity. PHI appears to be making a stand at $15, forming a triple bottom. We simply favor the strong support at the sold strike and the heavy-volume supported rally on Friday. Speculators only please! JAN 15.00 PHI AC LB=3.25 OI=20 CB=14.31 DE=28 MR=5.2% ***** WMS - WMS Industries $19.00 *** On The Rebound! *** WMS Industries designs, manufactures and markets video and reel- spinning gaming machines and video lottery terminals. Its gaming machines are installed in all of the major gaming jurisdictions in the U.S. and in numerous foreign jurisdictions. WMS conducts its gaming machine business through its subsidiary, WMS Gaming. Talk about a post-earnings drop! WMS dropped almost 50% after posting strong earnings November 1st, as analysts worried over deceleration in sold units and installed game base. The stock has since rallied back above its 150 dma and Bear Stearns has recently upgraded their recommendation. WMS has reported that it continues to outpace its internal sales goal of 4,000 units for fiscal 2001 due to high customer acceptance of its products. A conservative entry point for traders who have a bullish outlook and believe the sell-off was overdone. JAN 17.50 WMS AW LB=2.25 OI=1065 CB=16.75 DE=28 MR=4.9% ***** ***************** SUPPLEMENTAL COVERED CALLS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CRK 12.50 JAN 12.50 CRK AV 1.00 205 11.50 28 9.4% IMMU 21.25 JAN 20.00 QUI AD 2.56 213 18.69 28 7.6% GETY 29.75 JAN 25.00 QGT AE 6.38 200 23.37 28 7.6% PATH 25.13 JAN 25.00 AQE AE 1.69 0 23.44 28 7.2% PPRO 17.13 JAN 12.50 PXZ AV 5.38 96 11.75 28 6.9% ORLY 23.00 JAN 22.50 OQR AX 1.44 31 21.56 28 4.7% PCAR 47.88 JAN 45.00 PAQ AI 4.25 81 43.63 28 3.4% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1216 ************************************************************** ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ADBE 62.44 55 AXX-MK 2.81 1561 18% 55 NEWP 81.00 60 NZZ-ML 4.38 2025 22% 65 AFFX 71.25 60 FIQ-ML 4.00 1781 22% 60 AGN 92.13 85 AGN-MQ 3.13 2303 14% 90 DNA 79.38 70 DNA-MN 2.06 1985 10% 73 CMVT 108.94 90 CQZ-MR 4.38 2724 16% 90 GLW 56.25 50 GLW-MJ 3.25 1406 23% 50 IDPH 195.94 170 IHD-MN 9.50 4899 19% 170 ESRX 90.50 80 XTQ-MQ 3.00 2263 13% 80 FCEL 64.00 50 FQG-MJ 2.63 1600 16% 57 MERQ 94.75 70 RQB-MN 3.25 2369 14% 70 PDLI 87.50 75 RPV-MO 5.25 2188 24% 70 GS 98.81 90 GS-MR 3.38 2470 14% 90 QCOM 85.00 75 AAF-MO 3.50 2125 16% 73 HGSI 71.50 60 HHA-ML 3.50 1788 20% 60 RIMM 79.88 65 RUL-MM 5.00 1997 25% 65 MLNM 60.75 50 QMR-MJ 2.56 1519 17% 50 SUNW 31.88 25 SUQ-ME 0.94 797 12% 25 SEPR 71.88 65 ERQ-MM 3.75 1797 21% 60 VRTS 98.50 80 VUQ-MZ 4.75 2463 19% 80 *********************** CONSERVATIVE NAKED PUTS *********************** Technical Analysis: Our Approach to Play Selection... By Ray Cummins One of our readers asked about the different types of analysis that we use to select candidates for the "Covered Calls" and "Naked Puts" sections. For the majority of our selections, we rely heavily on basic technical analysis. There are three types of information that most traders use to determine a bias or opinion on a specific stock. The first is "fundamental" analysis; income statements, balance sheets, and the future projections for revenues and earnings. The second is "sentiment" analysis; investor expectations of market and individual stock performance, news or upcoming events and other possible activities such as mergers and stock splits. The final category is "charting". This method relies on the history of trading and price movement in a specific stock. The issue can also be a future, index, or industry group. Most analysts (and we agree with this outlook) believe that charts reflect all of the known information and public opinion surrounding a specific stock or security. Technical analysis involves the use of historical pricing to identify trends and patterns. Many different indicators are displayed on price charts. Moving averages, support/resistance lines, envelopes, Bollinger bands, and momentum curves are all common measures. Price, time and volume are basic inputs into these indicators. Price reflects the level of change in the attitude of investors. Time measures the cycle or period of change and volume (relative to its past history) measures the intensity of that change. Together, these indicators reveal buying and selling patterns that are difficult to discern by tracking stock quotes in a textual format. Charting can also display selling pressure that develops when an issue reaches a certain level, or repeated buying at a lower price. There are a number of simple charting techniques that can help a trader better understand