The Option Investor Newsletter Tuesday 01-02-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010201_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-02-2001 High Low Volume Advance/Decline DJIA 10646.10 -140.70 10797.00 10585.40 1.10 bln 1348/1714 NASDAQ 2291.86 -178.66 2474.16 2273.07 1.91 bln 1645/2337 S&P 100 667.13 - 19.32 686.45 662.56 totals 2993/4051 S&P 500 1283.27 - 37.01 1320.28 1276.05 42.5%/57.5% RUS 2000 462.49 - 21.04 483.55 461.38 DJ TRANS 2874.11 - 72.49 2950.11 2869.56 VIX 34.20 + 3.97 34.39 31.47 Put/Call Ratio 0.79 ************************************************************* Score one market drop for Robertson Stephens Analyst Dane Lewis from Robertson Stephens probably stayed awake all weekend planning his interviews after putting his finishing touches on his tech sector downgrade. After the announcement this morning he was in great demand by all the major networks. He was probably on the top of most investors hate mail list as well. He said a "significant slowdown" in information technology spending will crimp average selling prices and total sales for a number of high profile tech companies. Declines in IT spending by corporate buyers as well as a slow down in spending by dot coms led to the change in the brokerage's previous view. The resulting carnage in the tech sector coupled with continued tax selling was not pretty. Some of the stocks downgraded included VRTS -21, EMC -12, NTAP -13, CFLO -3, NTIQ -22, NETE -13, ISSX -13, VRSN -13. With data storage requirements slowing and the need for security software seen as less critical for the contracting Internet sector the outlook is seen as lasting several quarters. Slowing spending due to smaller budgets will lengthen the sales cycles and shrink margins due to more competition for the same dollar. As if to punctuate this concept AAPL announced a massive price cut after the close on all its business systems. Some of the cuts were more than -$1,000 and according to Apple were designed to clear the more than 11 weeks of inventory currently sitting on dealers shelves. That is a quarters worth of sales which does not bode well for the next round of earnings from Apple. I am sure Mr. Lewis could have been influenced as well by the massive discounts and sale prices in all the post holiday sale flyers. Many offered almost free computers after rebates that approached 75% of the sales price. About the only shoe left to drop here is an earnings warning from CSCO which would go along with this sector downgrade. This fact was not lost on investors as they fled CSCO in droves with over 122 million shares traded. CSCO lost -$5 to close at a new 52-week low of 33.25. After the close there was another flurry of earnings warnings as expected. EVOL, EFNT, IMSC, JDAS and TSTN were the headliners. I have been telling you for several weeks that historically 43% of warnings occur in the first two weeks of January. In reality I don't think there are that many stocks left that have not already warned but we still need to be aware that all the bad news has not been announced yet. IBM, CSCO, SUNW, JDSU are the big caps that could create another disaster should they decide to confess. It is not that everyone does not already know the news, it is just the act that burns it into our collective consciousness. Tech stocks were not the only losers on Tuesday. The biggest Dow stock GE dropped over -$4 to $43 after a WSJ article concerning the safety of some of its jet engines. By itself this probably would not have been a major event but coupled with the NAPM number this morning the health of the GE manufacturing complex as a whole was questioned. The NAPM index fell to 43.7 which was more than expected and the lowest level since the 1991 recession. This level is consistent with zero growth in the economy. The employment index fell to 42.8% its lowest level since 1998 and suggests the Jobs Report on Friday will be weaker than expected. The NAPM numbers solidified the need for prompt and aggressive Fed action which could come as soon as Friday. The Jobs Report could be the trigger for an inter-meeting rate cut as it did four times in 1991. The tax selling today was very strong. Up volume on the Nasdaq was beaten by down volume over 4:1. The stocks that suffered most were the ones up the most from January of last year. Yes, there were some stocks still up for the year. JNPR, which I speculated on Sunday would be a major target, dropped -23. I am sure the Robertson Stephens tech downgrade did not help but across the board the biggest 2000 gainers were the biggest Tuesday losers. This selling shifts capital gains into this year and frees up cash to invest in some of the current bargains. It normally only lasts for one week after which that same cash is put back into the market. Analysts estimate that cash, now on the sidelines and waiting for this last selling flurry to be over, is at two year highs. Another example of tax selling would be Laboratory Corp which dropped -$28 on no news after moving up from $35 on 1/1/2000 to $183 last Thursday. Ironically the lower the Nasdaq goes the easier to have big days make it into the history books. Today the Nasdaq posted its 7th largest percentage loss of -7.23% which percentage wise was more than the Dow lost in all of 2000. Technically it sounds huge but realistically it was a normal day. 15% of the Nasdaq set new 52-week lows and only 10 of the Nasdaq 100 finished positive. The value investing funds which were considering closing last year are probably dusting off their prospectus as investors become more interested in slow growth value stocks instead of the daily heartbreak of continued tech wrecks. Many are deciding that +18% to +25% annual returns would be very nice considering the current state of their accounts. This return to value investing will prevent GE and companies like that from dropping much farther. Companies with earnings and companies with tangible assets will be money magnets when the pile of cash on the sidelines spills over into the markets. GE was up +.75 in after hours trading after coming within $1 of its 52-week low set last February. Waiting to exhale? With the Jobs Report on Friday and all eyes on the Fed there is not likely to be a rush to buy the current dip. Even with the almost -300 point drop from Friday's high the Nasdaq showed no signs of a bargain hunter bounce at the close. Experienced traders are waiting patiently for the index to find a bottom and the new 52-week low of 2273 from today may not be it. Volume on both exchanges was good with 1.9 billion on the Nasdaq and 1.1 billion on the NYSE but declines obviously overwhelmed advances. The VIX spiked to close at the high of the day at 34.39 and very close to the numbers posted when the Dow and Nasdaq hit their previous bottoms on Dec-21st. The Dow gained +600 points and the Nasdaq +300 points starting the very next day. Nobody can guarantee that will happen again tomorrow since we have a completely different set of circumstances governing our current market sentiment. With capital gains tax selling limited to those stocks with gains from last year that does limit the extent of that selling. If any Wednesday bounce holds, then traders could start taking positions in front of the Jobs Report in hopes of a favorable outcome. As I said on Sunday, we should be watching the stocks we want to buy this week and looking for bottoms. With only two trading days left before the Jobs Report the possibility of a bottom Wednesday is about 75%. Futures are up +4.40 already and hopefully that is a leading indicator of tomorrows direction. Still, be patient and make sure the market, sector and stock are all positive and moving up as well as advances beating declines before opening a new long position. If any of these are negative then wait. We have all year, one day will not make a difference. We had a huge response to our annual renewal offer and I would like to thank everyone who chose OptionInvestor as their source for investment ideas in 2001. We will work very hard to maintain your confidence. We have some outstanding new features we will be announcing next week and we are sure you will be excited as well! Good Luck, Don't buy too soon! Jim Brown Editor *************************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=1238 ************************************************************ **************** MARKET SENTIMENT **************** More Of The Same By Austin Passamonte New calendar, new trading year... same market action. We started off to the downside this morning and never looked back. Bullish solace could be found as indexes closed off their lows, but that is of little comfort for sustained upside bias right now. Any January rally might have to wait for our next retest of new lows first. Another relief bounce should emerge soon but it will take plenty of bullish market news to move buyers into action. Nothing short of a significant rate-cut by the Fed will move us up strongly with duration at this time. A warning by CSCO, JDSU or other tech darling could be capitulatory as well. The VIX is rising into mid-30's but we need to see a spike above 35.6 (daily chart's upper Bollinger-band) to