the market and technicians have popular names for the most common patterns. To avoid complexity, new traders should focus on three basic concepts: the stock's price trend; its support and resistance levels (the prices at which a stock typically reverses course); and the relationship between price movement and volume activity. Various systems have been developed to help traders form an opinion based on the chart patterns and predict future turning points (and direction) in the underlying issue. The analysis begins by determining the strength and direction of a trend. The basis for future predictions is supported by the fact that once a trend is in motion, it will continue in that direction until a change in character occurs. The more times the stock tests and remains above the current trend line, the greater the significance of any subsequent price decline that violates the line. Occasionally stocks simply bounce back and forth in a trading range and when that happens, it's helpful to identify the boundaries of the pattern for clues to its future direction. For example, if a stock breaks decisively below a support level, it is likely to continue falling until a new level of support is established. In contrast, when an issue rallies above a previous resistance level, it is likely to continue higher as there is no overhead supply to restrict its upward movement. Successful analysts will look at many indicators from different perspectives and identify signals that forecast upcoming changes or trend reversals. When you can do this accurately on a regular basis, your portfolio value will grow consistently, regardless of the overall market character. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return CHTR 22.00 22.56 JAN 20.00 0.81 *$ 0.81 9.3% NEM 16.25 17.69 JAN 15.00 0.88 *$ 0.88 8.9% AEIS 24.38 20.50 JAN 20.00 0.69 *$ 0.69 8.2% ADVP 39.50 39.25 JAN 30.00 0.81 *$ 0.81 8.1% MU 35.88 34.94 JAN 25.00 0.69 *$ 0.69 7.6% LFG 38.38 39.81 JAN 35.00 1.00 *$ 1.00 6.7% CORR 48.94 37.50 JAN 32.50 0.81 *$ 0.81 5.5% BSTE 36.94 37.50 JAN 22.50 0.50 *$ 0.50 5.5% TXCC 47.88 43.19 JAN 25.00 0.75 *$ 0.75 5.3% KLAC 35.94 31.81 JAN 22.50 0.56 *$ 0.56 5.2% SPF 25.44 22.38 JAN 22.50 0.69 $ 0.57 5.2% SNPS 42.13 47.56 JAN 35.00 0.88 *$ 0.88 5.2% BCHE 28.38 31.75 JAN 25.00 0.50 *$ 0.50 5.1% CCR 41.69 48.38 JAN 35.00 0.75 *$ 0.75 5.1% FNSR 37.50 27.00 JAN 22.50 0.56 *$ 0.56 5.0% ADLAC 40.81 48.56 JAN 30.00 0.50 *$ 0.50 5.0% OXY 22.56 23.75 JAN 20.00 0.56 *$ 0.56 4.9% *$ = Stock price is above the sold striking price. Comments: Standard Pacific (SPF) appears to have made a successful test of its 50 dma - but monitor it closely for changes. Advanced Energy (AEIS) is again showing signs of heavy selling after the recent downgrade by Merrill Lynch. An early exit or roll down appears to be the appropriate course of action. Lots of buying support for Micron (MU) around $30, even after earnings. Cor Therapeutics (CORR) is testing the November low - a key support area. Biochem Pharma (BCHE) is another one of those, "I should have bought calls" positions. Add Countrywide Credit (CCR) and Adelphia (ADLAC) to that list also! NEW PICKS ********* Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PLNR 28.88 JAN 22.50 PNQ MX 0.63 210 21.87 28 10.7% BSTE 37.50 JAN 25.00 BQS ME 0.69 253 24.31 28 9.2% HCR 19.69 JAN 17.50 HCR MW 0.44 0 17.06 28 7.8% ADLAC 48.56 JAN 35.00 ADU MG 0.69 224 34.31 28 7.2% CPRT 20.25 JAN 17.50 KQJ MW 0.38 50 17.12 28 7.2% PPDI 48.19 JAN 40.00 PJQ MH 0.69 40 39.31 28 6.4% TXN 47.63 JAN 32.50 TXN MZ 0.56 4598 31.94 28 6.0% NKE 51.19 JAN 45.00 NKE MI 0.75 724 44.25 28 5.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADLAC - Adelphia Communications $48.56 *** On The Move! *** Adelphia Communications is a leader in the telecommunications industry with cable television and local telephone operations. Adelphia's operations consist of providing telecommunications services primarily over networks, which are commonly referred to as broadband networks because they can transmit quantities of voice, video and data by way of digital or analog signals. After hinting about several important strategic initiatives at investor conferences last week, the company announced that its Adelphia Business Solutions (ABIZ) will significantly scale back its network expansion. Adelphia also formalized plans to divest its cable systems in Puerto Rico and explore the sale of other non-strategic systems. Investors appear to favor the announcement and a recent upgrade has helped propel the stock to a 6-month high. Last week offered a better entry point but the issue shows no signs