signal a relief rally is near, and that could happen tomorrow with further weakness. Daily chart signals indicate more downside ahead is likely. The following markets need to find support near listed levels if we are to hold above recent lows: Dow: 10,625; then 10,337 SPX: 1275; then 1264 OEX: 660; then 656 We cannot quantify any real support for the NASDAQ markets while they are buried below recent daily-chart values. Trying to use weekly chart support going back more than one year shows we could see sub-2,000 level for the NDX and COMPX. Keep in mind that the Dow and NDX have not traded near new lows together since before year 2000. Should the Dow fall below 10,000 while the NDW remains in a trough, the OEX and SPX would hit price levels unseen in years. Is this what S&P 500 commercial traders are waiting for? Not a long shot by any means. Market Sentiment does not see any technical evidence of a market bounce next session, but anything is possible. Keep in mind that a lack of bullish news to drive prices up leaves a path of least resistance on the downside. What is a trader to do? Buy puts on any failed bounce! It was quite an easy session to play OTM puts on the QQQ, OEX and SPX for +50% returns on cost or much more. Equity-option traders who hit the right stocks headed down would have done extremely well also. Today's early break below recent support was a clear entry signal for bearish plays, and price action moved steadily down from there. A reverse rally (decline) is as simple to trade as markets breaking resistance to move steadily higher. No difference in entry approach at all. Given the choice to "sit in cash" or trade with the trend, we'll choose the latter every time! Until otherwise noted the trend remains decidedly down and we will continue to target bearish plays and the fast returns they offer until this trend changes. Market Sentiment will consider any attempt to rally tomorrow our next high-odds put play entry unless the VIX spikes above 36.00, which would have our attention for a relief bounce soon after. Take your trades as market direction dictates, and prosper in the year 2001! ***** VIX Tuesday 01/02 close: 34.20 30-yr Bonds Tuesday 01/02 close: 5.38% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (01/02/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 705 - 690 8,546 5,861 1.46 685 - 670 2,399 7,484 .32 OEX close: 667.13 Support: 665 - 650 1,071 6,976 6.51 640 - 620 32 9,471 295.97 Maximum calls: 720/5,274 Maximum puts : 600/9,334 Moving Averages 10 DMA 682 20 DMA 699 50 DMA 716 200 DMA 769 NASDAQ 100 Index (NDX/QQQ) Resistance: 63 - 61 49,461 37,702 1.31 60 - 58 49,619 49,333 1.01 57 - 55 21,253 24,170 .88 QQQ(NDX)close: 53.43 Support: 52 - 50 5,372 17,507 3.26 49 - 47 1,032 11,794 11.43 46 - 44 940 2,516 2.68 Maximum calls: 70/49,704 Maximum puts : 60/40,040 Moving Averages 10 DMA 59 20 DMA 63 50 DMA 70 200 DMA 87 S&P 500 (SPX) Resistance: 1350 35,879 34,962 1.03 1325 5,550 5,922 .94 1300 4,307 15,115 .28 SPX close: 1283.27 Support: 1275 397 11,332 28.54 1250 1,328 15,999 12.05 1225 95 14,138 148.82 Maximum calls: 1350/35,879 Maximum puts : 1350/34,962 Moving Averages 10 DMA 1305 20 DMA 1329 50 DMA 1358 200 DMA 1432 ***** CBOT Commitment Of Traders Report: Friday 12/29 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 -818 -588 -2589 -1646 Total Open interest % (-12.51%) (-7.52%) (-11.60%) (-8.22%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +1428 +3385 -2569 -4239 Total Open Interest % (+8.65%) (+19.05%) (-4.43%) (-8.24%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +67807 +66148 -85776 -81998 Total Open Interest % (+38.16%) (+36.56%) (-11.94%) (-11.60%) 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 increased their net-short positions on the DJIA. (Bearish) Interest Rates: Commercials are still moderately short T-Bond and T-Note futures. (Bearish) Currencies: Commercials heavily short Euro futures while small specs build net long. Small specs are betting on interest rate reduction while commercials remain skeptical. (Bearish) Energies: Commercials are net-short all oil products. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. (Bullish) Metals: Commercials are moving from net-long towards neutral in Gold, could be under distribution. Silver, Copper and Platinum are net-short. (Mixed to Bearish) Data compiled as of Tuesday 12/26 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/010201_1.asp *********** OPTIONS 101 *********** Long-Term Strategies in a Short-Term World By David Popper You've seen the commercials. You've heard the arguments. Indeed, the buzzards are circling. The message is simple, "Now that you novices have messed up your accounts, let a professional handle it for you. After all, you are not equipped to handle your own account. Remember, you should not be concerned with short-term market movements because real money is made over the long haul. Further, a ten percent return per year is what you should expect." This logic may have been true at some point in history, but that time is past. There was a time where long-term holding made sense. Thirty years ago, a person leaving high school could expect to take a job and have a career with one company. Most of his/her friends would work at the same company. When times were tough, the company would tighten their belts but they did not fire people. There was loyalty between employee and employer. Companies saw employees through the hard times and on the other hand employees did not leave to make an extra thousand dollars. There was loyalty and long-term commitment. Finally, company officers were compensated with reasonable salaries. They personally benefited if the company performed over the long run. Therefore, a long-term strategy was employed. What about now? Companies that once considered employees as family will not hesitate to send jobs overseas to save money. Employees, even top level executives will not hesitate to leave for even slightly greener pastures. How often have we heard, especially in the high tech world of executives leaving their old company in which they played a key role to join a perceived better opportunity. Look no further than MSFT, DIS and ORCL. Further, executives are often paid with stock options with short exercise periods as a major component of their compensation. This method of compensation gives them every incentive to perform in the short-term, while disregarding the long-term consequences of their decisions. As long as the stock price is up when they are able to exercise their options, they will be fine. Investors are also different. My grandfather bought stock in a company and continued to buy shares in the same company at every opportunity. Diversification was never considered and selling was not an option. Shareholders were fiercely loyal. Today, the conservative players are in mutual funds and more adventuresome traders such as ourselves can be in and out of stocks in minutes, days, or weeks. There is little stockholder loyalty. Don't get me wrong. I do not bemoan the changes. They are exciting. It makes trading a dynamic hobby. It is almost a contact sport. It is important to recognize the environment and realize that everything can change and change quickly. Executives, employees and shareholders turnover rates quickly change. Industry prospects change from read hot to dead in a matter of months. Remember those AMZN investors who were "long and strong forever?" In such a setting, it is foolish not to evaluate your equities on at least a weekly basis. Going to sleep at the wheel because you purchased a one decision stock may give you an unhappy surprise. Lucent and Xerox used to be considered growth stocks safe enough for widows and orphans. Now look at them. Sometimes in the law it is said that bad facts make bad law. This means that an extreme set of circumstances can lead to the creation of law which does not make sense in normal situations. So too, a bad year in trading can lead some to assume that it is safer to hold for the long-term. No, it is not better to hold for the long-term, it is better to evaluate your trading and eliminate as many mistakes as possible. What changes am I going to employ in my trading next year? I am going to slow down the action to better fit my time limitation. Specifically, I plan to limit my trading in the high fliers. CHKP can yield tremendous gains if you catch it right but you can get clobbered quickly. Look at JDSU on Friday, December 22nd. It ran up 12% with everything else, only to turn down 12% on an analyst warning. It was a good day on the Nasdaq, but a terrible day for JDSU and SDLI shareholders. How would the normal trader know Thursday night that Friday would be a rally and that NTAP would be up 20% while JDSU caves? How would the normal trader who can't watch the computer all day know when to sell JDSU on Friday while it was still profitable? You wouldn't. In the mean time, the QQQ's performed well. Since the QQQ's are a weighted composite of the top 100 Nasdaq stocks excluding financial stocks, bad news on one stock will not hurt you too bad. Since the Nasdaq is still oversold, I am planning to scale into the QQQ's and trade them with the majority of my funds. I won't get that one big day, but I won't get that one big fall either. The QQQ's also still have enough fire to yield good returns if traded properly. Does this mean that I will abandon the high fliers? No, but I will trade them with less capital. Will I stick with my plan? Only as long as it works. It works if I can successfully achieve an overall 33% return on my portfolio while trading on a part-time basis. I have found that trading requires constant learning and constant maintenance of the account. I am convinced that a reasonable trader can beat a mutual fund's return. I am convinced that long-term strategies are not best employed in a short-term world. ************** TRADERS CORNER ************** A New Year Brings New Hope By Scott Martindale The year 2000 has ended, and not a moment too soon as far as I'm concerned. After a highly successful 1999, I struggled mightily during 2000. However, I think the lessons learned were extremely important to my development as an investor and options trader, and a glance at powerful market indicators offers hope that we might yet see some sustained market strength. Even 1999, as successful as it was for the indices as a whole, provided many lessons from the standpoint of individual stocks. For example, I had many naked put/covered call plays on small cap stocks that were big losers. I often based my selections strictly on technicals, and sometimes they went south fast without the underlying fundamentals in place. So in 2000, I only played stocks that I liked from both a technical and fundamental basis, but still got burned on occasion because of the overall market weakness (which I didn't expect to persist through the fall) and my own hesitance to bail out on big down days ("It will surely bounce!"). Santa's gift to the bulls turned out to be only a fleeting dose of holiday cheer, much like the eggnog at the Christmas party. His rally had no follow-through, and he didn't hold the line at Nasdaq 2500 like I asked. Is this another great entry point? Or just a sign of more gloom ahead? Many market watchers have said that they consider this to be one of the best buying opportunities in the last 20 years. Should we be listening? There's some interesting stuff in the latest issue of Bloomberg's Personal Finance magazine. One article describes what they believe are the five key market indicators. The slope of the yield curve (difference between 10-year and 3-month Treasury yields), the Fed funds rate, and credit spreads (difference between Treasuries and corporates) apply to sustainability of growth in earnings and the economy. The Yardeni Model (12-month forward corporate earnings yield vs. 10-yr Treasury yield) applies to stock valuation, and the consensus stock allocation recommendation of Wall Street's top strategists applies to market sentiment. According to the article, the best situation for stock appreciation is when sentiment is negative (below 50 percent allocation), valuations are low, earnings growth is accelerating, the Fed eases rates, the yield curve steepens positively, and credit spreads narrow. When I checked current numbers, however, the yield curve is still inverted with a spread of -0.98 (although the Fed buyback program has depressed 10-year yields), and corporate/Treasury credit spreads have been widening as well -- both indicating economic slowing. Also, stock strategists are more bullish than ever, recommending around 67 percent allocated to stocks, whereas stocks tend to do poorly when the recommended allocation is over 60. However, on the bright side, the Yardeni model (Ed Yardeni of Deutsche Bank) indicates that stocks are nearing undervalued levels for the first time since the fall 1998 correction. And of course, Fed futures contracts are increasingly weighting the likelihood of both a 25 basis point rate cut in advance of the next FOMC meeting, and a total of 50 basis points by month-end. Another indicator used by contrarian traders is the percentage futures traders that consider themselves bullish. This has dropped to the lowest levels seen since May 12th, 2000 and October 15th, 1999, which might be a positive sign. Furthermore, gains in the S&P 500 have averaged 10 percent three months after a Fed rate cut, 19 percent six months after, and 23 percent one year after (and even higher gains for Nasdaq). We should expect investors to be willing to pay more for earnings as interest rates are cut, oil prices to stabilize under $30, and a firming Euro. So which sectors should come back fastest? Well, if S&P 500 revenues grow 5-8 percent in 2001 as some predict, the high-growth cutting-edge technology leaders could see both revenues and earnings growing by 40-70 percent or more! And if you look at the P/E to Earnings Growth rate ratio (PEG), the S&P tech index is well below the rest of the S&P index. Without a recession, this valuation gap will likely correct to the benefit of the tech leaders. As for today, I certainly didn't expect such a massive sell off. But surprisingly, my long-term stock account actually showed flat or a little green in value holdings like TX, HAL, WCOM, MOT, LSI, TSM, INTC, CLIC, and some REIT's, and relatively small red numbers in some of my recent acquisitions like JDSU, IRF, CRA, and HD. [My worst performer was EMC, which unfortunately I just bought on Thursday.] For what it's worth, I see this as a great opportunity in the making. I see today's weakness as a sign that we're shaking out all the weak holders, finding a true bottom, inducing a Fed rate cut (perhaps 50 basis points), and providing the impetus for a sustained uptrend. And as bad a day as today was, I still think it was a great day to start getting your cash ready for the long side, for the reasons described above. I'm looking at naked puts and long-term calls on top tech companies like ORCL, SUNW, CSCO, EMC, QCOM, AMCC, ADBE, CMVT, VRTS, JNPR, CHKP, ITWO, and BEAS, as well as some other players like CPST, MUSE, KANA, and EXTR. To actually execute such trades today would have required a high- risk approach that most of us should avoid, so I didn't move on it, myself. But I admit that I am still holding some naked put positions from last week, and I stand ready to sell more at the first signs of a reversal. ************************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=1243 ************************************************************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** GILD $74.13 -8.81 (-8.81) Gilead rolled over at $82 this morning, and held up at support at $78, albeit briefly. However, the overall weakness in the biotech sector was too much for the stock, and profit taking followed. Gilead may recover if the biotech sector recovers in the next few days, however, it closed below our stop level of $78, and so we are dropping it tonight, and moving on to stronger plays. CEPH $57.75 -5.56 (-5.56) CEPH's recent technical developments were wiped out in today's very bearish session. At first, the stock managed quite well for the better part of the day, with the $60 and $61 levels buoying the issue. Unfortunately, the intraday trend was broken in a heavy sell-off during late afternoon trading. Our $58 protective stop, bolstered by the 10-dma ($57.29), was violated. This infraction coupled with the dim market outlook solicits an exit this evening. LVLT $30.81 -2.00 (-2.00) LVLT couldn't stand alone against the bears in the New Year. The issue quickly transgressed below our $32 protective stop and landed on the $30 support level before the end of amateur hour today. The failure to recover and to regain a bullish position above the converged 5 and 10-dmas at the $32 level warrants an exit this evening. If you have open positions, consider selling into strength to protect existing capital. ESRX $93.63 -8.63 (-8.63) It's a shame this play never got a chance. Today's sharp, one session decline followed a pattern of tremendous gains in December. With the market starting off the year on a bearish note, ESRX suffered heavy profit taking right from the get-go. ESRX was cut down a hefty 8.4%, which put the stock well below the 10-dma and our $96 stop loss. It's very disappointing to have to drop the play before getting the opportunity to lock in any profits. CIEN $65.88 -15.38 (-15.38) CIEN, BRCM, SCMR and GLW were literally bludgeoned into the New Year. There was no specific news to provoke the bloodshed - just more of the same profit concerns of a slowing economy. Generally, the techs were hit especially hard today; but the optical sector, along with data storage in particular, went down for the count. CIEN saw a 19%, or $15.38 loss in heavy selling, with the final score leaving CIEN well below our $75 protective stop. If you failed to set stops, look for any intraday surges to repair losses. UTX $75.25 -3.38 (-3.38) The bad news swirling around GE's engine probe and Boeing's (BA) downgrade from First Union Securities spilled over to other stocks in the industry. UTX didn't escape the carnage and gave back 4.3% on average volume. The stock's position below our $76 protective stop and the 5 & 10-dmas line puts UTX in a precarious position. Therefore, we're exiting tonight in light of the weakness. A