of slowing in its upward movement. Target a higher premium initially, to open the play. JAN 35.00 ADU MG LB=0.69 OI=224 CB=34.31 DE=28 MR=7.2% ***** BSTE - Biosite Diagnostics $37.50 *** FDA Approval! *** Biosite Diagnostics serves clinical needs in emergency medicine by speeding the flow of critical diagnostic information. Through its integrated discovery and diagnostics businesses, Biosite is developing rapid diagnostic tests that improve clinical outcomes for acute diseases. Biosite's Triage. products are used in 45% of U.S. hospitals and in 40 international markets. On November 22, Biosite announced that it had received FDA clearance to market the Triage. BNP Test in the U.S. This is the first blood test to be cleared in the U.S. as an aid in the diagnosis of congestive heart failure. Investors cheered this news as the stock rallied above its 150 dma on strong volume. A brief consolidation took the issue back to a recent support level and now it appears the up-trend is ready to resume. BSTE is another second-chance play and the position offers favorable speculation for traders who are interested in the drug sector. JAN 25.00 BQS ME LB=0.69 OI=253 CB=24.31 DE=28 MR=9.2% ***** CPRT - Copart $20.25 *** Post-Earnings Rally! *** Copart provides vehicle suppliers, primarily insurance companies, a full range of services to process and sell salvage vehicles through auctions, principally to licensed dismantlers, rebuilders and used vehicle dealers. Copart recently reported 1st quarter earnings with net income of $8.9 million which generated a 45% increase in earnings per share, on revenues of $57.1 million. The results were ahead of expectations due to strong performance from new and existing stores, and continued growth of Internet sales. We simply favor the strong rally above the September high, which completes a short-term "double-bottom" formation and suggests that a test of the all-time high is forthcoming. JAN 17.50 KQJ MW LB=0.38 OI=50 CB=17.12 DE=28 MR=7.2% ***** HCR - Manor Care $19.69 *** Congressional Decision! *** Manor Care is a provider of a range of health care services, including skilled nursing care, assisted living, sub-acute medical care, rehabilitation therapy, home health care and management services for sub-acute care, rehabilitation therapy, vision care and eye surgery. The company's assisted living facilities also operate under the brand names Arden Courts and Springhouse. The Arden Courts facilities are focused on care for persons suffering from early to middle-stage Alzheimer's disease and related memory impairment, while the Springhouse facilities serve the general assisted living population of frail elderly. Manor Care shares rose after the Medicare and Medicaid Benefits Improvement and Protection Act was passed last Friday by the lame-duck Congress. The company hailed the act as an important step toward achieving a payment system that reimburses providers more appropriately for treating Medicare patients, and officials said that future profits will likely be improved by the decision. JAN 17.50 HCR MW LB=0.44 OI=0 CB=17.06 DE=28 MR=7.8% ***** NKE - Nike $51.19 *** Solid Earnings! *** Nike designs, develops and markets high quality footwear, apparel, equipment, and accessory products. Nike is the largest seller of athletic footwear and athletic apparel in the world. The company sells its products to 19,000 retail accounts in the United States and through a mix of independent distributors, licensees and other subsidiaries in 140 countries around the world. Virtually all of its products are manufactured by independent contractors and most footwear products are produced outside the United States, while apparel products are produced both in the United States and abroad. The sports shoe and apparel giant recently reported that quarterly profits rose 16%, in line with Wall Street forecasts, as revenues increased 7%. The company also reaffirmed its full-year earnings target of mid-teens percentage growth as the company's revenues have been bolstered by tremendous international sales and surging equipment sales. JAN 45.00 NKE MI LB=0.75 OI=724 CB=44.25 DE=28 MR=5.4% ***** PLNR - Planar Systems $28.88 *** Blue Sky Territory! *** Planar is a worldwide leader in the development and marketing of high performance information display systems currently supplied to more than 1,000 customers. The company is at the leading edge in providing customers in the medical, transportation and industrial markets with value-added products that allow digital and video information to be viewed in a wide range of applications. The company reported a