breakdown below the 30-dma ($73.20) spells big trouble, so if you have open plays to repair, sell into intraday strength. The company's earnings release is confirmed for January 18th, BEFORE the bell. BRCD $75.50 -16.31 (-16.31) Negative sector sympathy was the name of the game on the first trading day of the New Year. With peers EMC and VRTS down double-digit percentage points on high volume, there was nowhere for BRCD to go but down. The sell-off came on the heels of a downgrade of EMC and VRTS, both from Buy to Long Term Attractive ratings by Robertson Stephens. For its part, BRCD ended the day down almost 18 percent on over three times the ADV. While the stock did find support at the $70 level, the massive volume to the downside and the close well below our stop price of $88 leaves us with little choice but to cut this play loose. MWD $72.13 -7.13 (-7.13) With the DOW down over 140 points, shares of MWD and most other financial stocks got caught in the selling spree, as the bears took the first trading day of the new year by storm. Many financial issues rallied at the end of December on hopes that the 2001 would bring an easing Fed but now that hope has become something more urgent. With today's weak NAPM report (the lowest since recession-level 1991), it seems that the issue is no longer about rate cuts, but rather, whether the Fed can cut enough and in time. Today, MWD closed down almost 9 percent on 117% of ADV and in doing so, put itself back below its 50-dma at $72.46 and our stop price at $72. As a result we are no longer recommending this play. RFMD $24.25 -3.19 (-3.19) A morning downgrade by Robertson Stephens on Networking stocks citing slowdowns in corporate IT spending affected Tech issues across the board, and RFMD was no exception. Shares of communication chips stocks such as BRCM, CNXT and TQNT fell sharply lower and with them in sympathy, RFMD. The stock ended the day down over 11 percent. While volume was below average, only 58% of ADV, most of the volume was to the sell side and the lack of buyers to support the stock was not a good sign. With RFMD's close below our stop price of $25, we are taking our money off the table. TXN $46.31 -1.06 (-1.06) While shares of TXN fared better than most other Tech stocks, it did not fare well enough. Compared to other large cap semiconductor peers such as Intel and Applied Materials, which managed to end the day positive, TXN's close in negative territory was not a a bullish sign. While down only 2.24 percent for the day on light volume, only 72% of ADV, the close below both its 5 and 10-dma, currently sitting at $48.03 and $47.04 respectively suggests that there could be further downside ahead. Our stop price of $46 did hold up and there is support from the 50-dma at $45.26 but the weak relative strength compared to its peers and the possibility that the selling could accelerate no longer makes this an attractive play. COF $61.94 -3.88 (-3.88) COF didn't last very long on the playlist, as it felt the pressure of continued tax-loss selling on Friday. But the problem only got worse today, as investors sold first and asked questions later in response to the UBS Warburg downgrade. It seemed there was no place for the bulls to hide in today's market, with Techs, Financials, Biotechs, Drugs, and Retail stocks all coming under selling pressure. Everything got sold, and it appears that at least part of the problem was profit taking deferred until the first of the year. Regardless of the cause, COF fell through our $62 stop this morning, and despite an attempted late-day recovery, couldn't regain its footing. Needless to say, COF is a drop tonight. LH $148.00 -28.00 (-28.00) Stop losses anyone? LH has been a stellar performer for us over the past couple weeks, but it all came crashing down today. Traders wanting to take profits, but defer their taxable gains for another 12 months, waited for the opening bell this morning before hitting the sell button, which they did with a vengeance, driving volume more than 50% over the ADV. Posting a loss of $28 on top of last Friday's loss drops LH through our stop and several levels of support to end the first day of the new year right where it began the month of December. Stop losses took us out of the play with some fat profits in our pockets. If you didn't have them in place, use any bounce as an opportunity to get out with your skin intact. QQQ $53.44 -4.94 (4.94) Several high-profile downgrades in the tech sector this morning snowballed into a broad-based sell-off across the Nasdaq. The heavy selling witnessed in the Nasdaq caused the QQQs to drop to a new 52-week low, en route to falling through our protective stop at $55. At this point, we're dropping coverage on the QQQs and will wait for the Nasdaq to find a solid bottom before initiating a trade on the tech-heavy index again. WPI $48.31 -2.88 (-2.88) Not even the defensive drug stocks could escape the selling in the broader markets during Tuesday's session. After challenging its 50 and 200-dmas late last week, WPI gapped down this morning and continued to slide into the close of trading. The gap down and subsequent slide this morning didn't provide any solid entry points, but if you have any open long positions in WPI use any bounce or strength to exit positions early tomorrow. Watch for a move back up to the $49 or $50 levels and use such an advance to exit on strength. VOD $34.50 -1.31 (-1.31) Our technical-based play on shares of Vodafone took a turn for the worse today. The stock slipped back towards its long-standing support at $33, the site of our stop, and on very heavy volume. The unusually active trading is cause for concern, and may be related to the recent news of cell phone-related health concerns. Instead of waiting around for additional bad news, we're dropping coverage on VOD this evening and would exit any existing positions early Wednesday morning on a move back up to the $35 level. ORCL $26.44 -2.63 (-2.63) The downgrade from Robertson Stephens this morning on several Internet infrastructure plays spilled over into our long-term play and Oracle. Shares of the database software giant fell sharply at the close this morning and continued to decline into the close of trading. We don't like the fact that ORCL fell below the $28 level (our stop), which had been a solid support level since early December. Use any short-covering or relief rally early Wednesday morning to exit positions. FRNT $28.81 -2.13 (-2.13) We had been gaming the declining price in energy when we initiated coverage on shares of Frontier and as Murphy would have it, OPEC decided to "walk" the price of crude up this morning. Add to that fact the downgrade of peer Southwest Airlines this morning, and we never really saw a solid entry point into a FRNT trade. In fact, the stock fell precipitously at the opening bell this morning and continued to slide past our protective stop at $29. In light of the stop violation and rising price of oil, we're dropping FRNT tonight and would exit positions on any relief rally Wednesday. GD $75.06 -2.94 (-2.94) Volume was unusually active during GD's sell-off today. The high-volume sell-off is somewhat disconcerting and may lead to an extended pullback in shares of General Dynamics. And although the stock managed to close above our protective stop at the $75 level this afternoon, we're dropping coverage on GD tonight and will no longer initiate new positions. Use any bounce off the $75 level early tomorrow to exit existing positions. PUTS: ***** No dropped puts tonight ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1271 ************************************************************** 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. 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The Option Investor Newsletter Tuesday 01-02-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010201_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1244 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** COST $41.19 +1.25 (+1.25) Our strategy is working out as planned for Costco, which exhibited a high level of strength amidst the bloodshed in most sectors, including the retail sector. After breaking out of resistance at $38.38 last week, Costco has been moving up in a stair-step pattern of daily one point moves. Old resistance of $40 became support on Friday, and today Friday's resistance level of $41 became support, which could be an excellent entry point in the near future. Costco has shown a pattern over the last two days of making a surge early in the morning trading, and leveling off during the day. Today's volume was strong, at 12.4 million shares, which is almost double the average daily volume of 5.9 million shares. The volume and momentum should lead Costco to the next resistance level of $44, which has not been visited since March. After that, resistance is light at $45, and $46, and heavier at $49 and $50. The point of least resistance is up for Costco, however, to be completely safe, wait for strength in the retail index (RTX.X) before entering positions. Keep stops set at $34. NOK $40.88 -2.63 (-2.63) Considering the widespread carnage in the technology sector today, Nokia held up fairly well. The stock actually moved to $44.81 in the morning, however, the weak NAPM report, and several analyst downgrades of technology stocks proved to be too much for even Nokia to handle. Strong support at $40 has held since mid-November, faltering only once on November 13th, which brought Nokia to $37.56. A possible entry point would be a move above $43, which would position Nokia to move above the major moving averages to the next resistance at $45. Watch the telecom sector for strength, and keep stops at $40. SEPR $76.38 -3.75 (-3.75) Sepracor held up well in the widespread sell-off today, particularly considering the sharp decline in the biotech index late in the afternoon. Sepracor rolled over at $80.94 in the morning, stopped briefly at support at $77.50, and actually rebounded slightly from the day's low at the close. Considering Sepracor's relative strength we are keeping the play. A good aggressive entry point could be an advance above $77.50, or above the 50-dma at $79 for a more conservative trader. Monitor the biotech index for strength (BTK.X) and continue to set stops at $74. IVGN $86.38 -5.31 (-5.31) With a dearth of news from the company recently, technicals and sector sympathy have played a key role in the movement of IVGN's stock price. Today, with Biotech issues pretty much down across the board, shares of IVGN got caught in the downdraft. For the day, the stock closed 6.14 percent lower but the good news is, volume was light, only about half of ADV. The close above its 5 and 10-dma (currently at $82.78 and $80.86 respectively) was also a good sign. A bounce off these moving averages and well as the $80 level and our stock price at $79 could allow aggressive traders to make a play but confirm a bounce with buying volume. For a safer entry, wait for IVGN to move strongly above its 5-dma before taking a position. A break through resistance at $82 is another possible entry but make sure the conviction is there and keep a close eye on peers ABI, AFFX and CRA to confirm strength in upward momentum. JNJ $102.00 -3.06 (-3.06) The blue-chip rally put JNJ on last week's winner's list and today, JNJ's strength amid the market adversity kept it on the play list. The stock closed smack on our $102 safeguard. A close below $102 and we would have bailed out - in spite of JNJ's fantastic developments in recent sessions. There was also some good news on the wire today, although it didn't have too much impact on JNJ trading. The drug maker announced that US regulators have expanded the use for a common rheumatoid arthritis treatment to include the slowing of joint damage that can result from the ailment. Moving forward, look for convincing moves through the 5-dma ($103.44) and the $104 level to re-establish the up-trend line. A high-volume break through $105 and Friday's 52-week high of $105.94 warrants play consideration, even for the conservatives. Keep stops tight. ******************* PLAY UPDATES - PUTS ******************* P $57.06 +0.19 (+0.19) Resistance from the 50-dma, now at $58.69, and from the key level of $59 is turning out to be formidable indeed. While the stock attempted to rally in the early going on news that OPEC could hike prices, news of warmer than expected weather in the short term helped to subdue Phillips' rally attempt. While the stock did close up fractionally on average volume, most of that volume was to the downside. As well, the stock failed to close above the 5-dma, now at $57.27. Our put play could receive a little help in the near future as news that Australia has cleared the way to let Phillips bid for oil and gas explorer Petroz NL. At this point, a failed rally above the 5 and 50-dma could provide for aggressive entry points buy confirm a rollover with volume and be aware of our stop price at $59. For the risk adverse, wait for a break below $56 before taking a position, confirming direction with rivals TX and XOM. SFA $30.00 -2.56 (-2.56) The descending trend line stretched down another 7.9% amid respectable volume. The embellishing pattern of lower-highs and lower-lows continues to add credibility to the notion of further losses over the near-term. And within the sector, even the pick of the litter GMST saw significant losses. We persist in keeping our protective stop a bit high at the $38 level to allow SFA to operate freely during a volatile session. However, your personal stop loss may be tighter to reflect a more conservative play. At this point in trading SFA, look for a subsequent break below the $30 mark to further corroborate a continued slide. Remember the 52-week low sits at $24.41, so expect some opposition in moving through that level even in a declining market. SNDK $25.75 -2.00 (-2.00) Pressured by the continued selling on the NASDAQ, SNDK finally penetrated the $27 support level and headed for new 52-week lows again. The series of lower highs and lower lows is creating a very tradable trend, despite the fact the daily moves are fairly small. The bulls have been letting the bears have their way with everything technology related, and our play is no different. SNDK is currently sitting on support at $25, but it doesn't look like it will take much to drive it south from there to challenge the $19-20 level. The Bollinger bands have expanded again, leaving plenty of room for the stock to fall, and the only apparent hope for the bulls is the fact that the daily Stochastics are now the most oversold they have ever been. A bounce seems imminent, so tighten up those stops. Our stop is still sitting at $31, and any bounce that fails to clear this level is another entry opportunity. Wait for the selling to begin and verify weakness on the NASDAQ before playing. Of course, further weakness can always be used to add to open positions; use a drop through the $25 level as your trigger. TQNT $38.94 -4.75 (-4.75) Friday's meltdown continued unabated today as TQNT gave up another 11% to land squarely on the 10-week trendline. This is a critical test for our play; a drop below the trendline ($38) will break the longer-term bullish trend, putting the bears firmly in control. If the bears are successful at breaching support, they have a series of support levels to target, starting with $36, then $32, and finally $26. Stochastics have rolled over again, and with the lower Bollinger band sitting down at $33, it seems there is more selling in store. We want to give our play room to run, so our stop is still sitting at $49. An intraday bounce near this level is unlikely, but would provide a wonderful entry point for aggressive traders. More realistically, we would look for any market-driven bounce to produce a rollover in the neighborhood of the 200-dma ($43.56). more conservative players will wait for further weakness and open new positions as TQNT falls through the $38 level. The Semiconductor sector is continuing to struggle, so confirm weakness on the SOX.X as well as the NASDAQ before playing. VSTR $101.00 +0.38 (+0.38) We're still holding our breath, waiting for VSTR to penetrate support. While the rest of the technology market continued to slide into the abyss, VSTR actually held up fairly well today, refusing to penetrate $100, even on an intraday basis. Aggressive traders got a nice entry point though, as the bulls failed to rally the stock through the $104-105 resistance level, leaving our $106 stop completely untouched. In the weak technology market though, they couldn't hold the bears at bay and succumbed to the selling, right up to the closing bell. Ending the first day of the new year at $101, VSTR is poised to take out the critical $100 level in the days ahead. Conservative players will watch for weakness in both the Telecom sector (AMEX:TTH) and the broader NASDAQ and then open new positions as VSTR falls below $100. Volume has recently increased to near the ADV again, and as long as it stays heavy, that is a good confirmation that there is significant selling pressure. ************************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=1262 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: SBC - SBC Communications $50.38 +2.63 (+2.63 this week) With 61 million phone lines in 13 states, SBC is the #2 local phone outfit in the United States. It's not just a local operation either, as the company has stakes in Telecom operations in 23 other countries around the world. The services and products that SBC offers vary by market, and include local exchange services, wireless communications, long distance services, Internet services, cable and wireless television services, security monitoring, telecommunications equipment, messaging, paging, and directory advertising and publishing. Up until late November, SBC was one of the few Telecom stocks that was still riding high. At the time, it was looking like the bulls might actually engineer a breakout to new highs, but sector weakness combined with a deteriorating overall market conspired to create a double-top near $59. Once the top was in place, the stock lost ground quickly, breaking below the 10-dma, 30-dma, and 50-dma in short order. After finding resistance at the 50-dma (then at $54.56), SBC really got the bears riled up on December 19th by announcing that they would