strong 4th quarter with higher-than-expected sales and net income before accounting for non-recurring charges. Sales for the quarter rose to $47 million, up 42%, as Planar benefited from a favorable product mix and improved yield in the company's LCD and CRT operations. The stock has rallied strongly on heavy volume, breaking out to a new all-time high and this play offers a favorable cost basis for traders who are bullish on the issue. JAN 22.50 PNQ MX LB=0.63 OI=210 CB=21.87 DE=28 MR=10.7% ***** PPDI - Pharmaceutical Product Dev. $48.19 *** All Time High! *** Pharmaceutical Product Development and its subsidiaries provide a broad range of research and development and consulting services in the life and discovery sciences segments. PPD Development, the company's life sciences subsidiary, is the fourth largest contract research organization (CRO) in the world, providing integrated product development resources on a global basis to complement the research and development activities of companies in the pharmaceutical and biotechnology industries. PPD recently raised its outlook for fourth quarter earnings and revenues, and said it had licensed a chemical compound that could help treat premature ejaculation. Investors and analysts applauded the news and based on the strong up-trend, our outlook for the issue is cautiously bullish. The recent momentum should propel the share value well clear of our target cost basis. JAN 40.00 PJQ MH LB=0.69 OI=40 CB=39.31 DE=28 MR=6.4% ***** TXN - Texas Instruments $47.63 *** Blue-Chip Technology! *** Texas Instruments is a global semiconductor maker and the world's leading designer and supplier of digital signal processors and analog integrated circuits, the engines driving the digitization of electronics. TI also is a world leader in the design and manufacturing of other semiconductor products including standard logic, application-specific ICs, unique reduced instruction-set computing microprocessors, micro-controllers and digital imaging devices. TI has manufacturing, design or sales operations in 27 countries around the world an is an industry leader in virtually every product it offers. A trading-range bottom appears to be well established near $37 and we favor the opportunity to own this blue-chip at a discount price. JAN 32.50 TXN MZ LB=0.56 OI=4598 CB=31.94 DE=28 MR=6.0% ***** ***************** SUPPLEMENTAL NAKED PUTS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return MU 34.94 JAN 25.00 MU ME 0.63 6886 24.37 28 9.0% GETY 29.75 JAN 20.00 QGT MD 0.50 338 19.50 28 8.4% KLAC 31.81 JAN 20.00 KCQ MD 0.44 498 19.56 28 7.0% PATH 25.13 JAN 22.50 AQE MX 0.50 0 22.00 28 6.9% GMST 49.50 JAN 30.00 QLF MF 0.63 315 29.37 28 6.5% ERTS 42.19 JAN 30.00 EZQ MF 0.50 309 29.50 28 6.1% *************************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=1208 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ Santa Claus arrives...just in time! The stock market enjoyed an impressive rally today as investors looked for technology bargains on the last trading day before Christmas. Friday, December 22 The stock market enjoyed an impressive rally today as investors looked for technology bargains on the last trading day before Christmas. The Nasdaq closed up 176 points at 2,517 and the Dow was up 148 points at 10,635. The S&P 500 index ended 31 points higher at 1,305. Trading volume on the NYSE reached 1.1 billion shares, with advances outpacing declines 2,043 to 895. Activity on the Nasdaq was heavy at 2.2 billion shares exchanged, with advances beating declines 2,672 to 1,293. In the bond market, the 30-year Treasury rose 8/32, pushing its yield down to 5.39%. Thursday's new plays (positions/opening prices/strategy): Pfizer PFE JAN46C/JAN45P $0.50 credit bear-call ADC Telecom ADCT FEB17C/FEB17P $5.50 debit straddle Placer Dome PDG JAN10C/JAN10P $0.12 debit synthetic Pfizer rebounded from Thursday's slump and our credit spread was easily opened at the target credit. Now we will watch for signs of another attempt to break-out of the recent trading range and the first indication will be a close near $47 on heavy volume. ADC Telecom moved in a relatively small range during the morning session and although it is difficult to determine whether any contracts were traded in our position, the straddle was offered at $5.56 debit just after 1:00 P.M. Placer Dome traded lower as the equity markets moved higher and the synthetic position was available at the target debit. Portfolio Plays: The stock market gave investors a much-needed Christmas present today with triple-digit gains in both major indices. Analysts said that