fail to meet the current earnings projections. That shock wave, combined with a Merrill Lynch downgrade from Buy to Accumulate, sent shares reeling all the way to $43 before buyers started showing up. Given the sharp recovery over the past 2 weeks, it seems that investors think the selloff was overdone, as they have been bidding the price up, bouncing up from the 200-dma ($47.19) and clearing the $50 resistance level today. Telecom stocks did well in today's session, beginning to claw their way out of the hole dug by the bears in recent months. Critical support lies near the 200-dma, so we have placed our stop at $47; another violation of this level would definitely put a crimp in our bullish plans. As long as our stop isn't violated, intraday dips near the $47-48 level look like attractive entry points for aggressive investors. More conservative players will look for SBC to find support near $50 and continue higher through the $52 level before playing. Confirm sector strength (AMEX:TTH) and buying pressure in competitors such as VZ and WCOM before initiating new positions. BUY CALL JAN-45 SBC-AI OI= 4065 at $5.75 SL=3.75 BUY CALL JAN-50*SBC-AJ OI=10359 at $2.00 SL=1.00 BUY CALL JAN-55 SBC-AK OI=12446 at $0.50 SL=0.00 High Risk! BUY CALL FEB-50 SBC-BJ OI= 506 at $3.50 SL=1.75 BUY CALL FEB-55 SBC-BK OI= 519 at $1.50 SL=0.75 BUY CALL APR-55 SBC-DK OI=15728 at $3.00 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=SBC LOW VOLATILITY: RJR - RJ Reynolds Tobacco HLDGS $51.00 +2.25 (+2.25 this week) RJR is a holding company for the #2 cigarette maker in the US, after Philip Morris. Some of its best-selling brands include Camel, Doral, Salem and Winston. And starting on January 22nd, RJR plans to test sales of Eclipse cigarettes, which supposedly releases less carcinogens because the tobacco is heated rather than burned. RJ Reynolds continues to deliver profitable earnings and gain the respect of WallStreet investors despite the slew of lawsuits and multibillion-dollar settlements that plague the company. And it's not only RJR that's been on the move lately. Fierce competitor, Philip Morris' (MO) made significant gains as post- tech investors look for solid, long-term investments to pad their portfolios. Since its submergence below the $20 level in December 1999, the share price's made a healthy recovery (yes, that could be a pun!) into the millennium. The last six weeks have been particularly impressive. In a steady fashion, RJR climbed from the mid-thirties and tacked on 45% to its share value. Today's 4.6% breakout above the $50 level, and the positive sentiment of the sector going forward, prompted us to add RJR to our low-volatility calls. In a market environment enveloped with dim profit outlooks and growing concerns of tech stock valuations, this value play should bode well for the more conservative option traders. If you're conservative, but still have a sense of trading adventure, then entries might be found on pullbacks to our protective stop mark of $48. Our stop loss is currently sandwiched between the 10-dma ($47.54) and the 5- dma ($49.20); and remember an entry at this level is much more risky than jumping in at the $50 support. Looking down the road, there's also the potential for some sparks to fly ahead of the company's earnings' release. Look for high-volume breakouts to forecast a run into the announcement. RJ Reynolds is confirmed to report earnings on January 25th, BEFORE the opening bell. BUY CALL JAN-45 RJR-AI OI=147 at $6.50 SL=4.50 BUY CALL JAN-50*RJR-AJ OI=123 at $2.63 SL=1.25 BUY CALL JAN-55 RJR-AK OI= 0 at $0.69 SL=0.00 Wait for OI! BUY CALL FEB-50 RJR-BJ OI=130 at $3.88 SL=2.50 BUY CALL FEB-55 RJR-BK OI= 12 at $1.75 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=RJR ************* NEW PUT PLAYS ************* AGGRESSIVE: SEBL - Siebel Systems $54.00 -13.63 (-13.63 this week) Siebel Systems Inc. is the world's leading provider of eBusiness applications software. Siebel Systems provides an integrated family of eBusiness application software enabling multichannel sales, marketing and customer service systems to be deployed over the Web, call centers, field, reseller channels, and retail and dealer networks. Siebel Systems' sales and service facilities are located in more than 28 locations around the world. Siebel Systems took a big hit today, along with other software and infrastructure companies. The catalysts were one-two punches from a very weak NAPM report, which increased investors' fears of a recession, as well as a downgrade of several internet infrastructure, storage, software and security stocks from an influential analyst at Robertson Stephens. According to Dane Lewis, several companies have told him that their spending on IT technology will be lower than expected in the first half of the year, and that sectors which were previously considered immune, such as storage and security, are no longer immune to spending slowdowns. While Lewis did not specifically downgrade SEBL, shock waves were felt throughout the entire software and infrastructure sector. Additional news was released regarding Nortel entering Siebel's market for eBusiness software, and helped to push Siebel below the key support level of $59.81, which had held since June. Siebel is now deeply below the 200-dma of $79.58 and the 50-dma of $84.59, and it seems only a miracle would pull the stock to those levels anytime soon. Volume was 50% above the 3 month average daily volume. A possible entry point could be taken on a roll over from light resistance at $55.56, or resistance at $58.00. The next support level is $49.75, and Siebel could move there very quickly. Monitor the software index, and the software holders (SWH), as well as internet infrastructure holders (IIH) for weakness before buying puts, and set stops at $64. BUY PUT JAN-55*SGW-MK OI=1295 at $8.50 SL=6.00 BUY PUT JAN-50 SGW-MJ OI=2472 at $6.00 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SEBL EXDS - Exodus Communications $16.56 -3.44 (-3.44 this week) Exodus provides Internet system and network management solutions for enterprises with mission-critical Internet operations. They have pioneered the Internet Data Center (IDC) market and are one of the leading providers of Internet server hosting to the growing number of companies using the Internet. At present, Exodus also has twenty Internet Data Centers where clients store their servers in secure vaults. Clients include CBS Sports, eBay, Lycos, Yahoo!, MSNBC, and Hewlett-Packard. Big caps like CSCO and a broad range of networkers; particularly the security and data storage stocks, effectively dragged the NASDAQ lower as we entered 2001 trading today. EXDS was caught in the Internet dragnet and plunged 17%, or $3.44 on extremely heavy volume. By the close of business today, almost 25.8 mln shares exchanged hands in comparison to an ADV of 10.7 mln. If you take a look at a one-month chart, you can visually confirm the strong downtrend line, initiated in mid-December. We decided to add EXDS to our put line-up this evening because of the technical breakdown below the bottom-of-the-barrel support at $20. Granted the share price is already dirt-cheap, but there's no viable reason why EXDS can't move lower and return to its pre-millennium prices. And take a look at the options, there's certainly not a lack of interested parties. Another possible profit opportunity would be to aggressively target shoot entries/exits amid a volatile session - to play the spread. Whatever your course of action, we're anticipating that EXDS will trade under the $19, going forward. If this level is violated on a bullish CLOSE, we'll quickly exit the play to protect our capital. There's some light, historical support at $15, but the support is firmer at the $10 and $12 levels. You might consider aggressive entries on rollovers at the 5-dma ($20.04) or buying into weakness if EXDS slides through the $16 mark in a declining market. BUY PUT JAN-25 DUB-ME OI=1335 at $9.13 SL=6.25 BUY PUT JAN-20*EXF-MD OI=3373 at $5.00 SL=3.00 BUY PUT JAN-15 EXF-MC OI=1297 at $1.94 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=EXDS JNPR - Juniper Networks $102.56 -23.50 (-23.50 this week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. As a long-time favorite on OIN's call play list, we have made substantial gains numerous times to the upside on JNPR. But now, it appears that we have the opportunity profit to the downside, for reasons both fundamental and technical. A soft market for Tech stocks is no surprise, as JNPR is well off its highs from mid-October of last year. With the recent rise of value stocks, traders have been eschewing high-growth, high-PE stocks for lower growth-rate, lower-PE companies. The market as a whole has been in defensive mode, undergoing a compression in earnings multiples, with a slowing economy. With JNPR's current PE well north of 400, it appears that there is plenty of room for the stock to move, despite being 58 percent below its all-time high. Connecting the highs and lows since its peak in mid-October reveals a downward trending regression channel in which the stock has been moving lower on accelerating volume, so much so that JNPR is now well below all its moving averages, most notably the 200-dma at $150. Today's downgrade of the Networking sector by Robertson Stephens by analyst Dane Lewis, citing slower IT spending and macro-economic issues resulted in a drop of over 18 percent on over 160% of ADV. For aggressive traders, a bounce leading to a failed rally above JNPR's 10-dma at $117.02 could allow for a possible entry. There is also resistance in increments of $5 at $105, $110 and our stop price at $115 but confirm a rollover with volume. For an entry on weakness, wait for further selling to take JNPR below $98 on volume before making a play. Correlate entries with sentiment in Networking issues CSCO, EXTR and FDRY when making an entry. BUY PUT JAN-105 JUY-MA OI= 557 at $15.50 SL=11.25 BUY PUT JAN-100*JUD-MT OI=1586 at $12.50 SL= 9.00 BUY PUT JAN- 95 JUX-MS OI= 335 at $10.00 SL= 7.00 http://www.premierinvestor.com/oi/profile.asp?ticker=JNPR QCOM - Qualcomm Inc. $70.88 -11.31 (-11.31 this week) Qualcomm Incorporated is a leader in developing, delivering, and enabling innovative digital wireless communications products and services based on the Company's digital technologies. As the pioneer of Code Division Multiple Access (CDMA), the technology of choice for next-generation wireless communications, Qualcomm continues to lead the industry in the development of voice, data, and wireless Internet products and solutions. Qualcomm is also transforming industries through its various satellite businesses and technology partnerships. Since hitting its 52-week low in early July of 2000, shares of QCOM have been steadily rising despite a general malaise in Tech stocks. But now, it appears that the CDMA giant may not be immune to worries of a slowing economy. While news of a possible breakthrough into China and an alliance with Texas Instruments recently helped QCOM to move higher, this news already been factored into the stock price. Closer examination of the chart reveals a breakdown in QCOM's technical picture, as the stock appears to have formed a head and shoulders pattern over the past few months. Such a formation usually foretells a definitive end to an intermediate-term up-trend and a strong move in the opposite direction. Drawing a line across the $91 level on a 3-month daily chart, the shoulder tops can clearly be seen, with the first one in mid-to-late November and the most recent one this past week. The head can be seen in early December when the stock topped out at the $107 area. Drawing a line across the $78 mark reveals the neckline. Today's drop, down almost 14 percent on over 115% of ADV puts QCOM below this key support level as well as its 50 and 100-dma (at $81.17 and $74.13 respectively). At this point, a failed rally above resistance overhead at $74, $75 and $78 could allow aggressive traders to take a position. For a more conservative play, look for selling momentum to accelerate in QCOM, taking the stock below $70 with conviction. While the head and shoulders pattern is one that has been well documented, past performance is not a guarantee of future results. As such, we are placing our protective stop at the neckline at $78. A close above this level could suggest a reversal of negative momentum thus ending this play. Use the NASDAQ as a gauge of market sentiment when targeting an entry. BUY PUT JAN-75 AAF-MO OI=6152 at $8.75 SL=6.25 BUY PUT JAN-70*AAO-MN OI=7812 at $6.13 SL=4.00 BUY PUT JAN-65 AAO-MM OI=6051 at $4.13 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=QCOM LOW VOLATILITY: AZA - ALZA Corporation $39.69 -2.81 (-2.81 this week) As a research-based pharmaceutical company, AZA applies its leading drug delivery technologies to develop products with enhanced therapeutic value for its own portfolio and many of the world's leading drug companies. The company commercializes products it develops, as well as those it acquires from third parties. AZA is currently focusing its sales and marketing efforts on products for urology and oncology disorders, as well as products for the treatment of pediatric and central nervous system disorders. The might of the Drug sector as a defensive haven is coming under pressure, and the effects can be seen in Drug stocks large and small. Rolling over last week, AZA really felt the pull of gravity in today's session, giving up more than 6.5% on volume 75% above the ADV. Resistance at $44 was just too much for the bulls to penetrate, and the chart shows the possibility of an extended head-and-shoulders formation. Combine this with Stochastics just coming out of the overbought zone, the flattening upper Bollinger band at $45, and today's violation of both the 50-dma (currently $41.44) and the 30-dma (currently $40.63), and it is hard to make a case for AZA to go anywhere but down. Add in declining market sentiment, specifically the Drugs, and this looks like shooting fish in a barrel. Of course, that doesn't mean we can go off half-cocked. Conservative players will want to wait for AZA to fall through the $39 level before initiating new positions. Since this is a low volatility play, we are going with a nice tight stop, set at $42. More aggressive players will wait for a failed rally to open new plays; a rollover anywhere between $40-42 looks like the best entry we are likely to see. Use the Drug index (DRG.X) to confirm AZA's weakness and only play when both are headed south. BUY PUT JAN-40*AZA-MH OI= 577 at $2.44 SL=1.25 BUY PUT JAN-35 AZA-MG OI=2645 at $0.63 SL=0.00 High Risk! http://www.premierinvestor.com/oi/profile.asp?ticker=AZA ********************** PLAY OF THE DAY - CALL ********************** COST - Costco - $41.19 +1.25 (+1.25 this 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. Most Recent Write-Up Our strategy is working out as planned for Costco, which exhibited a high level of strength amidst the bloodshed in most sectors, including the retail. After breaking out of resistance at $38.38 last week, Costco has been moving up in a stair-step pattern of daily one point moves. Old resistance of $40 became support on Friday, and today, Friday's resistance level of $41 became support, which could be an excellent entry point in the near future. Costco has shown a pattern over the last two days of making a surge early in the morning trading, and leveling off during the day. Today's volume was strong, at 12.4 million shares, which is almost double the average daily volume of 5.9 million shares. The volume and momentum should lead Costco to the next resistance level of $44, which has not been visited since March. After that, resistance is light at $45, and $46, and heavier at $49 and $50. The path of least resistance is up for Costco, however, to be completely safe, wait for strength in the retail index (RTX.X) before entering positions. Keep stops set at $34. Comments Although the S&P Retail Index (RLX.X) finished slightly lower in Tuesday's session, shares of Costco powered higher. We're encouraged by the stock's impressive relative strength and strong technical position. Volume continues to remain active, and we're looking to that brisk buying to carry COST higher. New positions can be added on a breakout above resistance at $41.50 on active trading. Pullbacks on light volume to support at $41 or $40 would offer additional entry opportunities. BUY CALL JAN-35 PRQ-AG OI=7106 at $6.50 SL=4.50 BUY CALL JAN-40*PRQ-AH OI=3690 at $2.75 SL=1.50 BUY CALL JAN-45 PRQ-AI OI= 673 at $0.63 SL=0.00 High Risk! BUY CALL FEB-40 PRQ-BH OI= 235 at $4.00 SL=2.50 BUY CALL FEB-45 PRQ-BI OI= 0 at $1.75 SL=1.00 Wait for OI! http://www.premierinvestor.com/oi/profile.asp?ticker=COST ************************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=1269 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ The January barometer isn't looking too good... The stock market plunged today amid continued earnings woes and additional signs of an economic slowdown. Tuesday, January 2 The stock market plunged today amid continued earnings woes and additional signs of an economic slowdown. The Dow Jones average dropped 140 points to 10,646 and the Nasdaq Composite fell 178 points to 2291. The S&P 500 index plunged 37 points to 1,283. On the NYSE, declines outpaced advances 1,724 to 1,350 on volume of 1.1 billion shares. Nasdaq trades reached 1.9 billion shares as declines outpaced advances 2,336 to 1,651. In the U.S. bond market, the 30-year treasury surged 1 27/32 to 113 8/32 as the sell-off in equities continued, pushing its yield down to 5.34%. Sunday's new plays (positions/opening prices/strategy): Amerada Hess AHC JAN55P/JAN60P $0.00 credit bull-put Portal Software PRSF FEB12C/FEB5P $7.62 debit collar Allmerica AFC FEB75C/FEB70P $4.62 debit strangle Cytec CYT MAY40C/MAY40P $6.75 debit straddle SW Securities SWS MAR25C/MAR25P $5.31 debit straddle Thanks to the incredible market volatility, the majority of our new positions were opened at or near the target prices early in the session. Amerada Hess was one the only play that did not offer a favorable entry opportunity. Surprisingly, the Allmerica straddle was profitable by mid-afternoon, providing a credit near $4.81 as the stock plunged to session lows near 3:45 P.M. Portfolio Plays: The New Year did little to help the stock