much of the negative outlook for earnings has already been priced into the market and investors are optimistic about a potential interest rate cut in January. Among Nasdaq groups, Internet, computer hardware and software, networking, and chip shares moved higher. Wireless telecom stocks were also among the top performers and our recent position in Qualcomm (QCOM) benefited from the upside activity. Technology companies also boosted the Dow and International Business Machines (IBM) was the biggest gainer, rising $7 to $89 after Salomon Smith Barney reiterated its "buy" rating on the stock and said rumors of an earnings warning were unfounded. Software developer Microsoft (MSFT) and computer giant Hewlett-Packard (HWP) rebounded from recent selling pressure and in the industrial group, Alcoa (AA) and International Paper (IP) were among the blue-chip winners. Economists say that although the recent performance of cyclical stocks indicates the probability of a recession is relatively low, there is still potential for extended bear market activity in the coming months. In addition, the broader market is mired in a strong downtrend and even with today's technical recovery, continued tax-loss selling by fund managers will likely keep stocks under pressure until the New Year. The Combos section experienced mixed results in today's bullish session. While a number of plays recovered from recent losses, there were also some positions that suffered during the upside activity. However, the movement provides a good opportunity to explain some of the roll-out techniques discussed in Thursday's newsletter. The examples we will use today are Costco (COST), where we have a neutral credit strangle; JAN-40C/JAN-30P, and Bowater (BOW), which is the underlying issue for a call-credit spread; JAN-60C/JAN-55C. Both of these issues have new upside potential that could result in capital losses if the plays are not managed correctly. Lets look at the Costco position first: We are currently short 10 contracts in the JAN-30 Put and also short 10 contracts in the JAN-40 Call. The original position was a (credit) strangle with an initial credit of $1.38. Thus, our break-even cost basis is $41.38 on the upside and $28.62 on the downside. The well-established trading range for the issue was the primary reason for initiating the neutral position and the option prices also favored a premium-selling strategy. Now the stock has made a strong move to the top of the recent range with three consecutive "up" days and volume increasing during the rally. The first indication of a significant change in character will be a close above the August and September highs near $39, preferably on heavy trading volume. If that occurs, the simple alternatives are: close the short option at $40 for a small loss and accept the outcome (a closing cost greater than $1.38 will create a negative return); or buy stock to cover the short option and use the premium from the original position to adjust (lower) the overall cost basis in the issue. Of course, there are other more complex adjustments; you might purchase an "in-the-money" call option to create a bullish debit spread, or an "out-of-the-money" call option to limit losses if the rally continues. The choices are almost endless and that is why it is important to understand the most common methods of position adjustment before the play is initiated. In addition, almost every modification to the original play will be based on your future outlook for the underlying issue and that can only be determined with a thorough understanding of technical analysis. With the Bowater credit spread, the choices are very similar: We are currently long 10 contracts in the JAN-60 Call and also short 10 contracts in the JAN-55 Call. The original position was a call-credit spread with an initial credit of $1.50. Our break-even cost basis is $56.50 and above that price, losses are incurred up to a maximum of $3.50 at $60. The recent technical indications suggest that the resistance near $58 will be tested in the near future. Whether the outcome will be successful, no one can know, but there is a common technique for rolling out of a credit spread. I'll reprint the short version here for those of you that haven't seen it before. To "roll-out" of a bearish credit spread, place an order to exit the short option anytime the issue closes above technical resistance with a sustained movement, preferably on heavier-than-average trading volume. The technique is based on the probability that the stock should continue to move in that direction. After the short position is repurchased, wait