market as investors renewed their bearish outlook on big-cap technology issues. The selling on the Nasdaq quickly spread to the broader market and blue-chip stocks were also affected by the downward pressure. In the technology segment, Internet shares were among the big losers following a number of downgrades in security and infrastructure companies. The computer hardware and software sectors also moved sharply lower. Semiconductor issues were the only bright spot on the Nasdaq. On the Dow, Alcoa (AA), Boeing (BA) and DuPont (DD) led on the downside after analysts announced negative outlooks on the three blue-chip stocks. The broader market endured declines in biotechnology, utility, banking and consumer products shares while oil service, retail, drug, gold and transportation issues edged higher. The Spreads portfolio saw little bullish activity today and even the issues that rallied were not all favorable. One of our recent adjustment candidates, Costco (COST) moved up $1.25 to $41.19 on momentum from a recent technical "break-out." As we noted on Friday, the easiest way to transition to a bullish outlook was the purchase of shares (to cover the sold option at $40). Unfortunately, the stock opened $0.50 higher and the best we could achieve on the buy-in was $40.25. Now our cost basis in the covered-call is $38.88 and the maximum profit is $1.12. Another position that required attention was Qualcomm (QCOM) and depending on how you played the $11 move, the volatile activity offered some excellent adjustment opportunities. Our "roll-out" strategy was very simple, move as far down as possible and still maintain a credit in the position. In the February series, the 60P/65P offered a reasonable cost basis (near the OCT-NOV lows) and with the initial credit-spread premium of $0.75, we were able to make the transition early in the session, without additional cost. The new position is FEB60P/65P at $0.12 credit. Of course the issue did not cooperate with our adjusted outlook, falling another $7 to close near $71. With any luck, it will find new support at $65. A Reader's Request issue, AT&T (T) was among the few Dow stocks that advanced, climbing $1 to $18.25 after saying it closed its $25 billion syndicated bank facility to provide liquidity support against a comparable level of short-term borrowings. AT&T said it does not plan to borrow against this facility. In other news, its AT&T Broadband unit will increase cable prices in a month by an average of 4.8%, citing the rising cost of providing services, including programming, technical upgrades and customer service. Another blue-chip technology issue, Intel (INTC) was a surprise gainer, rising $1 to $31 after the hardware giant debuted a new portable digital audio player, Pocket Concert, that provides up to four hours of music programming and 20 hours of spoken-word audio. The player features 128 MB of memory for storing digital audio in MP3 and Windows media audio formats. Among smaller-cap shares, Placer Dome (PDG), Landry's Restaurants (LNY), and Aksys (AKSY) were the best performers. In the delta-neutral category, a number of issues moved to recent lows including ADC Telecom (ADCT), Scm Microsystems (SCMM), and Three-Five Systems (TFS). The financial stocks in the Straddles portfolio were also quite active with Alliance Capital (AC) falling $3 and Fifth-Third Bancorp (FITB) losing $2.53 to close at $57.22. Traders who opened new positions in these issues should monitor each play carefully for potential "early-exit" opportunities. Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - ****************************************************************** WSM - Williams Sonoma $21.63 ** On The Move! *** Williams-Sonoma and its subsidiaries are specialty retailers of products for the home. The company's retail segment sells its products through its three retail concepts: Williams-Sonoma, Pottery Barn and Hold Everything. The direct-to-customer segment sells similar products through its five direct-mail catalogs, Williams-Sonoma, Pottery Barn, Hold Everything and Chambers, and the Internet (Williams-Sonoma only). The principal concepts in both retail and direct-to-customer are Williams-Sonoma & Pottery Barn, which sell cookware essentials and contemporary tableware and home furnishings, respectively. Williams Sonoma (WSM) rallied again today, up $1.63 to a recent high near $21 as bargain hunters continued to support the rising price for the downtrodden retail issue. Shares of WSM stock had plunged after a September profit warning but today the issue was upgraded by Thomas Weisel Partners to a "buy" and the analysts also raised their earnings forecasts for the fiscal 4th quarter, which ends this month. WSM appears to be breaking out of a base near $18 on good volume and traders who have a bullish outlook for the issue can use this position to speculate on its movement in the near-term. A favorable premium disparity exist in the January call options and after a brief consolidation, the issue should continue to move towards a test of the November highs at $23. PLAY (aggressive - bullish/debit spread): BUY CALL JAN-17.50 WSM-AW OI=626 A=$4.62 SELL CALL JAN-20.00 WSM-AD OI=150 B=$2.62 INITIAL NET DEBIT TARGET=$1.75-$1.88 ROI(max)=32% B/E=$19.38 /charts/jan01/charts.asp?symbol=WSM ****************************************************************** WCOM - WorldCom $15.94 *** Bottom Fishing! *** WorldCom provides a broad range of communications, outsourcing, and managed network services to corporations. WorldCom is a global communications company utilizing a facilities-based, on-net strategy throughout the world. Their core business is communications services, which includes voice, data, Internet and international services. From private networking (such as frame relay and asynchronous transfer mode) to high capacity Internet and other related services, to hosting for complex, high-volume mega-sites, to network management and outsourcing, WorldCom provides one of the broadest range of Internet and traditional, private networking services available from any provider. WorldCom (WCOM) was a big mover on the Nasdaq today, rising over $2 to a recent high near $16 during the session, after Salomon Smith Barney reiterated its "buy" rating on the stock and its inclusion in Salomon's annual "Top Picks" publication. Despite Worldcom's decline in 2000, analysts say the company possesses the best set of global network and IP assets to address data/IP needs of corporate enterprises and WCOM is the firm's top pick for telecom service provider in the upcoming year. In addition, the company also announced it agreed to settle past financial disputes and drop all legal actions against Mexico's dominant phone carrier, Telefonos de Mexico (TMX). Telmex has agreed to drop all legal actions against WorldCom's Avantel SA, except the challenge by Telmex to rules issued in September that intend to curb its dominant market position. Telmex also agreed to lower long-distance access fees for U.S. companies. Traders who favor the change in WCOM's technical outlook can use this position to speculate conservatively on the movement of the issue. PLAY (conservative - bullish/debit spread): BUY CALL JAN-12.50 JQD-AV OI=7342 A=$3.88 SELL CALL JAN-15.00 JQD-AC OI=51834 B=$1.81 INITIAL NET DEBIT TARGET=$1.88 ROI(max)=32% B/E=$14.38 /charts/jan01/charts.asp?symbol=WCOM ****************************************************************** - STRADDLES - For all the traders who responded to our request for guidance on this section, we thank you! Here is another straddle candidate that may meet your criteria for portfolio suitability with regard to "delta-neutral" positions. ****************************************************************** TRIH - Triad Hospitals $30.50 *** Range-Roller! *** Triad Hospitals provides health care services through hospitals and ambulatory surgery centers located in small cities and other selected high growth urban markets in the southwestern, western and south-central United States. Triad's facilities include 30 general, acute care hospitals and 14 ambulatory surgery centers located in the states of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas. The company also offers a variety of management services to its health care facilities. These services include ethics and compliance programs, national supply and equipment purchasing and leasing contracts, accounting, financial and clinical systems, governmental reimbursement assistance, information systems, legal support, personnel management and internal audit, access to regional managed care networks, and resource management. Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. We think this position meets the basic criteria and also offers a great chance to play some rolling options on a low priced issue. PLAY (conservative - neutral/debit straddle): BUY CALL FEB-30 RIU-BF OI=240 A=$2.93 BUY PUT FEB-30 RIU-NF OI=10 A=$2.38 INITIAL NET DEBIT TARGET=$5.12-$5.25 TARGET ROI=20% /charts/jan01/charts.asp?symbol=TRIH ************************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=1254 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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