for the rally to lose momentum and sell the long position to close the entire play. That's just one method of exiting the play and it is by no means the solution to every failed credit spread. There are a number of other adjustments that can enhance the profit potential of the position such as buying additional calls at the $60 strike to offset the losses in the (short) $55 options or buying stock (or deep ITM options) and selling new OTM options to establish a bullish outlook in the position. They key to successful position management is to think like a market-maker, using all of the possible hedge and covering techniques and carefully review each alternative before making a final decision. Regardless of how you choose to adjust the play, be prepared for further draw-downs and always trade within the limits of your portfolio and your experience level. Merry Christmas! Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** CVTX - CV Therapeutics $65.31 *** Technicals Only! *** CV Therapeutics is a biopharmaceutical company engaged in the discovery and development of new small molecule drugs for the treatment of cardiovascular diseases. The company currently is conducting clinical trials for two of its drug candidates, including ranolazine, which is in its second Phase III trial. In addition, the company has several research and pre-clinical development programs designed to bring more drug candidates into human clinical testing. Consistent with its business strategy, the company currently retains United States marketing rights to its two lead clinical candidates, ranolazine and CVT-510. Since inception, substantially all of its resources have been dedicated to research and development. The company expect its sources of revenue, if any, for the next few years to consist of payments under corporate partnerships and interest income. Cv Therapeutics continues to weaken technically and the recent move below a 150 dma suggests there is little chance the stock can power through the layers of resistance near our sold strike. A bearish "head-n-shoulders" pattern is readily apparent over the past six months, and any move below $60 should signal the next downtrend. The premiums for the (OTM) call options are slightly inflated and the potential for a successful (technical) recovery is significantly affected by the overhead supply near $80-$85; a perfect condition for a bearish credit spread. PLAY (very conservative - bearish/credit spread): BUY CALL JAN-90 UXC-AR OI=18 A=$0.69 SELL CALL JAN-85 UXC-AQ OI=43 B=$1.00 INITIAL NET CREDIT TARGET=$0.50 ROI(max)=11% B/E=$85.50 ****************************************************************** SFAM - Speedfam-IPEC $5.63 *** Bottom Fishing! *** SpeedFam designs, develops, manufactures, markets and supports CMP systems used in the fabrication of semiconductor devices and also manufactures high-throughput precision surface processing systems. The company's flat surface processing systems are used in general industrial applications markets. The company also markets and distributes polishing liquids (slurries), parts and consumables used in its customers' manufacturing processes. The company offers the broadest range of CMP systems available to the semiconductor industry and their product lines include orbital and rotational technology. Last week, SFAM announced better-than-expected quarterly results with a 49% increase in revenue over the prior year, and up 11% from the first quarter of this fiscal year. The CEO said the introduction of their revolutionary Momentum CMP system remains on schedule with initial shipments planned for the third fiscal quarter and a ramp to volume production in the fourth quarter. He also noted that the company is poised to take advantage of a growing CMP equipment market and that process results from the new Momentum system suggests it will surpass the competition for the most advanced applications. Investors appear pleased with the company's outlook as the issue has finally begun to rebound from an extended downward trend. Traders who like to speculate on oversold technology issues in the chip industry can use this position to profit from any future recovery. PLAY (very conservative - bullish/collar): BUY STOCK - SFAM ASK=$5.62 SELL CALL APR-7.50 FQF-DA OI=135 B=$1.25 BUY PUT APR-5.00 FQF-PA OI=30 A=$1.50 TARGET COST BASIS=$5.75 ROI(max)=30% DOWNSIDE RISK(max)=$0.75 ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** IWOV - Interwoven $64.25 *** Premium Selling! *** Interwoven is a provider of enterprise-class content management software. The company's flagship product, TeamSite, controls the development, management and deployment of business-critical Web sites. Interwoven solutions are based on an inclusive content architecture that empowers all content contributors and leverages diverse Web assets including XML, Java, rich html, multimedia and database content. TeamSite is available for both the Sun Solaris operating system and Microsoft Windows platform. In this conservative, premium-selling position, we will use the recent volatility and the inflated option prices to initiate a neutral play with a favorable premium. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a significant change in character, so monitor the position on a regular basis. PLAY (conservative - neutral/credit strangle): SELL CALL JAN-115 IQG-AC OI=44 B=$1.12 SELL PUT JAN-35 IUW-MG OI=1 B=$1.19 INITIAL NET CREDIT TARGET=$2.25-$2.50 ROI(max)=16% UPSIDE B/E=$117.25 DOWNSIDE B/E=$32.75 ****************************************************************** - STRADDLES - This week we are proud to introduce the first of a number of new features in the Spreads section; a staff researcher to furnish conservative "delta-neutral" positions on a regular basis. Our goal is to offer at least two plays each week in this category and if the feedback is favorable, we will expand to other, more complex techniques such as ratio and butterfly spreads. Please let us know if you would like to see this section continue or if there are additional strategies that we should explore, and we will try to accommodate your requests in the coming year. ****************************************************************** WGO - Winnebago Industries $16.75 *** Probability Play! *** Winnebago Industries headquartered in Forest City, Iowa, is a leading United States manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. The company builds quality motor homes with state-of-the-art computer-aided design and manufacturing systems on automotive-styled assembly lines. The company markets its recreation vehicles on a wholesale basis to a broadly diversified dealer organizations located throughout the United States, and to a limited extent, in Canada. There is no particular news behind the selection of WGO. The company did report quarterly results on December 13, coming in well ahead of estimates. Their better-than-expected earnings certainly didn't hurt the stock's chances of moving higher. In addition, the issue has held up extremely well given the current market environment. While WGO is approaching a technically overbought area, the momentum has obviously been in favor of the bulls. The volatility in option premiums hasn't followed the expansion in the stock. Our new straddle for April will likely produce a respectable profit whether the bulls pull some money off the table or keep their focus on the "Buy" button. Note: Traders preferring to add a bit more time to this position could consider July options. Based on Friday's close, a straddle could be purchased for approximately $4.00 debit. PLAY (conservative - neutral/debit strangle): BUY CALL APR-17.50 WGO-DW OI=0 A=$1.38 BUY PUT APR-15.00 WGO-PC OI=10 A=$0.81 INITIAL NET DEBIT TARGET=$2.00-$2.12 TARGET ROI=50% ****************************************************************** TFS - Three-Five Systems $17.06 *** Speculation Only! *** Three-Five Systems specializes in the design, development and manufacture of custom displays and display systems employing liquid crystal display and liquid crystal on silicon (LCoS) microdisplay technology. With high volume manufacturing facilities and regional sales offices located throughout the world, Three-Five is truly a global company with world class credentials in display technology. The only news of any significance for TFS came from its board of directors earlier this month, when officials announced a $30 million buyback of the company's stock. From a technical view, TFS has suffered along with the rest of the technology sector and the semiconductor industry, but Friday's bounce off the new 52-week low suggests there is potential for future volatility. Other than speculation of an oversold rally or the buyback of company shares, there is little to suggest TFS could be on the road to a sustained recovery anytime soon. However, a rebound to short-term resistance near $24 could find this play sitting mighty pretty. PLAY (speculative - neutral/debit strangle): BUY CALL JAN-20.00 TFS-AD OI=151 A=$1.43 BUY PUT JAN-15.00 TFS-MC OI=0 A=$1.38 INITIAL NET DEBIT TARGET=$2.50-$2.63 TARGET ROI=20% ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. 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